Empire State Realty OP, L.P 10-Q for FY2020 Q2
Empire State Realty OP, L.P. (ESBA)
10-Q
2020-08-10
For: 2020-06-30
View Original
Added on
April 08, 2026
About this 10-Q
Empire State Realty OP, L.P filed this 10-Q on August 10, 2020, covering the quarter ended June 30, 2020 (FY2020 Q2).
Headline figures
Quarter ended June 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $141.03M
- down 20.0% from $176.24M a year earlier
- Net loss
- $19.62M
- compared with net income of $18.93M a year earlier
- Diluted EPS
- -$0.07
- compared with $0.06 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, 2020
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 ) 687-8700
(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 30, 2020, there were 24,522,366 units of the Registrant Series ES operating partnership units outstanding, 6,707,377 units of the Series 60 operating partnership units outstanding, and 3,361,500 units of the Series 250 operating partnership units outstanding.
EMPIRE STATE REALTY OP, L.P. | ||
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2020 | ||
TABLE OF CONTENTS | PAGE | |
PART 1. | FINANCIAL INFORMATION | |
ITEM 1. | FINANCIAL STATEMENTS | |
Condensed Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019 | ||
Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2020 and 2019 (unaudited) | ||
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2020 and 2019 (unaudited) | ||
Condensed Consolidated Statements of Capital for the three and six months ended June 30, 2020 and 2019 (unaudited) | ||
Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2020 and 2019 (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 unit and per unit amounts)
June 30, 2020 | December 31, 2019 | ||||||
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, net | |||||||
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, $13.52 per unit liquidation preference, 4,664,038 and 4,610,383 issued and outstanding in 2020 and 2019, respectively | |||||||
Private perpetual preferred units, $16.62 per unit liquidation preference, 1,560,360 issued and outstanding in 2020 and 2019 | |||||||
Series PR operating partnership units: | |||||||
ESRT partner's capital (2,908,226 and 2,996,520 general partner operating partnership units and 170,438,353 and 178,897,876 limited partner operating partnership units outstanding in 2020 and 2019, respectively) | |||||||
Limited partners' interests (82,765,689 and 81,387,763 limited partner operating partnership units outstanding in 2020 and 2019, respectively) | |||||||
Series ES operating partnership units (24,528,792 and 25,809,604 limited partner operating partnership units outstanding in 2020 and 2019, respectively) | ( | ) | |||||
Series 60 operating partnership units (6,776,577 and 7,025,089 limited partner operating partnership units outstanding in 2020 and 2019, respectively) | ( | ) | |||||
Series 250 operating partnership units (3,404,937 and 3,535,197 limited partner operating partnership units outstanding in 2020 and 2019, respectively) | ( | ) | |||||
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, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
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 charge | |||||||||||||||
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 (expense) | ( | ) | |||||||||||||
Net income (loss) | ( | ) | ( | ) | |||||||||||
Private perpetual preferred unit distributions | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net income (loss) attributable to common unitholders | $ | ( | ) | $ | $ | ( | ) | $ | |||||||
Total weighted average units: | |||||||||||||||
Basic | |||||||||||||||
Diluted | |||||||||||||||
Earnings 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, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
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, 2020 and 2019
(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, 2020 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
Conversion of operating partnership units to ESRT Partner's Capital | — | — | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||
Repurchases of common shares | — | — | ( | ) | ( | ) | — | — | — | — | — | — | — | — | ( | ) | |||||||||||||||||||||||||||||
Equity compensation | — | — | ( | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Distributions | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | ( | ) | |||||||||||||||||||||||||
Net income | — | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||
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, 2019 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
Conversion of operating partnership units to ESRT Partner's Capital | — | — | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||
Equity compensation | — | — | ( | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Distributions | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | ( | ) | |||||||||||||||||||||||||
Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
Balance at June 30, 2019 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
5
Empire State Realty OP, L.P.
Condensed Consolidated Statements of Capital
For The Six Months Ended June 30, 2020 and 2019
(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, 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 | — | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
Balance at June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||
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, 2018 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
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 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
Balance at June 30, 2019 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
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, | |||||||
2020 | 2019 | ||||||
Cash Flows From Operating Activities | |||||||
Net income (loss) | $ | ( | ) | $ | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | |||||||
Impairment charge | |||||||
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 | |||||||
Short-term investments | |||||||
Development costs | ( | ) | |||||
Additions to building and improvements | ( | ) | ( | ) | |||
Net cash (used in) provided by 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, | |||||||
2020 | 2019 | ||||||
Cash Flows From Financing Activities | |||||||
Repayment of mortgage notes payable | ( | ) | ( | ) | |||
Proceeds from unsecured senior notes | |||||||
Repayment of unsecured term loan | ( | ) | |||||
Proceeds from unsecured term loan | |||||||
Proceeds from unsecured revolving credit facility | |||||||
Deferred financing costs | ( | ) | |||||
Repurchases of common units | ( | ) | |||||
Distributions | ( | ) | ( | ) | |||
Net cash provided by (used in) 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 | |||||||
Right of use assets | |||||||
Ground lease liabilities | |||||||
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, 2020, 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 506,452 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 415,000 rentable square foot office building and garage. As of June 30, 2020, our portfolio included four standalone retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut, encompassing 205,488 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, 2020, ESRT owned approximately 59.6 % 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, 2019 Annual Report on Form 10-K.
Basis of Quarterly Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), for interim financial information, and with the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments and eliminations (including intercompany balances and transactions), consisting of normal recurring adjustments, considered necessary for the fair presentation of the financial statements have been included.
We consolidate entities in which we have a controlling financial interest. In determining whether we have a controlling financial interest in a partially owned entity and the requirement to consolidate the accounts of that entity, we
9
consider factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members. For variable interest entities ("VIE"), we consolidate the entity if we are deemed to have a variable interest in the entity and through that interest we are deemed the primary beneficiary. The primary beneficiary of a VIE is the entity that has (i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. The primary beneficiary is required to consolidate the VIE. We had no VIEs as of June 30, 2020 and December 31, 2019.
We will assess the accounting treatment for each investment we may have in the future. This assessment will include a review of each entity’s organizational agreement to determine which party has what rights and whether those rights are protective or participating. For all VIEs, we will review such agreements in order to determine which party has the power to direct the activities that most significantly impact the entity’s economic performance and benefit. In situations where we or our partner could approve, among other things, the annual budget, or leases that cover more than a nominal amount of space relative to the total rentable space at each property, we would not consolidate the investment as we consider these to be substantive participation rights that result in shared power of the activities that would most significantly impact the performance and benefit of such joint venture investment.
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Non-controlling interests are required to be presented as a separate component of equity in the condensed consolidated balance sheets and in the condensed consolidated statements of operations by requiring earnings and other comprehensive income to be attributed to controlling and non-controlling interests.
Accounting Estimates
Revenue Recognition
For Coronavirus 2019 (“COVID-19”) pandemic related rent deferral agreements, we will generally elect to record rental revenue and a receivable during the deferral period.
Recently Issued or Adopted Accounting Standards
During April 2020, the Financial Accounting Standards Board ("FASB") staff issued a question and answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 global pandemic. Under existing lease guidance, the entity would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant, which would be accounted for under the lease modification framework, or if a lease concession was under the enforceable rights and obligations that existed in the original lease, which would be accounted for outside the lease modification framework. The Lease Modification Q&A provides entities with the option to elect to account for lease concessions as though the enforceable rights and obligations existed in the original lease. This election is only available when total cash flows resulting from the modified lease are substantially similar to the cash flows in the original lease.
During March 2020, the FASB issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter 2020, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the
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presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
During January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which contain amendments that modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. ASU No. 2017-04 should be applied on a prospective basis and the amendments adopted for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted this standard and related amendments on January 1, 2020 and such adoption did not have a material impact our consolidated financial statements.
During June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which contains amendments that replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. During November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which clarifies that receivables arising from operating leases are not within the scope of Topic 326. Instead, impairment of receivables arising from operating leases should be accounted in accordance with ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-13 and ASU No. 2018-19 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Earlier adoption as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, is permitted. The amendments must be adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified retrospective approach). We adopted these standards on January 1, 2020 and such adoption did not have a material impact our consolidated financial statements.
3. Deferred Costs, Acquired Lease Intangibles and Goodwill
Deferred costs, net, consisted of the following as of June 30, 2020 and December 31, 2019 (amounts in thousands):
June 30, 2020 | December 31, 2019 | ||||||
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 December 31, 2019, $4.2 million of net deferred financing costs associated with the unsecured revolving credit facility was included in deferred costs, net on the condensed consolidated balance sheet. At June 30, 2020, $3.2 million net deferred financing costs associated with the unsecured revolving credit facility were included as a reduction of debt.
Amortization expense related to deferred leasing costs and acquired deferred leasing costs was $6.4 million and $5.9 million for the three months ended June 30, 2020 and 2019, respectively, and $12.3 million and $12.1 million for the six months ended June 30, 2020 and 2019, respectively. Amortization expense related to acquired lease intangibles was $2.4 million and $2.6 million for the three months ended June 30, 2020 and 2019, respectively, and $4.4 million and $5.8 million for the six months ended June 30, 2020 and 2019, respectively.
Amortizing acquired intangible assets and liabilities consisted of the following as of June 30, 2020 and December 31, 2019 (amounts in thousands):
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June 30, 2020 | December 31, 2019 | ||||||
Acquired below-market ground leases | $ | $ | |||||
Less: accumulated amortization | ( | ) | ( | ) | |||
Acquired below-market ground leases, net | $ | $ | |||||
June 30, 2020 | December 31, 2019 | ||||||
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 $1.4 million and $1.7 million for the three months ended June 30, 2020 and 2019, respectively, and $2.3 million and $4.1 million for the six months ended June 30, 2020 and 2019, respectively.
As of June 30, 2020, 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 segment.
During the second quarter 2020, the extended closure of our Observatory in compliance with state-mandated COVID-19 containment measures served as a triggering event for us 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 Real Estate reporting unit, we determined that the fair value of the Observatory reporting unit exceeded its carrying value by less than 5.0 %. 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 Observatory reporting unit goodwill going forward and that continued assessment may again utilize a third-party valuation consulting firm.
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4. Debt
Debt consisted of the following as of June 30, 2020 and December 31, 2019 (amounts in thousands):
Principal Balance | As of June 30, 2020 | ||||||||||||||
June 30, 2020 | December 31, 2019 | 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 | ||||||||||||
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 revolving credit facility (4) | LIBOR plus 1.10% | % | 8/29/2021 | ||||||||||||
Unsecured term loan facility (4) | LIBOR plus 1.20% | % | 3/19/2025 | ||||||||||||
Unsecured term loan facility (4) | LIBOR plus 1.50% | % | 12/31/2026 | ||||||||||||
Total principal | |||||||||||||||
Deferred financing costs, net | ( | ) | ( | ) | |||||||||||
Total | $ | $ | |||||||||||||
______________
(1) | The effective rate is the yield as of June 30, 2020 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 $ |
(4) | At June 30, 2020, we were in compliance with all debt covenants. |
Principal Payments
Aggregate required principal payments at June 30, 2020 are as follows (amounts in thousands):
Year | Amortization | Maturities | Total | ||||||||
2020 | $ | $ | $ | ||||||||
2021 | |||||||||||
2022 | |||||||||||
2023 | |||||||||||
2024 | |||||||||||
Thereafter | |||||||||||
Total | $ | $ | $ | ||||||||
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Deferred Financing Costs
Deferred financing costs, net, consisted of the following at June 30, 2020 and December 31, 2019 (amounts in thousands):
June 30, 2020 | December 31, 2019 | |||||||
Financing costs | $ | $ | ||||||
Less: accumulated amortization | ( | ) | ( | ) | ||||
Total deferred financing costs, net | $ | $ | ||||||
At December 31, 2019, $4.2 million of net deferred financing costs associated with the unsecured revolving credit facility was included in deferred costs, net on the condensed consolidated balance sheet. At June 30, 2020, $3.2 million net deferred financing costs associated with the unsecured revolving credit facility were included as a reduction of debt.
Amortization expense related to deferred financing costs was $1.0 million and $1.0 million for the three months ended June 30, 2020 and 2019, respectively, and $2.0 million and $2.0 million for the six months ended June 30, 2020 and 2019, respectively.
Unsecured Revolving Credit and Term Loan Facilities
On March 19, 2020, we entered into an amendment to an existing credit agreement with the lenders party thereto, Bank of America, N.A., as administrative agent, and Bank of America, Wells Fargo Bank, National Association and Capital One, National Association, as the letter of credit issuers party thereto. The amendment amends the amended and restated senior unsecured revolving credit and term loan facility, entered into as of August 29, 2017, with Bank of America, N.A., as administrative agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC as Joint Lead Arrangers and Joint Bookrunners, Wells Fargo, National Association and Capital One, National Association, as co-syndication agents, and the lenders party thereto.
