Empire State Realty OP, L.P 10-Q for FY2021 Q2
Empire State Realty OP, L.P. (ESBA)
10-Q
2021-08-05
For: 2021-06-30
View Original
Added on
April 08, 2026
About this 10-Q
Empire State Realty OP, L.P filed this 10-Q on August 5, 2021, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $153.41M
- up 8.8% from $141.03M a year earlier
- Net income
- $4.41M
- compared with a net loss of $19.62M a year earlier
- Diluted EPS
- $0.01
- compared with -$0.07 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the Quarterly Period Ended June 30, 2021
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 001-36106
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip Code)
(212 ) 850-2600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Securities | Trading Symbol | Exchange on which traded | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 28, 2021, there were 22,913,843 units of the Registrant Series ES operating partnership units outstanding, 6,112,894 units of the Series 60 operating partnership units outstanding, and 3,045,709 units of the Series 250 operating partnership units outstanding.
| EMPIRE STATE REALTY OP, L.P. | ||||||||
| FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2021 | ||||||||
| TABLE OF CONTENTS | PAGE | |||||||
| PART 1. | FINANCIAL INFORMATION | |||||||
| ITEM 1. | FINANCIAL STATEMENTS | |||||||
| Condensed Consolidated Balance Sheets as of June 30, 2021 (unaudited) and December 31, 2020 | ||||||||
| Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020 (unaudited) | ||||||||
| Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months June 30, 2021 and 2020 (unaudited) | ||||||||
| Condensed Consolidated Statements of Capital for the three and six months ended June 30, 2021 and 2020 (unaudited) | ||||||||
| Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2021 and 2020 (unaudited) | ||||||||
| Notes to Condensed Consolidated Financial Statements (unaudited) | ||||||||
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |||||||
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK | |||||||
| ITEM 4. | CONTROLS AND PROCEDURES | |||||||
| PART II. | OTHER INFORMATION | |||||||
| ITEM 1. | LEGAL PROCEEDINGS | |||||||
| ITEM 1A. | RISK FACTORS | |||||||
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |||||||
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | |||||||
| ITEM 4. | MINE SAFETY DISCLOSURES | |||||||
| ITEM 5. | OTHER INFORMATION | |||||||
| ITEM 6. | EXHIBITS | |||||||
| SIGNATURES | ||||||||
1
ITEM 1. FINANCIAL STATEMENTS
Empire State Realty OP, L.P.
Condensed Consolidated Balance Sheets
(amounts in thousands, except per unit amounts)
| June 30, 2021 | December 31, 2020 | ||||||||||
| ASSETS | (unaudited) | ||||||||||
| Commercial real estate properties, at cost: | |||||||||||
| Land | $ | $ | |||||||||
| Development costs | |||||||||||
| Building and improvements | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Commercial real estate properties, net | |||||||||||
| Cash and cash equivalents | |||||||||||
| Restricted cash | |||||||||||
| Tenant and other receivables | |||||||||||
| Deferred rent receivables | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Deferred costs, net | |||||||||||
| Acquired below-market ground leases, net | |||||||||||
| Right of use assets | |||||||||||
| Goodwill | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND CAPITAL | |||||||||||
| Liabilities: | |||||||||||
| Mortgage notes payable, net | $ | $ | |||||||||
| Senior unsecured notes, net | |||||||||||
| Unsecured term loan facilities, net | |||||||||||
| Unsecured revolving credit facility | |||||||||||
| Accounts payable and accrued expenses | |||||||||||
| Acquired below-market leases, net | |||||||||||
| Ground lease liabilities | |||||||||||
| Deferred revenue and other liabilities | |||||||||||
| Tenants’ security deposits | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Capital: | |||||||||||
| Private perpetual preferred units: | |||||||||||
Private perpetual preferred units, $ | |||||||||||
Private perpetual preferred units, $ | |||||||||||
| Series PR operating partnership units: | |||||||||||
ESRT partner's capital ( | |||||||||||
Limited partners' interests ( | |||||||||||
Series ES operating partnership units | ( | ( | |||||||||
Series 60 operating partnership units ( | ( | ( | |||||||||
Series 250 operating partnership units ( | ( | ( | |||||||||
| Total capital | |||||||||||
| Total liabilities and capital | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements
2
Empire State Realty OP, L.P.
Condensed Consolidated Statements of Operations
(unaudited)
(amounts in thousands, except per unit amounts)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Rental revenue | $ | $ | $ | $ | |||||||||||||||||||
| Observatory revenue | |||||||||||||||||||||||
| Lease termination fees | |||||||||||||||||||||||
| Third-party management and other fees | |||||||||||||||||||||||
| Other revenue and fees | |||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Property operating expenses | |||||||||||||||||||||||
| Ground rent expenses | |||||||||||||||||||||||
| General and administrative expenses | |||||||||||||||||||||||
| Observatory expenses | |||||||||||||||||||||||
| Real estate taxes | |||||||||||||||||||||||
| Impairment charges | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
Total operating income | |||||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Loss on early extinguishment of debt | ( | ( | |||||||||||||||||||||
| Income (loss) before income taxes | ( | ( | ( | ||||||||||||||||||||
| Income tax benefit | |||||||||||||||||||||||
| Net income (loss) | ( | ( | |||||||||||||||||||||
| Private perpetual preferred unit distributions | ( | ( | ( | ( | |||||||||||||||||||
| Net income (loss) attributable to common unitholders | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Total weighted average units: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Earnings (loss) per unit attributable to common unitholders: | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Dividends per unit | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
3
Empire State Realty OP, L.P.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
(amounts in thousands)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Unrealized gain (loss) on valuation of interest rate swap agreements | ( | ( | ( | ( | |||||||||||||||||||
| Less: amount reclassified into interest expense | |||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Comprehensive income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
4
Empire State Realty OP, L.P.
Condensed Consolidated Statements of Capital
For The Three Months Ended June 30, 2021 and 2020
(unaudited)
(amounts in thousands)
| Series PR Operating Partnership Units | Series ES Operating Partnership Units Limited Partners | Series 60 Operating Partnership Units Limited Partners | Series 250 Operating Partnership Units Limited Partners | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General Partner | Limited Partners | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Private Perpetual Preferred Units | Private Perpetual Preferred Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Total Capital | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of OP units, net of costs | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of operating partnership units to ESRT Partner's Capital | — | — | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common shares | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity compensation | — | — | ( | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | ( | — | ( | — | ( | — | ( | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series PR Operating Partnership Units | Series ES Operating Partnership Units Limited Partners | Series 60 Operating Partnership Units Limited Partners | Series 250 Operating Partnership Units Limited Partners | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General Partner | Limited Partners | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Private Perpetual Preferred Units | Private Perpetual Preferred Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Total Capital | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of OP units, net of costs | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of operating partnership units to ESRT Partner's Capital | — | — | ( | ( | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common shares | — | — | ( | ( | — | — | — | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity compensation | — | — | ( | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | ( | — | ( | — | ( | — | ( | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | ( | — | ( | — | ( | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
5
Empire State Realty OP, L.P.
Condensed Consolidated Statements of Capital
For The Six Months Ended June 30, 2021 and 2020
(unaudited)
(amounts in thousands)
| Series PR Operating Partnership Units | Series ES Operating Partnership Units Limited Partners | Series 60 Operating Partnership Units Limited Partners | Series 250 Operating Partnership Units Limited Partners | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General Partner | Limited Partners | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Private Perpetual Preferred Units | Private Perpetual Preferred Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Total Capital | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of private perpetual preferred in exchange for common units | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of operating partnership units to ESRT Partner's Capital | — | — | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common units | — | — | ( | ( | — | — | — | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | ( | — | ( | — | ( | — | ( | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | ( | — | ( | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series PR Operating Partnership Units | Series ES Operating Partnership Units Limited Partners | Series 60 Operating Partnership Units Limited Partners | Series 250 Operating Partnership Units Limited Partners | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General Partner | Limited Partners | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Private Perpetual Preferred Units | Private Perpetual Preferred Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Operating Partnership Units | Operating Partnership Unitholders | Total Capital | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of private perpetual preferred in exchange for common units | — | — | ( | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of operating partnership units to ESRT Partner's Capital | — | — | ( | ( | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common units | — | — | ( | ( | — | — | — | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | ( | — | ( | — | ( | — | ( | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | ( | — | ( | — | ( | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | — | ( | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
6
Empire State Realty OP, L.P.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(amounts in thousands)
| Six Months Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash Flows From Operating Activities | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Impairment charges | |||||||||||
| Amortization of non-cash items within interest expense | |||||||||||
| Amortization of acquired above- and below-market leases, net | ( | ( | |||||||||
| Amortization of acquired below-market ground leases | |||||||||||
| Straight-lining of rental revenue | ( | ( | |||||||||
| Equity based compensation | |||||||||||
| Settlement of derivative contract | ( | ||||||||||
| Loss on early extinguishment of debt | |||||||||||
| Increase (decrease) in cash flows due to changes in operating assets and liabilities: | |||||||||||
| Security deposits | ( | ||||||||||
| Tenant and other receivables | ( | ||||||||||
| Deferred leasing costs | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Accounts payable and accrued expenses | ( | ( | |||||||||
| Deferred revenue and other liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash Flows From Investing Activities | |||||||||||
| Development costs | ( | ( | |||||||||
| Additions to building and improvements | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
The accompanying notes are an integral part of these consolidated financial statements
7
Empire State Realty OP, L.P.
Condensed Consolidated Statements of Cash Flows (continued)
(unaudited)
(amounts in thousands)
| Six Months Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash Flows From Financing Activities | |||||||||||
| Repayment of mortgage notes payable | ( | ( | |||||||||
| Proceeds from unsecured senior notes | |||||||||||
| Proceeds from unsecured term loan | |||||||||||
| Repayment of unsecured term loan | ( | ||||||||||
| Proceeds from unsecured revolving credit facility | |||||||||||
| Deferred financing costs | ( | ( | |||||||||
| Repurchases of common units | ( | ( | |||||||||
| Distributions | ( | ( | |||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Net increase in cash and cash equivalents and restricted cash | |||||||||||
| Cash and cash equivalents and restricted cash—beginning of period | |||||||||||
| Cash and cash equivalents and restricted cash—end of period | $ | $ | |||||||||
| Reconciliation of Cash and Cash Equivalents and Restricted Cash: | |||||||||||
| Cash and cash equivalents at beginning of period | $ | $ | |||||||||
Restricted cash at beginning of period | |||||||||||
| Cash and cash equivalents and restricted cash at beginning of period | $ | $ | |||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Restricted cash at end of period | |||||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Building and improvements included in accounts payable and accrued expenses | $ | $ | |||||||||
| Write-off of fully depreciated assets | |||||||||||
| Derivative instruments at fair values included in accounts payable and accrued expenses | |||||||||||
Conversion of limited partners' operating partnership units to ESRT partner's capital | |||||||||||
| Issuance of Series 2019 private perpetual preferred in exchange for common units | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements
8
Empire State Realty OP, L.P.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Description of Business and Organization
As used in these condensed consolidated financial statements, unless the context otherwise requires, “we,” “us,” "our," and the "company,” mean Empire State Realty OP, L.P. and its consolidated subsidiaries.
Empire State Realty OP, L.P. (the "Operating Partnership") is the entity through which Empire State Realty Trust, Inc. (“ESRT”), a self-administered and self-managed real estate investment trust ("REIT"), conducts all of its business and owns (either directly or through subsidiaries) substantially all of its assets. We own, manage, operate, acquire and reposition office and retail properties in Manhattan and the greater New York metropolitan area. As of June 30, 2021, our total portfolio contained 10.1 million rentable square feet of office and retail space. We owned 14 office properties (including three long-term ground leasehold interests) encompassing approximately 9.4 million rentable square feet of office space. Nine of these properties are located in the midtown Manhattan market and aggregate approximately 7.6 million rentable square feet of office space, including the Empire State Building. Our Manhattan office properties also contain an aggregate of approximately 0.5 million rentable square feet of retail space on their ground floor and/or contiguous levels. Our remaining five office properties are located in Fairfield County, Connecticut and Westchester County, New York, encompassing in the aggregate approximately 1.8 million rentable square feet. The majority of square footage for these five properties is located in densely populated metropolitan communities with immediate access to mass transportation. Additionally, we have entitled land at the Stamford Transportation Center in Stamford, Connecticut, adjacent to one of our office properties, that will support the development of an approximately 0.4 million rentable square foot office building and garage. As of June 30, 2021, our portfolio included four standalone retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut, encompassing approximately 0.2 million rentable square feet in the aggregate.
We were organized as a Delaware limited partnership on November 28, 2011 and operations commenced upon completion of the initial public offering of ESRT’s Class A common stock and related formation transactions on October 7, 2013. ESRT, as the sole general partner in our company, has responsibility and discretion in the management and control of our company, and our limited partners, in such capacity, have no authority to transact business for, or participate in the management activities, of our company. As of June 30, 2021, ESRT owned approximately 60.7 % of our operating partnership units.
2. Summary of Significant Accounting Policies
There have been no material changes to the summary of significant accounting policies included in the section entitled "Summary of Significant Accounting Policies" in our December 31, 2020 Annual Report on Form 10-K.
Basis of Quarterly Presentation and Principles of Consolidation
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Accounting Estimates
Recently Issued or Adopted Accounting Standards
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3. Deferred Costs, Acquired Lease Intangibles and Goodwill
| June 30, 2021 | December 31, 2020 | ||||||||||
| Leasing costs | $ | $ | |||||||||
| Acquired in-place lease value and deferred leasing costs | |||||||||||
| Acquired above-market leases | |||||||||||
| Less: accumulated amortization | ( | ( | |||||||||
| Total deferred costs, net, excluding net deferred financing costs | $ | $ | |||||||||
At June 30, 2021 and December 31, 2020, $8.3 million and $2.1 million, respectively, of net deferred financing costs associated with the unsecured revolving credit facility was included in deferred costs, net on the condensed consolidated balance sheets.
Amortization expense related to deferred leasing costs and acquired deferred leasing costs was $6.1 million and $6.4 million for the three months ended June 30, 2021 and 2020, respectively, and $11.7 million and $12.3 million for the six months ended June 30, 2021 and 2020, respectively. Amortization expense related to acquired lease intangibles was $1.6 million and $2.4 million for the three months ended June 30, 2021 and 2020, respectively, and $3.3 million and $4.4 million for the six months ended June 30, 2021 and 2020, respectively.
| June 30, 2021 | December 31, 2020 | ||||||||||
| Acquired below-market ground leases | $ | $ | |||||||||
| Less: accumulated amortization | ( | ( | |||||||||
| Acquired below-market ground leases, net | $ | $ | |||||||||
| June 30, 2021 | December 31, 2020 | ||||||||||
| Acquired below-market leases | $ | ( | $ | ( | |||||||
| Less: accumulated amortization | |||||||||||
| Acquired below-market leases, net | $ | ( | $ | ( | |||||||
Rental revenue related to the amortization of below-market leases, net of above-market leases, was $0.7 million and $1.4 million for the three months ended June 30, 2021 and 2020, respectively, and $1.4 million and $2.3 million for the six months ended June 30, 2021 and 2020, respectively.
As of June 30, 2021, we had goodwill of $491.5 million. Goodwill was allocated $227.5 million to the observatory reportable segment and $264.0 million to the real estate reportable segment.
In compliance with the requirements of authorities, we closed the Empire State Building Observatory on March 16, 2020 due to the COVID-19 pandemic and it remained closed until the 86th floor observation deck was reopened on July 20, 2020. The 102nd observation deck was reopened on August 24, 2020. The closure of our Observatory and subsequent reopening under international, national, and local travel restrictions and quarantines caused us during the quarter to choose to perform an impairment test related to goodwill. We engaged a third-party valuation consulting firm to perform the valuation process. The analysis used a combination of the discounted cash flow method (a form of the income approach) utilizing Level 3 unobservable inputs and the guideline company method (a form of the market approach). Significant assumptions under the former included revenue and cost projections, weighted average cost of capital, long-term growth rate and income tax considerations while the latter included guideline company enterprise values, revenue multiples and control premium rates. Our methodology to review goodwill impairment, which included a significant amount of judgment and estimates, provided a reasonable basis to determine whether impairment had occurred. Based upon the results of the goodwill impairment test of the standalone Observatory reporting unit, which is after the intercompany rent expense paid to the Real Estate reporting unit, we
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4. Debt
| Principal Balance | As of June 30, 2021 | ||||||||||||||||||||||||||||
| June 30, 2021 | December 31, 2020 | Stated Rate | Effective Rate(1) | Maturity Date(2) | |||||||||||||||||||||||||
| Mortgage debt collateralized by: | |||||||||||||||||||||||||||||
| Fixed rate mortgage debt | |||||||||||||||||||||||||||||
| Metro Center | $ | $ | % | % | 11/5/2024 | ||||||||||||||||||||||||
| 10 Union Square | % | % | 4/1/2026 | ||||||||||||||||||||||||||
| 1542 Third Avenue | % | % | 5/1/2027 | ||||||||||||||||||||||||||
First Stamford Place(3) | % | % | 7/1/2027 | ||||||||||||||||||||||||||
| 1010 Third Avenue and 77 West 55th Street | % | % | 1/5/2028 | ||||||||||||||||||||||||||
| 250 West 57th Street | % | % | 12/1/2030 | ||||||||||||||||||||||||||
| 10 Bank Street | % | % | 6/1/2032 | ||||||||||||||||||||||||||
| 383 Main Avenue | % | % | 6/30/2032 | ||||||||||||||||||||||||||
| 1333 Broadway | % | % | 2/5/2033 | ||||||||||||||||||||||||||
| Total mortgage debt | |||||||||||||||||||||||||||||
Senior unsecured notes:(4) | |||||||||||||||||||||||||||||
| Series A | % | % | 3/27/2025 | ||||||||||||||||||||||||||
| Series B | % | % | 3/27/2027 | ||||||||||||||||||||||||||
| Series C | % | % | 3/27/2030 | ||||||||||||||||||||||||||
| Series D | % | % | 1/22/2028 | ||||||||||||||||||||||||||
| Series E | % | % | 3/22/2030 | ||||||||||||||||||||||||||
| Series F | % | % | 3/22/2033 | ||||||||||||||||||||||||||
| Series G | % | % | 3/17/2032 | ||||||||||||||||||||||||||
| Series H | % | % | 3/17/2035 | ||||||||||||||||||||||||||
Unsecured term loan facility (4) | LIBOR plus | % | 3/19/2025 | ||||||||||||||||||||||||||
Unsecured revolving credit facility (4) | LIBOR plus | 3/31/2025 | |||||||||||||||||||||||||||
Unsecured term loan facility (4) | LIBOR plus | % | 12/31/2026 | ||||||||||||||||||||||||||
| Total principal | |||||||||||||||||||||||||||||
| Deferred financing costs, net | ( | ( | |||||||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||||||||
______________
(1)The effective rate is the yield as of June 30, 2021 and includes the stated interest rate, deferred financing cost amortization and interest associated with variable to fixed interest rate swap agreements.
(2)Pre-payment is generally allowed for each loan upon payment of a customary pre-payment penalty.
(3)Represents a $164 million mortgage loan bearing interest at 4.09 % and a $16 million loan bearing interest at 6.25 %.
(4)At June 30, 2021, we were in compliance with all debt covenants.
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Principal Payments
| Year | Amortization | Maturities | Total | ||||||||||||||
| 2021 | $ | $ | $ | ||||||||||||||
| 2022 | |||||||||||||||||
| 2023 | |||||||||||||||||
| 2024 | |||||||||||||||||
| 2025 | |||||||||||||||||
| Thereafter | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
Deferred Financing Costs
| June 30, 2021 | December 31, 2020 | |||||||||||||
| Financing costs | $ | $ | ||||||||||||
| Less: accumulated amortization | ( | ( | ||||||||||||
| Total deferred financing costs, net | $ | $ | ||||||||||||
Amortization expense related to deferred financing costs was $1.1 million and $1.0 million for the three months ended June 30, 2021 and 2020, respectively, and $2.3 million and $2.0 million for the six months ended June 30, 2021 and 2020, respectively.
Unsecured Revolving Credit and Term Loan Facilities
As described more fully in our Form 10-Q for the quarterly period ended March 31, 2021 (the "Q1 2021 10-Q"), in Q1 2021,we entered into an amended senior unsecured credit facility (the "Credit Facility") with Bank of America, N.A., as administrative agent and the other lenders party thereto. The Credit Facility is in the initial maximum principal amount of up to $1.065 billion, which consists of $850.0 million revolving credit facility that matures on March 31, 2025, and a $215.0 million term loan facility that matures on March 19, 2025. As of June 30, 2021, we had no borrowings under the revolving credit facility and $215.0 million under the term loan facility.
Additionally, as described more fully in the Q1 2021 10-Q, we have outstanding a senior unsecured term loan facility (the "Term Loan Facility") that we entered into on March 19, 2020 with Wells Fargo Bank, National Association, as administrative agent, and the other lenders party thereto. The Term loan Facility is in the original principal amount of $175.0 million and matures on December 31, 2026. As of June 30, 2021, our borrowings amounted to $175.0 million under the Term Loan Facility.
The terms of both the Credit Facility and the Term Loan Facility include customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. Both facilities also require compliance with financial ratios including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a minimum unencumbered interest coverage ratio, and a maximum unsecured leverage ratio. The agreements governing both facilities also contain customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, invalidity of loan documents, loss of real estate investment trust qualification, and occurrence of a change of control. As of June 30, 2021, we were in compliance with the covenants.
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Senior Unsecured Notes
The terms of the senior unsecured notes include customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. It also requires compliance with financial ratios including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a minimum unencumbered interest coverage ratio, and a maximum unsecured leverage ratio. The agreements also contain customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, the occurrence of certain change of control transactions and loss of real estate investment trust qualification. As of June 30, 2021, we were in compliance with the covenants under the outstanding senior unsecured notes.
5. Accounts Payable and Accrued Expenses
| June 30, 2021 | December 31, 2020 | ||||||||||
| Accrued capital expenditures | $ | $ | |||||||||
| Accounts payable and accrued expenses | |||||||||||
| Interest rate swap agreements liability | |||||||||||
| Accrued interest payable | |||||||||||
| Due to affiliated companies | |||||||||||
| Total accounts payable and accrued expenses | $ | $ | |||||||||
6. Financial Instruments and Fair Values
Derivative Financial Instruments
We use derivative financial instruments primarily to manage interest rate risk and such derivatives are not considered speculative. These derivative instruments are typically in the form of interest rate swap and forward agreements and the primary objective is to minimize interest rate risks associated with investing and financing activities. The counterparties of these arrangements are major financial institutions with which we may also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties; however, we currently do not anticipate that any of the counterparties will fail to meet their obligations.
We have agreements with our derivative counterparties that contain a provision where if we either default or are capable of being declared in default on any of our indebtedness, then we could also be declared in default on our derivative obligations. As of June 30, 2021, the fair value of the derivative in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to the agreement was $6.2 million. If we had breached any of these provisions at June 30, 2021, we could have been required to settle our obligation under the agreement at its termination value of $6.2 million.
As of June 30, 2021 and December 31, 2020, we had an interest rate LIBOR swap with an aggregate notional value of $265.0 million and $265.0 million, respectively. The notional value does not represent exposure to credit, interest rate or market risks. As of June 30, 2021 and December 31, 2020, the fair value of our derivative instrument amounted to $(6.2 ) million and $(8.8 ) million, respectively, which is included in accounts payable and accrued expenses on the condensed consolidated balance sheets. This interest rate swap has been designated as a cash flow hedge and hedges the variability in future cash flows associated with our existing variable-rate term loan facilities.
As of June 30, 2021 and 2020, our cash flow hedge is deemed highly effective and a net unrealized gain (loss) of $2.8 million and $0.6 million for the three months ended June 30, 2021 and 2020, respectively, and a net unrealized gain (loss) of $5.7 million and $(16.3 ) million for the six months ended June 30, 2021 and 2020, respectively, relating to both active and terminated hedges of interest rate risk, are reflected in the condensed consolidated statements of comprehensive income (loss). Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the debt. We estimate that $(11.5 ) million net loss of the current balance held in accumulated other comprehensive income (loss) will be reclassified into interest expense within the next 12 months.
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| June 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||
| Derivative | Notional Amount | Receive Rate | Pay Rate | Effective Date | Expiration Date | Asset | Liability | Asset | Liability | |||||||||||||||||||||||||||||
| Interest rate swap | $ | 1 Month LIBOR | August 31, 2017 | August 24, 2022 | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| Effects of Cash Flow Hedges | June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | ||||||||||||||||||||||
| Amount of gain (loss) recognized in other comprehensive income (loss) | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Amount of gain (loss) reclassified from accumulated other comprehensive (loss) into interest expense | ( | ( | ( | ( | ||||||||||||||||||||||
The table below shows the effect of our derivative financial instruments designated as cash flow hedges on the condensed consolidated statements of operations for the three and six months ended June 30, 2021 and 2020 (amounts in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| Effects of Cash Flow Hedges | June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | ||||||||||||||||||||||
| Total interest (expense) presented in the condensed consolidated statements of operations in which the effects of cash flow hedges are recorded | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Amount of gain (loss) reclassified from accumulated other comprehensive (loss) into interest expense | ( | ( | ( | ( | ||||||||||||||||||||||
Fair Valuation
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| June 30, 2021 | |||||||||||||||||||||||||||||
| Estimated Fair Value | |||||||||||||||||||||||||||||
| Carrying Value | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Interest rate swap included in accounts payable and accrued expenses | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Mortgage notes payable | |||||||||||||||||||||||||||||
| Senior unsecured notes - Series A, B, C, D, E, F, G and H | |||||||||||||||||||||||||||||
| Unsecured term loan facilities | |||||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Estimated Fair Value | |||||||||||||||||||||||||||||
| Carrying Value | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Interest rate swap included in accounts payable and accrued expenses | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Mortgage notes payable | |||||||||||||||||||||||||||||
| Senior unsecured notes - Series A, B, C, D, E, F, G and H | |||||||||||||||||||||||||||||
| Unsecured term loan facilities | |||||||||||||||||||||||||||||
7. Leases
Lessor
We lease various spaces to tenants over terms ranging from to 21 years. Certain leases have renewal options for additional terms. The leases provide for base monthly rentals and reimbursements for real estate taxes, escalations linked to the consumer price index or common area maintenance known as operating expense escalation. Operating expense reimbursements are reflected in our June 30, 2021 and 2020 condensed consolidated statements of operations as rental revenue.
Rental revenue includes fixed and variable payments. Fixed payments primarily relate to base rent and variable payments primarily relate to tenant expense reimbursements for certain property operating costs. The components of rental revenue for the three and six months ended June 30, 2021 and 2020 are as follows (amounts in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| Rental revenue | June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | ||||||||||||||||||||||
| Fixed payments | $ | $ | $ | $ | ||||||||||||||||||||||
| Variable payments | ||||||||||||||||||||||||||
| Total rental revenue | $ | $ | $ | $ | ||||||||||||||||||||||
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| Remainder of 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| $ | |||||
The above future minimum lease payments exclude tenant recoveries, amortization of deferred rent receivables and the net accretion of above-below-market lease intangibles. Some leases are subject to termination options generally upon payment of a termination fee. The preceding table is prepared assuming such options are not exercised.
Lessee
We determine if an arrangement is a lease at inception. Our operating lease agreements relate to three ground lease assets and are reflected in right-of-use assets of $29.0 million and lease liabilities of $29.0 million in our consolidated balance sheets as of June 30, 2021. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Variable lease payments are excluded from the right-of-use assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred.
We make payments under ground leases related to three of our properties. The ground leases are due to expire between the years 2050 and 2077, inclusive of extension options, and have no variable payments or residual value guarantees. As our leases do not provide an implicit rate, we determined our incremental borrowing rate based on information available at the date of adoption of ASU No. 2016-02, Leases (Topic 842), in determining the present value of lease payments. The weighted average incremental borrowing rate used to calculate the right-of-use assets and lease liabilities as of June 30, 2021 was 4.5 %. Rent expense for lease payments related to our operating leases is recognized on a straight-line basis over the non-cancellable term of the leases. The weighted average remaining lease term as of June 30, 2021 was 48.9 years.
| Remainder of 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total undiscounted cash flows | |||||
| Present value discount | ( | ||||
| Ground lease liabilities | $ | ||||
8. Commitments and Contingencies
Legal Proceedings
Except as described below, as of June 30, 2021, we were not involved in any material litigation, nor, to our knowledge, was any material litigation threatened against us or our properties, other than routine litigation arising in the ordinary course of business such as disputes with tenants. We believe that the costs and related liabilities, if any, which may result from such actions will not materially affect our condensed consolidated financial position, operating results or liquidity.
As previously disclosed, in October 2014, 12 former investors (the "Claimants") in Empire State Building Associates L.L.C. (“ESBA”), which prior to the initial public offering of our company (the "Offering"), owned the fee title to the Empire
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State Building, filed an arbitration with the American Arbitration Association against Peter L. Malkin, Anthony E. Malkin, Thomas N. Keltner, Jr., and our subsidiary ESRT MH Holdings LLC, the former supervisor of ESBA (the "Respondents"). The statement of claim (also filed later in federal court in New York for the expressed purpose of tolling the statute of limitations) alleges breach of fiduciary duty and related claims in connection with the Offering and formation transactions and seeks monetary damages and declaratory relief. Claimants had opted out of a prior class action bringing similar claims that was settled with court approval. Respondents filed an answer and counterclaims. In March 2015, the federal court action was stayed on consent of all parties pending the arbitration. Arbitration hearings started in May 2016 and concluded in August 2018. On August 26, 2020, the arbitration panel issued an award that denied all Claimants’ claims with one exception, on which it awarded Claimants approximately $1.2 million, inclusive of seven years of interest through October 2, 2020. This amount was recorded as an IPO litigation expense in the consolidated statement of operations for the year ended December 31, 2020.
Respondents believe that such award in favor of the Claimants is entirely without merit and have sought to vacate that portion of the award. In addition, certain of the Claimants in the federal court action sought to pursue claims in that case against Respondents. Respondents believe that any such claims are meritless. The magistrate judge assigned to the action has issued a Report and Recommendation rejecting Claimants’ claims; the district judge will decide whether to adopt the Report and Recommendation.
Pursuant to indemnification agreements which were made with our directors, executive officers and chairman emeritus as part of our formation transactions, Anthony E. Malkin, Peter L. Malkin and Thomas N. Keltner, Jr. have defense and indemnity rights from us with respect to this arbitration.
Unfunded Capital Expenditures
At June 30, 2021, we estimate that we will incur approximately $89.1 million of capital expenditures (including tenant improvements and leasing commissions) on our properties pursuant to existing lease agreements. We expect to fund these capital expenditures with operating cash flow, additional property level mortgage financings, our unsecured credit facility, cash on hand and other borrowings. Future property acquisitions may require substantial capital investments for refurbishment and leasing costs. We expect that these financing requirements will be met in a similar fashion.
Concentration of Credit Risk
Financial instruments that subject us to credit risk consist primarily of cash and cash equivalents, restricted cash, short-term investments, tenant and other receivables and deferred rent receivables. At June 30, 2021, we held on deposit at various major financial institutions cash and cash equivalents and restricted cash balances in excess of amounts insured by the Federal Deposit Insurance Corporation.
Asset Retirement Obligations
We are required to accrue costs that we are legally obligated to incur on retirement of our properties which result from acquisition, construction, development and/or normal operation of such properties. Retirement includes sale, abandonment or disposal of a property. Under that standard, a conditional asset retirement obligation represents a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement is conditional on a future event that may or may not be within a company’s control and a liability for a conditional asset retirement obligation must be recorded if the fair value of the obligation can be reasonably estimated. Environmental site assessments and investigations have identified asbestos or asbestos-containing building materials in certain of our properties. As of June 30, 2021, management has no plans to remove or alter these properties in a manner that would trigger federal and other applicable regulations for asbestos removal, and accordingly, the obligations to remove the asbestos or asbestos-containing building materials from these properties have indeterminable settlement dates. As such, we are unable to reasonably estimate the fair value of the associated conditional asset retirement obligation. However, ongoing asbestos abatement, maintenance programs and other required documentation are carried out as required and related costs are expensed as incurred.
Other Environmental Matters
Certain of our properties have been inspected for soil contamination due to pollutants, which may have occurred prior to our ownership of these properties or subsequently in connection with its development and/or its use. Required remediation to such properties has been completed, and as of June 30, 2021, management believes that there are no obligations related to environmental remediation other than maintaining the affected sites in conformity with the relevant authority’s mandates and filing the required documents. All such maintenance costs are expensed as incurred. We expect that resolution of the environmental matters relating to the above will not have a material impact on our business, assets, consolidated financial
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condition, results of operations or liquidity. However, we cannot be certain that we have identified all environmental liabilities at our properties, that all necessary remediation actions have been or will be undertaken at our properties or that we will be indemnified, in full or at all, in the event that such environmental liabilities arise.
Insurance Coverage
9. Capital
As of June 30, 2021, there were 285,722,956 common stock and operating partnership units outstanding, of which 173,400,552 , or 60.7 %, were owned by ESRT and 112,322,404 , or 39.3 %, were owned by other partners, including ESRT directors, members of senior management and other employees.
On May 16, 2019, the Empire State Realty Trust, Inc. Empire State Realty OP, L.P. 2019 Equity Incentive Plan (“2019 Plan”) was approved by our shareholders. The 2019 Plan provides for grants to directors, employees and consultants of ESRT and the Operating Partnership, including options, restricted stock, restricted stock units, stock appreciation rights, performance awards, dividend equivalents and other equity-based awards. An aggregate of approximately 11.0 million shares of ESRT common stock is authorized for issuance under awards granted pursuant to the 2019 Plan. We will not issue any new equity awards under the First Amended and Restated Empire State Realty Trust, Inc. and Empire State Realty OP, L.P. 2013 Equity Incentive Plan ("2013 Plan", and collectively with the 2019 Plan, "the Plans"). The shares of ESRT Class A common stock underlying any awards under the 2019 Plan and the 2013 Plan that are forfeited, canceled or otherwise terminated, other than by exercise, will be added back to the shares of ESRT Class A common stock available for issuance under the 2019 Plan. Shares tendered or held back upon exercise of a stock option or settlement of an award under the 2019 Plan or the 2013 Plan to cover the exercise price or tax withholding and shares subject to a stock appreciation right that are not issued in connection with the stock settlement of the stock appreciation right upon exercise thereof, will not be added back to the shares of ESRT Class A common stock available for issuance under the 2019 Plan. In addition, shares of ESRT Class A common stock repurchased on the open market will not be added back to the shares of ESRT Class A common stock available for issuance under the 2019 Plan.
Long-term incentive plan ("LTIP") units are a special class of partnership interests. Each LTIP unit awarded will be deemed equivalent to an award of one share of ESRT stock under the Plans, reducing the availability for other equity awards on a one-for-one basis.
The vesting period for LTIP units, if any, will be determined at the time of issuance. Under the terms of the LTIP units, we will revalue for tax purposes its assets upon the occurrence of certain specified events, and any increase in valuation from the time of grant until such event will be allocated first to the holders of LTIP units to equalize the capital accounts of such holders with the capital accounts of unitholders. Subject to any agreed upon exceptions, once vested and having achieved parity with unitholders, LTIP units are convertible into Series PR operating partnership units on a one-for-one basis.
LTIP units subject to time-based vesting, whether vested or not, receive the same per unit distributions as operating partnership units, which equal per share dividends (both regular and special) on our common stock. LTIP units subject to market-based vesting receive 10 % of such distributions currently, unless and until such LTIP units are earned based on performance, at which time they will receive the accrued and unpaid 90 % and will commence receiving 100 % of such distributions thereafter.
Stock and Publicly Traded Operating Partnership Unit Repurchase Program
ESRT's Board of Directors reauthorized the repurchase of up to $500 million of ESRT Class A common stock and the Operating Partnership’s Series ES, Series 250 and Series 60 operating partnership units through December 31, 2021. Under the program, ESRT may purchase ESRT Class A common stock and we may purchase our Series ES, Series 250 and Series 60 operating partnership units in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by ESRT and us at our discretion and will be subject to stock price, availability, trading volume and general market conditions. The authorization does not obligate ESRT or us to acquire any particular amount of securities, and the program may be suspended or discontinued at ESRT and our discretion without prior notice.
There were no purchases of equity securities during the three months ended June 30, 2021.
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As of June 30, 2021, there were 4,664,038 Series 2019 Preferred Units ("Series 2019 Preferred Units") and 1,560,360 Series 2014 Private Perpetual Preferred Units ("Series 2014 Preferred Units"). The Series 2019 Preferred Units have a liquidation preference of $13.52 per unit and are entitled to receive cumulative preferential annual cash distributions of $0.70 per unit payable in arrears on a quarterly basis. The Series 2019 Preferred Units are not redeemable at the option of the holders and are redeemable at our option only in the case of specific defined events. The Series 2014 Preferred Units which have a liquidation preference of $16.62 per unit and are entitled to receive cumulative preferential annual cash distributions of $0.60 per unit payable in arrears on a quarterly basis. The Series 2014 Preferred Units are not redeemable at the option of the holders and are redeemable at our option only in the case of specific defined events.
Distributions
Total distributions paid to OP unitholders were $9.5 million and $9.5 million for the three and six months ended June 30, 2021, respectively, and $30.6 million and $62.2 million for the three and six months ended June 30, 2020, respectively. Total distributions paid to preferred unitholders were $1.1 million and $2.1 million for the three and six months ended June 30, 2021, respectively, and $1.0 million and $2.1 million for the three and six months ended June 30, 2020, respectively.
Incentive and Share-Based Compensation
The Plans provide for grants to directors, employees and consultants consisting of stock options, restricted stock, dividend equivalents, stock payments, performance shares, LTIP units, stock appreciation rights and other incentive awards. An aggregate of 11.0 million shares of ESRT common stock is authorized for issuance under awards granted pursuant to the 2019 Plan, and as of June 30, 2021, 7.7 million shares of ESRT common stock remain available for future issuance.
Annually, we make grants of LTIP units to our non-employee directors under the 2019 Plan. In 2021, each of our directors received 60 % of their $200,000 annual base retainer in the form of equity vesting ratably over four years , and could elect to receive the remaining 40 % of such base retainer (i) in cash at the face value of the award, (ii) in immediately vesting equity at the face value of the award, or (iii) in equity vesting ratably over three years at 120 % of the face amount. Each director could elect to receive any equity portion of the base retainer in either (i) LTIP units or (ii) restricted shares of our Class A common stock. In accordance with each director's election, we granted a total of 126,713 LTIP units that are subject to time-based vesting with fair market values of $1.4 million and no restricted shares. The LTIP units vest ratably over or four years from the date of the grant, based on grantee election, subject generally to the director's continued service on our Board of Directors. We also granted 8,324 LTIP units that are subject to immediate vesting with fair market values of $0.1 million.
In COVID-19 disrupted markets which created unusual volatility in our share price during the first quarter of 2020, the LTIP units that are subject to market-based vesting were undervalued on initial appraisal, and the resulting number of LTIP units issued in March 2020 was reduced on final appraisal to match the original Board-approved dollar value. Thus, in June 2020, we reduced the grants of LTIP units that are subject to market-based vesting which were awarded to executive officers and certain other employees by 666,933 LTIP units with fair market values of $2.8 million and 99,630 LTIP units with fair market values of $0.5 million, respectively. Such volatility was not material in 2021, and no such adjustment was needed in 2021.
Share-based compensation for time-based equity awards is measured at the fair value of the award on the date of grant and recognized as an expense on a straight-line basis over the shorter of (i) the stated vesting period, which is generally , or five years , or (ii) the period from the date of grant to the date the employee becomes retirement eligible, which may occur upon grant. An employee is retirement eligible when the employee attains the (i) age of 65 and (ii) the date on which the employee has first completed ten years of continuous service with us or our affiliates. During the second quarter of 2020, the Board approved changing the definition of retirement age from 60 to 65 starting with the grant awards issued in March 2020 under the 2019 Plan. Share-based compensation for market-based equity awards is measured at the fair value of the award on the date of grant and recognized as an expense on a straight-line basis over or four years depending on retirement eligibility.
For the market-based LTIP units, the fair value of the awards was estimated using a Monte Carlo Simulation model and discounted for the restriction period during which the LTIP units cannot be redeemed or transferred and the uncertainty regarding if, and when, the book capital account of the LTIP units will equal that of the common units. Our stock price, along with the prices of the comparative indexes, is assumed to follow the Geometric Brownian Motion Process. Geometric Brownian Motion is a common assumption when modeling in financial markets, as it allows the modeled quantity (in this case
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the stock price) to vary randomly from its current value and take any value greater than zero. The volatilities of the returns on our stock price and the comparative indexes were estimated based on implied volatilities and historical volatilities using a six-year look-back period. The expected growth rate of the stock prices over the performance period is determined with consideration of the risk-free rate as of the grant date. For LTIP unit awards that are time-based, the fair value of the awards was estimated based on the fair value of our stock at the grant date discounted for the restriction period during which the LTIP units cannot be redeemed or transferred and the uncertainty regarding if, and when, the book capital account of the LTIP units will equal that of the common units. For restricted stock awards, we estimate the stock compensation expense based on the fair value of the stock at the grant date.