This new amended and restated senior unsecured revolving credit and term loan facility (the "Credit Facility") is in the original principal amount of up to $1.315 billion, which consists of a $1.1 billion revolving credit facility and a $215.0 million term loan facility. We borrowed the term loan facility in full at closing. We may request the Credit Facility be increased through one or more increases in the revolving credit facility or one or more increases in the term loan facility or the addition of new pari passu term loan tranches, for a maximum aggregate principal amount not to exceed $1.75 billion. As of June 30, 2020, our borrowings amounted to $550.0 million under the revolving credit facility and $215.0 million under the term loan facility.
The initial maturity of the unsecured revolving credit facility is August 2021. We have the option to extend the initial term for up to two additional 6 -month periods, subject to certain conditions, including the payment of an extension fee equal to 0.0625 % and 0.075 % of the then outstanding commitments under the unsecured revolving credit facility on the first and the second extensions, respectively. The term loan facility matures in March 2025. We may prepay the loans under the Credit Facility at any time in whole or in part, subject to reimbursement of the lenders’ breakage and redeployment costs in the case of prepayment of Eurodollar Rate borrowings.
On March 19, 2020, we entered into a senior unsecured term loan facility (the “Term Loan Facility”) with Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC as sole bookrunner, Wells Fargo Securities, LLC, Capital One, National Association, U.S. Bank National Association and SunTrust Robinson Humphrey, Inc. as Joint Lead Arrangers, Capital One, National Association, as syndication agent, U.S. Bank National Association and Truist Bank, as documentation agents, and the lenders party thereto.
The Term Loan Facility is in the original principal amount of $175 million which we borrowed in full at closing. We may request the Term Loan Facility be increased through one or more increases or the addition of new pari passu term loan tranches, for a maximum aggregate principal amount not to exceed $225 million. As of June 30, 2020, our borrowings amounted to $175.0 million under the Term Loan Facility.
The Term Loan Facility matures on December 31, 2026. We may prepay loans under the Term Loan Facility at any time in whole or in part, subject to reimbursement of the lenders’ breakage and redeployment costs in the case of prepayment of Eurodollar rate borrowings and, if the prepayment occurs on or before December 31, 2021, a prepayment fee. If the
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prepayment occurs on or prior to December 31, 2020, the prepayment fee is equal to 2.0 % of the principal amount prepaid, and if the prepayment occurs after December 31, 2020 but on or prior to December 31, 2021, the prepayment fee is equal to 1.0 % of the principal amount prepaid.
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. 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 agreement also contains 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, 2020, we were in compliance with the covenants under the Credit Facility and the Term Loan Facility.
Senior Unsecured Notes
On March 17, 2020, we entered into an agreement to issue and sell an aggregate $175 million of senior unsecured notes, consisting of (a) $100 million aggregate principal amount of 3.61 % Series G Senior Notes due March 17, 2032 (the “Series G Notes”) and (b) $75 million aggregate principal amount of 3.73 % Series H Senior Notes due March 17, 2035 (the “Series H Notes”). The issue price for the Series G and H Notes was 100 % of the aggregate principal amount thereof.
The terms of the Series G and H Notes agreement 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 agreement also contains 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, 2020, we were in compliance with the covenants under the outstanding senior unsecured notes.
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following as of June 30, 2020 and December 31, 2019 (amounts in thousands):
June 30, 2020 | December 31, 2019 | ||||||
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.
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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, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $11.7 million. If we had breached any of these provisions at June 30, 2020, we could have been required to settle our obligations under the agreements at their termination value of $11.7 million.
As of June 30, 2020 and December 31, 2019, we had interest rate LIBOR swaps with an aggregate notional value of $265.0 million and $390.0 million, respectively. The notional value does not represent exposure to credit, interest rate or market risks. As of June 30, 2020 and December 31, 2019, the fair value of our derivative instruments amounted to $(11.6 ) million and $(13.3 ) million, respectively, which is included in accounts payable and accrued expenses on the condensed consolidated balance sheets. These interest rate swaps have been designated as cash flow hedges and hedge the variability in future cash flows associated with our existing variable-rate term loan facilities.
As of June 30, 2020 and 2019, our cash flow hedges are deemed highly effective and a net unrealized gain (loss) of $0.6 million and $(12.2 ) million for the three months ended June 30, 2020 and 2019, respectively, and a net unrealized gain (loss) of $(16.3 ) million and $(19.4 ) million for the six months ended June 30, 2020 and 2019, respectively, relating to both active and terminated hedges of interest rate risk, are reflected in the condensed consolidated statements of comprehensive income. 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.
The table below summarizes the terms of agreements and the fair values of our derivative financial instruments as of June 30, 2020 and December 31, 2019 (dollar amounts in thousands):
June 30, 2020 | December 31, 2019 | |||||||||||||||||||||
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 | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||
Interest rate swap | 3 Month LIBOR | July 1, 2019 | N/A | ( | ) | |||||||||||||||||
$ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
The table below shows the effect of our derivative financial instruments designated as cash flow hedges on accumulated other comprehensive income (loss) for the three and six months ended June 30, 2020 and 2019 (amounts in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
Effects of Cash Flow Hedges | June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | ||||||||||||
Amount of gain (loss) recognized in other comprehensive income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Amount of gain (loss) reclassified from accumulated other comprehensive income (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, 2020 and 2019 (amounts in thousands):
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Three Months Ended | Six Months Ended | |||||||||||||||
Effects of Cash Flow Hedges | June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | ||||||||||||
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 income (loss) into interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Fair Valuation
The estimated fair values at June 30, 2020 and December 31, 2019 were determined by management, using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The fair value of derivative instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Although the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our counterparties. The impact of such credit valuation adjustments, determined based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of our derivatives were classified as Level 2 of the fair value hierarchy.
The fair value of our mortgage notes payable, senior unsecured notes - Series A, B, C, D, E, F, G and H, unsecured term loan facilities, unsecured revolving credit facility and ground lease liabilities which are determined using Level 3 inputs, are estimated by discounting the future cash flows using current interest rates at which similar borrowings could be made to us.
The following tables summarize the carrying and estimated fair values of our financial instruments as of June 30, 2020 and December 31, 2019 (amounts in thousands):
June 30, 2020 | |||||||||||||||||||
Estimated Fair Value | |||||||||||||||||||
Carrying Value | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
Interest rate swaps 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 | |||||||||||||||||||
Unsecured revolving credit facility | |||||||||||||||||||
December 31, 2019 | |||||||||||||||||||
Estimated Fair Value | |||||||||||||||||||
Carrying Value | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
Interest rate swaps included in accounts payable and accrued expenses | $ | $ | $ | $ | $ | ||||||||||||||
Mortgage notes payable | |||||||||||||||||||
Senior unsecured notes - Series A, B, C, D, E and F | |||||||||||||||||||
Unsecured term loan facility | |||||||||||||||||||
Disclosure about the fair value of financial instruments is based on pertinent information available to us as of June 30, 2020 and December 31, 2019. Although we are not aware of any factors that would significantly affect the reasonable fair
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7. Leases
Lessor
We lease various spaces to tenants over terms ranging from one 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, 2020 and 2019 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, 2020 and 2019 are as follows (amounts in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
Rental revenue | June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | ||||||||||||
Fixed payments | $ | $ | $ | $ | ||||||||||||
Variable payments | ||||||||||||||||
Total rental revenue | $ | $ | $ | $ | ||||||||||||
As of June 30, 2020, we were entitled to the following future contractual minimum lease payments (excluding operating expense reimbursements) on non-cancellable operating leases to be received which expire on various dates through 2038 (amounts in thousands):
Remainder of 2020 | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
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 $29.2 million and lease liabilities of $29.2 million in our consolidated balance sheet as of June 30, 2020. 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, 2020 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, 2020 was 49.8 years.
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As of June 30, 2020, the following table summarizes our future minimum lease payments discounted by our incremental borrowing rates to calculate the lease liabilities of our leases (amounts in thousands):
Remainder of 2020 | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
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, 2020, 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 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 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, as 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. These investors had opted out of a prior class action bringing similar claims that was settled with court approval. The 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 for a select number of sessions started in May 2016 and concluded in August 2018. Post-hearing briefing has been completed.
The respondents believe the allegations in the arbitration are entirely without merit, and they intend to continue to defend them vigorously.
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, 2020, we estimate that we will incur approximately $132.3 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, 2020, 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
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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, 2020, 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, 2020, 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 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, 2020, there were 290,822,574 operating partnership units outstanding, of which 173,346,579 , or 59.6 %, were owned by ESRT and 117,475,995 , or 40.4 %, 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.
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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. Performance based LTIP units 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, 2020. 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.
The following table summarizes ESRT's purchases of equity securities in each of the three months ended June 30, 2020 and the month of July 2020:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Maximum Approximate Dollar Value Available for Future Purchase (in thousands) | |||||||||
April 2020 | $ | $ | |||||||||||
May 2020 | $ | $ | |||||||||||
June 2020 | $ | $ | |||||||||||
July 2020 | $ | $ | |||||||||||
Private Perpetual Preferred Units
As of June 30, 2020, 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 $30.6 million and $62.2 million for the three and six months ended June 30, 2020, respectively, and $32.0 million and $63.7 million for the three and six months ended June 30, 2019, respectively. Total distributions paid to preferred unitholders were $1.0 million and $2.1 million for the three and six months ended June 30, 2020, respectively, and $0.2 million and $0.5 million for the three and six months ended June 30, 2019, 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, 2020, 7.2 million shares of ESRT common stock remain available for future issuance.
In March 2020, we made grants of LTIP units to executive officers under the 2019 Plan. At such time, we granted to executive officers a total of 745,155 LTIP units that are subject to time-based vesting and 3,358,767 LTIP units that are subject to market-based vesting, with fair market values of $5.6 million for the time-based vesting awards and $14.0 million for the market-based vesting awards. In March 2020, we made grants of LTIP units and restricted stock to certain other employees
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under the 2019 Plan. At such time, we granted to certain other employees a total of 113,971 LTIP units and 158,806 shares of restricted stock that are subject to time-based vesting and 502,475 LTIP units that are subject to market-based vesting, with fair market values of $2.3 million for the time-based vesting awards and $2.3 million for the market-based vesting awards. The awards subject to time-based vesting vest ratably over four years from January 1, 2020, subject generally to the grantee's continued employment. The first installment vests on January 1, 2021 and the remainder will vest thereafter in three equal annual installments. The vesting of the LTIP units subject to market-based vesting is based on the achievement of relative total stockholder return hurdles over a three-year performance period, commencing on January 1, 2020. Following the completion of the three-year performance period, our compensation committee will determine the number of LTIP units to which the grantee is entitled based on our performance relative to the performance hurdles set forth in the LTIP unit award agreements the grantee entered into in connection with the award grant. These units then vest in two installments, with the first installment vesting on January 1, 2023 and the second installment vesting on January 1, 2024, subject generally to the grantee's continued employment on those dates.
Our named executive officers can elect to receive their annual incentive bonus in any combination of (i) cash or vested LTIP's at the face amount of such bonus or (ii) time-vesting LTIP's which would vest over three years , subject to continued employment, at 125 % of such face amount. In March 2020, we made grants of LTIP units to executive officers under the 2019 Plan in connection with the 2019 bonus election program. We granted to executive officers a total of 624,380 LTIP units that are subject to time-based vesting with a fair market value of $4.4 million. Of these LTIP units, 23,049 LTIP units vested immediately on the grant date and 601,331 LTIP units vest ratably over three years from January 1, 2020, subject generally to the grantee's continued employment. The first installment vests on January 1, 2021 and the remainder will vest thereafter in two equal annual installments.
In May 2020, we made grants of LTIP units under the 2019 Plan. At such time, we granted our non-employee directors a total of 171,153 LTIP units that are subject to time-based vesting with fair market values of $1.1 million. These awards vest ratably over three years from the date of the grant, subject generally to the director's continued service on our Board of Directors. We also granted Christina Chiu, our Executive Vice President and Chief Financial Officer, a total of 82,199 LTIP units that are subject to time-based vesting and 116,927 LTIP units that are subject to market-based vesting, with fair market values of $0.5 million for the time-based vesting awards and $0.5 million for the market-based vesting awards. We also granted certain other employees a total of 63,229 LTIP units that are subject to time-based vesting with a fair market value of $0.4 million. The awards subject to time-based vesting vest ratably over three or four years from the date of grant, subject generally to the grantee's continued employment. The first installment vests on the respective grant dates in May 2021 and the remainder will vest thereafter in two or three equal annual installments. The vesting of the LTIP units subject to market-based vesting is based on the achievement of relative total stockholder return hurdles over a three-year performance period, commencing on May 7, 2020. Following the completion of the three-year performance period, our compensation committee will determine the number of LTIP units to which the grantee is entitled based on our performance relative to the performance hurdles set forth in the LTIP unit award agreements the grantee entered into in connection with the award grant. These units then vest in two installments, with the first installment vesting on May 7, 2023 and the second installment vesting on May 7, 2024, subject generally to the grantee's continued employment on those dates.