LTIP units and ESRT restricted stock issued during the six months ended June 30, 2021 were valued at $19.8 million. The weighted average per unit or share fair value was $8.55 for grants issued in 2021. The per unit or share granted in 2021 was estimated on the respective dates of grant using the following assumptions: an expected life from 2.0 to 5.3 years, a dividend rate of 2.60 %, a risk-free interest rate from 0.12 % to 0.32 %, and an expected price volatility from 36.0 % to 53.0 %. No other stock options, dividend equivalents, or stock appreciation rights were issued or outstanding in 2021.
| Restricted Stock | LTIP Units | Weighted Average Grant Fair Value | |||||||||||||||
| Unvested balance at December 31, 2020 | $ | ||||||||||||||||
| Vested | ( | ( | |||||||||||||||
| Granted | |||||||||||||||||
| Forfeited or unearned | ( | ( | |||||||||||||||
| Unvested balance at June 30, 2021 | $ | ||||||||||||||||
The LTIP unit and ESRT restricted stock awards are treated for accounting purposes as immediately vested upon the later of (i) the date the grantee attains the age of 60 or 65 , as applicable, and (ii) the date on which grantee has first completed ten years of continuous service with our company or its affiliates. For award agreements that qualify, we recognize noncash compensation expense on the grant date for the time-based awards and ratably over the vesting period for the performance-based awards, and accordingly, we recognized $0.4 million and $1.4 million for the three and six months ended June 30, 2021, respectively, and $0.3 million and $1.9 million for the three and six months ended June 30, 2020, respectively. Unrecognized compensation expense was $2.3 million at June 30, 2021, which will be recognized over a weighted average period of 2.5 years.
For the remainder of the LTIP unit and ESRT restricted stock awards, we recognize noncash compensation expense ratably over the vesting period, and accordingly, we recognized noncash compensation expense of $4.8 million and $8.6 million for the three and six months ended June 30, 2021, respectively, and $8.5 million and $12.8 million for the three and six months ended June 30, 2020, respectively. Unrecognized compensation expense was $34.7 million at June 30, 2021, which will be recognized over a weighted average period of 2.5 years.
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Earnings Per Unit
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Private perpetual preferred unit distributions | ( | ( | ( | ( | |||||||||||||||||||
| Earnings allocated to unvested units | ( | ( | ( | ( | |||||||||||||||||||
| Net income (loss) attributable to common unitholders – basic and diluted | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average units outstanding – basic | |||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Stock-based compensation plans | |||||||||||||||||||||||
| Weighted average units outstanding –- diluted | |||||||||||||||||||||||
| Earnings (loss) per share: | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
10. Related Party Transactions
Supervisory Fee Revenue
We earned supervisory fees from entities affiliated with Anthony E. Malkin, our Chairman and Chief Executive Officer, of $0.3 million and $0.2 million for the three months ended June 30, 2021 and 2020, respectively, and $0.5 million and $0.5 million for the six months ended June 30, 2021 and 2020, respectively. These fees are included within third-party management and other fees.
Property Management Fee Revenue
We earned property management fees from entities affiliated with Anthony E. Malkin of $0.1 million and $0.1 million for the three months ended June 30, 2021 and 2020, respectively, and $0.1 million and $0.2 million for the six months ended June 30, 2021 and 2020, respectively. These fees are included within third-party management and other fees.
Other
We receive rent generally at the market rental rate for 5,447 square feet of leased space from entities affiliated with Anthony E. Malkin at one of our properties. Under the lease, the tenant has the right to cancel such lease without special payment on 90 days’ notice. We also have a shared use agreement with such tenant, to occupy a portion of the leased premises as the office location for Peter L. Malkin, our chairman emeritus and employee, utilizing approximately 15 % of the space, for which we pay to such tenant an allocable pro rata share of the cost. We also have agreements with these entities and excluded properties and businesses to provide them with general computer-related support services. Total revenue aggregated $0.1 million and $0.1 million for the three months ended June 30, 2021 and 2020, respectively, and $0.2 million and $0.2 million for the six months ended June 30, 2021 and 2020, respectively.
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11. Segment Reporting
We have identified two reportable segments: (1) real estate and (2) observatory. Our real estate segment includes all activities related to the ownership, management, operation, acquisition, redevelopment, repositioning and disposition of our traditional real estate assets. Our observatory segment includes the operation of the 86th and 102nd floor observatories at the Empire State Building. These two lines of businesses are managed separately because each business requires different support infrastructures, provides different services and has dissimilar economic characteristics such as investments needed, stream of revenues and marketing strategies. We account for intersegment sales and rent as if the sales or rent were to third parties, that is, at current market prices.
| Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||
| Real Estate | Observatory | Intersegment Elimination | Total | |||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Rental revenue | $ | $ | — | $ | — | $ | ||||||||||||||||||||
| Intercompany rental revenue | ( | |||||||||||||||||||||||||
| Observatory revenue | — | — | ||||||||||||||||||||||||
| Lease termination fees | — | — | ||||||||||||||||||||||||
| Third-party management and other fees | — | — | ||||||||||||||||||||||||
| Other revenue and fees | — | — | ||||||||||||||||||||||||
| Total revenues | ( | |||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Property operating expenses | — | — | ||||||||||||||||||||||||
| Intercompany rent expense | — | ( | ||||||||||||||||||||||||
| Ground rent expense | — | — | ||||||||||||||||||||||||
| General and administrative expenses | ||||||||||||||||||||||||||
| Observatory expenses | — | — | ||||||||||||||||||||||||
| Real estate taxes | — | — | ||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Total operating expenses | ( | |||||||||||||||||||||||||
Total operating income (loss) | ( | |||||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Interest income | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ||||||||||||||||||||||||
| Income (loss) before income taxes | ( | |||||||||||||||||||||||||
| Income tax (expense) benefit | ( | |||||||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | |||||||||||||||||||||
| Segment assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Expenditures for segment assets | $ | $ | $ | $ | ||||||||||||||||||||||
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| Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||
| Real Estate | Observatory | Intersegment Elimination | Total | |||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Rental revenue | $ | $ | — | $ | — | $ | ||||||||||||||||||||
| Intercompany rental revenue | ( | |||||||||||||||||||||||||
| Observatory revenue | — | — | ||||||||||||||||||||||||
| Lease termination fees | — | — | ||||||||||||||||||||||||
| Third-party management and other fees | — | — | ||||||||||||||||||||||||
| Other revenue and fees | — | — | ||||||||||||||||||||||||
| Total revenues | ( | |||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Property operating expenses | — | — | ||||||||||||||||||||||||
| Intercompany rent expense | — | ( | ||||||||||||||||||||||||
| Ground rent expense | — | — | ||||||||||||||||||||||||
| General and administrative expenses | ||||||||||||||||||||||||||
| Observatory expenses | — | — | ||||||||||||||||||||||||
| Real estate taxes | — | — | ||||||||||||||||||||||||
| Impairment charges | — | — | ||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Total operating expenses | ( | |||||||||||||||||||||||||
| Total operating income (loss) | ( | |||||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Interest income | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ||||||||||||||||||||||||
| Loss before income taxes | ( | ( | ( | |||||||||||||||||||||||
| Income tax (expense) benefit | ( | |||||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||
| Segment assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Expenditures for segment assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||
| Real Estate | Observatory | Intersegment Elimination | Total | |||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Rental revenue | $ | $ | — | $ | — | $ | ||||||||||||||||||||
| Intercompany rental revenue | ( | |||||||||||||||||||||||||
| Observatory revenue | — | — | ||||||||||||||||||||||||
| Lease termination fees | — | — | ||||||||||||||||||||||||
| Third-party management and other fees | — | — | ||||||||||||||||||||||||
| Other revenue and fees | — | — | ||||||||||||||||||||||||
| Total revenues | ( | |||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Property operating expenses | — | — | ||||||||||||||||||||||||
| Intercompany rent expense | — | ( | ||||||||||||||||||||||||
| Ground rent expense | — | — | ||||||||||||||||||||||||
| General and administrative expenses | ||||||||||||||||||||||||||
| Observatory expenses | — | — | ||||||||||||||||||||||||
| Real estate taxes | — | — | ||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Total operating expenses | ( | |||||||||||||||||||||||||
Total operating income (loss) | ( | |||||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Interest income | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ||||||||||||||||||||||||
| Loss on early extinguishment of debt | ( | ( | ||||||||||||||||||||||||
| Income (loss) before income taxes | ( | ( | ||||||||||||||||||||||||
| Income tax (expense) benefit | ( | |||||||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | |||||||||||||||||||||
| Expenditures for segment assets | $ | $ | $ | $ | ||||||||||||||||||||||
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| Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||
| Real Estate | Observatory | Intersegment Elimination | Total | |||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||
| Rental revenue | $ | $ | — | $ | — | $ | ||||||||||||||||||||||||||
| Intercompany rental revenue | ( | |||||||||||||||||||||||||||||||
| Observatory revenue | — | — | ||||||||||||||||||||||||||||||
| Lease termination fees | — | — | ||||||||||||||||||||||||||||||
| Third-party management and other fees | — | — | ||||||||||||||||||||||||||||||
| Other revenue and fees | — | — | ||||||||||||||||||||||||||||||
| Total revenues | ( | |||||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Property operating expenses | — | — | ||||||||||||||||||||||||||||||
| Intercompany rent expense | — | ( | ||||||||||||||||||||||||||||||
| Ground rent expense | — | — | ||||||||||||||||||||||||||||||
| General and administrative expenses | ||||||||||||||||||||||||||||||||
| Observatory expenses | — | — | ||||||||||||||||||||||||||||||
| Real estate taxes | — | — | ||||||||||||||||||||||||||||||
| Impairment charges | — | — | ||||||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||||||||
| Total operating expenses | ( | |||||||||||||||||||||||||||||||
| Total operating income (loss) | ( | |||||||||||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||||||||
| Interest income | ||||||||||||||||||||||||||||||||
| Interest expense | ( | ( | ||||||||||||||||||||||||||||||
| Loss on early extinguishment of debt | ( | — | — | ( | ||||||||||||||||||||||||||||
| Loss before income taxes | ( | ( | ( | |||||||||||||||||||||||||||||
| Income tax (expense) benefit | ( | |||||||||||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||||||||
| Expenditures for segment assets | $ | $ | $ | $ | ||||||||||||||||||||||||||||
During the second quarter 2020, we wrote off $4.1 million of prior expenditures on a Combined Heat Power/Redundancy onsite power generation project in our real estate segment that is rendered economically unviable due to New York City's Local Law 97 and from its measurement of carbon from natural gas combustion generates fines. For the three and six months ended June 30, 2020, the $4.1
12. Subsequent Events
On July 29, 2021, GBG USA Inc., an indirect wholly-owned subsidiary of Global Brands Group Holding Limited, announced that its North America wholesale business and certain subsidiaries and affiliates (collectively, “GBG USA”) filed for bankruptcy under Chapter 11. At the time of the filing, GBG USA leased 353,325 square feet of office space at 1333 Broadway and the Empire State Building, or 3.5 %, of our total portfolio rentable square feet, representing approximately 3.6 % of total portfolio annualized rent. Of that total, all but 191,000 square feet, or 1.9 % of our total portfolio rentable square feet, has been sublet to tenants, where both GBG USA and the subtenant are liable for the rent, and we have the right to require the subtenant to pay directly to us.
The sublets are for GBG USA’s entire premises at 1333 Broadway and have been in effect for several years. We have current discussions to convert the subtenants to direct tenants.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires or indicates, references in this section to “we,” “our,” and “us” refer to our company and its consolidated subsidiaries. The following discussion related to our consolidated financial statements should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2020.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor provisions. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “contemplates,” “aims,” “continues,” “would” or “anticipates” or the negative of these words and phrases or similar words or phrases. In particular, statements pertaining to our capital resources, portfolio performance, dividend policy and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our portfolio from operations, acquisitions and anticipated market conditions, demographics and results of operations are forward-looking statements.
Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all).
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: (i) economic, political and social impact of, and uncertainty relating to, the COVID-19 pandemic; (ii) resolution of legal proceedings involving the Company; (iii) reduced demand for office or retail space, including as a result of the COVID-19 pandemic; (iv) changes in our business strategy; (v) changes in technology and market competition that affect utilization of our office, retail, broadcast or other facilities; (vi) changes in domestic or international tourism, including due to health crises such as the COVID-19 pandemic, geopolitical events and/or currency exchange rates, which may cause a decline in Observatory visitors; (vii) defaults on, early terminations of, or non-renewal of, leases by tenants; (viii) increases in the Company’s borrowing costs as a result of changes in interest rates and other factors, including the potential phasing out of LIBOR after 2021; (ix) declining real estate valuations and impairment charges; (x) termination or expiration of our ground leases; (xi) changes in our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due and potential limitations on our ability to borrow additional funds in compliance with drawdown conditions and financial covenants; (xii) decreased rental rates or increased vacancy rates; (xiii) 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; (xiv) difficulties in identifying properties to acquire and completing acquisitions; (xv) risks related to our development projects (including our Metro Tower development site) and capital projects, including the cost of construction delays and cost overruns; (xvi) impact of changes in governmental regulations, tax laws and rates and similar matters; (xvii) our failure to qualify as a real estate investment trust ("REIT"); (xviii) environmental uncertainties and risks related to adverse weather conditions, rising sea levels and natural disasters, and (xix) the accuracy of our methodologies and estimates regarding ESG metrics, goals and targets, tenant willingness and ability to collaborate towards reporting ESG metrics and meeting ESG goals and targets, and the impact of governmental regulation on our ESG efforts. 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 Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021, and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, 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 Quarterly
Report on Form 10-Q, 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.
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Overview
Empire State Realty OP, L.P. is the entity through which Empire State Realty Trust, Inc. (“ESRT”), a self-administered and self-managed REIT, conducts all of its business and owns (either directly or through subsidiaries) substantially all of its assets. We own, manage, operate, acquire and reposition office and retail properties in Manhattan and the greater New York metropolitan area.
Highlights for the three months ended June 30, 2021 included:
•Incurred net income of $3.4 million and achieved Core Funds From Operations of $48.8 million.
•Same-Store Property Cash NOI, excluding lease termination fees, was down 6.0% from the second quarter of 2020 primarily driven by a reduction in revenues due to write-offs taken over the one-year period.
•Empire State Building Observatory revenue for the second quarter 2021 increased to $8.4 million, from $2.6 million in the first quarter 2021 as visitation continued to ramp up. Observatory net operating income was $3.1 million for the second quarter 2021.
•Realized lease termination fees were $3.3 million. In keeping with historical practice, we include lease termination fees when calculating FFO and Core FFO.
•Signed 35 new, renewal, and expansion leases, representing a total of 190,838 rentable square feet.
•Collected 95% of second quarter 2021 total billings with 95% for office tenants and 91% for retail tenants.
•Reinstated quarterly dividend at $0.035 per share for the second quarter of 2021, which is one quarter earlier than previously announced, driven by confidence in the New York City recovery and improvement in our results and liquidity.
•From January 1, 2021 and through July 27, 2021, we repurchased $3.5 million of our common stock at a weighted average price of $9.22 per share. This brings the cumulative total, since the stock repurchase program began on March 5, 2020 through August 5, 2021, to $147.2 million at a weighted average price of $8.34 per share.
As of June 30, 2021, our total portfolio contained 10.1 million rentable square feet of office and retail space. We owned 14 office properties (including three long-term ground leasehold interests) encompassing approximately 9.4 million rentable square feet of office space. Nine of these properties are located in the midtown Manhattan market and aggregate approximately 7.6 million rentable square feet of office space, including the Empire State Building. Our Manhattan office properties also contain an aggregate of approximately 0.5 million rentable square feet of premier retail space on their ground floor and/or contiguous levels. Our remaining five office properties are located in Fairfield County, Connecticut and Westchester County, New York, encompassing in the aggregate approximately 1.8 million rentable square feet. The majority of square footage for these five properties is located in densely populated metropolitan communities with immediate access to mass transportation. Additionally, we have entitled land at the Stamford Transportation Center in Stamford, Connecticut, adjacent to one of our office properties, that will support the development of an approximately 0.4 million rentable square foot office building and garage. Our portfolio includes four standalone retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut, encompassing approximately 0.2 million rentable square feet in the aggregate.
The Empire State Building is our flagship property. The Empire State Building provides us with a diverse source of revenue through its office and retail leases, observatory operations and broadcasting licenses and related leased space. Our observatory operations are a separate reporting segment. Our observatory operations are subject to regular patterns of tourist activity in Manhattan and currently impacted by the COVID-19 pandemic. Historically, prior to the outbreak of the COVID-19 pandemic, approximately 16.0% to 18.0% of our annual observatory revenue was realized in the first quarter, 26.0% to 28.0% was realized in the second quarter, 31.0% to 33.0% was realized in the third quarter, and 23.0% to 25.0% was realized in the fourth quarter. On March 16, 2020, we complied with governmental mandates regarding the closing of non-essential businesses in response to the COVID-19 pandemic and closed the Empire State Building Observatory. The Observatory reopened on July 20, 2020.
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The components of the Empire State Building revenue are as follows (dollars in thousands):
| Six Months Ended June 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Office leases | $ | 70,827 | 68.8 | % | $ | 74,907 | 62.4 | % | |||||||||||||||
| Retail leases | 3,526 | 3.4 | % | 3,058 | 2.6 | % | |||||||||||||||||
| Tenant reimbursements & other income | 7,681 | 7.5 | % | 12,900 | 10.7 | % | |||||||||||||||||
| Observatory operations | 10,962 | 10.6 | % | 19,630 | 16.3 | % | |||||||||||||||||
| Broadcasting licenses and leases | 9,972 | 9.7 | % | 9,596 | 8.0 | % | |||||||||||||||||
| Total | $ | 102,968 | 100.0 | % | $ | 120,091 | 100.0 | % | |||||||||||||||
We have undertaken a comprehensive redevelopment and repositioning strategy of our Manhattan office properties. This strategy is designed to improve the overall value and attractiveness of our properties and has contributed significantly to our tenant repositioning efforts, which seek to increase our occupancy, raise our rental rates, increase our rentable square feet, increase our aggregate rental revenue, lengthen our average lease term, increase our average lease size, and improve our tenant credit quality. These improvements include restored, renovated and upgraded or new lobbies, elevator modernization, renovated public areas and bathrooms, refurbished or new windows, upgrade and standardization of retail storefront and signage, façade restorations, modernization of building-wide systems, and enhanced tenant amenities. We have also aggregated smaller spaces in order to offer larger blocks of office space, including multiple floors, that are attractive to larger, higher credit-quality tenants as well as to offer new, pre-built suites with improved layouts. This strategy has shown what we believe to be attractive results to date, and we believe has the potential to improve our operating margins and cash flows in the future. From 2002 through June 30, 2021, we have invested a total of approximately $956.4 million (excluding tenant improvement costs and leasing commissions) in our Manhattan office properties pursuant to this program. We intend to fund capital improvements through a combination of operating cash flow, cash on hand, and borrowings.
The Greater New York Metropolitan Area office market is soft, and we compete with properties that have been redeveloped recently or have planned redevelopment. We have spent approximately $37.3 million over 2018 through 2021 on these well-maintained and our well-located properties’ common areas and amenities to ensure competitiveness and protect our market position.
As of June 30, 2021, we had total debt outstanding of approximately $2.1 billion, with a weighted average interest rate of 3.9%, and a weighted average maturity of 7.7 years. 94.2% of our total debt outstanding is fixed-rate indebtedness. Excluding principal amortization, we had no outstanding debt maturing until November 2024. As of June 30, 2021, we had cash and cash equivalents of $540.6 million. Our consolidated net debt to total market capitalization was 31.4% as of June 30, 2021.
Impact of COVID-19
In March 2020, the outbreak of the novel COVID-19 was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented economic, social and political uncertainty, volatility and disruption in the United States and globally. We have taken the following actions in response to the impact of the COVID-19 pandemic on our business.
Liquidity
We currently hold $540.6 million in cash and cash equivalents on our balance sheet and have $850 million undrawn capacity under our unsecured revolving credit facility. Our $850 million unsecured revolving credit facility matures in March 2025 and has two six-month extension options, subject to certain conditions.
Property Operations
All of our office buildings have remained open during the COVID-19 pandemic. We have scaled back certain building operations in cleaning, security, lobby concierge and recurring maintenance, which reduced costs until buildings are repopulated. A portion of the reduction in operating expenses was offset by a reduction in tenant expense recoveries.
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Our operations team worked diligently to develop and implement plans for tenants' reoccupation of our buildings to ensure a safe, clean and healthy work environment. These plans involved staff reassigned to screen tenants and visitors, changes to cleaning and maintenance standards, and changes to building operations for access by tenants and their guests.