In COVID-19 disrupted markets 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. 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.
In March 2019, we made grants of LTIP units to executive officers under the 2013 Plan. At such time, we granted to executive officers a total of 461,693 LTIP units that are subject to time-based vesting and 1,806,520 LTIP units that are subject to market-based vesting, with fair market values of $6.4 million for the time-based vesting awards and $12.8 million for the market-based vesting awards. In March 2019, we made grants of LTIP units and restricted stock to certain other employees under the 2013 Plan. At such time, we granted to certain other employees a total of 61,432 LTIP units and 69,358 shares of restricted stock that are subject to time-based vesting and 113,383 LTIP units that are subject to market-based vesting, with fair market values of $2.0 million for the time-based vesting awards and $0.9 million for the market-based vesting awards. The awards subject to time-based vesting vest ratably over four years from January 1, 2019, subject generally to the grantee's continued employment. The first installment vests on January 1, 2020 and the remainder will vest thereafter in three equal annual installments. The vesting of the LTIP units subject to market-based vesting is based on the achievement of relative total stockholder return hurdles over a three-year performance period, commencing on January 1, 2019. Following the completion of the three-year performance period, our compensation committee will determine the number of LTIP units to which the grantee is entitled based on our performance relative to the performance hurdles set forth in the LTIP unit award agreements the grantee entered into in connection with the award grant. These units then vest in two installments, with the first installment
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vesting on January 1, 2022 and the second installment vesting on January 1, 2023, subject generally to the grantee's continued employment on those dates.
Our named executive officers can elect to receive their annual incentive bonus in any combination of (i) cash or vested LTIP's at the face amount of such bonus or (ii) time-vesting LTIP's which would vest over three years , subject to continued employment, at 125 % of such face amount. In March 2019, we made grants of LTIP units to executive officers under the 2013 Plan in connection with the 2018 bonus election program. We granted to executive officers a total of 334,952 LTIP units that are subject to time-based vesting with a fair market value of $4.6 million. Of these LTIP units, 26,056 LTIP units vested immediately on the grant date and 308,896 LTIP units vest ratably over three years from January 1, 2019, subject generally to the grantee's continued employment. The first installment vests on January 1, 2020 and the remainder will vest thereafter in two equal annual installments.
In October 2019 and May 2019, we made grants of LTIP units to our non-employee directors under the 2019 Plan. In the aggregate, we granted a total of 76,718 LTIP units that are subject to time-based vesting with fair market values of $1.1 million. The awards vest ratably over three years from May 17, 2019, subject generally to the director's continued service on our Board of Directors. The first installment vests on May 17, 2020 and the remainder will vest thereafter in two equal annual installments.
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 three or four 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 60 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 three 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 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 that are time-based, 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, 2020 were valued at $28.1 million. The weighted average per unit or share fair value was $5.43 for grants issued in 2020. The per unit or share granted in 2020 was estimated on the respective dates of grant using the following assumptions: an expected life from 2.0 to 5.5 years, a dividend rate of 3.70 %, a risk-free interest rate from 0.16 % to 0.50 %, and an expected price volatility from 19.0 % to 26.0 %.
No other stock options, dividend equivalents, or stock appreciation rights were issued or outstanding in 2020.
The following is a summary of ESRT restricted stock and LTIP unit activity for the six months ended June 30, 2020:
Restricted Stock | LTIP Units | Weighted Average Grant Fair Value | |||||||
Unvested balance at December 31, 2019 | $ | ||||||||
Vested | ( | ) | ( | ) | |||||
Granted | |||||||||
Forfeited or unearned | ( | ) | ( | ) | |||||
Unvested balance at June 30, 2020 | $ | ||||||||
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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 $0.3 million and $1.9 million for the three and six months ended June 30, 2020, respectively, and $0.2 million and $1.5 million for the three and six months ended June 30, 2019, respectively. Unrecognized compensation expense was $1.9 million at June 30, 2020, 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 $8.5 million and $12.8 million for the three and six months ended June 30, 2020, respectively, and $6.1 million and $10.2 million for the three and six months ended June 30 2019, respectively. Unrecognized compensation expense was $37.0 million at June 30, 2020, which will be recognized over a weighted average period of 2.9 years.
Earnings Per Unit
Earnings per unit for the three and six months ended June 30, 2020 and 2019 is computed as follows (amounts in thousands, except per share amounts):
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | ||||||||||||
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 per share: | |||||||||||||||
Basic | $ | ( | ) | $ | $ | ( | ) | $ | |||||||
Diluted | $ | ( | ) | $ | $ | ( | ) | $ | |||||||
There were 109,649 and 254,772 antidilutive shares and LTIP units for the three and six months ended June 30, 2020, respectively, and 411,019 and 205,851 antidilutive shares and LTIP units for the three and six months ended June 30, 2019, respectively.
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 $0.2 million and $0.3 million for the three months ended June 30, 2020 and 2019, respectively, and $0.5 million and $0.5 million for the six months ended June 30, 2020 and 2019, respectively. These fees are included within third-party management and other fees.
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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, 2020 and 2019, respectively, and $0.2 million and $0.2 million for the six months ended June 30, 2020 and 2019, respectively. These fees are included within third-party management and other fees.
Other
We receive rent generally at 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, 2020 and 2019, respectively, and $0.2 million and $0.2 million for the six months ended June 30, 2020 and 2019, respectively.
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.
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The following tables provide components of segment profit for each segment for the three and six months ended June 30, 2020 and 2019 (amounts in thousands):
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 charge | ||||||||||||||||
Depreciation and amortization | ||||||||||||||||
Total operating expenses | ( | ) | ||||||||||||||
Total operating income (loss) | ( | ) | ||||||||||||||
Other income (expense): | ||||||||||||||||
Interest income | ||||||||||||||||
Interest expense | ( | ) | ( | ) | ||||||||||||
Loss on early extinguishment of debt | ||||||||||||||||
Income 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, 2019 | ||||||||||||||||
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 | ||||||||||||||||
Other income (expense): | ||||||||||||||||
Interest income | ||||||||||||||||
Interest expense | ( | ) | ( | ) | ||||||||||||
Income before income taxes | ||||||||||||||||
Income tax (expense) benefit | ( | ) | ( | ) | ( | ) | ||||||||||
Net income | $ | $ | $ | $ | ||||||||||||
Segment assets | $ | $ | $ | $ | ||||||||||||
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 charge | ||||||||||||||||
Depreciation and amortization | ||||||||||||||||
Total operating expenses | ( | ) | ||||||||||||||
Total operating income (loss) | ( | ) | ||||||||||||||
Other income (expense): | ||||||||||||||||
Interest income | ||||||||||||||||
Interest expense | ( | ) | ( | ) | ||||||||||||
Loss on early extinguishment of debt | ( | ) | ( | ) | ||||||||||||
Income before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
Income tax (expense) benefit | ( | ) | ||||||||||||||
Net income (loss) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
Expenditures for segment assets | $ | $ | $ | $ | ||||||||||||
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Six Months Ended June 30, 2019 | ||||||||||||||||
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 | ||||||||||||||||
Other income (expense): | ||||||||||||||||
Interest income | ||||||||||||||||
Interest expense | ( | ) | ( | ) | ||||||||||||
Income before income taxes | ||||||||||||||||
Income tax (expense) benefit | ( | ) | ||||||||||||||
Net income | $ | $ | $ | $ | ||||||||||||
Expenditures for segment assets | $ | $ | $ | $ | ||||||||||||
During the second quarter 2020, we wrote-off $4.1 million of prior expenditures on a potential energy efficiency project in our real estate segment that is not economically feasible in today's regulatory environment. For the three and six months ended June 30, 2020, the $4.1 million write-off is shown as Impairment charge in the condensed consolidated statements of operations.
12. Subsequent Events
None.
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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, 2019.
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, including (a) the effectiveness or lack of effectiveness of governmental relief in providing assistance to businesses that have suffered significant declines in revenues as a result of mandatory business shut-downs, “shelter-in-place” or “stay-at-home” orders and social distancing practices, as well as individuals adversely impacted by the COVID-19 pandemic, (b) the duration of any such orders or other formal recommendations for social distancing and the speed and extent to which revenues of the Company’s tenants, particularly retail, and the Observatory recover following the lifting of any such orders or recommendations, (c) the potential impact of any such events on the obligations of the Company’s tenants to make rent and other payments or honor other commitments, including such tenants’ ability to pay rent following the termination of temporary governmental assistance and benefits programs, (d) government moratoriums and/or limits (including temporary closure of certain court systems) which directly or indirectly abridge the enforcement of lease obligations and related guarantees, (e) the potential impact on the Company’s human capital management, including potential reductions in productivity associated with work-from-home and risks associated with employees returning to the office, (f) international and national disruption of travel and tourism with a resulting decline in Observatory visitors, and (g) macroeconomic conditions, such as a disruption of, or lack of access to, the capital markets, and general volatility adversely impacting the market price of the Company’s Class A common stock and publicly-traded partnership units of the Operating Partnership; (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 REIT; and (xviii) environmental uncertainties and risks related to adverse weather conditions, rising sea levels and natural disasters. For a further discussion of these and other factors that could impact the Company's future results, performance or
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transactions, see the section entitled “Risk Factors” on page 50 of this Quarterly Report on Form 10-Q, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, 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.
Overview
Empire State Realty OP, L.P. 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.
Highlights for the three months ended June 30, 2020 included:
• | Achieved net loss of $20.7 million and Core Funds From Operations of $39.5 million. |
• | After a $0.03 per share reserve against tenant receivables and non-cash reduction in straight-line rent balances, Core Funds From Operations (“Core FFO”) was $0.14 per fully diluted share. |
• | Same Store Property Cash NOI excluding lease termination fees was up 18.0% from the second quarter 2019 primarily driven by lower property operating expenses, partially offset by a reserve against tenant receivables. When COVID-19 related rent deferrals are excluded, Same Store Property Cash NOI increased 9.9% from the second quarter 2019. |
• | Strong liquidity position with $1.4 billion of total liquidity as of June 30, 2020, which consists of $873 million of cash plus an additional $550 million available under our revolving credit facility. |
• | The Company repurchased $52 million of its common stock shares at a weighted average price of $7.99 per share in the second quarter, and year-to-date through July 31, 2020, the Company repurchased $119 million of common stock at a weighted average share price of $8.67. |
• | For the total portfolio in the second quarter, we signed 19 new, renewal, and expansion leases, representing 113,431 rentable square feet at an average starting rental rate of $64.43 per rentable square foot. |
• | Collected 84% of second quarter 2020 total billings with 86% for office tenants and 75% for retail tenants. Through July 31, 2020, collected 91% of July total billings, with 95% for office tenants and 74% for retail tenants. |
• | The Empire State Building Observatory remained closed during the entire second quarter and reopened on July 20, 2020. |
• | Declared a dividend of $0.105 per share. |
• | Announced the appointment of Christina Chiu to EVP and CFO, and Aaron D. Ratner to SVP and CIO. |
• | . On July 13, 2020, the Company announced the appointment of R. Paige Hood to its Board of Directors, effective August 1, 2020, and the departure of William H. Berkman, effective July 31, 2020. |
As of June 30, 2020, 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 506,452 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 415,000 rentable square foot office building and
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garage. As of June 30, 2020, our portfolio included four standalone retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut, encompassing 205,488 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. During the past ten years, 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.
The components of the Empire State Building revenue are as follows (dollars in thousands):
Six Months Ended June 30, | |||||||||||||
2020 | 2019 | ||||||||||||
Office leases | $ | 74,907 | 62.4 | % | $ | 71,337 | 47.4 | % | |||||
Retail leases | 3,058 | 2.6 | % | 3,666 | 2.4 | % | |||||||
Tenant reimbursements & other income | 12,900 | 10.7 | % | 14,465 | 9.6 | % | |||||||
Observatory operations | 19,630 | 16.3 | % | 53,464 | 35.6 | % | |||||||
Broadcasting licenses and leases | 9,596 | 8.0 | % | 7,457 | 5.0 | % | |||||||
Total | $ | 120,091 | 100.0 | % | $ | 150,389 | 100.0 | % | |||||
We have been undertaking 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, 2020, we have invested a total of approximately $933.6 million (excluding tenant improvement costs and leasing commissions) in our Manhattan office properties pursuant to this program. We intend to fund these 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 expect to spend approximately $40 million over 2018 through 2020 on these well-maintained and our well-located properties’ common areas and amenities to ensure competitiveness and protect our market position. Expenditures, which began during the second quarter 2018, were $33.1 million through June 30, 2020.
As of June 30, 2020, excluding principal amortization, there is $550.0 million of debt that matures in 2021, which is our unsecured revolving credit facility and we have the option to extend the initial term for up to two additional six-month periods, subject to certain conditions. As of June 30, 2020, we had total debt outstanding of approximately $2.5 billion, with a weighted average interest rate of 3.41%, and a weighted average maturity of 6.9 years and 73.3% of which is fixed-rate indebtedness and 26.7% of which is variable-rate indebtedness. As of June 30, 2020, we had cash and cash equivalents of approximately $0.9 billion. Our consolidated net debt to total market capitalization was approximately 43.7% as of June 30, 2020.
Impact of COVID-19
In March 2020, the outbreak of the novel Coronavirus Disease 2019 ("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.
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Liquidity
In March 2020, we bolstered our balance sheet to ensure proper liquidity by raising $300.0 million in net proceeds in two financings and drawing down $550.0 million under our $1.1 billion unsecured revolving credit facility. We currently hold $0.9 billion in cash on our balance sheet and have $550.0 million undrawn capacity under our credit facility.
Property Operations
All of our office buildings have remained open during the current COVID-19 pandemic to tenants that provide essential goods and services, as permitted by the authorities. We have scaled back certain building operations in cleaning, security, lobby concierge and recurring maintenance, which will reduce costs until buildings are repopulated. A portion of the reduction in operating expenses will be offset by a reduction in tenant expense recoveries.
Our operations team worked hard to develop plans for when our tenants reoccupy our buildings to ensure a safe, clean and healthy work environment. These plans involve additional staffing, cleaning and maintenance, and changes to building operations for building access by tenants and their guests.
All New York State capital improvement work, except for essential work as defined by the authorities which includes safety-related work and work to demobilize previously started projects, was stopped in March 2020 until such time that the government restrictions were lifted. The restrictions were lifted on June 8, 2020. The spend was significantly curtailed under the restrictions.
Despite the challenge of the uncertain near-term environment, we continue to believe in the long-term demand for office space. Many have now experienced the inefficiencies of working from home and miss the connectivity and productivity that an office environment provides. That said, we believe the pandemic may cause some fundamental changes to how tenants use their office space in the future including less densification and smarter open floor plans with appropriate spacing. We also believe current co-working build-outs are too dense and will be poorly positioned for tenant demand in the new paradigm.
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, 2020, our portfolio was 89.6% leased, including SLNC, including 3.4% subject to leases scheduled to expire in 2020 and 6.6% subject to leases scheduled to expire in 2021.
New leasing activity was impacted during the second quarter by the pandemic and shelter-in-place rules that were in effect for much of the period. During this time period, we instituted a number of online measures to maintain our relationships with brokers and expose our availabilities to the market. While physical tours resumed on June 22, 2020 and coincided with Phase 2 reopening, we expect lower leasing volumes for the third and fourth quarters based on current tenant activity.
Rent Collections
As of July 31, 2020, we have experienced steady monthly improvement in the collection of our property billings. The following table reflects the percentages of rent collected from total billings.
Collections of July 31, 2020 | April | May | June | July | |||||||
Total billings collected | 86.2 | % | 83.2 | % | 83.1 | % | 91.3 | % | |||
Rent deferrals | 4.0 | % | 4.4 | % | 3.6 | % | 0.3 | % | |||
Security deposits collected | 8.2 | % | 8.0 | % | 7.3 | % | 0.5 | % | |||
Uncollected - covered by security deposit | 0.7 | % | 1.6 | % | 2.6 | % | 3.6 | % | |||
Uncollected | 0.9 | % | 2.8 | % | 3.4 | % | 4.3 | % | |||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
Before any consideration to any tenant request for rent deferral, we request that the tenant provide:
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• | an explanation of COVID-19 impact on their business, |
• | steps taken, or planned, to mitigate that impact, |
• | financial statements to compare 2019 to 2020, |
• | copy of any claim under insurance or business interruption coverage, and |
• | evidence of application(s) under Federal, State and local assistance programs. |
We then assess each request on an individual basis. Typical deferral agreement is for (i) deferral of tenant obligation to restore security deposit amount equal to three months' rent or less, or (ii) three month or less rent deferral, and payback of deferral amount within 18 months or less.
Our smaller food and service type retailers have been hit particularly hard. They provide critical amenities and services to our office tenants. Our plan is to convert their remaining 2020 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.
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. While closed, we reduced our annualized operating expense run-rate from $35 million in February 2020 to approximately $14 million, a 60% reduction in May 2020. Approximately two-thirds of the reduction was attributable to lower payroll expenses as we furloughed staff and the balance is due to lower operational and other costs.
The Observatory reopened under Phase 4, Outside Attractions, on July 20, 2020. We anticipate that initially we will have a higher local visitor mix, followed by a ramp up of nationally sourced travel, which 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.
With the Observatory reopened, for the balance of 2020, we will operate with reduced hours, staffing, services, operating costs, credit card fees and marketing expenses. We project we can operate at this level until we reach 60% of 2019 attendance, after which expenses will ramp up.
During the second quarter 2020, the extended closure of our Observatory in compliance with state-mandated COVID-19 containment measures served as a triggering event for us 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 Real Estate reporting unit, we determined that the fair value of the Observatory reporting unit exceeded its carrying value by less than 5.0%. 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 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, 2020.
Expense Reductions
We have undertaken meaningful cost reduction measures to ensure our ongoing strength and position the business optimally through the current environment broken down as follows:
• | Named Executive Officer compensation: |
▪ | ($0.4) million from reduction in annual base salary for Anthony E. Malkin and Thomas P. Durels through December 31, 2020; |
▪ | ($1.2) million from the change in age requirement from 60 to 65 for the accounting vesting period for time-based equity compensation; and |
▪ | ($2.7) million from the departure of our former Chief Operating Officer. |
• | Other corporate overhead: |
▪ | ($1.5) million of net changes from the addition of investment personnel and reductions in executive and corporate staff, and temporary corporate salary reductions through December 31, 2020; and |
▪ | Balance from department budget cuts and lower anticipated spending due to COVID-19. |
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• | In addition, we announced a $3.9 million reduction in 2021 NEO annual equity compensation, comprised of a $2.7 million reduction for Mr. Malkin and $1.2 million reduction for Mr. Durels. |
• | Property operating expenses |
▪ | $12 million in one-time operating expense savings for 2H 2020 from additional cost reduction efforts. |
▪ | $4 million on an annualized basis of permanent cost reductions due to staffing and other reductions. |
• | Capital expenditures |
▪ | $24 million in lower planned 2020 capital expenditures for buildings improvements compared to 2019 due to focus only on mandatory spending and work previously commenced. |
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, 2020 and 2019, respectively.
Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019
The following table summarizes our historical results of operations for the three months ended June 30, 2020 and 2019 (dollars in thousands):
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Three Months Ended June 30, | ||||||||||||||
2020 | 2019 | Change | % | |||||||||||
Revenues: | ||||||||||||||
Rental revenue | $ | 137,999 | $ | 141,071 | $ | (3,072 | ) | (2.2 | )% | |||||
Observatory revenue | 86 | 32,895 | (32,809 | ) | (99.7 | )% | ||||||||
Lease termination fees | 1,033 | 363 | 670 | 184.6 | % | |||||||||
Third-party management and other fees | 301 | 331 | (30 | ) | (9.1 | )% | ||||||||
Other revenues and fees | 1,611 | 1,584 | 27 | 1.7 | % | |||||||||
Total revenues | 141,030 | 176,244 | (35,214 | ) | (20.0 | )% | ||||||||
Operating expenses: | ||||||||||||||
Property operating expenses | 29,750 | 40,227 | 10,477 | 26.0 | % | |||||||||
Ground rent expenses | 2,332 | 2,332 | — | — | % | |||||||||
General and administrative expenses | 18,149 | 15,998 | (2,151 | ) | (13.4 | )% | ||||||||
Observatory expenses | 4,002 | 8,360 | 4,358 | 52.1 | % | |||||||||
Real estate taxes | 29,579 | 28,267 | (1,312 | ) | (4.6 | )% | ||||||||
Impairment charge | 4,101 | — | (4,101 | ) | (100.0 | )% | ||||||||
Depreciation and amortization | 52,783 | 44,821 | (7,962 | ) | (17.8 | )% | ||||||||
Total operating expenses | 140,696 | 140,005 | (691 | ) | (0.5 | )% | ||||||||
Operating income (loss) | 334 | 36,239 | (35,905 | ) | (99.1 | )% | ||||||||
Other income (expense): | ||||||||||||||
Interest income | 1,526 | 3,899 | (2,373 | ) | (60.9 | )% | ||||||||
Interest expense | (23,928 | ) | (20,597 | ) | (3,331 | ) | (16.2 | )% | ||||||
Loss on early extinguishment of debt | — | — | — | — | % | |||||||||
Income (loss) before income taxes | (22,068 | ) | 19,541 | (41,609 | ) | (212.9 | )% | |||||||
Income tax benefit (expense) | 2,450 | (611 | ) | 3,061 | 501.0 | % | ||||||||
Net income (loss) | (19,618 | ) | 18,930 | (38,548 | ) | (203.6 | )% | |||||||
Private perpetual preferred unit distributions | (1,047 | ) | (234 | ) | (813 | ) | 347.4 | % | ||||||
Net income (loss) attributable to common unitholders | $ | (20,665 | ) | $ | 18,696 | $ | (39,361 | ) | (210.5 | )% | ||||
Rental Revenue
The decrease in base rent revenue was due to the write-off of straight-line receivables and uncollectible tenant receivables.
Observatory Revenue
Observatory revenues were lower driven by the closure of the Observatory on March 16, 2020 due to the COVID-19 pandemic.
Lease Termination Fees
Higher termination fees were earned in the three months ended June 30, 2020 compared to the three months ended June 30, 2019.
Third-Party Management and Other Fees
Management fee income was consistent with prior year.
Other Revenues and Fees
Other revenues and fees were generally consistent with prior year.
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Property Operating Expenses
The decrease in property operating expenses was primarily due to lower payroll costs, lower repair and maintenance costs and lower utility costs.
Ground Rent Expenses
Ground rent expense was consistent with 2019.
General and Administrative Expenses
The increase in general and administrative expenses was primarily due to severance costs, partially offset by lower legal leasing costs.
Observatory Expenses
Lower Observatory expenses were driven by the closure of the Observatory due to the COVID-19 pandemic.
Real Estate Taxes
The increase in real estate taxes was primarily due to higher assessed values for multiple properties.
Impairment charge
Reflects a $4.1 million write-off of prior expenditures on a potential energy efficiency project that is not economically feasible in today's regulatory environment.
Depreciation and Amortization
The increase in depreciation and amortization reflects tenant improvement write-offs due to the early termination of a tenant.
Interest Income
The decrease in interest income was primarily due to lower interest rates.
Interest Expense
Interest expense increased due to new financings entered into in March 2020 and a draw on our unsecured revolving credit facility.
Income Taxes
The increase in income tax benefit was attributable to higher net loss for the Observatory segment.