Despite the challenge of the uncertain near-term environment, we continue to believe in the long-term demand for office space. We believe many tenants have acknowledged the challenges, inequities, and worries about divided workplaces between home and office work, the challenges with onboarding new employees and miss the connectivity and productivity that an office environment provides.
Leasing
The economic uncertainty relating to the COVID-19 pandemic has slowed the pace of our leasing activity and could result in higher vacancy than we otherwise would have experienced, a longer amount of time to fill vacancies and potentially lower rental rates. As of June 30, 2021, our portfolio was 88.2% leased, including signed leases not yet commenced, with 4.9% subject to leases scheduled to expire in 2021 and 5.6% subject to leases scheduled to expire in 2022.
New leasing activity was impacted during 2020 by the COVID-19 pandemic and shelter-in-place rules that were in effect for much of the period. On June 15, 2021, New York State ended pandemic-linked restrictions given the broad-based distribution of the COVID-19 vaccine. During the second quarter 2021, we have seen a sustained increase in leasing tour volume in our Manhattan office portfolio to about 84% of pre-Covid-19 pandemic levels. While the recent increase is a positive sign that some tenants are beginning to re-engage, any potential lease transactions that stem from these tours will likely appear in the second half of the year.
Our smaller food and service type retailers have been hit particularly hard. They provide critical amenities and services to our office tenants. In many instances, we have converted some of their fixed rent to a percentage rent structure, with a payback of the difference between current and percentage rent over a defined period. We intend to support our food and service retailers so that they can service our office tenants when they re-occupy.
Retailers, in general, have been hardest hit by the pandemic. Our retail-orientated tenants are no exception. As with all landlords, we are working with some of our retail tenants that are financially challenged. Some of these tenants may end up in bankruptcy or default in their leases in the near term.
On July 29, 2021, GBG USA Inc., an indirect wholly-owned subsidiary of Global Brands Group Holding Limited, announced that its North America wholesale business and certain subsidiaries and affiliates (collectively, “GBG USA”) filed for bankruptcy under Chapter 11. At the time of the filing, GBG USA leased 353,325 square feet of office space at 1333 Broadway and the Empire State Building, or 3.5%, of our total portfolio rentable square feet, representing approximately 3.6% of total portfolio annualized rent. Of that total, all but 191,000 square feet, or 1.9% of our total portfolio rentable square feet, has been sublet to tenants, where both GBG USA and the subtenant are liable for the rent, and we have the right to require the subtenant to pay directly to us.
The sublets are for GBG USA’s entire premises at 1333 Broadway and have been in effect for several years. We have current discussions to convert the subtenants to direct tenants.
We collected rent from GBG USA through June 2021 and have converted the full balance of its $17.0 million letter of credit to cash, which we will apply against amounts due to us. In the short-term, we expect the current circumstances will cause us to record a non-cash write-off in the third quarter of $1.6 million in straight line rent receivables.
We actively monitor these developments to review our alternatives.
Observatory Operations
On March 16, 2020, we complied with governmental mandates regarding the closing of non-essential businesses in response to the COVID-19 pandemic and closed the Empire State Building Observatory. The observatory reopened under New York State's Phase 4 guidelines, Low-Risk Outdoor Arts and Entertainment, on July 20, 2020. The 102nd observation deck was reopened on August 24, 2020.
Due to the lifting of New York State COVID-19 restrictions, on June 16, 2021, the observatory fully reopened with interactive exhibits. We continue to operate with reduced hours, staffing, services, operating costs, credit card fees and marketing expenses. We have seen a higher local visitor mix, followed by a ramp up of nationally sourced travel. We anticipate
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this pattern will then be followed by a restoration of our typical visitor mix that is approximately two-thirds international which we do not expect to be achieved until the broad resumption of international air travel some time in 2022. Second quarter 2021 attendance was at nearly 17% of 2019 comparable attendance; a gradual improvement from 2020 levels and above our hypothetical admissions forecast.
We anticipate expenses to be approximately $6-7 million per quarter for the balance of 2021 dependent upon the pace of visitor ramp-up.
The closure of our observatory caused us during each quarter of 2020 and during the first and second quarters of 2021 to choose to perform an impairment test related to goodwill. We engaged a third-party valuation consulting firm to perform the valuation process. Based upon the results of the goodwill impairment test of the stand-alone observatory reporting unit, which is after the intercompany rent expense paid to the Real Estate reporting unit, we determined that the fair value of the observatory reporting unit exceeded its carrying value by less than 15.0%. Many of the factors employed in determining whether or not goodwill is impaired are outside of our control and it is reasonably likely that assumptions and estimates will change in future periods. We will continue to assess the impairment of the observatory reporting unit goodwill going forward and that continued assessment may again utilize a third-party valuation consulting firm. Goodwill allocated to the observatory reporting unit was $227.5 million at June 30, 2021.
Results of Operations
Overview
The discussion below relates to our financial condition and results of operations for the three and six months ended June 30, 2021 and 2020, respectively.
Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020
The following table summarizes our historical results of operations for the three months ended June 30, 2021 and 2020 (dollars in thousands):
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| Three Months Ended June 30, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % | ||||||||||||||||||||
Revenues: | |||||||||||||||||||||||
Rental revenue | $ | 140,797 | $ | 137,999 | $ | 2,798 | 2.0 | % | |||||||||||||||
| Observatory revenue | 8,359 | 86 | 8,273 | 9,619.8 | % | ||||||||||||||||||
| Lease termination fees | 3,339 | 1,033 | 2,306 | 223.2 | % | ||||||||||||||||||
Third-party management and other fees | 327 | 301 | 26 | 8.6 | % | ||||||||||||||||||
Other revenues and fees | 586 | 1,611 | (1,025) | (63.6) | % | ||||||||||||||||||
Total revenues | 153,408 | 141,030 | 12,378 | 8.8 | % | ||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||
Property operating expenses | 28,793 | 29,750 | 957 | 3.2 | % | ||||||||||||||||||
Ground rent expenses | 2,332 | 2,332 | — | — | % | ||||||||||||||||||
General and administrative expenses | 14,089 | 18,149 | 4,060 | 22.4 | % | ||||||||||||||||||
Observatory expenses | 5,268 | 4,002 | (1,266) | (31.6) | % | ||||||||||||||||||
Real estate taxes | 31,354 | 29,579 | (1,775) | (6.0) | % | ||||||||||||||||||
Impairment charges | — | 4,101 | 4,101 | 100.0 | % | ||||||||||||||||||
Depreciation and amortization | 45,088 | 52,783 | 7,695 | 14.6 | % | ||||||||||||||||||
Total operating expenses | 126,924 | 140,696 | 13,772 | 9.8 | % | ||||||||||||||||||
Operating income | 26,484 | 334 | 26,150 | 7,829.3 | % | ||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
Interest income | 164 | 1,526 | (1,362) | (89.3) | % | ||||||||||||||||||
Interest expense | (23,422) | (23,928) | 506 | 2.1 | % | ||||||||||||||||||
Loss on early extinguishment of debt | — | — | — | — | % | ||||||||||||||||||
Income (loss) before income taxes | 3,226 | (22,068) | 25,294 | 114.6 | % | ||||||||||||||||||
Income tax benefit (expense) | 1,185 | 2,450 | (1,265) | (51.6) | % | ||||||||||||||||||
Net income (loss) | 4,411 | (19,618) | 24,029 | 122.5 | % | ||||||||||||||||||
| Private perpetual preferred unit distributions | (1,051) | (1,047) | (4) | (0.4) | % | ||||||||||||||||||
Net income (loss) attributable to common unitholders | $ | 3,360 | $ | (20,665) | $ | 24,025 | 116.3 | % | |||||||||||||||
Rental Revenue
The increase in rental revenue as compared to the prior year was attributable to the prior year write-off of straight-line receivables in the three months ended June 30, 2020.
Observatory Revenue
The Observatory was closed for the entire second quarter 2020 due to COVID-19 pandemic restrictions. The increase in revenues reflects increased visitors due to the lifting of COVID-19 pandemic restrictions in the second quarter 2021.
Lease Termination Fees
Higher termination fees were earned in the three months ended June 30, 2021 compared to the three months ended June 30, 2020.
Third-Party Management and Other Fees
Management fee income was consistent with prior year.
Other Revenues and Fees
The decrease in other revenues and fees was due to higher bad debt recovery income received in the three months ended June 30, 2020.
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Property Operating Expenses
Property operating expenses were consistent with 2020.
Ground Rent Expenses
Ground rent expense was consistent with 2020.
General and Administrative Expenses
The decrease in general and administrative expenses was primarily due to lower equity compensation expense and lower legal leasing costs. Also contributing to the decrease were higher severance costs recorded in the three months ended June 30, 2020.
Observatory Expenses
Due to the observatory closure in the second quarter 2020, we reduced variable costs such as labor, union, security, and cleaning costs. During the second quarter 2021, the observatory was open to visitors, which resulted in increased expenses compared to the second quarter 2020.
Real Estate Taxes
The increase in real estate taxes was primarily due to higher assessed values for multiple properties.
Impairment charge
The variance reflects a $4.1 million of prior expenditures on a Combined Heat Power/ Redundancy onsite power generation project in our real estate segment that is rendered economically unviable due to New York City’s Local Law 97 and from its measurement of carbon from natural gas combustion generates fines, recorded in the second quarter 2020.
Depreciation and Amortization
The decrease in depreciation and amortization reflects tenant improvement write-offs due to the early termination of a tenant in the second quarter 2020.
Interest Income
The decrease in interest income reflects higher cash investments in 2020 compared to 2021 and lower interest rates in 2021.
Interest Expense
Interest expense was consistent with 2020.
Income Taxes
The decrease in income tax benefit was attributable to lower net loss for the Observatory segment.
Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020
The following table summarizes our historical results of operations for the six months ended June 30, 2021 and 2020 (dollars in thousands):
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| Six Months Ended June 30, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % | ||||||||||||||||||||
Revenues: | |||||||||||||||||||||||
Rental revenue | $ | 281,028 | $ | 286,112 | $ | (5,084) | (1.8) | % | |||||||||||||||
| Observatory revenue | 10,962 | 19,630 | (8,668) | (44.2) | % | ||||||||||||||||||
| Lease termination fees | 4,628 | 1,244 | 3,384 | 272.0 | % | ||||||||||||||||||
Third-party management and other fees | 603 | 647 | (44) | (6.8) | % | ||||||||||||||||||
Other revenues and fees | 1,491 | 3,621 | (2,130) | (58.8) | % | ||||||||||||||||||
Total revenues | 298,712 | 311,254 | (12,542) | (4.0) | % | ||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||
Property operating expenses | 59,072 | 71,218 | 12,146 | 17.1 | % | ||||||||||||||||||
Ground rent expenses | 4,663 | 4,663 | — | — | % | ||||||||||||||||||
General and administrative expenses | 27,942 | 34,100 | 6,158 | 18.1 | % | ||||||||||||||||||
Observatory expenses | 9,856 | 12,156 | 2,300 | 18.9 | % | ||||||||||||||||||
Real estate taxes | 62,801 | 58,833 | (3,968) | (6.7) | % | ||||||||||||||||||
Impairment charges | — | 4,101 | 4,101 | 100.0 | % | ||||||||||||||||||
Depreciation and amortization | 89,545 | 98,876 | 9,331 | 9.4 | % | ||||||||||||||||||
Total operating expenses | 253,879 | 283,947 | 30,068 | 10.6 | % | ||||||||||||||||||
Operating income | 44,833 | 27,307 | 17,526 | 64.2 | % | ||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
Interest income | 286 | 2,163 | (1,877) | (86.8) | % | ||||||||||||||||||
Interest expense | (46,976) | (43,546) | (3,430) | (7.9) | % | ||||||||||||||||||
Loss on early extinguishment of debt | (214) | (86) | (128) | (148.8) | % | ||||||||||||||||||
Income (loss) before income taxes | (2,071) | (14,162) | 12,091 | 85.4 | % | ||||||||||||||||||
Income tax benefit | 3,291 | 2,832 | 459 | 16.2 | % | ||||||||||||||||||
Net income (loss) | 1,220 | (11,330) | 12,550 | 110.8 | % | ||||||||||||||||||
| Private perpetual preferred unit distributions | (2,101) | (2,097) | (4) | (0.2) | % | ||||||||||||||||||
Net income (loss) attributable to common unitholders | $ | (881) | $ | (13,427) | $ | 12,546 | 93.4 | % | |||||||||||||||
Rental Revenue
The decrease in rental revenue was attributable to lower tenant expense reimbursements, consistent with lower operating expenses.
Observatory Revenue
Observatory revenues were lower due to the COVID-19 pandemic as our results continue to be impacted the strong first quarter 2020, pre-COVID-19 performance and the rebuild of tourist travel and by international travel restrictions.
Lease Termination Fees
Higher termination fees were earned in the six months ended June 30, 2021 compared to the six months ended June 30, 2020.
Third-Party Management and Other Fees
Management fee income was consistent with prior year.
Other Revenues and Fees
The decrease in other revenues and fees was due to higher bad debt recovery income received in the six months ended June 30, 2020 and lower food and beverage sales and lower parking income due to the COVID-19 pandemic in the six months ended June 30, 2021.
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Property Operating Expenses
The decrease in property operating expenses was primarily due to lower payroll costs, lower cleaning costs, lower repair and maintenance costs, and other lower operating expenses. The lower costs are primarily driven by lower tenant utilization in our buildings.
Ground Rent Expenses
Ground rent expense was consistent with 2020.
General and Administrative Expenses
The decrease in general and administrative expenses was primarily due to lower equity compensation expense and lower legal leasing costs. Also contributing to the decrease were higher severance costs recorded in the six months ended June 30, 2020.
Observatory Expenses
The decrease in observatory expenses was driven by cost controls and reduced hours of operation instituted in response to reduced tourist demand during the six months ended June 30, 2021 due to COVID-19 reduced travel and international travel restrictions.
Real Estate Taxes
The increase in real estate taxes was primarily due to higher assessed values for multiple properties.
Impairment charge
The variance reflects a $4.1 million of prior expenditures on a Combined Heat Power/ Redundancy onsite power generation project in our real estate segment that is rendered economically unviable due to New York City’s Local Law 97 and from its measurement of carbon from natural gas combustion generates fines, recorded in the second quarter 2020.
Depreciation and Amortization
The decrease in depreciation and amortization reflects tenant improvement write-offs due to the early termination of a tenant in 2020.
Interest Income
The decrease in interest income reflects higher cash investments in 2020 compared to 2021 and lower interest rates in 2021.
Interest Expense
Interest expense increased due to higher deferred financing cost amortization and higher interest associated with variable to fixed interest rate swap agreements.
Income Taxes
The increase in income tax benefit was attributable to higher net loss for the Observatory segment.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, including lease-up costs, fund our redevelopment and repositioning programs, acquire properties, make distributions to our securityholders and fulfill other general business needs. Based on the historical experience of our management and our business strategy, in the foreseeable future we anticipate we will generate positive cash flows from operations. In order for ESRT to qualify as a REIT, ESRT is required under the Internal Revenue Code of 1986 to distribute to its stockholders, on an annual basis, at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We expect to make quarterly distributions, as required, to our securityholders.
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While we may be able to anticipate and plan for certain liquidity needs, there may be unexpected increases in uses of cash that are beyond our control and which would affect our financial condition and results of operations. For example, we may be required to comply with new laws or regulations that cause us to incur unanticipated capital expenditures for our properties, thereby increasing our liquidity needs. Even if there are no material changes to our anticipated liquidity requirements, our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or needed. Our primary sources of liquidity will generally consist of cash on hand and cash generated from our operating activities, debt issuances and unused borrowing capacity under our unsecured revolving credit facility. We expect to meet our short-term liquidity requirements, including distributions, operating expenses, working capital, debt service, and capital expenditures from cash flows from operations, cash on hand, debt issuances, and available borrowing capacity under our unsecured revolving credit facility. The availability of these borrowings is subject to the conditions set forth in the applicable loan agreements. We expect to meet our long-term capital requirements, including acquisitions, redevelopments and capital expenditures through our cash flows from operations, cash on hand, our unsecured revolving credit facility, mortgage financings, debt issuances, common and/or preferred equity issuances and asset sales. Our properties require periodic investments of capital for individual lease related tenant improvements allowances, general capital improvements and costs associated with capital expenditures. Our overall leverage will depend on our mix of investments and the cost of leverage. ESRT's charter does not restrict the amount of leverage that we may use.
At June 30, 2021, we had $540.6 million available in cash and cash equivalents, and $850 million available under our unsecured revolving credit facility.
For a five year right of first offer period expiring August 23, 2021, Q REIT Holding LLC, a Qatar Financial Centre limited liability company and a wholly owned subsidiary of the Qatar Investment Authority, a governmental authority of the State of Qatar (“QREIT”, together with any eligible transferee, “QIA”) will have a right of first offer to co-invest with us as a joint venture partner in real estate investment opportunities initiated by us where we have elected, at our discretion, to seek out a joint venture partner in real estate investment opportunities. The right of first offer period will be extended for 30 months beyond its original expiration date so long as at least one joint venture transaction is consummated by us and QIA during the initial five year term, and will be extended for a further 30-month term if at least one more joint venture transaction is consummated during such initial extension period.
As of June 30, 2021, we had approximately $2.1 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 3.9% and a weighted average maturity of 7.7 years. As of June 30, 2021, excluding principal amortization, we have no outstanding debt maturing until November 2024. Our consolidated net debt to total market capitalization was 31.4% as of June 30, 2021.
Unsecured Revolving Credit and Term Loan Facilities
As described more fully in our Form 10-Q for the quarterly period ended March 31, 2021 (the "Q1 2021 10-Q"), in Q1 2021, we entered into an amended senior unsecured credit facility (the "Credit Facility") with Bank of America, N.A., as administrative agent and the other lenders party thereto. The Credit Facility is in the initial maximum principal amount of up to $1.065 billion, which consists of $850.0 million revolving credit facility that matures on March 31, 2025, and a $215.0 million term loan facility that matures on March 19, 2025. As of June 30, 2021, we had no borrowings under the revolving credit facility and $215.0 million under the term loan facility.
Additionally, as described more fully in the Q1 2021 10-Q, we have outstanding a senior unsecured term loan facility (the "Term Loan Facility") that we entered into on March 19, 2020 with Wells Fargo Bank, National Association, as administrative agent, and the other lenders party thereto. The Term loan Facility is in the original principal amount of $175.0 million and matures on December 31, 2026. As of June 30, 2021, our borrowings amounted to $175.0 million under the Term Loan Facility.
The terms of both the Credit Facility and the Term Loan Facility include customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. Both facilities also require compliance with financial ratios including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a minimum unencumbered interest coverage ratio, and a maximum unsecured leverage ratio. The agreements governing both facilities also contain customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, invalidity of loan documents, loss of real estate investment trust qualification, and occurrence of a change of control. As of June 30, 2021, we were in compliance with the covenants.
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Senior Unsecured Notes
The terms of the senior unsecured notes include customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. It also requires compliance with financial ratios including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a minimum unencumbered interest coverage ratio, and a maximum unsecured leverage ratio. The agreements also contain customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, the occurrence of certain change of control transactions and loss of real estate investment trust qualification. As of June 30, 2021, we were in compliance with the covenants under the outstanding senior unsecured notes.
Financial Covenants
As of June 30, 2021, we were in compliance with the following financial covenants:
| Financial covenant | Required | June 30, 2021 | In Compliance | ||||||||
| Maximum total leverage | < 60% | 37.6 | % | Yes | |||||||
| Maximum secured debt | < 40% | 13.7 | % | Yes | |||||||
| Minimum fixed charge coverage | > 1.50x | 2.6x | Yes | ||||||||
| Minimum unencumbered interest coverage | > 1.75x | 5.3x | Yes | ||||||||
| Maximum unsecured leverage | < 60% | 29.4 | % | Yes | |||||||
Leverage Policies
We expect to employ leverage in our capital structure in amounts determined from time to time by ESRT's board of directors. Although ESRT's board of directors has not adopted a policy that limits the total amount of indebtedness that we may incur, we anticipate that ESRT's board of directors will consider a number of factors in evaluating our level of indebtedness from time to time, as well as the amount of such indebtedness that will be either fixed or floating rate. ESRT's charter and bylaws do not limit the amount or percentage of indebtedness that we may incur nor do they restrict the form in which our indebtedness will be taken (including, but not limited to, recourse or non-recourse debt and cross-collateralized debt). Our overall leverage will depend on our mix of investments and the cost of leverage, however, we initially intend to maintain a level of indebtedness consistent with our plan to seek an investment grade credit rating. ESRT's board of directors may from time to time modify our leverage policies in light of the then-current economic conditions, relative costs of debt and equity capital, market values of our properties, general market conditions for debt and equity securities, fluctuations in the market price of ESRT's common stock and our traded OP units, growth and acquisition opportunities and other factors.