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Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019
The following table summarizes our historical results of operations for the six months ended June 30, 2020 and 2019 (dollars in thousands):
Six Months Ended June 30, | ||||||||||||||
2020 | 2019 | Change | % | |||||||||||
Revenues: | ||||||||||||||
Rental revenue | $ | 286,112 | $ | 284,488 | $ | 1,624 | 0.6 | % | ||||||
Observatory revenue | 19,630 | 53,464 | (33,834 | ) | (63.3 | )% | ||||||||
Lease termination fees | 1,244 | 751 | 493 | 65.6 | % | |||||||||
Third-party management and other fees | 647 | 651 | (4 | ) | (0.6 | )% | ||||||||
Other revenues and fees | 3,621 | 4,183 | (562 | ) | (13.4 | )% | ||||||||
Total revenues | 311,254 | 343,537 | (32,283 | ) | (9.4 | )% | ||||||||
Operating expenses: | ||||||||||||||
Property operating expenses | 71,218 | 83,182 | 11,964 | 14.4 | % | |||||||||
Ground rent expenses | 4,663 | 4,663 | — | — | % | |||||||||
General and administrative expenses | 34,100 | 30,024 | (4,076 | ) | (13.6 | )% | ||||||||
Observatory expenses | 12,156 | 15,935 | 3,779 | 23.7 | % | |||||||||
Real estate taxes | 58,833 | 56,499 | (2,334 | ) | (4.1 | )% | ||||||||
Impairment charge | 4,101 | — | (4,101 | ) | (100.0 | )% | ||||||||
Depreciation and amortization | 98,876 | 90,919 | (7,957 | ) | (8.8 | )% | ||||||||
Total operating expenses | 283,947 | 281,222 | (2,725 | ) | (1.0 | )% | ||||||||
Operating income (loss) | 27,307 | 62,315 | (35,008 | ) | (56.2 | )% | ||||||||
Other income (expense): | ||||||||||||||
Interest income | 2,163 | 7,638 | (5,475 | ) | (71.7 | )% | ||||||||
Interest expense | (43,546 | ) | (41,286 | ) | (2,260 | ) | (5.5 | )% | ||||||
Loss on early extinguishment of debt | (86 | ) | — | (86 | ) | (100.0 | )% | |||||||
Income (loss) before income taxes | (14,162 | ) | 28,667 | (42,829 | ) | (149.4 | )% | |||||||
Income tax benefit | 2,832 | 119 | 2,713 | (2,279.8 | )% | |||||||||
Net income (loss) | (11,330 | ) | 28,786 | (40,116 | ) | (139.4 | )% | |||||||
Private perpetual preferred unit distributions | (2,097 | ) | (468 | ) | (1,629 | ) | (348.1 | )% | ||||||
Net income (loss) attributable to common unitholders | $ | (13,427 | ) | $ | 28,318 | $ | (41,745 | ) | (147.4 | )% | ||||
Rental Revenue
The increase in base rent revenue was attributable to increased rental rates and lower rent concessions, partially offset by the write-off of straight-line receivables and uncollectible tenant receivables.
Observatory Revenue
Observatory revenues were lower primarily driven by the closure of the Observatory on March 16, 2020 due to the COVID-19 pandemic. Observatory revenues increased during the first two months of 2020 by 13.2%, after adjusting for the 102nd floor observation deck, to $14.4 million from $12.7 million in the first two months of 2019.
Lease Termination Fees
Higher termination fees were earned in the six months ended June 30, 2020 compared to the six months ended June 30, 2019.
Third-Party Management and Other Fees
Management fee income was consistent with prior year.
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Other Revenues and Fees
The decrease in other revenues and fees is primarily due to settlement income received in the six months ended June 30, 2019.
Property Operating Expenses
The decrease in property operating expenses was primarily due to lower payroll costs, lower repair and maintenance costs and lower utility costs.
Ground Rent Expenses
Ground rent expense was consistent with 2019.
General and Administrative Expenses
The increase in general and administrative expenses was primarily due to severance costs as well as higher cash compensation costs.
Observatory Expenses
Lower Observatory expenses were driven by the closure of the Observatory due to the COVID-19 pandemic.
Real Estate Taxes
The increase in real estate taxes was primarily due to higher assessed values for multiple properties.
Impairment charge
Reflects a $4.1 million write-off of prior expenditures on a potential energy efficiency project that is not economically feasible in today's regulatory environment.
Depreciation and Amortization
The increase in depreciation and amortization reflects tenant improvement write-offs due to the early termination of a tenant.
Interest Income
The decrease in interest income was primarily due to lower interest rates and higher short-term investments in the prior year.
Interest Expense
Interest expense increased due to new financings entered into in March 2020 and a draw on our unsecured revolving credit facility.
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt was incurred in connection with the refinancing of the term loan in the first quarter 2020.
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
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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 to our securityholders.
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, 2020, we had approximately $873.0 million available in cash and cash equivalents and there was $550.0 million available under our unsecured revolving credit facility.
Through August 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 so long as at least one joint venture transaction is consummated by us and QIA during the initial 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, 2020, we had approximately $2.5 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 3.41% and a weighted average maturity of 6.9 years. As of June 30, 2020, excluding principal amortization, there is $550.0 million of debt that matures in 2021, which is our unsecured revolving credit facility and we have the option to extend the initial term for up to two additional six-month periods, subject to certain conditions. Our consolidated net debt to total market capitalization was 43.7% as of June 30, 2020.
Unsecured Revolving Credit and Term Loan Facilities
During March 2020, we entered into an amendment to an existing credit agreement with the lenders party thereto, Bank of America, N.A., as administrative agent, and Bank of America, Wells Fargo Bank, National Association and Capital One, National Association, as the letter of credit issuers party thereto. The amendment amends the amended and restated senior unsecured revolving credit and term loan facility, entered into in August 2017, with Bank of America, N.A., as administrative agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC as Joint Lead Arrangers and Joint Bookrunners, Wells Fargo, National Association and Capital One, National Association, as co-syndication agents, and the lenders party thereto.
This new amended unsecured revolving credit and term loan facility is comprised of a $1.1 billion revolving credit facility and a $215 million term loan facility. We borrowed the term loan facility in full at closing. We also borrowed $550.0 million on the revolving credit facility. The amended unsecured revolving credit and term loan facility contains an accordion feature that would allow us to increase the maximum aggregate principal amount to $1.75 billion under specified circumstances. Certain of our subsidiaries are guarantors of our obligations under the amended unsecured revolving credit and term loan facility.
Amounts outstanding under the term loan facility bear interest at a floating rate equal to, at our election, (x) the Eurodollar rate, plus a spread that will range from 1.20% to 1.75% depending upon our leverage ratio, or (y) a base rate, plus a spread that will range from 0.20% to 0.75% depending upon our leverage ratio. If we achieve investment-grade ratings, subject to the terms of the amended unsecured revolving credit and term loan facility, we may elect for amounts outstanding to bear interest at a floating rate equal to, at our election, (x) the Eurodollar rate, plus a spread that will range from 0.85% to
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1.65% depending upon our credit rating, or (y) a base rate, plus a spread that will range from 0.0% to 0.65% depending upon our credit rating. Amounts under the revolving credit facility bear interest at a floating rate equal to, at our election, (x) the Eurodollar rate, plus a spread that will range from 1.10% to 1.50% depending upon our leverage ratio or (y) a base rate, plus a spread that will range from 0.10% to 0.50% depending upon our leverage ratio. If we achieve investment-grade ratings, subject to the terms of the amended unsecured revolving credit and term loan facility, we may elect for the amounts outstanding to bear interest at a floating rate equal to, at our election, (x) the Eurodollar rate, plus a spread that will range from 0.825% to 1.55% depending upon our credit rating, or (y) a base rate, plus a spread that will range from 0.0% to 0.55% depending upon our credit rating.
We paid certain customary fees and expense reimbursements in connection with the amended unsecured revolving credit and term loan facility, including a facility fee on commitments under the revolving credit facility that range from 0.125% to 0.35%, subject to the terms of the amended unsecured revolving credit and term loan facility.
The initial maturity of the unsecured revolving credit facility is August 2021. We have the option to extend the initial term for up to two additional six-month periods, subject to certain conditions, including the payment of an extension fee equal to 0.0625% and 0.075% of the then outstanding commitments under the unsecured revolving credit facility on the first and the second extensions, respectively. The term loan facility matures on March 2025. We may prepay the loans under the amended unsecured revolving credit and term loan facility at any time in whole or in part, subject to reimbursement of the lenders’ breakage and redeployment costs in the case of prepayment of Eurodollar Rate borrowings.
Also during March 2020, we entered into a senior unsecured term loan facility (the “Term Loan Facility”) with Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC as sole bookrunner, Wells Fargo Securities, LLC, Capital One, National Association, U.S. Bank National Association and SunTrust Robinson Humphrey, Inc. as Joint Lead Arrangers, Capital One, National Association, as syndication agent, U.S. Bank National Association and Truist Bank, as documentation agents, and the lenders party thereto.
The Term Loan Facility is in the original principal amount of $175 million which we borrowed in full at closing. We may request the Term Loan Facility be increased through one or more increases or the addition of new pari passu term loan tranches, for a maximum aggregate principal amount not to exceed $225 million. Certain of our subsidiaries are guarantors of our obligations under the Term Loan Facility.
Amounts outstanding under the Term Loan Facility bear interest at a floating rate equal to, at our election, (x) the LIBOR rate, plus a spread that will range from 1.5% to 2.2% depending upon our leverage ratio, or (y) a base rate, plus a spread that will range from 0.5% to 1.2% depending upon our leverage ratio. If we achieve investment-grade ratings, subject to the terms of the Term Loan Facility, we may elect for amounts outstanding to bear interest at a floating rate equal to, at our election, (x) the LIBOR rate, plus a spread that will range from 1.4% to 2.25% depending upon our credit rating, or (y) a base rate, plus a spread that will range from 0.4% to 1.25% depending upon our credit rating.
The Term Loan Facility matures on December 31, 2026. We may prepay loans under the Term Loan Facility at any time, in whole or in part, subject to reimbursement of the lenders’ breakage and redeployment costs in the case of prepayment of Eurodollar rate borrowings and, if the prepayment occurs on or before December 31, 2021, a prepayment fee. If the prepayment occurs on or prior to December 31, 2020, the prepayment fee is equal to 2.0% of the principal amount prepaid, and if the prepayment occurs after December 31, 2020 but on or prior to December 31, 2021, the prepayment fee is equal to 1.0% of the principal amount prepaid.
Both the amended revolving credit and term loan facility and the Term Loan Facility (collectively, the "Credit Facilities") include the following financial covenants, subject to customary qualifications and cushions: (i) maximum leverage ratio of total indebtedness to total asset value of the loan parties and their consolidated subsidiaries will not exceed 60%, (ii) consolidated secured indebtedness will not exceed 40% of total asset value, (iii) adjusted EBITDA (as defined in the agreement) to consolidated fixed charges will not be less than 1.50x, (iv) the aggregate net operating income with respect to all unencumbered eligible properties to the portion of interest expense attributable to unsecured indebtedness will not be less than 1.75x, and (v) the ratio of total unsecured indebtedness to unencumbered asset value will not exceed 60%.
The Credit Facilities contain customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates, and requires certain customary financial reports.
The Credit Facilities 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 defined in the respective Credit Facilities). As of June 30, 2020, we were in compliance with the covenants.
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Senior Unsecured Notes
On March 17, 2020, we entered into an agreement to issue and sell an aggregate $175 million of senior unsecured notes, consisting of (a) $100 million aggregate principal amount of 3.61% Series G Senior Notes due March 17, 2032 (the “Series G Notes”) and (b) $75 million aggregate principal amount of 3.73% Series H Senior Notes due March 17, 2035 (the “Series H Notes”), in a private placement to entities affiliated with Prudential Capital Group, AIG Asset Management and MetLife Investment Management, LLC. The issue price for the Series G Notes and Series H Notes was 100% of the aggregate principal amount thereof.
The senior unsecured notes are senior unsecured obligations and are unconditionally guaranteed by each of our subsidiaries that guarantees indebtedness under the unsecured revolving credit and term loan facility. Interest on the senior unsecured notes is payable quarterly.
The terms of the Series G Notes and Series H Notes agreement 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 agreement also contains 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, 2020, we were in compliance with the covenants under the outstanding senior unsecured notes.
Financial Covenants
As of June 30, 2020, we were in compliance with the following financial covenants:
Financial covenant | Required | June 30, 2020 | In Compliance | |
Maximum total leverage | < 60% | 34.2 | % | Yes |
Maximum secured debt | < 40% | 8.2 | % | Yes |
Minimum fixed charge coverage | > 1.50x | 3.3x | Yes | |
Minimum unencumbered interest coverage | > 1.75x | 5.7x | Yes | |
Maximum unsecured leverage | < 60% | 30.6 | % | 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).
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Office Properties(1)
Six Months Ended June 30, | |||||||
Total New Leases, Expansions, and Renewals | 2020 | 2019 | |||||
Number of leases signed(2) | 48 | 82 | |||||
Total square feet | 216,710 | 528,754 | |||||
Leasing commission costs(3) | $ | 2,548 | $ | 7,730 | |||
Tenant improvement costs(3) | 10,147 | 28,123 | |||||
Total leasing commissions and tenant improvement costs(3) | $ | 12,695 | $ | 35,853 | |||
Leasing commission costs per square foot(3) | $ | 11.76 | $ | 14.62 | |||
Tenant improvement costs per square foot(3) | 46.83 | 53.19 | |||||
Total leasing commissions and tenant improvement costs per square foot(3) | $ | 58.59 | $ | 67.81 | |||
Retail Properties(4)
Six Months Ended June 30, | |||||||
Total New Leases, Expansions, and Renewals | 2020 | 2019 | |||||
Number of leases signed(2) | 6 | 7 | |||||
Total square feet | 45,864 | 40,349 | |||||
Leasing commission costs(3) | $ | 1,997 | $ | 966 | |||
Tenant improvement costs(3) | 7,345 | 1,132 | |||||
Total leasing commissions and tenant improvement costs(3) | $ | 9,342 | $ | 2,098 | |||
Leasing commission costs per square foot(3) | $ | 43.54 | $ | 23.94 | |||
Tenant improvement costs per square foot(3) | 160.14 | 28.06 | |||||
Total leasing commissions and tenant improvement costs per square foot(3) | $ | 203.68 | $ | 52.00 | |||
_______________
(1) | Excludes an aggregate of 506,452 and 512,951 rentable square feet of retail space in our Manhattan office properties in 2020 and 2019, 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 506,452 and 512,951 rentable square feet of retail space in our Manhattan office properties in 2020 and 2019, respectively. Excludes the Empire State Building broadcasting licenses and observatory operations. |
Six Months Ended June 30, | |||||||
2020 | 2019 | ||||||
Total Portfolio | |||||||
Capital expenditures (1) | $ | 23,884 | $ | 64,356 | |||
_______________
(1) | Excludes tenant improvements and leasing commission costs. |
As of June 30, 2020, we expect to incur additional costs relating to obligations under existing lease agreements of approximately $132.3 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.