Capital Expenditures
The following tables summarize our leasing commission costs, tenant improvement costs and our capital expenditures for each of the periods presented (dollars in thousands, except per square foot amounts).
Office Properties(1)
| Six Months Ended June 30, | |||||||||||
| Total New Leases, Expansions, and Renewals | 2021 | 2020 | |||||||||
Number of leases signed(2) | 57 | 48 | |||||||||
Total square feet | 350,196 | 216,710 | |||||||||
Leasing commission costs(3) | $ | 6,397 | $ | 2,548 | |||||||
Tenant improvement costs(3) | 20,529 | 10,147 | |||||||||
Total leasing commissions and tenant improvement costs(3) | $ | 26,926 | $ | 12,695 | |||||||
Leasing commission costs per square foot(3) | $ | 18.27 | $ | 11.76 | |||||||
Tenant improvement costs per square foot(3) | 58.62 | 46.83 | |||||||||
Total leasing commissions and tenant improvement costs per square foot(3) | $ | 76.89 | $ | 58.59 | |||||||
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Retail Properties(4)
| Six Months Ended June 30, | |||||||||||
| Total New Leases, Expansions, and Renewals | 2021 | 2020 | |||||||||
Number of leases signed(2) | 4 | 6 | |||||||||
Total square feet | 12,459 | 45,864 | |||||||||
Leasing commission costs(3) | $ | 573 | $ | 1,997 | |||||||
Tenant improvement costs(3) | 405 | 7,345 | |||||||||
Total leasing commissions and tenant improvement costs(3) | $ | 978 | $ | 9,342 | |||||||
Leasing commission costs per square foot(3) | $ | 46.03 | $ | 43.54 | |||||||
Tenant improvement costs per square foot(3) | 32.49 | 160.14 | |||||||||
Total leasing commissions and tenant improvement costs per square foot(3) | $ | 78.52 | $ | 203.68 | |||||||
_______________
(1)Excludes an aggregate of 504,284 and 506,452 rentable square feet of retail space in our Manhattan office properties in 2021 and 2020, respectively. Includes the Empire State Building broadcasting licenses and observatory operations.
(2)Presents a renewed and expansion lease as one lease signed.
(3)Presents all tenant improvement and leasing commission costs as if they were incurred in the period in which the lease was signed, which may be different than the period in which they were actually paid.
(4)Includes an aggregate of 504,284 and 506,452 rentable square feet of retail space in our Manhattan office properties in 2021 and 2020, respectively. Excludes the Empire State Building broadcasting licenses and observatory operations.
| Six Months Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
Total Portfolio | |||||||||||
Capital expenditures (1) | $ | 9,331 | $ | 23,884 | |||||||
_______________
(1)Excludes tenant improvements and leasing commission costs.
As of June 30, 2021, we expect to incur additional costs relating to obligations under existing lease agreements of approximately $89.1 million for tenant improvements and leasing commissions. We intend to fund the tenant improvements and leasing commission costs through a combination of operating cash flow, cash on hand, additional property level mortgage financings and borrowings under the unsecured revolving credit facility.
Capital expenditures are considered part of both our short-term and long-term liquidity requirements. We intend to fund capital improvements through a combination of operating cash flow, cash on hand and borrowings under the unsecured revolving credit facility.
Contractual Obligations
Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of our contractual obligations. There have been no material changes, outside the ordinary course of business, to these contractual obligations during the six months ended June 30, 2021.
Off-Balance Sheet Arrangements
As of June 30, 2021, we did not have any off-balance sheet arrangements.
Distribution Policy
In order for ESRT to qualify as a REIT, it must distribute to its securityholders, on an annual basis, at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, it will be subject to U.S. federal income tax at regular corporate rates to the extent that it distributes less than 100% of its net taxable income (including net capital gains) and will be subject to a 4% nondeductible excise tax on the amount, if any, by which its distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. We intend to distribute our net income to our securityholders in a manner intended to allow ESRT to satisfy its REIT 90%
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distribution requirement and to allow ESRT to avoid U.S. federal income tax liability on its income and the 4% nondeductible excise tax.
Before we pay any distribution, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and obligations to make payments of principal and interest, if any. However, under some circumstances, we may be required to use cash reserves, incur debt or liquidate assets at rates or times that we regard as unfavorable or make a taxable distribution of our units in order to allow ESRT to satisfy its REIT 90% distribution requirement and to avoid U.S. federal income tax and the 4% nondeductible excise tax in that year.
In 2020, we had a unique situation whereby we had no requirement to pay a dividend beyond the quarterly dividends paid in the first and second quarters of 2020 due to two primary factors: (i) the significant decline in revenue due to lower levels of observatory visitation, and (ii) ESRT had a net operating loss carryforward available to reduce the amount of REIT taxable income otherwise required to be distributed by ESRT to meet REIT requirements. After careful consideration and focus on long-term shareholder value creation and preservation of our balance sheet strength and flexibility, our management and the Board of Directors concluded the best course of action was to temporarily suspend our quarterly dividend and to activate our share repurchase program. During August 2020, we announced the suspension of our third and fourth quarter 2020 dividends to holders of ESRT's Class A common stock and Class B common stock and to holders of our Series ES, Series 250 and Series 60 operating partnership units and Series PR operating partnership units. During December 2020, we announced the continued dividend suspension for the first and second quarters of 2021. During May 2021, we announced our decision to reinstate the quarterly dividend, one quarter earlier than previously announced, driven by confidence in the New York City recovery and improvement in our results and liquidity. We declared a dividend of $0.035 per share for the second quarter of 2021, which equates to an annualized rate of $0.14 per share. The Board of Directors will continue its regular review of its dividend and capital allocation policies at each Board meeting.
As of June 30, 2021, our parent and general partner, Empire State Realty Trust, Inc., had net operating loss ("NOL") carryforwards that may be used in the future to reduce the amount otherwise required to be distributed by ESRT to meet REIT requirements. However, for federal income tax purposes, the NOL will not be able to offset more than 80% of ESRT’s REIT taxable income and, therefore, may not be able to reduce the amount required to be distributed by ESRT to meet REIT requirements to zero, except for the tax year ended December 31, 2020, of which ESRT was able to offset 100% of its taxable income in accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The federal NOL may be carried forward indefinitely. Other limitations may apply to ESRT’s ability to use its NOL to offset taxable income.
Distribution to Securityholders
Distributions and dividends amounting to $11.6 million and $64.3 million have been made to securityholders for the six months ended June 30, 2021 and 2020, respectively.
Stock and Publicly Traded Operating Partnership Unit Repurchase Program
ESRT's Board of Directors authorized the repurchase of up to $500 million of ESRT Class A common stock and the Operating Partnership’s Series ES, Series 250 and Series 60 operating partnership units through December 31, 2021. Under the program, ESRT may purchase ESRT Class A common stock and we may purchase our Series ES, Series 250 and Series 60 operating partnership units in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by ESRT and us at our discretion and will be subject to stock price, availability, trading volume and general market conditions. The authorization does not obligate ESRT or us to acquire any particular amount of securities, and the program may be suspended or discontinued at ESRT and our discretion without prior notice. There were no purchases of equity securities during the three months ended June 30, 2021.
Cash Flows
Comparison of Six Months Ended June 30, 2021 to the Six Months Ended June 30, 2020
Net cash. Cash and cash equivalents and restricted cash were $578.6 million and $931.8 million, respectively, as of June 30, 2021 and 2020. The decrease was primarily due to a $550.0 million draw on the unsecured revolving credit facility in March 2020 which was subsequently repaid in September 2020.
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Operating activities. Net cash provided by operating activities increased by $9.3 million to $83.7 million for the six months ended June 30, 2021 compared to $74.4 million for the six months ended June 30, 2020, primarily due to changes in working capital.
Investing activities. Net cash used in investing activities decreased by $31.3 million to $48.4 million for the six months ended June 30, 2021 compared to $79.7 million for the six months ended June 30, 2020, due to lower capital expenditures.
Financing activities. Net cash provided by financing activities decreased by $690.2 million to $24.7 million used in financing activities for the six months ended June 30, 2021 compared to $665.5 million provided by financing activities for the six months ended June 30, 2020, primarily due to $850.0 million of net proceeds from issuance of debt, partially offset by higher repurchases of common shares of $111.1 million and higher dividends and distributions of $52.8 million which occurred in the six months ended June 30, 2020.
Net Operating Income ("NOI")
Our financial reports include a discussion of property net operating income, or NOI. NOI is a non-GAAP financial measure of performance. NOI is used by our management to evaluate and compare the performance of our properties and to determine trends in earnings and to compute the fair value of our properties as it is not affected by: (i) the cost of funds of the property owner, (ii) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP, (iii) acquisition expenses, loss on early extinguishment of debt and loss from derivative financial instruments, or (iv) general and administrative expenses and other gains and losses that are specific to the property owner. The cost of funds is eliminated from NOI because it is specific to the particular financing capabilities and constraints of the owner and because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital which may have changed or may change in the future. Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our office or retail properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale which will usually change from period to period. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly-timed purchases or sales. We believe that eliminating these costs from net income is useful because the resulting measure captures the actual revenue, generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs.
However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, depreciation and amortization expense and gains or losses from the sale of properties, and other gains and losses as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net income which further limits its usefulness.
NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income computed in accordance with GAAP and discussions elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding the components of net income that are eliminated in the calculation of NOI. Other companies may use different methods for calculating NOI or similarly titled measures and, accordingly, our NOI may not be comparable to similarly titled measures reported by other companies that do not define the measure exactly as we do.
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The following table presents a reconciliation of our net income, the most directly comparable GAAP measure, to NOI for the periods presented (amounts in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||
Net income (loss) | $ | 4,411 | $ | (19,618) | $ | 1,220 | $ | (11,330) | |||||||||||||||
Add: | |||||||||||||||||||||||
General and administrative expenses | 14,089 | 18,149 | 27,942 | 34,100 | |||||||||||||||||||
Depreciation and amortization | 45,088 | 52,783 | 89,545 | 98,876 | |||||||||||||||||||
Interest expense | 23,422 | 23,928 | 46,976 | 43,546 | |||||||||||||||||||
Loss on early extinguishment of debt | — | — | 214 | 86 | |||||||||||||||||||
Income tax (benefit) | (1,185) | (2,450) | (3,291) | (2,832) | |||||||||||||||||||
Impairment charges | — | 4,101 | — | 4,101 | |||||||||||||||||||
Less: | |||||||||||||||||||||||
Third-party management and other fees | (327) | (301) | (603) | (647) | |||||||||||||||||||
Interest income | (164) | (1,526) | (286) | (2,163) | |||||||||||||||||||
Net operating income | $ | 85,334 | $ | 75,066 | $ | 161,717 | $ | 163,737 | |||||||||||||||
Other Net Operating Income Data | |||||||||||||||||||||||
Straight-line rental revenue | $ | 3,763 | $ | (2,710) | $ | 10,110 | $ | 5,483 | |||||||||||||||
Net increase in rental revenue from the amortization of above-and below-market lease assets and liabilities | $ | 717 | $ | 1,366 | $ | 1,371 | $ | 2,274 | |||||||||||||||
Amortization of acquired below-market ground leases | $ | 1,958 | $ | 1,958 | $ | 3,916 | $ | 3,916 | |||||||||||||||
Funds from Operations ("FFO")
We present below a discussion of FFO. We compute FFO in accordance with the “White Paper” on FFO published by the National Association of Real Estate Investment Trusts, or NAREIT, which defines FFO as net income (loss) (determined in accordance with GAAP), excluding impairment write-off of investments in depreciable real estate and investments in in-substance real estate investments, gains or losses from debt restructurings and sales of depreciable operating properties, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs), less distributions to non-controlling interests and gains/losses from discontinued operations and after adjustments for unconsolidated partnerships and joint ventures. FFO is a widely recognized non-GAAP financial measure for REITs that we believe, when considered with financial statements determined in accordance with GAAP, is useful to investors in understanding financial performance and providing a relevant basis for comparison among REITs. In addition, FFO is useful to investors as it captures features particular to real estate performance by recognizing that real estate has generally appreciated over time or maintains residual value to a much greater extent than do other depreciable assets. Investors should review FFO, along with GAAP net income, when trying to understand an equity REIT’s operating performance. We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results of operations, the utility of FFO as a measure of performance is limited. There can be no assurance that FFO presented by us is comparable to similarly titled measures of other REITs. FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. Although FFO is a measure used for comparability in assessing the performance of REITs, as the NAREIT White Paper only provides guidelines for computing FFO, the computation of FFO may vary from one company to another.
Modified Funds From Operations ("Modified FFO")
Modified FFO adds back an adjustment for any above or below-market ground lease amortization to traditionally defined FFO. We consider this a useful supplemental measure in evaluating our operating performance due to the non-cash
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accounting treatment under GAAP, which stems from the third quarter 2014 acquisition of two option properties following our formation transactions as they carry significantly below market ground leases, the amortization of which is material to our overall results. We present Modified FFO because we consider it an important supplemental measure of our operating performance in that it adds back the non-cash amortization of below-market ground leases. There can be no assurance that Modified FFO presented by us is comparable to similarly titled measures of other REITs. Modified FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Modified FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions.
Core Funds From Operations ("Core FFO")
Core FFO adds back to Modified FFO the following items: IPO litigation expense, severance expenses and loss on early extinguishment of debt. The company presents Core FFO because it considers it an important supplemental measure of its operating performance in that it excludes items associated with its IPO and formation transactions and other non-recurring items. There can be no assurance that Core FFO presented by the company is comparable to similarly titled measures of other REITs. Core FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Core FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. In future periods, we may also exclude other items from Core FFO that we believe may help investors compare our results.
The following table presents a reconciliation of our net income, the most directly comparable GAAP measure, to FFO, Modified FFO and Core FFO for the periods presented (amounts in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||
Net income (loss) | $ | 4,411 | $ | (19,618) | $ | 1,220 | $ | (11,330) | |||||||||||||||
Private perpetual preferred unit distributions | (1,051) | (1,047) | (2,101) | (2,097) | |||||||||||||||||||
Real estate depreciation and amortization | 43,480 | 51,096 | 86,584 | 95,526 | |||||||||||||||||||
Impairment charge | — | 4,101 | — | 4,101 | |||||||||||||||||||
FFO attributable to common stockholders | 46,840 | 34,532 | 85,703 | 86,200 | |||||||||||||||||||
Amortization of below-market ground leases | 1,958 | 1,958 | 3,916 | 3,916 | |||||||||||||||||||
Modified FFO attributable to common stockholders | 48,798 | 36,490 | 89,619 | 90,116 | |||||||||||||||||||
Loss on early extinguishment of debt | — | — | 214 | 86 | |||||||||||||||||||
Severance expenses | — | 3,008 | — | 3,008 | |||||||||||||||||||
Core FFO attributable to common stockholders | $ | 48,798 | $ | 39,498 | $ | 89,833 | $ | 93,210 | |||||||||||||||
Weighted average Operating Partnership units | |||||||||||||||||||||||
Basic | 277,893 | 283,384 | 277,887 | 288,015 | |||||||||||||||||||
Diluted | 278,436 | 283,384 | 277,887 | 288,015 | |||||||||||||||||||
Factors That May Influence Future Results of Operations
Impact of COVID-19
See "Overview" section.
Leasing
We signed 0.9 million rentable square feet of new leases, expansions and lease renewals for the year ended December 31, 2020. During the six months ended June 30, 2021, we signed 0.4 million rentable square feet of new leases, expansions and renewals.
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Due to the relatively small number of leases that are signed in any particular quarter, one or more larger leases may have a disproportionately positive or negative impact on average rent, tenant improvement and leasing commission costs for that period. As a result, we believe it is more appropriate when analyzing trends in average rent and tenant improvement and leasing commission costs to review activity over multiple quarters or years. Tenant improvement costs include expenditures for general improvements occurring concurrently with, but that are not directly related to, the cost of installing a new tenant. Leasing commission costs are similarly subject to significant fluctuations depending upon the length of leases being signed and the mix of tenants from quarter to quarter.
As of June 30, 2021, there were approximately 1.2 million rentable square feet of space in our portfolio available to lease (excluding leases signed but not yet commenced) representing 11.8% of the net rentable square footage of the properties in our portfolio. In addition, leases representing 4.9% and 5.6% of net rentable square footage of the properties in our portfolio will expire in 2021 and in 2022, respectively. These leases are expected to represent approximately 5.0% and 6.1%, respectively, of our annualized rent for such periods. Our revenues and results of operations can be impacted by expiring leases that are not renewed or re-leased or that are renewed or re-leased at base rental rates equal to, above or below the current average base rental rates. Further, our revenues and results of operations can also be affected by the costs we incur to re-lease available space, including payment of leasing commissions, redevelopments and build-to-suit remodeling that may not be borne by the tenant.
Despite the challenge of the uncertain near-term environment, we continue to believe that as we have largely completed the redevelopment and repositioning of our properties we will, over the long-term, experience increased occupancy levels and rents. Over the short-term, as we renovate and reposition our properties, including aggregating smaller spaces to offer large blocks of space, we may experience lower occupancy levels as a result of having to relocate tenants to alternative space and the strategic expiration of existing leases. We believe that despite the short-term lower occupancy levels we may experience, we will continue to experience increased rental revenues as a result of the increased rents which we expect to obtain following the redevelopment and repositioning of our properties.
Observatory Operations
On March 16, 2020, we complied with governmental mandates regarding the closing of non-essential businesses in response to the COVID-19 pandemic and closed the Empire State Building Observatory. The observatory was closed for the entirety of the second quarter 2020 and reopened the 86th floor observation deck on July 20, 2020 with new protocols and processes under New York State's Phase 4's Low-Risk Outdoor Arts and Entertainment guidelines. The 102nd floor observation deck reopened on August 24, 2020.
The Observatory hosted approximately 162,000 visitors in the second quarter of 2021, compared to 51,000 visitors in the first quarter of 2021 and no visitors in the second quarter of 2020. In spite of the ongoing nature of international, national, and local travel restrictions and quarantines, the observatory has seen steady, weekly increases in visitors. Our return of attendance to pre-COVID-19 levels is closely tied to national and international travel trends and these remain adversely impacted by developments around the COVID-19 pandemic.
Observatory revenues for the three months ended June 30, 2021 were $8.4 million, driven by low visitation levels. Observatory expenses were $5.3 million for the three months ended June 30, 2021.
Observatory revenues and admissions are dependent upon the following: (i) the number of tourists (domestic and international) who come to New York City and visit the observatory, as well as any related tourism trends; (ii) the prices per admission that can be charged; (iii) seasonal trends affecting the number of visitors to the observatory; (iv) competition, in particular from other new and existing observatories; and (v) weather trends.
Critical Accounting Estimates
Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of our critical accounting estimates. There were no material changes to our critical accounting estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. One of the principal market risks facing us is interest rate risk on our variable rate indebtedness. As of June 30, 2021, our floating rate debt of $125.0 million represented 2.2% of our total enterprise value.
Subject to maintaining ESRT's qualification as a REIT for U.S. federal income tax purposes, we may mitigate the risk of interest rate volatility through the use of hedging instruments, such as interest rate swap agreements and interest rate cap agreements. Our primary objectives when undertaking hedging transactions and derivative positions will be to reduce our floating rate exposure and to fix a portion of the interest rate for anticipated financing and refinancing transactions. This in turn will reduce the risk that the variability of cash flows will impose on floating rate debt. However, we can provide no assurances that our efforts to manage interest rate volatility will successfully mitigate the risks of such volatility on our portfolio. We are not subject to foreign currency risk.
We are exposed to interest rate changes primarily on our unsecured revolving credit facility and debt refinancings. Our objectives with respect to interest rate risk are to limit the impact of interest rate changes on operations and cash flows, and to lower our overall borrowing costs. To achieve these objectives, we may borrow at fixed rates and may enter into derivative financial instruments such as interest rate swaps or caps in order to mitigate our interest rate risk on a related floating rate financial instrument. We do not enter into derivative or interest rate transactions for speculative purposes.
As of June 30, 2021, we have an interest rate LIBOR swap agreement with an aggregate notional value of $265.0 million, which fixes the LIBOR interest rate at 2.1485% and matures on August 24, 2022. This interest rate swap has been designated as a cash flow hedge and is deemed highly effective with a fair value of $(6.2) million which is included in accounts payable and accrued expenses on the condensed consolidated balance sheet as of June 30, 2021.
Based on our variable balances, interest expense would have increased by approximately $0.6 million for the six months ended June 30, 2021, if short-term interest rates had been 1% higher. As of June 30, 2021, the weighted average interest rate on the $2.0 billion of fixed-rate indebtedness outstanding was 3.91% per annum, with maturities at various dates through March 17, 2035.