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Contractual Obligations
Refer to our Annual Report on Form 10-K for the year ended December 31, 2019 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, 2020.
Off-Balance Sheet Arrangements
As of June 30, 2020, 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% 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.
Distributions to Securityholders
Distributions and dividends amounting to $64.3 million and $64.2 million have been made to securityholders for the six months ended June 30, 2020 and 2019, respectively.
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, 2020. 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.
The following table summarizes ESRT's purchases of equity securities in each of the six months ended June 30, 2020 and the month of July 2020:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Maximum Approximate Dollar Value Available for Future Purchase (in thousands) | |||||||||
March 2020 | 6,570,778 | $ | 9.54 | 6,570,778 | $ | 437,334 | |||||||
April 2020 | 2,345,129 | $ | 8.66 | 2,345,129 | $ | 417,023 | |||||||
May 2020 | 3,913,709 | $ | 7.66 | 3,913,709 | $ | 387,057 | |||||||
June 2020 | 240,996 | $ | 6.90 | 240,996 | $ | 385,395 | |||||||
July 2020 | 656,318 | $ | 6.72 | 656,318 | $ | 380,982 | |||||||
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Cash Flows
Comparison of Six Months Ended June 30, 2020 to the Six Months Ended June 30, 2019
Net cash. Cash and cash equivalents and restricted cash were $931.8 million and $413.4 million, respectively, as of June 30, 2020 and 2019. The increase was primarily due to the issuance of financings and draws on the unsecured revolving credit facility, partially offset by capital improvements and expenditures during the six months ended June 30, 2020.
Operating activities. Net cash provided by operating activities decreased by $14.9 million to $74.4 million for the six months ended June 30, 2020 compared to $89.3 million for the six months ended June 30, 2019, primarily due to changes in working capital and settlement of derivative contracts.
Investing activities. Net cash used in investing activities decreased by $199.1 million to $79.7 million used in investing activities for the six months ended June 30, 2020 compared to $119.4 million net cash provided by investing activities for the six months ended June 30, 2019, due to proceeds from maturing short-term investments in 2019.
Financing activities. Net cash provided by financing activities increased by $731.6 million to $665.5 million provided by financing activities for the six months ended June 30, 2020 compared to $66.1 million used in financing activities for the six months ended June 30, 2019, primarily due to the net proceeds from issuance of debt and a draw on our unsecured revolving credit facility in the six months ended June 30, 2020 compared to none for the six months ended June 30, 2019.
Net Operating Income ("NOI")
Our internal financial reports include a discussion of property net operating income. 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, impairment charges and loss from derivative 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 net operating income because it is specific to the particular financing capabilities and constraints of the owner. The cost of funds is also eliminated 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, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
(unaudited) | (unaudited) | ||||||||||||||
Net income (loss) | $ | (19,618 | ) | $ | 18,930 | $ | (11,330 | ) | $ | 28,786 | |||||
Add: | |||||||||||||||
General and administrative expenses | 18,149 | 15,998 | 34,100 | 30,024 | |||||||||||
Depreciation and amortization | 52,783 | 44,821 | 98,876 | 90,919 | |||||||||||
Interest expense | 23,928 | 20,597 | 43,632 | 41,286 | |||||||||||
Income tax expense (benefit) | (2,450 | ) | 611 | (2,832 | ) | (119 | ) | ||||||||
Impairment charge | 4,101 | — | 4,101 | — | |||||||||||
Less: | |||||||||||||||
Third-party management and other fees | (301 | ) | (331 | ) | (647 | ) | (651 | ) | |||||||
Interest income | (1,526 | ) | (3,899 | ) | (2,163 | ) | (7,638 | ) | |||||||
Net operating income | $ | 75,066 | $ | 96,727 | $ | 163,737 | $ | 182,607 | |||||||
Other Net Operating Income Data | |||||||||||||||
Straight-line rental revenue | $ | (2,710 | ) | $ | 3,203 | $ | 5,483 | $ | 8,607 | ||||||
Net increase in rental revenue from the amortization of above-and below-market lease assets and liabilities | $ | 1,366 | $ | 1,745 | $ | 2,274 | $ | 4,099 | |||||||
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-downs 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 accounting treatment under GAAP, which stems from the third quarter 2014 acquisition of two option properties as they carry significantly below market ground leases, the amortization of which is material to our overall results. We present Modified
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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: deferred tax asset write-off, loss on early extinguishment of debt, acquisition expenses and severance expenses. The Company presents Core FFO because it considers it an important supplemental measure of its operating performance in that it excludes 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, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
(unaudited) | (unaudited) | ||||||||||||||
Net income (loss) | $ | (19,618 | ) | $ | 18,930 | $ | (11,330 | ) | $ | 28,786 | |||||
Private perpetual preferred unit distributions | (1,047 | ) | (234 | ) | (2,097 | ) | (468 | ) | |||||||
Real estate depreciation and amortization | 51,096 | 43,822 | 95,526 | 88,914 | |||||||||||
FFO attributable to common stockholders | 30,431 | 62,518 | 82,099 | 117,232 | |||||||||||
Amortization of below-market ground leases | 1,958 | 1,958 | 3,916 | 3,916 | |||||||||||
Modified FFO attributable to common stockholders | 32,389 | 64,476 | 86,015 | 121,148 | |||||||||||
Loss on early extinguishment of debt | — | — | 86 | — | |||||||||||
Severance expenses | 3,008 | — | 3,008 | — | |||||||||||
Impairment charge | 4,101 | — | 4,101 | — | |||||||||||
Core FFO attributable to common stockholders | $ | 39,498 | $ | 64,476 | $ | 93,210 | $ | 121,148 | |||||||
Weighted average Operating Partnership units | |||||||||||||||
Basic | 283,384 | 298,131 | 288,015 | 298,100 | |||||||||||
Diluted | 283,384 | 298,131 | 288,015 | 298,100 | |||||||||||
Factors That May Influence Future Results of Operations
Impact of COVID-19
See "Overview" section.
Leasing
We signed 1.3 million rentable square feet of new leases, expansions and lease renewals for the year ended December 31, 2019. During the six months ended June 30, 2020, we signed 0.3 million rentable square feet of new leases, expansions and renewals.
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
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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, 2020, there were approximately 1.1 million rentable square feet of space in our portfolio available to lease (excluding leases signed but not yet commenced) representing 10.4% of the net rentable square footage of the properties in our portfolio. In addition, leases representing 3.4% and 6.6% of net rentable square footage of the properties in our portfolio will expire in 2020 and in 2021, respectively. These leases are expected to represent approximately 3.5% and 7.1%, 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 complete 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, which includes 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 on July 20, 2020 with new protocols and processes under New York State's Phase 4 guidelines as an Outdoor Attraction.
Observatory revenues for the first two months of 2020 increased by 13.2%, after adjusting the for the 102nd observation deck which was closed during the first quarter of 2019.
Observatory revenues and admissions are dependent upon the following: (i) the number of tourists (domestic and international) that 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, 2019 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, 2019.
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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, 2020, our floating rate debt of $675.0 million represented 14.5% 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.
We entered into 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 as of June 30, 2020 has been designated as a cash flow hedge and is deemed highly effective with a fair value of $(11.6) million which is included in accounts payable and accrued expenses on the condensed consolidated balance sheet.
Based on our variable balances, interest expense would have increased by approximately $6.8 million for the six months ended June 30, 2020, if short-term interest rates had been 1% higher. As of June 30, 2020, the weighted average interest rate on the $1.8 billion of fixed-rate indebtedness outstanding was 4.02% per annum, with maturities at various dates through March 17, 2035.
As of June 30, 2020, the fair value of our outstanding debt was approximately $2.6 billion, which was approximately $114.4 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. In the event that LIBOR is discontinued, the interest rates for our unsecured revolving credit facility and our unsecured term loan facility and the swap rate for our interest rate swaps following such event will be based on an alternative variable rate as specified in the applicable documentation governing such debt or swaps or as otherwise agreed upon with our bankers. Such an event would not affect our ability to borrow or maintain already outstanding borrowings or our ability to maintain our outstanding swaps, but the alternative variable rate could be higher and more volatile than LIBOR prior to its discontinuance. We understand that LIBOR is expected to remain available through the end of 2021 but may be discontinued or otherwise become unavailable thereafter.
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, 2020, 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,
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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, 2019, except as disclosed below.
The current COVID-19 pandemic has had, and any future public health crisis could have, serious adverse effects on our and our tenants’ businesses, operations, and financial condition.
The COVID-19 pandemic has had, and other pandemics, epidemics and public health crises in the future could have, significant adverse impacts on local, national, and global economic activity and contribute to volatility and negative pressure in financial markets.
The COVID-19 pandemic has impacted the entire U.S., including New York and Connecticut where we own assets and operate the Observatory, and measures taken by local, state and federal authorities to prevent, remediate or limit the impact of COVID-19, including quarantines, restrictions on travel, “stay-at-home” or “shelter-in-place” orders, social distancing practices, restrictions on business operations, construction projects and certain contract and judicial remedies that may continue, have had an adverse effect on us and our tenants. As a result of such measures, we had to close the Observatory to the public beginning on March 16, 2020, which discontinued all Observatory revenue during such closure. Even though we were able to reopen the Observatory on July 20, 2020 under New York State Phase 4 guidelines as an Outdoor Attraction, we have been required to reduce our visitor capacity, and we cannot predict when we may achieve Observatory revenues comparable to prior periods. Continued international and national disruption of travel and tourism will also cause a decline in Observatory visitors, as approximately 64% of our visitors in recent years were from other countries.
The COVID-19 pandemic and the measures taken to limit its spread have adversely impacted and may continue to impact adversely some or all of our tenants regarding, among other things, their ability to generate adequate, or in certain cases any, revenue from their businesses, their ability or willingness to pay rent in full, or at all, or on a timely basis, and our ability to collect rent from them. A number of our tenants across various industries have announced temporary closures of their locations and requested rent deferral or abatement during this pandemic. For the months of April, May, June and July 2020, our percentage of rent collected from tenants has been lower than prior year comparable periods across both our office and retail portfolios, and we have provided rent deferral agreements to certain of our tenants. Additional tenants may request rent deferrals, rent abatement or early termination of their leases and/or may default in obligations to us, and/or challenge the existence of such obligations and/or be forced to close temporarily or permanently and/or declare bankruptcy, any of which would reduce our revenue and such reduction could be material. While some of our tenants have been able to qualify for COVID-related temporary government assistance, the termination of such assistance programs may increase the severity of the pandemic’s economic effects. Government moratoriums and/or limits (including temporary closure of certain court systems) which directly or indirectly abridge the enforcement of lease obligations and related guarantees, may also affect our ability to collect rent or enforce remedies for the failure to pay rent. The occurrence and duration of the foregoing events are uncertain and unpredictable.
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In addition, the COVID-19 pandemic, or any future public health crisis, could have a material adverse effect on our human capital management. Many of our employees currently work remotely. An extended period of remote work arrangements could strain our team efficiencies, collaboration culture, cybersecurity, employee morale, and ability to supervise our employees and manage our business. Further, the illness of any of our employees, including our senior management team, could create new challenges in leadership and execution.
Moreover, real estate companies like us may be subject to claims from employees, tenants, vendors, visitors or the public that they were exposed to COVID-19 by our failure to take adequate protective measures or were unnecessarily inconvenienced or damaged by our excessive protective measures.
The COVID-19 pandemic, or any future other public health crisis, could also have a material adverse effect on our results of operations, cash flows and financial condition due to, among other factors:
• | prolonged reduction in business vitality which could impair our prospects for new and renewal leases, decrease demand for office and retail space, decrease rental rates, and/or increase lease terminations and vacancy rates-all with an adverse impact on the value or market price of our assets; |
• | new obstacles to our plans to redevelop and reposition properties, or to execute any newly planned capital project, successfully or on the anticipated timeline or at the anticipated costs; |
• | impairment of our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due, to comply with covenants in existing credit agreements, to borrow additional funds in compliance with drawdown conditions of existing facilities, or to enter into new financings; |
• | volatility and downward pressure on the market price of our Class A common stock and publicly traded partnership units of the Operating Partnership which also reduces our access to capital; and |
• | reduction of our cash flows and diminished ability to pay dividends at expected levels or at all. |
While the rapid developments regarding the COVID-19 pandemic preclude any prediction as to its ultimate adverse impact, the current economic, political and social environment presents material risks and uncertainties with respect to our and our tenants’ businesses, financial condition, operations, cash flows, liquidity, and ability to access the capital markets and satisfy debt service obligations. The magnitude will depend on factors beyond our control including actions taken by local, state, national and international authorities, non-governmental organizations, the medical and scientific community, among many others. Many risk factors which were described in our 2019 Annual Report, prior to the emergence of the pandemic, now should be considered to have heightened significance as a result of the COVID-19 pandemic.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None
Recent Purchases of Equity Securities
Stock and Publicly Traded Operating Partnership Unit Repurchase Program
ESRT's Board of Directors reauthorized 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, 2020. 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.
The following table summarizes ESRT's purchases of equity securities in each of the three months ended June 30, 2020 and the month of July 2020:
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Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Maximum Approximate Dollar Value Available for Future Purchase (in thousands) | |||||||||
April 2020 | 2,345,129 | $ | 8.66 | 2,345,129 | $ | 417,023 | |||||||
May 2020 | 3,913,709 | $ | 7.66 | 3,913,709 | $ | 387,057 | |||||||
June 2020 | 240,996 | $ | 6.90 | 240,996 | $ | 385,395 | |||||||
July 2020 | 656,318 | $ | 6.72 | 656,318 | $ | 380,982 | |||||||
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
ITEM 5. OTHER INFORMATION
Decision regarding the frequency of an Advisory Vote on Executive Compensation
As previously disclosed under Item 5.07 in a Current Report on Form 8-K filed with the Commission on May 20, 2020, at the Company’s Annual Meeting of Stockholders held on May 14, 2020, stockholders cast an advisory vote regarding the frequency of a stockholder advisory vote on the compensation of named executive officers. 98.5% of the votes cast on frequency favored holding such a vote on compensation every year, consistent with the recommendation of the Board. In response, the Company will continue to hold such a vote on compensation every year until the next vote on frequency.
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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 10, 2020 By:/s/ Christina Chiu
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 10, 2020 By:/s/ Andrew J. Prentice
Senior Vice President, Chief Accounting
Officer and Treasurer
(Principal Accounting Officer)
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EXHIBIT 10.6
FIRST AMENDED AND RESTATED
EMPIRE STATE REALTY TRUST, INC.
EMPIRE STATE REALTY OP, L.P.
2019 EQUITY INCENTIVE PLAN
(As Amended and Restated as of July 13, 2020)
1. | Purpose. | |
The purpose of the Plan is to assist the Company and the Partnership in attracting, retaining, motivating, and rewarding certain key employees, officers, directors, and consultants of the Company, the Partnership and their respective Affiliates and promoting the creation of long-term value for stockholders of the Company by closely aligning the interests of such individuals with those of such stockholders. The Plan authorizes the award of equity-based incentives to Eligible Persons to encourage such persons to expend maximum effort in the creation of stockholder and partner value.
2. | Definitions. | |
For purposes of the Plan, the following terms shall be defined as set forth below:
(a) “2013 Plan” means the Empire State Realty Trust, Inc. and Empire State Realty O.P. First Amended and Restated 2013 Equity Incentive Plan, as amended and restated on April 4, 2016.
(b) “Affiliate” means, with respect to any Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such Person.
(c) “Award” means any Option, Restricted Stock, Restricted Stock Unit, Stock Appreciation Right, Performance Award, Dividend Equivalent Right or other equity-based award granted under the Plan.
(d) “Award Agreement” means an Option Agreement, a Restricted Stock Agreement, an RSU Agreement, an SAR Agreement, a Performance Award Agreement, or an agreement governing the grant of any Dividend Equivalent Right or other equity-based Award granted under the Plan.
(e) “Board” means the Board of Directors of the Company.
(f) “Cause” means, with respect to any Participant and in the absence of an Award Agreement or Participant Agreement otherwise defining Cause, (1) the Participant’s commission of any crime (whether or not involving the Company or its Affiliates) (i) constituting a felony or a misdemeanor involving moral turpitude, deceit, dishonesty or fraud or (ii) that has, or could reasonably be expected to result in, an adverse impact on the performance of the Participant’s duties to the Service Recipient, or otherwise has, or could reasonably be expected to result in, an adverse impact on the business or reputation of the Company or its Affiliates, (2) conduct of the Participant, in connection with his employment or service, that has resulted, or could reasonably be expected to result, in material injury to the business or reputation of the Company or its Affiliates, (3) any material violation of the policies of the Company or its Affiliates, including but not limited to those relating to sexual harassment or the disclosure or misuse of confidential information, or those set forth in the manuals or statements of policy of the Company or its Affiliates, (4) willful neglect in the performance of the Participant’s duties for the Service Recipient or willful or repeated failure or refusal to perform such duties or (5) the Participant’s material violation of any provision of any agreement(s) between the Participant and the Company or an Affiliate relating to noncompetition, nonsolicitation, and/or nondisclosure. In the event that there is an Award Agreement or Participant Agreement defining Cause, “Cause” shall have the meaning provided in such agreement, and a Termination by the Service Recipient for Cause hereunder shall not be deemed to have occurred unless all applicable notice and cure periods in such Award Agreement or Participant Agreement are complied with.
(g) “Change in Control” means:
(1) a change in ownership or control of the Company effected through a transaction or series of transactions (other than an offering of Stock to the general public through a registration statement filed with the Securities and Exchange Commission or pursuant to a Non-Control Transaction) whereby any “person” (as defined in Section 3(a)(9) of the Exchange Act) or any two or more persons deemed to be one “person” (as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), other than the Company or any of its Affiliates, an employee benefit plan sponsored or maintained by the Company or any of its Affiliates (or its related trust), or any underwriter temporarily holding securities pursuant to an offering of such securities, directly or indirectly acquire “beneficial ownership” (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company possessing more than thirty percent (30%) of the total combined voting power of the Company’s securities eligible to vote in the election of the Board (the “Company Voting Securities”);
(2) the date, within any consecutive twenty-four (24) month period commencing on or after the Effective Date, upon which individuals who constitute the Board as of the Effective Date (the “Incumbent Board”) cease for any reason (other than by reason of death) to constitute at least a majority of the Board; provided, however, that any individual who becomes a director subsequent to the Effective Date whose election or nomination for election by the Company’s stockholders was approved by a vote of at least a majority of the directors then constituting the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such individual is named as a nominee for director, without objection to such nomination) shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest (including but not limited to a consent solicitation) with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board;
(3) the consummation of a merger, consolidation, share exchange, or similar form of corporate transaction involving the Company or any of its Affiliates that requires the approval of the Company’s stockholders (whether for such transaction or the issuance of securities in the transaction or otherwise) (a “Reorganization”), unless immediately following such Reorganization (i) more than fifty percent (50%) of the total voting power of (A) the corporation resulting from such Reorganization (the “Surviving Company”) or (B) if applicable, the ultimate parent corporation that has, directly or indirectly, beneficial ownership of one hundred percent (100%) of the voting securities of the Surviving Company (the “Parent Company”), is represented by Company Voting Securities that were outstanding immediately prior to such Reorganization (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Reorganization), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among holders thereof immediately prior to the Reorganization, (ii) no Person, other than an employee benefit plan sponsored or maintained by the Surviving Company or the Parent Company (or its related trust), is or becomes the beneficial owner, directly or indirectly, of fifty percent (50%) or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Company, or if there is no Parent Company, the Surviving Company, and (iii) at least a majority of the members of the board of directors of the Parent Company, or if there is no Parent Company, the Surviving Company, following the consummation of the Reorganization are members of the Incumbent Board at the time of the Board’s approval of the execution of the initial agreement providing for such Reorganization (any Reorganization which satisfies all of the criteria specified in (i), (ii), and (iii) above shall be a “Non-Control Transaction”); or
(4) the sale or disposition, in one or a series of related transactions, of all or substantially all of the assets of the Company to any “person” (as defined in Section 3(a)(9) of the Exchange Act) or to any two or more persons deemed to be one “person” (as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) other than the Company’s Affiliates.
Notwithstanding the foregoing, (x) a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of thirty percent (30%) or more of the Company Voting Securities as a result of an acquisition of Company Voting Securities by the Company that reduces the number of Company Voting Securities outstanding; provided that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control shall then occur, and (y) with respect to the payment of any amount that constitutes a deferral of compensation subject to Section 409A of the Code payable upon a Change in Control, a Change in Control shall not be deemed to have occurred, unless the Change in Control constitutes a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company under Section 409A(a)(2)(A)(v) of the Code.
(h) “Code” means the Internal Revenue Code of 1986, as amended from time to time, including regulations thereunder and successor provisions and regulations thereto.
(i) “Committee” means the Board or such other committee consisting of two or more individuals appointed by the Board to administer the Plan and each other individual or committee of individuals designated to exercise authority under the Plan.
(j) “Company” means Empire State Realty Trust, Inc., a Maryland corporation, and its successors by operation of law.
(k) “Company Voting Securities” has the meaning set forth in Section 2(g)(1) hereof.
(l) “Corporate Event” has the meaning set forth in Section 12(b) hereof.
(m) “Data” has the meaning set forth in Section 22(c) hereof.
(n) “Disability” means, in the absence of an Award Agreement or Participant Agreement otherwise defining Disability, the permanent and total disability of such Participant within the meaning of Section 22(e)(3) of the Code. In the event that there is an Award Agreement or Participant Agreement defining Disability, “Disability” shall have the meaning provided in such Award Agreement or Participant Agreement.
(o) “Disqualifying Disposition” means any disposition (including any sale) of Stock acquired upon the exercise of an Incentive Stock Option made within the period that ends on the later of (i) two years after the date on which the Participant was granted the Incentive Stock Option or (ii) one year after the date upon which the Participant acquired the Stock.
(p) “Dividend Equivalent Right” means a right granted to a Participant under Section 10 hereof, to receive cash, Stock or other property equal in value to all or some portion of the regular cash dividends that are or would be payable with respect to shares of Stock subject to an Award.
(q) “Effective Date” means March 1, 2019.
(r) “Eligible Person” means (1) each employee and officer of the Company, the Partnership or any of their respective Affiliates, including each such employee and officer who may also be a director of the Company, the Partnership or any of their respective Affiliates, (2) each non-employee director of the Company or any of its Affiliates, (3) each other natural person who provides substantial services to the Company, the Partnership or any of their respective Affiliates as a consultant or advisor and who is designated as eligible by the Committee, and (4) each natural person who has been offered employment by the Company, the Partnership or any of their respective Affiliates; provided that such prospective employee may not receive any payment or exercise any right relating to an Award until such person has commenced employment or service with the Company or its Affiliates; provided further, however, that (i) with respect to any Award that is intended to qualify as a “stock right” that does not provide for a “deferral of compensation” within the meaning of Section 409A of the Code, the term Affiliate as used in this Section 2(r) shall include only those corporations or other entities in the unbroken chain of corporations or other entities beginning with the Company where each of the corporations in the unbroken chain other than the last corporation owns stock possessing at least fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain, and (ii) with respect to any Award that is intended to qualify as an Incentive Stock Option, the term “Affiliate” as used in this Section 2(r) shall include only those entities that qualify as a “subsidiary corporation” with respect to the Company within the meaning of Code Section 424(f). An employee on an approved leave of absence may be considered as still in the employ of the Company, the Partnership or any of their respective Affiliates for purposes of eligibility for participation in the Plan.
(s) “Excepted Award” has the meaning set forth in Section 4(d) hereof.
(t) “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, including rules and regulations thereunder and successor provisions and rules and regulations thereto.
(u) “Expiration Date” means the date upon which the term of an Option or Stock Appreciation Right expires, as determined under Section 5(b) or 8(b) hereof, as applicable.
(v) “Fair Market Value” means, as of any date when the Stock is listed on one or more national securities exchanges, the closing price reported on the principal national securities exchange on which such Stock is listed and traded on the date of determination, or if the closing price is not reported on such date of determination, the closing price on the most recent date on which such closing price is reported. If the Stock is not listed on a national securities exchange, the Fair Market
Value shall mean the amount determined by the Board in good faith, and in a manner consistent with Section 409A of the Code, to be the fair market value per share of Stock.