As of June 30, 2021, the fair value of our outstanding debt was approximately $2.2 billion, which was approximately $49.2 million more than the historical book value as of such date. Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.
On March 5, 2021, the Financial Conduct Authority (“FCA”) announced that USD LIBOR will no longer be published after June 30, 2023. This announcement has several implications, including setting the spread that may be used to automatically convert contracts from LIBOR to the Secured Overnight Financing Rate ("SOFR"). Additionally, banking regulators are encouraging banks to discontinue new LIBOR debt issuances by December 31, 2021.
We anticipate that LIBOR will continue to be available at least until June 30, 2023. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.
We have contracts that are indexed to LIBOR and are monitoring and evaluating the related risks, which include interest on loans and amounts received and paid on derivative instruments. These risks arise in connection with transitioning contracts to an alternative rate, including any resulting value transfer that may occur, and are likely to vary by contract. The value of loans or derivative instruments tied to LIBOR, as well as interest rates on our unsecured revolving credit facility and our unsecured term loan facilities and the swap rate for our interest rate swap, may also be impacted if LIBOR is limited or discontinued. For some instruments the method of transitioning to an alternative reference rate may be challenging, especially if we cannot agree with the respective counterparty about how to make the transition.
While we expect LIBOR to be available in substantially its current form until at least the end of June 30, 2023, it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified.
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Alternative rates and other market changes related to the replacement of LIBOR, including the introduction of financial products and changes in market practices, may lead to risk modeling and valuation challenges, such as adjusting interest rate accrual calculations and building a term structure for an alternative rate.
The introduction of an alternative rate also may create additional basis risk and increased volatility as alternative rates are phased in and utilized in parallel with LIBOR.
Adjustments to systems and mathematical models to properly process and account for alternative rates will be required, which may strain the model risk management and information technology functions and result in substantial incremental costs for us.
Our exposures to market risk have not changed materially since December 31, 2020.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations and that such information is accumulated and communicated to management, including ESRT's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of June 30, 2021, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of ESRT management, including ESRT's Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures at the end of the period covered by this report. Based on the foregoing, ESRT's Chief Executive Officer and Chief Financial Officer concluded, as of that time, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including ESRT's Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
No changes to our internal control over financial reporting were identified in connection with the evaluation referenced above that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 8 to the Notes to Condensed Consolidated Financial Statements for a description of legal proceedings.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors included in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 and in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None
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Recent Purchases of Equity Securities
Stock and Publicly Traded Operating Partnership Unit Repurchase Program
ESRT's Board of Directors authorized the repurchase of up to $500 million of our Class A common stock and the Operating Partnership’s Series ES, Series 250 and Series 60 operating partnership units through December 31, 2021. Under the program, ESRT may purchase our Class A common stock and we may purchase our Series ES, Series 250 and Series 60 operating partnership units in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by ESRT and us at our discretion and will be subject to stock price, availability, trading volume and general market conditions. The authorization does not obligate ESRT or us to acquire any particular amount of securities, and the program may be suspended or discontinued at ESRT and our discretion without prior notice. There were no purchases of ESRT's equity securities during the three months ended June 30, 2021.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS
| Exhibit No. | Description | ||||
| 101.INS* | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||
| 101.SCH* | XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Document | ||||
| 101.DEF* | XBRL Taxonomy Extension Definitions Document | ||||
| 101.LAB* | XBRL Taxonomy Extension Labels Document | ||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Document | ||||
| Notes: | |||||
| * Filed herewith. | |||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EMPIRE STATE REALTY OP, L.P.
By: Empire State Realty Trust, Inc., its general partner
Date: August 5, 2021 By:/s/ Christina Chiu
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 5, 2021 By:/s/ Stephen V. Horn
Senior Vice President, Chief Accounting
Officer
(Principal Accounting Officer)
48
Exhibit 10.1
TIME-BASED VESTING LTIP UNIT VESTING AGREEMENT
UNDER THE
EMPIRE STATE REALTY TRUST, INC.
EMPIRE STATE REALTY OP, L.P.
2019 EQUITY INCENTIVE PLAN
Grantee: ___________________
No. of LTIP Units: _________________
Grant Date: _____________________
Pursuant to the Empire State Realty Trust, Inc. Empire State Realty OP, L.P. 2019 Equity Incentive Plan (the “Plan”) and the Amended and Restated Agreement of Limited Partnership, dated as of October 1, 2013, as amended (the “Partnership Agreement”), of Empire State Realty OP, L.P., a Delaware limited partnership (the “Partnership”), Empire State Realty Trust, Inc., a Maryland corporation and the general partner of the Partnership (the “Company”), hereby grants to Grantee named above an other equity-based award (pursuant to Section 11 of the Plan, and referred to herein as an “Award”) in the form of, and by causing the Partnership to issue to Grantee named above, LTIP Units (as defined in the Partnership Agreement) having the rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption and conversion set forth herein and in the Partnership Agreement. If this LTIP Unit Vesting Agreement (this “Agreement”) is accepted, Grantee shall receive the number of LTIP Units specified above as of the Grant Date, subject to the restrictions and conditions set forth herein, in the Plan and in the Partnership Agreement. All capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Plan.
1.Acceptance of Agreement. Grantee shall have no rights with respect to this Agreement unless Grantee has accepted this Agreement by (i) signing and delivering to the Partnership a copy of this Agreement and (ii) unless Grantee is already a Limited Partner (as defined in the Partnership Agreement), signing, as a Limited Partner, and delivering to the Partnership a counterpart signature page to the Partnership Agreement (attached hereto as Annex A). If this Agreement is accepted by Grantee, the Partnership Agreement shall be amended to reflect the issuance to Grantee of the LTIP Units so accepted. Thereupon, Grantee shall have all the rights of a Limited Partner of the Partnership with respect to the number of LTIP Units then issued to Grantee, as set forth in the Partnership Agreement, subject, however, to the restrictions and conditions specified in Section 2 below.
2.Restrictions and Conditions.
(a)The records of the Partnership evidencing the LTIP Units granted herein shall bear an appropriate legend, as determined by the Partnership in its sole discretion, to the effect that such LTIP Units are subject to restrictions as set forth herein, in the Plan and in the Partnership Agreement.
(b)LTIP Units granted herein may not be sold, assigned, transferred, pledged hypothecated or otherwise disposed of and shall be subject to a risk of forfeiture until the lapse of restrictions as set forth in this Agreement including the additional restrictions on transfer set forth in Section 3.
3.Lapse of Restrictions.
(a)The restrictions and conditions in Section 2 of this Agreement shall lapse and the LTIP Units granted herein shall vest as to [____________]1; provided, that, with respect to the last such annual installment, the number of LTIP Units that vest in the installment shall be such that Grantee will be fully vested in the total number of LTIP Units listed above as of the applicable annual anniversary. Notwithstanding the foregoing, except as provided in Section 3(b) or Section 4 below or in Section 12(c) of the Plan, an LTIP Unit shall not vest on any vesting date unless Grantee continues to be employed by the Company, the Partnership or any of their Affiliates through the vesting date applicable to such LTIP Unit. No LTIP Unit granted hereunder shall be sold, assigned, transferred, pledged, hypothecated, given away or in any other manner disposed of, or encumbered, whether voluntarily or by operation of law until the [_________]2 anniversary of the applicable [vesting][grant] date of such LTIP Unit; provided that, this sentence shall not prevent conversion of an LTIP Unit to a Series PR OP Unit (as defined in the Partnership Agreement) and/or Class A REIT Share (as defined in the Partnership Agreement) if such conversion is otherwise permitted under this Agreement and the Partnership Agreement.
(b)In the event of a Corporate Event, this Award shall be treated as set forth in Section 12 of the Plan; provided, however, if the LTIP Units do not remain outstanding or are not replaced with awards of the Company’s successor in a Change in Control, all outstanding LTIP Units shall become fully vested upon the consummation of the Change in Control.
4.Termination of Employment.
(a)In the event of Grantee’s Termination for any reason, except as provided in (b) below, all vesting with respect to the LTIP Units shall immediately cease, and all LTIP Units that have not vested at that time will be forfeited to the Partnership without payment of any consideration by the Partnership or any of its Affiliates, and neither Grantee nor any of his or her successors, heirs, assigns, or personal representatives will thereafter have any further rights or interests in such LTIP Units.
(b)In the event Grantee’s Termination is a result of (i) death, (ii) Disability, (iii) a termination without Cause by the Company or its Affiliates, (iv) a voluntary termination by Grantee that follows the Grantee’s Retirement Eligibility Date, or (v) a termination by Grantee with Good Reason (as defined in Grantee’s Participant Agreement); any restrictions and conditions on all LTIP Units subject to this Agreement shall lapse and the LTIP Units, unless earlier terminated or forfeited and to the extent not otherwise vested, shall automatically become fully vested as of such date of Termination.
1 Number of years and vesting dates to be inserted, usually in range of 3-5 years.
2 Length of lock-up period to be inserted, usually 2 years from vesting date or 4 years from grant date, as applicable.
2
(c)Notwithstanding any other provision hereof, if Grantee is a party to an effective Participant Agreement, then the terms of such Participant Agreement shall supersede any contrary provision in this Agreement and the applicable period of forfeiture shall also end if and as may otherwise be required by such Participant Agreement; and nothing herein shall limit any rights Grantee may otherwise have under such Participant Agreement.
5.Distributions. Distributions on the LTIP Units shall be paid to Grantee in accordance with the terms of the Partnership Agreement.
6.Covenants, Representation and Warranties. Grantee hereby covenants as follows:
(a)So long as Grantee holds any LTIP Units, Grantee shall disclose to the Partnership in writing such information as may be reasonably requested with respect to ownership of LTIP Units as the Partnership may deem reasonably necessary to ascertain and to establish compliance with provisions of the Code as applicable to the Partnership or to comply with the requirements of any other appropriate tax authority.
(b)Grantee hereby agrees to make an election under Section 83(b) of the Code with respect to the LTIP Units awarded hereunder, and has delivered with this Agreement a completed, executed copy of the election form attached hereto as Annex B. Grantee agrees to file the election within thirty (30) days after the Grant Date with the Internal Revenue Service, and to promptly provide a copy of such filed election to the Company.
(c)Grantee hereby agrees not to dispose of the LTIP Units subject to this Award within [____________]3 after the [vesting][grant] date.
The Partnership and Grantee hereby agree to treat Grantee as the owner of the LTIP Units from the Grant Date. Grantee hereby agrees to take into account the distributive share of Partnership income, gain, loss, deduction, and credit associated with the LTIP Units in computing Grantee’s income tax liability for the entire period during which Grantee has the LTIP Units.
(d)Grantee hereby recognizes that the Internal Revenue Service has proposed regulations under Sections 83 and 704 of the Code that may affect the proper treatment of the LTIP Units for federal income tax purposes. In the event that those proposed regulations are finalized, Grantee hereby agrees to cooperate with the Partnership in amending this Agreement and the Partnership Agreement, and to take such other action as may be required, to conform to such regulations.
(e)Grantee has received and read a copy of the Partnership Agreement and the Plan and has had his or her tax advisors advise him or her on the application of U.S. federal income tax laws, and the tax laws of any state, local or other taxing jurisdiction to which Grantee is or by reason of the Award may become subject to.
3 Length of lock-up period to be inserted, usually 2 years from vesting date or 4 years from grant date, as applicable.
3
7.Clawback. This Award is subject to any incentive compensation clawback or recoupment policy currently in effect or as may be adopted by the Board, and in each case, as may be amended from time to time.
8.Assignment and Transfer. Except as expressly permitted under this Agreement or by the Committee pursuant to the Plan, the rights and interests of Grantee under this Agreement may not be sold, assigned, encumbered, pledged, or otherwise transferred except in the event of the death of Grantee, by will or by the laws of descent and distribution. In the event of any attempt by Grantee in breach of the foregoing sentence to sell, assign, encumber, pledge or otherwise transfer its rights and interests hereunder, or in the event of the levy or any attachment, execution or similar process upon the rights or interests hereby conferred, the Company or the Partnership may require Grantee to forfeit the LTIP Units by notice to Grantee, and the LTIP Units and all rights hereunder shall thereupon become null and void. The rights and protections of the Company and the Partnership hereunder shall extend to any successors or assigns of the Company and the Partnership.
9.Incorporation of the Plan. This Agreement is made under and subject to and governed by all of the terms and conditions of the Plan. In the event of any discrepancy or inconsistency between this Agreement and the Plan, the terms and conditions of the Plan shall control. By signing this Agreement, Grantee confirms that he or she has received a copy of the Plan and has had an opportunity to review the contents thereof. Any shares of Stock issued in exchange for partnership units into which LTIP Units may have been converted pursuant to the Partnership Agreement will be issued under the Plan.
10.Amendment. Grantee acknowledges that the Plan may be amended or discontinued in accordance with Section 19 or Section 20 thereof and that this Agreement may be amended or canceled by the Board or the Committee, on behalf of the Partnership, for the purpose of satisfying changes in law or for any other lawful purpose, provided that no such action shall materially impair Grantee’s rights under this Agreement without Grantee’s written consent.
11.No Right to Continued Employment. Neither the Plan nor this Agreement will give Grantee any right to continue to be in the employ of the Company, the Partnership or any of their Affiliates, affect the right of the Company, the Partnership or any of their Affiliates to discharge or discipline such Grantee at any time, or affect any right of such Grantee to terminate his or her employment at any time.
12.Waiver. The failure of Grantee or the Company to insist upon strict compliance with any provision of this Agreement or the Plan, or to assert any right Grantee or the Company, respectively, may have under this Agreement or the Plan, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement or the Plan.
13.Notices. Notices hereunder shall be mailed or delivered to the Partnership at its principal place of business and shall be mailed or delivered to Grantee at the address on file with the Partnership or, in either case, at such other address as one party may subsequently furnish to the other party in writing.
4
14.Consent to Electronic Delivery. Grantee agrees that the Company or the Partnership may deliver by email all documents relating to the Plan or the LTIP Units (including without limitation, a copy of the Plan) and all other documents that the Company or Partnership is required to deliver to its security holders (including, without limitation, disclosures that may be required by the Securities and Exchange Commission). Grantee also agrees that the Company or the Partnership may deliver these documents by posting them on a website maintained by the Company or by a third-party under contract with the Company. If the Company posts these documents on a website, it shall notify Grantee by email.
15.Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. Facsimile or electronic submission of any signed original document or retransmission of any signed facsimile or other electronic transmission will be deemed the same as delivery of an original.
16.Severability. In the event that one or more provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had never been contained herein.
17.Headings. Section, paragraph and other headings and captions are provided solely as a convenience to facilitate reference. Such headings and captions shall not be deemed in any way material or relevant to the construction, meaning or interpretation of this Agreement or any term or provision hereof.
18. Governing Law. This Agreement and all claims or disputes arising out of or based upon this Agreement or relating to the subject matter hereof shall be governed by, and construed in accordance with, the laws of the State of Maryland, applied without regard to conflict of law principles or rules that would cause the application of the domestic substantive laws of any other jurisdiction.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
| EMPIRE STATE REALTY TRUST, INC. | ||||||||
| By: | ||||||||
| Name: | ||||||||
| Title: | ||||||||
| EMPIRE STATE REALTY OP, L.P. | ||||||||
| By: | EMPIRE STATE REALTY TRUST, INC., its general partner | |||||||
| By: | ||||||||
| Name: | ||||||||
| Title: | ||||||||
The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by Grantee.
Dated: _____________ | |||||
| [NAME] | |||||
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ANNEX A
FORM OF LIMITED PARTNER SIGNATURE PAGE
Grantee, desiring to become one of the within named Limited Partners of Empire State Realty OP, L.P., hereby becomes a party to the Amended and Restated Agreement of Limited Partnership of Empire State Realty OP, L.P., dated as of October 1, 2013, as amended through the date hereof (the “Partnership Agreement”). Grantee agrees that this signature page may be attached to any counterpart of the Partnership Agreement.
Signature Line for Limited Partner:
[NAME]
Date:
Address of Limited Partner:
ANNEX B
ELECTION TO INCLUDE IN GROSS INCOME IN YEAR OF
TRANSFER OF PROPERTY PURSUANT TO SECTION 83(B)
OF THE INTERNAL REVENUE CODE
The undersigned hereby makes an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in gross income in 20__ as compensation for services rendered, the fair market value of the property received in connection with his/her services in excess of the amount paid for the property and supplies the following information in accordance with the regulations promulgated thereunder:
1.The name, address and taxpayer identification number of the undersigned are:
Name: __________________________ (the “Taxpayer”)
Address:
Social Security No. /Taxpayer Identification No.: ____________________
2.Description of property with respect to which the election is being made:
The election is being made with respect to _______________ LTIP Units in Empire State Realty O.P. L.P. (the “Partnership”).
3.The date on which the LTIP Units were transferred is ___________.
4.The taxable year to which this election relates is calendar year 20__.
5.Nature of restrictions to which the LTIP Units are subject:
(a) The Taxpayer may not transfer in any manner any unvested portion of the LTIP Units without the consent of the Partnership.
(b) The LTIP Units are subject to service-based vesting conditions, such that _______________ of the LTIP Units will vest on__________________________, provided the undersigned continues employment with the Partnership, its general partner, Empire State Realty Trust, Inc. or any of their respective affiliates through each such date, subject to accelerated vesting in certain circumstances.
6.The fair market value at time of transfer (determined without regard to any restrictions other than restrictions which by their terms will never lapse) of the LTIP Units with respect to which this election is being made was $0 per LTIP Unit.
7.The amount paid by the Taxpayer for the LTIP Units was $0 per LTIP Unit.
8.The amount to be included in gross income is $0.
9.A copy of this statement has been furnished to the Partnership and to its general partner, Empire State Realty Trust, Inc.
The Taxpayer will file this election with the Internal Revenue Service office with which the Taxpayer files his or her annual income tax return no later than 30 days after the date of transfer of the property. The Taxpayer is the person performing the services in connection with which the property was transferred.
| Dated: ___________________ | |||||
| _________________________ | |||||
| Taxpayer’s Signature | |||||
Exhibit 10.2
PERFORMANCE-BASED VESTING LTIP UNIT VESTING AGREEMENT
UNDER THE
EMPIRE STATE REALTY TRUST, INC.
EMPIRE STATE REALTY OP, L.P.
2019 EQUITY INCENTIVE PLAN
UNDER THE
EMPIRE STATE REALTY TRUST, INC.
EMPIRE STATE REALTY OP, L.P.
2019 EQUITY INCENTIVE PLAN
Grantee: _______________________
No. of LTIP Units: _______________
Grant Date: ________________
No. of LTIP Units: _______________
Grant Date: ________________
Pursuant to the Empire State Realty Trust, Inc. Empire State Realty OP, L.P. 2019 Equity Incentive Plan (the “Plan”) and the Amended and Restated Agreement of Limited Partnership, dated as of October 1, 2013, as amended (the “Partnership Agreement”), of Empire State Realty OP, L.P., a Delaware limited partnership (the “Partnership”), Empire State Realty Trust, Inc., a Maryland corporation and the general partner of the Partnership (the “Company”), hereby grants to Grantee named above an other equity-based award (pursuant to Section 11 of the Plan, and referred to herein as an “Award”) in the form of, and by causing the Partnership to issue to Grantee named above, LTIP Units (as defined in the Partnership Agreement) having the rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption and conversion set forth herein and in the Partnership Agreement. The LTIP Units (rounded down to the nearest whole LTIP Unit) shall vest based upon the achievement of the Performance Metrics set forth on Schedule I. If this LTIP Unit Vesting Agreement (this “Agreement”) is accepted, Grantee shall receive the number of LTIP Units specified above as of the Grant Date, subject to the restrictions and conditions set forth herein, in the Plan and in the Partnership Agreement. All capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Plan.
1.Acceptance of Agreement. Grantee shall have no rights with respect to this Agreement unless Grantee has accepted this Agreement by (i) signing and delivering to the Partnership a copy of this Agreement and (ii) unless Grantee is already a Limited Partner (as defined in the Partnership Agreement), signing, as a Limited Partner, and delivering to the Partnership a counterpart signature page to the Partnership Agreement (attached hereto as Annex A). If this Agreement is accepted by Grantee, the Partnership Agreement shall be amended to reflect the issuance to Grantee of the LTIP Units so accepted. Thereupon, Grantee shall have all the rights of a Limited Partner of the Partnership with respect to the number of LTIP Units then issued to Grantee, as set forth in the Partnership Agreement, subject, however, to the restrictions and conditions specified in Section 3 below.
2.Definitions. The following terms have the following meanings:
(a)“Earned LTIP Units” has the meaning set forth on Schedule I.
(b)“Effective Date” means ___________, 20__.
1
(c)“Performance Period” means the period commencing, except as provided in Section 5(b) below, on the Effective Date and ending on the earlier of (i) __________, 20___ and (ii) the date determined in accordance with Section 12(c)(ii) of the Plan.
3.Restrictions and Conditions.
(a)The records of the Partnership evidencing the LTIP Units granted herein shall bear an appropriate legend, as determined by the Partnership in its sole discretion, to the effect that such LTIP Units are subject to restrictions as set forth herein, in the Plan and in the Partnership Agreement.
(b)LTIP Units granted herein may not be sold, assigned, transferred, pledged hypothecated or otherwise disposed of and shall be subject to a risk of forfeiture until the lapse of restrictions as set forth in this Agreement including the additional restrictions on transfer set forth in Section 4.
4.Lapse of Restrictions.
(a)Following the completion of the Performance Period, the Committee shall determine the outcomes on each of the Performance Metrics and will certify the level of achievement with respect to each such metric and the portion of the LTIP Units granted here that have become Earned LTIP Units. Following the Committee’s determination, LTIP Units granted herein which have not become Earned LTIP Units shall be immediately forfeited to the Partnership without any consideration by the Partnership or any of its Affiliates, and neither Grantee nor any of his or her successors, heirs, assigns or personal representatives will thereafter have any further rights or interests in such forfeited LTIP Units.
(b)The restrictions and conditions in Section 3 of this Agreement with respect to the Earned LTIP Units (if any) shall lapse and the Earned LTIP Units shall vest as to [________]1 percent of the Earned LTIP Units, rounded down to the nearest whole LTIP Unit, on the [________]1 anniversary of the Effective Date and as to the remainder of the Earned LTIP Units on the day immediately preceding the [_________]1 anniversary of the Effective Date. Notwithstanding the foregoing, except as provided in Section 4(c) or Section 5 below or in Section 12(c) of the Plan, an Earned LTIP Unit shall not vest on any vesting date unless Grantee continues to be employed by the Company, the Partnership or any of their Affiliates through the vesting date applicable to such LTIP Unit. No Earned LTIP Unit granted hereunder shall be sold, assigned, transferred, pledged, hypothecated, given away or in any other manner disposed of, or encumbered, whether voluntarily or by operation of law until the [________]2 anniversary of the vesting date of such Earned LTIP Unit; provided, that this sentence shall not prevent conversion of an LTIP Unit to a Series PR OP Unit (as defined in the Partnership Agreement) and/or Class A REIT Share (as defined in the
1 Number of years and vesting dates to be inserted, usually vesting 50% at end of the performance period and 50% one year thereafter.
2 Length of lock-up period to be inserted, usually 2 years from vesting date.
2
Partnership Agreement) if such conversion is otherwise permitted under this Agreement and the Partnership Agreement.
(c)In the event of a Corporate Event, this Award shall be treated as set forth in Section 12 of the Plan; provided, however, that if Earned LTIP Units do not remain outstanding or are not replaced with awards of the Company’s successor in a Change in Control, they shall become fully vested upon the consummation of the Change in Control.
5.Termination of Employment.
(a)In the event of Grantee’s Termination for any reason, except as provided in (b) below, all vesting with respect to the LTIP Units (whether or not such LTIP Units are Earned LTIP Units) shall immediately cease, and all LTIP Units that have not vested at that time will be forfeited to the Partnership without payment of any consideration by the Partnership or any of its Affiliates, and neither Grantee nor any of his or her successors, heirs, assigns, or personal representatives will thereafter have any further rights or interests in such LTIP Units.
(b)In the event Grantee’s Termination is a result of (i) death, (ii) Disability, (iii) a termination without Cause by the Company or its Affiliates, (iv) a voluntary termination by Grantee that follows Grantee’s Retirement Eligibility Date, or (v) a termination by Grantee with Good Reason (as defined in Grantee’s Participant Agreement):
(i)If such Termination occurs following the completion of the Performance Period, any restrictions and conditions on the Earned LTIP Units shall lapse, and the Earned LTIP Units, unless earlier terminated or forfeited and to the extent not otherwise vested, shall automatically become fully vested as of such date of Termination; and
(ii)If such Termination occurs prior to the expiration of the Performance Period, (A) the end date of the Performance Period shall be the date immediately prior to the Termination and the number of Earned LTIP Units shall be determined as of such date based on the applicable Performance Metrics during such shortened Performance Period, provided that “N” shall be the number of full or partial calendar years completed during the Performance Period (e.g., “N” shall be 2.5 if the termination occurs two-years and six months after the Effective Date), and (B) any restrictions and conditions on the LTIP Units that become Earned LTIP Units as of the Termination shall lapse and the number of Earned LTIP Units, unless earlier terminated or forfeited, that become vested as of such date of Termination shall be determined by multiplying the number of Earned LTIP Units by a fraction, the numerator of which is the number of days in the shortened Performance Period and the denominator of which is 1,096.
(c)Notwithstanding any other provision hereof, if Grantee is a party to an effective Participant Agreement with the Company, then the terms of such Participant Agreement shall supersede any contrary provision in this Agreement and any restrictions and conditions shall also lapse if and as may otherwise be required by such Participant
3
Agreement; and nothing herein shall limit any rights Grantee may otherwise have under such Participant Agreement.
6.Distributions. During the Performance Period, Grantee shall be entitled to receive only ten percent (10%) of distributions with respect to the LTIP Units. At the end of the Performance Period, Grantee shall receive an amount equal to one hundred percent (100%) of all distributions paid by the Partnership during the Performance Period with respect to one OP Unit (as defined in the Partnership Agreement) multiplied by the number of Earned LTIP Units, reduced by the distributions received by Grantee during the Performance Period with respect to the LTIP Units. After the Performance Period, Grantee shall receive all distributions paid by the Partnership with respect to all Earned LTIP Units.
7.Covenants, Representation and Warranties. Grantee hereby covenants as follows:
(a)So long as Grantee holds any LTIP Units, Grantee shall disclose to the Partnership in writing such information as may be reasonably requested with respect to ownership of LTIP Units as the Partnership may deem reasonably necessary to ascertain and to establish compliance with provisions of the Code, as applicable to the Partnership or to comply with the requirements of any other appropriate tax authority.
(b)Grantee hereby agrees to make an election under Section 83(b) of the Code with respect to the LTIP Units awarded hereunder, and has delivered with this Agreement a completed, executed copy of the election form attached hereto as Annex B. Grantee agrees to file the election within thirty (30) days after the Grant Date with the Internal Revenue Service and to promptly provide a copy of such filed election to the Company.
(c)Grantee hereby agrees not to dispose of the LTIP Units subject to this Award within [______]3 years after the vesting date. The Partnership and Grantee hereby agree to treat Grantee as the owner of the LTIP Units from the Grant Date. Grantee hereby agrees to take into account the distributive share of Partnership income, gain, loss, deduction, and credit associated with the LTIP Units in computing Grantee’s income tax liability for the entire period during which Grantee has the LTIP Units.
(d)Grantee hereby recognizes that the Internal Revenue Service has proposed regulations under Sections 83 and 704 of the Code that may affect the proper treatment of the LTIP Units for federal income tax purposes. In the event that those proposed regulations are finalized, Grantee hereby agrees to cooperate with the Partnership in amending this Agreement and the Partnership Agreement, and to take such other action as may be required, to conform to such regulations.
(e)Grantee has received and read a copy of the Partnership Agreement and the Plan and has had his or her tax advisors advise him or her on the application of U.S. federal income tax laws, and the tax laws of any state, local or other taxing jurisdiction to which Grantee is or by reason of the Award may become subject to.
3 Length of lock-up period to be inserted, usually 2 years from vesting date.
4
8.Clawback. This Award is subject to any incentive compensation clawback or recoupment policy currently in effect or as may be adopted by the Board, and in each case, as may be amended from time to time.
9.Assignment and Transfer. Except as expressly permitted under this Agreement or by the Committee pursuant to the Plan, the rights and interests of Grantee under this Agreement may not be sold, assigned, encumbered, pledged, or otherwise transferred except in the event of the death of Grantee, by will or by the laws of descent and distribution. In the event of any attempt by Grantee in breach of the foregoing sentence to sell, assign, encumber, pledge or otherwise transfer its rights and interests hereunder, or in the event of the levy or any attachment, execution or similar process upon the rights or interests hereby conferred, the Company or the Partnership may require Grantee to forfeit the LTIP Units by notice to Grantee, and the LTIP Units and all rights hereunder shall thereupon become null and void. The rights and protections of the Company and the Partnership hereunder shall extend to any successors or assigns of the Company and the Partnership.
10.Incorporation of the Plan. This Agreement is made under and subject to and governed by all of the terms and conditions of the Plan. In the event of any discrepancy or inconsistency between this Agreement and the Plan, the terms and conditions of the Plan shall control. By signing this Agreement, Grantee confirms that he or she has received a copy of the Plan and has had an opportunity to review the contents thereof. Any shares of Stock issued in exchange for partnership units into which LTIP Units may have been converted pursuant to the Partnership Agreement will be issued under the Plan.
11.Amendment. Grantee acknowledges that the Plan may be amended or discontinued in accordance with Section 19 or Section 20 thereof and that this Agreement may be amended or canceled by the Board or the Committee, on behalf of the Partnership, for the purpose of satisfying changes in law or for any other lawful purpose, provided that no such action shall materially impair Grantee’s rights under this Agreement without Grantee’s written consent.
12.No Right to Continued Employment. Neither the Plan nor this Agreement will give Grantee any right to continue to be in the employ of the Company, the Partnership or any of their Affiliates, affect the right of the Company, the Partnership or any of their Affiliates to discharge or discipline such Grantee at any time, or affect any right of such Grantee to terminate his or her employment at any time.
13.Waiver. The failure of Grantee or the Company to insist upon strict compliance with any provision of this Agreement or the Plan, or to assert any right Grantee or the Company, respectively, may have under this Agreement or the Plan, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement or the Plan.
14.Notices. Notices hereunder shall be mailed or delivered to the Partnership at its principal place of business and shall be mailed or delivered to Grantee at the address on file with the Partnership or, in either case, at such other address as one party may subsequently furnish to the other party in writing.
5
15.Consent to Electronic Delivery. Grantee agrees that the Company or the Partnership may deliver by email all documents relating to the Plan or the LTIP Units (including without limitation, a copy of the Plan) and all other documents that the Company or Partnership is required to deliver to its security holders (including, without limitation, disclosures that may be required by the Securities and Exchange Commission). Grantee also agrees that the Company or the Partnership may deliver these documents by posting them on a website maintained by the Company or by a third-party under contract with the Company. If the Company posts these documents on a website, it shall notify Grantee by email.
16.Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. Facsimile or electronic submission of any signed original document or retransmission of any signed facsimile or other electronic transmission will be deemed the same as delivery of an original.
17.Severability. In the event that one or more provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had never been contained herein.
18.Headings. Section, paragraph and other headings and captions are provided solely as a convenience to facilitate reference. Such headings and captions shall not be deemed in any way material or relevant to the construction, meaning or interpretation of this Agreement or any term or provision hereof.
19. Governing Law. This Agreement and all claims or disputes arising out of or based upon this Agreement or relating to the subject matter hereof shall be governed by, and construed in accordance with, the laws of the State of Maryland, applied without regard to conflict of law principles or rules that would cause the application of the domestic substantive laws of any other jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreements as of the date first above written.
6
| EMPIRE STATE REALTY TRUST, INC. | ||||||||
| By: | ||||||||
| Name: | ||||||||
| Title: | ||||||||
| EMPIRE STATE REALTY OP, L.P. | ||||||||
| By: | EMPIRE STATE REALTY TRUST, INC., its general partner | |||||||
| By: | ||||||||
| Name: | ||||||||
| Title: | ||||||||
The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by Grantee.
 Dated: | |||||
| [NAME] | |||||
7
Schedule I
Performance Metrics
8
ANNEX A
FORM OF LIMITED PARTNER SIGNATURE PAGE
Grantee, desiring to become one of the within named Limited Partners of Empire State Realty OP, L.P., hereby becomes a party to the Amended and Restated Agreement of Limited Partnership of Empire State Realty OP, L.P., dated as of October 1, 2013, as amended through the date hereof (the “Partnership Agreement”). Grantee agrees that this signature page may be attached to any counterpart of the Partnership Agreement.
Signature Line for Limited Partner:
[NAME]
Date:
Address of Limited Partner:
A-1
ANNEX B
ELECTION TO INCLUDE IN GROSS INCOME IN YEAR OF
TRANSFER OF PROPERTY PURSUANT TO SECTION 83(B)
OF THE INTERNAL REVENUE CODE
TRANSFER OF PROPERTY PURSUANT TO SECTION 83(B)
OF THE INTERNAL REVENUE CODE
The undersigned hereby makes an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in gross income in 20__ as compensation for services rendered, the fair market value of the property received in connection with his/her services in excess of the amount paid for the property and supplies the following information in accordance with the regulations promulgated thereunder:
1.The name, address and taxpayer identification number of the undersigned are:
Name: _________________________ (the “Taxpayer”)
Address: _________________________________________________________
Social Security No. / Taxpayer Identification No.: ________________________
2.Description of property with respect to which the election is being made:
The election is being made with respect to _____________ LTIP Units in Empire State Realty O.P. L.P. (the “Partnership”).
3.The date on which the LTIP Units were transferred is____________.
4.The taxable year to which this election relates is calendar year 20__.
5.Nature of restrictions to which the LTIP Units are subject:
(a) Until the LTIP Units vest, the Taxpayer may not transfer in any manner any portion of the LTIP Units without the consent of the Partnership.
(b) The LTIP Units are subject to both performance-based vesting conditions, which are satisfied based upon [performance metrics to be inserted] over a [_______] year performance period (or a shorter period in the event of a Change in Control or upon certain terminations of employment) and service-based vesting conditions, such that [_____] percent of the LTIP Units that satisfy the performance-based vesting condition will vest on each of the [______] and [________] anniversaries of the effective date set by the grant award, provided the undersigned continues employment with the Partnership, its general partner, Empire State Realty Trust, Inc. or any of their respective affiliates through such vesting date, subject to accelerated vesting in certain circumstances.
B-1
6.The fair market value at time of transfer (determined without regard to any restrictions other than restrictions which by their terms will never lapse) of the LTIP Units with respect to which this election is being made was $0 per LTIP Unit.
7.The amount paid by the Taxpayer for the LTIP Units was $0 per LTIP Unit.
8.The amount to be included in gross income is $0.
9.A copy of this statement has been furnished to the Partnership and to its general partner, Empire State Realty Trust, Inc.
The Taxpayer will file this election with the Internal Revenue Service office with which the Taxpayer files his or her annual income tax return no later than 30 days after the date of transfer of the property. The Taxpayer is the person performing the services in connection with which the property was transferred.
| Dated: ___________________ | |||||
| _________________________ | |||||
| Taxpayer’s Signature | |||||
B-2
Exhibit 10.3
LTIP UNIT VESTING AGREEMENT
[FOR NON-EMPLOYEE DIRECTORS] [FOR EMPLOYEES] UNDER THE
EMPIRE STATE REALTY TRUST, INC.
EMPIRE STATE REALTY OP, L.P.
2019 EQUITY INCENTIVE PLAN
Grantee: _____________________
No. of LTIP Units: ____________________
Grant Date: ____________________
Pursuant to the Empire State Realty Trust, Inc. Empire State Realty OP, L.P. 2019 Equity Incentive Plan (the “Plan”) and the Amended and Restated Agreement of Limited Partnership, dated as of October 1, 2013, as amended (the “Partnership Agreement”), of Empire State Realty OP, L.P., a Delaware limited partnership (the “Partnership”), Empire State Realty Trust, Inc., a Maryland corporation and the general partner of the Partnership (the “Company”), hereby grants to Grantee named above an other equity-based award (pursuant to Section 11 of the Plan, and referred to herein as an “Award”) in the form of, and by causing the Partnership to issue to Grantee named above, LTIP Units (as defined in the Partnership Agreement) having the rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption and conversion set forth herein and in the Partnership Agreement. If this LTIP Unit Vesting Agreement (this “Agreement”) is accepted, Grantee shall receive the number of LTIP Units specified above as of the Grant Date, fully vested, subject to the restrictions and conditions set forth herein, in the Plan and in the Partnership Agreement. All capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Plan.
1.Acceptance of Agreement. Grantee shall have no rights with respect to this Agreement unless Grantee has accepted this Agreement by (i) signing and delivering to the Partnership a copy of this Agreement and (ii) unless Grantee is already a Limited Partner (as defined in the Partnership Agreement), signing, as a Limited Partner, and delivering to the Partnership a counterpart signature page to the Partnership Agreement (attached hereto as Annex A). If this Agreement is accepted by Grantee, the Partnership Agreement shall be amended to reflect the issuance to Grantee of the LTIP Units so accepted. Thereupon, Grantee shall have all the rights of a Limited Partner of the Partnership with respect to the number of LTIP Units then issued to Grantee, as set forth in the Partnership Agreement, subject, however, to the restrictions and conditions specified in Section 2 below.
2.Restrictions and Conditions.
(a)The records of the Partnership evidencing the LTIP Units granted herein shall bear an appropriate legend, as determined by the Partnership in its sole discretion, to the
effect that such LTIP Units are subject to restrictions as set forth herein, in the Plan and in the Partnership Agreement.
(b)No LTIP Unit granted hereunder shall be sold, assigned, transferred, pledged, hypothecated, given away or in any other manner disposed of, or encumbered, whether voluntarily or by operation of law until the second anniversary of the Grant Date; provided, that this sentence shall not prevent conversion of an LTIP Unit to a Series PR OP Unit (as defined in the Partnership Agreement) and/or Class A REIT Share (as defined in the Partnership Agreement) if such conversion is otherwise permitted under this Agreement and the Partnership Agreement.
(c)In the event of a Corporate Event, this Award shall be treated as set forth in Section 12 of the Plan; provided, however, if the LTIP Units do not remain outstanding or are not replaced with awards of the Company’s successor in a Change in Control, all outstanding LTIP Units shall become fully vested upon the consummation of the Change in Control.
3.Distributions. Distributions on the LTIP Units shall be paid to Grantee in accordance with the terms of the Partnership Agreement.
4.Covenants, Representation and Warranties. Grantee hereby covenants as follows:
(a)So long as Grantee holds any LTIP Units, Grantee shall disclose to the Partnership in writing such information as may be reasonably requested with respect to ownership of LTIP Units as the Partnership may deem reasonably necessary to ascertain and to establish compliance with provisions of the Code as applicable to the Partnership or to comply with the requirements of any other appropriate tax authority.
(b)Grantee hereby agrees to make an election under Section 83(b) of the Code with respect to the LTIP Units awarded hereunder, and has delivered with this Agreement a completed, executed copy of the election form attached hereto as Annex B. Grantee agrees to file the election within thirty (30) days after the Grant Date with the Internal Revenue Service, and to promptly provide a copy of such filed election to the Company.
(c)Grantee hereby agrees not to dispose of the LTIP Units subject to this Award within two years after the Grant Date. The Partnership and Grantee hereby agree to treat Grantee as the owner of the LTIP Units from the Grant Date. Grantee hereby agrees to take into account the distributive share of Partnership income, gain, loss, deduction, and credit associated with the LTIP Units in computing Grantee’s income tax liability for the entire period during which Grantee has the LTIP Units.
(d)Grantee hereby recognizes that the Internal Revenue Service has proposed regulations under Sections 83 and 704 of the Code that may affect the proper treatment of the LTIP Units for federal income tax purposes. In the event that those proposed regulations are finalized, Grantee hereby agrees to cooperate with the Partnership in amending this Agreement and the Partnership Agreement, and to take such other action as may be required, to conform to such regulations.
2
(e)Grantee has received and read a copy of the Partnership Agreement and the Plan and has had his or her tax advisors advise him or her on the application of U.S. federal income tax laws, and the tax laws of any state, local or other taxing jurisdiction to which Grantee is or by reason of the Award may become subject to.
5.Clawback. This Award is subject to any incentive compensation clawback or recoupment policy currently in effect or as may be adopted by the Board, and in each case, as may be amended from time to time.
6.Assignment and Transfer. Except as expressly permitted under this Agreement or by the Committee pursuant to the Plan, the rights and interests of Grantee under this Agreement may not be sold, assigned, encumbered, pledged, or otherwise transferred except in the event of the death of Grantee, by will or by the laws of descent and distribution. In the event of any attempt by Grantee in breach of the foregoing sentence to sell, assign, encumber, pledge or otherwise transfer its rights and interests hereunder, or in the event of the levy or any attachment, execution or similar process upon the rights or interests hereby conferred, the Company or the Partnership may require Grantee to forfeit the LTIP Units by notice to Grantee, and the LTIP Units and all rights hereunder shall thereupon become null and void. The rights and protections of the Company and the Partnership hereunder shall extend to any successors or assigns of the Company and the Partnership.
7.Incorporation of the Plan. This Agreement is made under and subject to and governed by all of the terms and conditions of the Plan. In the event of any discrepancy or inconsistency between this Agreement and the Plan, the terms and conditions of the Plan shall control. By signing this Agreement, Grantee confirms that he or she has received a copy of the Plan and has had an opportunity to review the contents thereof. Any shares of Stock issued in exchange for partnership units into which LTIP Units may have been converted pursuant to the Partnership Agreement will be issued under the Plan.
8.Amendment. Grantee acknowledges that the Plan may be amended or discontinued in accordance with Section 19 or Section 20 thereof and that this Agreement may be amended or canceled by the Board or the Committee, on behalf of the Partnership, for the purpose of satisfying changes in law or for any other lawful purpose, provided that no such action shall materially impair Grantee’s rights under this Agreement without Grantee’s written consent.
9.No Right to Continued [Service or] Employment. Neither the Plan nor this Agreement will give Grantee any right to continue to be in the [service or] employ of the Company, the Partnership or any of their Affiliates, affect the right of the Company, the Partnership or any of their Affiliates to discharge or discipline such Grantee at any time, or affect any right of such Grantee to terminate his or her [service or] employment at any time.
10.Waiver. The failure of Grantee or the Company to insist upon strict compliance with any provision of this Agreement or the Plan, or to assert any right Grantee or the Company, respectively, may have under this Agreement or the Plan, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement or the Plan.
3
11.Notices. Notices hereunder shall be mailed or delivered to the Partnership at its principal place of business and shall be mailed or delivered to Grantee at the address on file with the Partnership or, in either case, at such other address as one party may subsequently furnish to the other party in writing.
12.Consent to Electronic Delivery. Grantee agrees that the Company or the Partnership may deliver by email all documents relating to the Plan or the LTIP Units (including without limitation, a copy of the Plan) and all other documents that the Company or Partnership is required to deliver to its security holders (including, without limitation, disclosures that may be required by the Securities and Exchange Commission). Grantee also agrees that the Company or the Partnership may deliver these documents by posting them on a website maintained by the Company or by a third-party under contract with the Company. If the Company posts these documents on a website, it shall notify Grantee by email.
13.Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. Facsimile or electronic submission of any signed original document or retransmission of any signed facsimile or other electronic transmission will be deemed the same as delivery of an original.
14.Severability. In the event that one or more provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had never been contained herein.
15.Headings. Section, paragraph and other headings and captions are provided solely as a convenience to facilitate reference. Such headings and captions shall not be deemed in any way material or relevant to the construction, meaning or interpretation of this Agreement or any term or provision hereof.
16. Governing Law. This Agreement and all claims or disputes arising out of or based upon this Agreement or relating to the subject matter hereof shall be governed by, and construed in accordance with, the laws of the State of Maryland, applied without regard to conflict of law principles or rules that would cause the application of the domestic substantive laws of any other jurisdiction.
4
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
| EMPIRE STATE REALTY TRUST, INC. | ||||||||
| By: | ||||||||
| Name: | ||||||||
| Title: | ||||||||
| EMPIRE STATE REALTY OP, L.P. | ||||||||
| By: | EMPIRE STATE REALTY TRUST, INC., its general partner | |||||||
| By: | ||||||||
| Name: | ||||||||
| Title: | ||||||||
The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by Grantee.
Dated: _____________ | |||||
| [NAME] | |||||
5
ANNEX A
FORM OF LIMITED PARTNER SIGNATURE PAGE
Grantee, desiring to become one of the within named Limited Partners of Empire State Realty OP, L.P., hereby becomes a party to the Amended and Restated Agreement of Limited Partnership of Empire State Realty OP, L.P., dated as of October 1, 2013, as amended through the date hereof (the “Partnership Agreement”). Grantee agrees that this signature page may be attached to any counterpart of the Partnership Agreement.
Signature Line for Limited Partner:
[NAME]
Date:
Address of Limited Partner:
ANNEX B
ELECTION TO INCLUDE IN GROSS INCOME IN YEAR OF
TRANSFER OF PROPERTY PURSUANT TO SECTION 83(B)
OF THE INTERNAL REVENUE CODE
The undersigned hereby makes an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in gross income in 2021 as compensation for services rendered, the fair market value of the property received in connection with his/her services in excess of the amount paid for the property and supplies the following information in accordance with the regulations promulgated thereunder:
1.The name, address and taxpayer identification number of the undersigned are:
Name: _____________________________ (the “Taxpayer”)
Address:
Social Security No. /Taxpayer Identification No.: _____________________
2.Description of property with respect to which the election is being made:
The election is being made with respect to _____________ LTIP Units in Empire State Realty O.P. L.P. (the “Partnership”).
3.The date on which the LTIP Units were transferred is__________.
4.The taxable year to which this election relates is calendar year 20__.
5.The fair market value at time of transfer (determined without regard to any restrictions other than restrictions which by their terms will never lapse) of the LTIP Units with respect to which this election is being made was $0 per LTIP Unit.
6.The amount paid by the Taxpayer for the LTIP Units was $0 per LTIP Unit.
7.The amount to be included in gross income is $0.
8.A copy of this statement has been furnished to the Partnership and to its general partner, Empire State Realty Trust, Inc.
The Taxpayer will file this election with the Internal Revenue Service office with which the Taxpayer files his or her annual income tax return no later than 30 days after the date of transfer
of the property. The Taxpayer is the person performing the services in connection with which the property was transferred.
| Dated: ___________________ | |||||
| _________________________ | |||||
| Taxpayer’s Signature | |||||
Exhibit 10.4
LTIP UNIT VESTING AGREEMENT
FOR NON-EMPLOYEE DIRECTORS
UNDER THE
UNDER THE
EMPIRE STATE REALTY TRUST, INC.
EMPIRE STATE REALTY OP, L.P.
2019 EQUITY INCENTIVE PLAN
Grantee: _____________________
No. of LTIP Units: ____________________
Grant Date: ___
Pursuant to the Empire State Realty Trust, Inc. Empire State Realty OP, L.P. 2019 Equity Incentive Plan (the “Plan”) and the Amended and Restated Agreement of Limited Partnership, dated as of October 1, 2013, as amended (the “Partnership Agreement”), of Empire State Realty OP, L.P., a Delaware limited partnership (the “Partnership”), Empire State Realty Trust, Inc., a Maryland corporation and the general partner of the Partnership (the “Company”), hereby grants to Grantee named above an other equity-based award (pursuant to Section 11 of the Plan, and referred to herein as an “Award”) in the form of, and by causing the Partnership to issue to Grantee named above, LTIP Units (as defined in the Partnership Agreement) having the rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption and conversion set forth herein and in the Partnership Agreement. If this LTIP Unit Vesting Agreement (this “Agreement”) is accepted, Grantee shall receive the number of LTIP Units specified above as of the Grant Date, subject to the restrictions and conditions set forth herein, in the Plan and in the Partnership Agreement. All capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Plan.
1.Acceptance of Agreement. Grantee shall have no rights with respect to this Agreement unless Grantee has accepted this Agreement by (i) signing and delivering to the Partnership a copy of this Agreement and (ii) unless Grantee is already a Limited Partner (as defined in the Partnership Agreement), signing, as a Limited Partner, and delivering to the Partnership a counterpart signature page to the Partnership Agreement (attached hereto as Annex A). If this Agreement is accepted by Grantee, the Partnership Agreement shall be amended to reflect the issuance to Grantee of the LTIP Units so accepted. Thereupon, Grantee shall have all the rights of a Limited Partner of the Partnership with respect to the number of LTIP Units then issued to Grantee, as set forth in the Partnership Agreement, subject, however, to the restrictions and conditions specified in Section 2 below.
2.Restrictions and Conditions.
(a)The records of the Partnership evidencing the LTIP Units granted herein shall bear an appropriate legend, as determined by the Partnership in its sole discretion, to the
effect that such LTIP Units are subject to restrictions as set forth herein, in the Plan and in the Partnership Agreement.
(b)LTIP Units granted herein may not be sold, assigned, transferred, pledged hypothecated or otherwise disposed of and shall be subject to a risk of forfeiture until the lapse of restrictions as set forth in this Agreement.
3.Lapse of Restrictions.
(a)The restrictions and conditions in Section 2 of this Agreement shall lapse and the LTIP Units granted herein shall vest as to [___________]1 of the LTIP Units on the one (1) year anniversary of the Grant Date, and the remainder shall vest in substantially equal annual installments, rounded down to the nearest whole LTIP Unit, on each subsequent anniversary for a period of [_______]1 thereafter; provided, that, with respect to the last such annual installment, the number of LTIP Units that vest in the installment shall be such that Grantee will be fully vested in the total number of LTIP Units listed above as of the applicable annual anniversary. Notwithstanding the foregoing, except as provided in Section 3(b) or in Section 4 below or Section 12(c) of the Plan, an LTIP Unit shall not vest on any vesting date unless Grantee continues to serve as a member of the Board or is employed by the Company, the Partnership or any of their Affiliates through the applicable vesting date.
(b)In the event of a Corporate Event, this Award shall be treated as set forth in Section 12 of the Plan; provided, however, if the LTIP Units do not remain outstanding or are not replaced with awards of the Company’s successor in a Change in Control, all outstanding LTIP Units shall become fully vested upon the consummation of the Change in Control.
4.Termination of Service.
(a)In the event of Grantee’s Termination for any reason, except as provided in (b) below, all vesting with respect to the LTIP Units shall immediately cease, and all LTIP Units that have not vested at that time will be forfeited to the Partnership without payment of any consideration by the Partnership or any of its Affiliates, and neither Grantee nor any of his or her successors, heirs, assigns, or personal representatives will thereafter have any further rights or interests in such LTIP Units.
(b)In the event Grantee’s Termination is a result of (i) death, (ii) Disability, (iii) a voluntary termination by Grantee that follows the Grantee’s reaching the age of 65 (without regard to years of service), (iv) a voluntary termination by the Grantee in accord with any Company policy for a mandatory term limit or retirement age, (v) a voluntary termination by Grantee, while in good standing as a director, at the request of the Board in connection with ordinary refreshment of Board composition or any Change in Control at the Company, or (vi) any termination by the Company without Cause, any restrictions and conditions on all LTIP Units subject to this Agreement shall lapse and the LTIP Units, unless earlier terminated or forfeited and to the extent not otherwise vested, shall automatically become fully vested as of such date of Termination.
1 Number of years and vesting dates to be inserted, usually in range of 3-4 years.
2
(c)Notwithstanding any other provision hereof, if Grantee is a party to an effective Participant Agreement, then the terms of such Participant Agreement shall supersede any contrary provision in this Agreement and the applicable period of forfeiture shall also end if and as may otherwise be required by such Participant Agreement; and nothing herein shall limit any rights Grantee may otherwise have under such Participant Agreement.
5.Distributions. Distributions on the LTIP Units shall be paid to Grantee in accordance with the terms of the Partnership Agreement.
6.Covenants, Representation and Warranties. Grantee hereby covenants as follows:
(a)So long as Grantee holds any LTIP Units, Grantee shall disclose to the Partnership in writing such information as may be reasonably requested with respect to ownership of LTIP Units as the Partnership may deem reasonably necessary to ascertain and to establish compliance with provisions of the Code as applicable to the Partnership or to comply with the requirements of any other appropriate tax authority.
(b)Grantee hereby agrees to make an election under Section 83(b) of the Code with respect to the LTIP Units awarded hereunder, and has delivered with this Agreement a completed, executed copy of the election form attached hereto as Annex B. Grantee agrees to file the election within thirty (30) days after the Grant Date with the Internal Revenue Service, and to promptly provide a copy of such filed election to the Company.
(c)Grantee hereby agrees not to dispose of the LTIP Units subject to this Award within two years after the Grant Date. The Partnership and Grantee hereby agree to treat Grantee as the owner of the LTIP Units from the Grant Date. Grantee hereby agrees to take into account the distributive share of Partnership income, gain, loss, deduction, and credit associated with the LTIP Units in computing Grantee’s income tax liability for the entire period during which Grantee has the LTIP Units.
(d)Grantee hereby recognizes that the Internal Revenue Service has proposed regulations under Sections 83 and 704 of the Code that may affect the proper treatment of the LTIP Units for federal income tax purposes. In the event that those proposed regulations are finalized, Grantee hereby agrees to cooperate with the Partnership in amending this Agreement and the Partnership Agreement, and to take such other action as may be required, to conform to such regulations.
(e)Grantee has received and read a copy of the Partnership Agreement and the Plan and has had his or her tax advisors advise him or her on the application of U.S. federal income tax laws, and the tax laws of any state, local or other taxing jurisdiction to which Grantee is or by reason of the Award may become subject to.
7.Clawback. This Award is subject to any incentive compensation clawback or recoupment policy currently in effect or as may be adopted by the Board, and in each case, as may be amended from time to time.
3
8.Assignment and Transfer. Except as expressly permitted under this Agreement or by the Committee pursuant to the Plan, the rights and interests of Grantee under this Agreement may not be sold, assigned, encumbered, pledged, or otherwise transferred except in the event of the death of Grantee, by will or by the laws of descent and distribution. In the event of any attempt by Grantee in breach of the foregoing sentence to sell, assign, encumber, pledge or otherwise transfer its rights and interests hereunder, or in the event of the levy or any attachment, execution or similar process upon the rights or interests hereby conferred, the Company or the Partnership may require Grantee to forfeit the LTIP Units by notice to Grantee, and the LTIP Units and all rights hereunder shall thereupon become null and void. The rights and protections of the Company and the Partnership hereunder shall extend to any successors or assigns of the Company and the Partnership.
9.Incorporation of the Plan. This Agreement is made under and subject to and governed by all of the terms and conditions of the Plan. In the event of any discrepancy or inconsistency between this Agreement and the Plan, the terms and conditions of the Plan shall control. By signing this Agreement, Grantee confirms that he or she has received a copy of the Plan and has had an opportunity to review the contents thereof. Any shares of Stock issued in exchange for partnership units into which LTIP Units may have been converted pursuant to the Partnership Agreement will be issued under the Plan.
10.Amendment. Grantee acknowledges that the Plan may be amended or discontinued in accordance with Section 19 or Section 20 thereof and that this Agreement may be amended or canceled by the Board or the Committee, on behalf of the Partnership, for the purpose of satisfying changes in law or for any other lawful purpose, provided that no such action shall materially impair Grantee’s rights under this Agreement without Grantee’s written consent.
11.No Right to Continued Service or Employment. Neither the Plan nor this Agreement will give Grantee any right to continue to be in the employ or service of the Company, the Partnership or any of their Affiliates, affect the right of the Company, the Partnership or any of their Affiliates to discharge or discipline such Grantee at any time, or affect any right of such Grantee to terminate his or her service or employment at any time.
12.Waiver. The failure of Grantee or the Company to insist upon strict compliance with any provision of this Agreement or the Plan, or to assert any right Grantee or the Company, respectively, may have under this Agreement or the Plan, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement or the Plan.
13.Notices. Notices hereunder shall be mailed or delivered to the Partnership at its principal place of business and shall be mailed or delivered to Grantee at the address on file with the Partnership or, in either case, at such other address as one party may subsequently furnish to the other party in writing.
14.Consent to Electronic Delivery. Grantee agrees that the Company or the Partnership may deliver by email all documents relating to the Plan or the LTIP Units (including without limitation, a copy of the Plan) and all other documents that the Company or Partnership
4
is required to deliver to its security holders (including, without limitation, disclosures that may be required by the Securities and Exchange Commission). Grantee also agrees that the Company or the Partnership may deliver these documents by posting them on a website maintained by the Company or by a third-party under contract with the Company. If the Company posts these documents on a website, it shall notify Grantee by email.
15.Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. Facsimile or electronic submission of any signed original document or retransmission of any signed facsimile or other electronic transmission will be deemed the same as delivery of an original.
16.Severability. In the event that one or more provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had never been contained herein.
17.Headings. Section, paragraph and other headings and captions are provided solely as a convenience to facilitate reference. Such headings and captions shall not be deemed in any way material or relevant to the construction, meaning or interpretation of this Agreement or any term or provision hereof.
18. Governing Law. This Agreement and all claims or disputes arising out of or based upon this Agreement or relating to the subject matter hereof shall be governed by, and construed in accordance with, the laws of the State of Maryland, applied without regard to conflict of law principles or rules that would cause the application of the domestic substantive laws of any other jurisdiction.
5
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
| EMPIRE STATE REALTY TRUST, INC. | ||||||||
| By: | ||||||||
| Name: | ||||||||
| Title: | ||||||||
| EMPIRE STATE REALTY OP, L.P. | ||||||||
| By: | EMPIRE STATE REALTY TRUST, INC., its general partner | |||||||
| By: | ||||||||
| Name: | ||||||||
| Title: | ||||||||
The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by Grantee.
Dated: _____________ | |||||
| [NAME] | |||||
6
ANNEX A
FORM OF LIMITED PARTNER SIGNATURE PAGE
Grantee, desiring to become one of the within named Limited Partners of Empire State Realty OP, L.P., hereby becomes a party to the Amended and Restated Agreement of Limited Partnership of Empire State Realty OP, L.P., dated as of October 1, 2013, as amended through the date hereof (the “Partnership Agreement”). Grantee agrees that this signature page may be attached to any counterpart of the Partnership Agreement.
Signature Line for Limited Partner:
NAME
Date:
Address of Limited Partner:
ANNEX B
ELECTION TO INCLUDE IN GROSS INCOME IN YEAR OF
TRANSFER OF PROPERTY PURSUANT TO SECTION 83(B)
OF THE INTERNAL REVENUE CODE
The undersigned hereby makes an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in gross income in 20__ as compensation for services rendered, the fair market value of the property received in connection with his/her services in excess of the amount paid for the property and supplies the following information in accordance with the regulations promulgated thereunder:
1.The name, address and taxpayer identification number of the undersigned are:
Name: ___________________ (the “Taxpayer”)
Address: ________________________________
Social Security No. /Taxpayer Identification No.: _________
2.Description of property with respect to which the election is being made:
The election is being made with respect to _________ LTIP Units in Empire State Realty O.P. L.P. (the “Partnership”).
3.The date on which the LTIP Units were transferred is ___________.
4.The taxable year to which this election relates is calendar year 20__.
5.Nature of restrictions to which the LTIP Units are subject:
(a) The Taxpayer may not transfer in any manner any unvested portion of the LTIP Units without the consent of the Partnership.
(b) The LTIP Units are subject to service-based vesting conditions, such that ______________ of the LTIP Units will vest on each of the first__________ anniversaries of the grant date, provided the undersigned continues to serve as a member of the Company’s board of directors or is employed with the Partnership, its general partner, Empire State Realty Trust, Inc. or any of their respective affiliates through each such date, subject to accelerated vesting in certain circumstances.
6.The fair market value at time of transfer (determined without regard to any restrictions other than restrictions which by their terms will never lapse) of the LTIP Units with respect to which this election is being made was $0 per LTIP Unit.
7.The amount paid by the Taxpayer for the LTIP Units was $0 per LTIP Unit.
8.The amount to be included in gross income is $0.
9.A copy of this statement has been furnished to the Partnership and to its general partner, Empire State Realty Trust, Inc.
The Taxpayer will file this election with the Internal Revenue Service office with which the Taxpayer files his or her annual income tax return no later than 30 days after the date of transfer of the property. The Taxpayer is the person performing the services in connection with which the property was transferred.
| Dated: ___________________ | |||||
| _________________________ | |||||
| Taxpayer’s Signature | |||||
EXHIBIT 31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Anthony E. Malkin, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Empire State Realty OP, L.P.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: August 5, 2021 | By: /s/ Anthony E. Malkin Anthony E. Malkin Chairman, President and Chief Executive Officer | ||||
EXHIBIT 31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Christina Chiu, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Empire State Realty OP, L.P.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: August 5, 2021 | By: /s/ Christina Chiu Christina Chiu Executive Vice President and Chief Financial Officer | ||||
| AMR-444272-v1 | 2 | 80-40476364 | ||||||
EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, the undersigned Chief Executive Officer of Empire State Realty OP, L.P. (the "Company"), hereby certifies, to his knowledge that the Quarterly Report on Form 10-Q for the period ended June 30, 2021 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 5, 2021 | By: /s/ Anthony E. Malkin Anthony E. Malkin Chairman, President and Chief Executive Officer | ||||
EXHIBIT 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, the undersigned, Executive Vice President and Chief Financial Officer of Empire State Realty OP, L.P. (the "Company"), hereby certifies, to her knowledge that the Quarterly Report on Form 10-Q for the period ended June 30, 2021 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 5, 2021 | By: /s/ Christina Chiu Christina Chiu Executive Vice President and Chief Financial Officer | ||||