(w) “Incentive Stock Option” means an Option that is intended to, and does, qualify as an incentive stock option within the meaning of Section 422 of the Code.
(x) “Incumbent Board” has the meaning set forth in Section 2(g)(2) hereof.
(y) “LTIP Unit” means an “LTIP Unit” as defined in the Partnership Agreement. An LTIP Unit granted under this Plan represents the right to receive the benefits, payments or other rights in respect of an LTIP Unit set forth in the Partnership Agreement, subject to the terms and conditions of the applicable Award Agreement and the Partnership Agreement.
(z) “Minimum Vesting Period” means the one-year period following the date of grant of an Award.
(aa) “Non-Control Transaction” has the meaning set forth in Section 2(g)(3) hereof.
(bb) “Nonqualified Stock Option” means an Option that does not qualify as an Incentive Stock Option.
(cc) “Option” means a conditional right, granted to a Participant under Section 5 hereof, to purchase Stock at a specified price during a specified time period.
(dd) “Option Agreement” means a written agreement (including an electronic writing to the extent permitted by applicable law) between the Company and a Participant evidencing the terms and conditions of an individual Option grant.
(ee) “OP Unit” means an “OP Unit” as defined in the Partnership Agreement.
(ff) “Parent Company” has the meaning set forth in Section 2(g)(3) hereof.
(gg) “Participant” means an Eligible Person who has been granted an Award under the Plan, or if applicable, such other Person who holds an Award.
(hh) “Participant Agreement” means an employment or other services agreement or a severance or change in control agreement between a Participant and the Service Recipient and is effective as of the date of determination.
(ii) “Partnership” means Empire State Realty OP, L.P., a Delaware limited partnership.
(jj) “Partnership Agreement” means the First Amended and Restated Agreement of Limited Partnership of Empire State Realty OP, L.P., dated October 1, 2013, as it may be amended, supplemented or restated from time to time in accordance with its terms.
(kk) “Performance Award” means an Award granted to a Participant under Section 9 hereof, which Award is subject to the achievement of Performance Objectives during a Performance Period. A Performance Award shall be designated as a “Performance Share” or a “Performance Unit” at the time of grant.
(ll) “Performance Award Agreement” means a written agreement (including an electronic writing to the extent permitted by applicable law) between the Company and a Participant evidencing the terms and conditions of an individual Performance Award grant.
(mm) “Performance Objectives” means the performance objectives established pursuant to this Plan for Participants who have received Performance Awards.
(nn) “Performance Period” means the period designated for the achievement of Performance Objectives.
(oo) “Person” means any individual, corporation, partnership, firm, joint venture, association, joint-stock company, trust, unincorporated organization, or other entity.
(pp) “Plan” means this Empire State Realty Trust, Inc. Empire State Realty OP, L.P. 2019 Equity Incentive Plan, as amended from time to time.
(qq) “Qualified Member” means a member of the Committee who is a “Non-Employee Director” within the meaning of Rule 16b-3 under the Exchange Act.
(rr) “Qualifying Committee” has the meaning set forth in Section 3(b) hereof.
(ss) “Reorganization” has the meaning set forth in Section 2(g)(3) hereof.
(tt) “Restricted Stock” means Stock granted to a Participant under Section 6 hereof that is subject to certain restrictions and to a risk of forfeiture.
(uu) “Restricted Stock Agreement” means a written agreement (including an electronic writing to the extent permitted by applicable law) between the Company and a Participant evidencing the terms and conditions of an individual Restricted Stock grant.
(vv) “Restricted Stock Unit” means a notional unit granted to a Participant under Section 7 hereof representing the right to receive one share of Stock (or the cash value of one share of Stock, if so determined by the Committee) on a specified settlement date.
(ww) “Retirement Eligibility Date” means the later of (i) the date a Participant attains the age of (a) 60 for any Awards granted on or after the Effective Date and prior to July 13, 2020 or (b) 65 for any Awards granted on or after July 13, 2020, and (ii) the date on which a Participant has first completed ten (10) years of continuous service with the Company or its Affiliates, any predecessor of the Company or its Affiliates (including, without limitation Malkin Holdings LLC), or any entity acquired by the predecessor of the Company in connection with the consolidation of certain office and retail properties in Manhattan and the greater New York metropolitan area and management businesses supervised by Malkin Holdings LLC into the Partnership and/or the Company.
(xx) “RSU Agreement” means a written agreement (including an electronic writing to the extent permitted by applicable law) between the Company and a Participant evidencing the terms and conditions of an individual grant of Restricted Stock Units.
(yy) “SAR Agreement” means a written agreement (including an electronic writing to the extent permitted by applicable law) between the Company and a Participant evidencing the terms and conditions of an individual grant of Stock Appreciation Rights.
(zz) “Securities Act” means the Securities Act of 1933, as amended from time to time, including rules and regulations thereunder and successor provisions and rules and regulations thereto.
(aaa) “Service Recipient” means, with respect to a Participant holding a given Award, either the Company, the Partnership or any of their respective Affiliates by which the original recipient of such Award is, or following a Termination was most recently, principally employed or to which such original recipient provides, or following a Termination was most recently providing, services, as applicable.
(bbb) “Stock” means the Company’s Class A common stock, par value $0.01 per share, and such other securities as may be substituted for such stock pursuant to Section 12 hereof.
(ccc) “Stock Appreciation Right” means a conditional right to receive an amount equal to the value of the appreciation in the Stock over a specified period granted to a Participant under Section 8 hereof. Except in the event of extraordinary circumstances, as determined in the sole discretion of the Committee, or pursuant to Section 12(b) hereof, Stock Appreciation Rights shall be settled in Stock.
(ddd) “Surviving Company” has the meaning set forth in Section 2(g)(3) hereof.
(eee) “Termination” means the termination of a Participant’s employment or service, as applicable, with the Service Recipient; provided, however, that, if so determined by the Committee at the time of any change in status in relation to the Service Recipient (e.g., a Participant ceases to be an employee and begins providing services as a consultant, or vice versa), such change in status will not be deemed a Termination hereunder. Unless otherwise determined by the Committee, in the event that any Service Recipient ceases to be an Affiliate of the Company (by reason of sale, divestiture, spin-off, or other similar transaction), unless a Participant’s employment or service is transferred to another entity that would constitute a Service Recipient immediately following such transaction, such Participant shall be deemed to have suffered a Termination hereunder
as of the date of the consummation of such transaction. Notwithstanding anything herein to the contrary, a Participant’s change in status in relation to the Service Recipient (for example, a change from employee to consultant) shall not be deemed a Termination hereunder with respect to any Awards constituting nonqualified deferred compensation subject to Section 409A of the Code that are payable upon a Termination unless such change in status constitutes a “separation from service” within the meaning of Section 409A of the Code. Any payments in respect of an Award constituting nonqualified deferred compensation subject to Section 409A of the Code that are payable upon a Termination shall be delayed for such period as may be necessary to meet the requirements of Section 409A(a)(2)(B)(i) of the Code. On the first business day following the expiration of such period, the Participant shall be paid, in a single lump sum without interest, an amount equal to the aggregate amount of all payments delayed pursuant to the preceding sentence, and any remaining payments not so delayed shall continue to be paid pursuant to the payment schedule applicable to such Award.
3. | Administration. | |
(a) Authority of the Committee. Except as otherwise provided below, the Plan shall be administered by the Committee. The Committee shall have full and final authority, in each case subject to and consistent with the provisions of the Plan, to (1) select Eligible Persons to become Participants, (2) grant Awards, (3) determine the type, number of shares of Stock or other equity interests (including, without limitation, LTIP Units) subject to, other terms and conditions of, and all other matters relating to, Awards, (4) prescribe Award Agreements (which need not be identical for each Participant) and rules and regulations for the administration of the Plan, (5) construe and interpret the Plan and Award Agreements and correct defects, supply
omissions, and reconcile inconsistencies therein, (6) suspend the right to exercise Awards during any period that the Committee deems appropriate to comply with applicable securities laws, and thereafter extend the exercise period of an Award by an equivalent period of time, (7) accelerate at any time the exercisability or vesting of all or any portion of any Award in circumstances involving the grantee’s death or disability, and (8) make all other decisions and determinations as the Committee may deem necessary or advisable for the administration of the Plan. Any action of the Committee shall be final, conclusive, and binding on all persons, including, without limitation, the Company, its Affiliates, Eligible Persons, Participants, and beneficiaries of Participants. For the avoidance of doubt, the Board shall have the authority to take all actions under the Plan that the Committee is permitted to take.
(b) Manner of Exercise of Committee Authority. At any time that a member of the Committee is not a Qualified Member, any action of the Committee relating to an Award granted or to be granted to a Participant who is then subject to Section 16 of the Exchange Act in respect of the Company, must be taken by a subcommittee, designated by the Committee or the Board, composed solely of two or more Qualified Members (a “Qualifying Committee”). Any action authorized by such a Qualifying Committee shall be deemed the action of the Committee for purposes of the Plan. The express grant of any specific power to the Qualifying Committee, and the taking of any action by the Qualifying Committee, shall not be construed as limiting any power or authority of the Committee.
(c) Delegation. To the extent permitted by applicable law, the Committee may delegate to officers or employees of the Company or any of its Affiliates, or committees thereof, the authority, subject to such terms as the Committee shall determine, to perform such functions under the Plan, including, but not limited to, administrative functions, as the Committee may determine appropriate. The Committee may appoint agents to assist it in administering the Plan. Notwithstanding the foregoing or any other provision of the Plan to the contrary, any Award granted under the Plan to any Eligible Person who is not an employee of the Company or any of its Affiliates (including any non-employee director of the Company or any Affiliate) or to any Eligible Person who is subject to Section 16 of the Exchange Act must be expressly approved by the Committee or Qualifying Committee in accordance with subsection (b) above.
(d) Section 409A. All Awards made under the Plan that are intended to be “deferred compensation” subject to Section 409A shall be interpreted, administered and construed to comply with Section 409A, and all Awards made under the Plan that are intended to be exempt from Section 409A shall be interpreted, administered and construed to comply with and preserve such exemption. The Committee shall have full authority to give effect to the intent of the foregoing sentence. To the extent necessary to give effect to this intent, in the case of any conflict or potential inconsistency between the Plan and a provision of any Award or Award Agreement with respect to an Award, the Plan shall govern. Notwithstanding the foregoing, neither the Company nor the Committee shall have any liability to any person in the event Section 409A applies to any Award in a manner that results in adverse tax consequences for the Participant or any of his beneficiaries or transferees.
4. | Shares Available Under the Plan. | |
(a) Number of Shares Available for Delivery. Subject to adjustment as provided in Section 12 hereof, the total number of shares of Stock reserved and available for delivery in connection with Awards under the Plan shall not exceed 10,960,000 shares of Stock. Shares of Stock delivered under the Plan shall consist of authorized and unissued shares. Notwithstanding the foregoing, the number of shares of Stock available for issuance hereunder shall not be reduced by shares issued pursuant to Awards issued or assumed in connection with a merger or acquisition as contemplated by, as applicable, NASDAQ Listing Rule 5635(c) and IM-5635-1, NYSE Listed Company Manual Section 303A.08, AMEX Company Guide Section 711, or other applicable stock exchange rules, and their respective successor rules and listing exchange promulgations.
(b) Share Counting Rules. The Committee may adopt reasonable counting procedures to ensure appropriate counting, avoid double-counting (as, for example, in the case of tandem or substitute awards) and make adjustments if the number of shares of Stock actually delivered differs from the number of shares previously counted in connection with an Award. Other equity-based Awards that are LTIP Units shall reduce the total number of shares of Stock available for delivery under the Plan on a one-for-one basis, i.e., each LTIP Unit shall be treated as an award of a single share of Stock. Shares of Stock into which LTIP Units are converted shall deemed to be issued under the Plan but shall not reduce the total number of shares of Stock available for delivery under the Plan. To the extent that an Award under the Plan or an award under the 2013 Plan expires or is canceled, forfeited, or otherwise terminated without a delivery to the Participant of the full number of shares of Stock (or LTIP Units) to which the award related, the undelivered shares of Stock (or LTIP Units) will again be available for grant under the Plan. The following shares of Stock shall be deemed to constitute shares delivered to the Participant and shall not again be available for Awards under the Plan: (i) shares of Stock withheld in payment of the exercise price or taxes relating to an Award or an award under the 2013 Plan and shares equal to the number surrendered in payment of any exercise price or taxes relating to an Award or an award under the 2013 Plan and (ii) shares of Stock subject to a Stock Appreciation Right granted under the Plan or the 2013 Plan that are not issued in connection with the stock settlement of the Stock Appreciation Right upon exercise thereof. In the event the Company or the Partnership repurchases shares of Stock on the open market, such shares shall not be added to the shares of Stock available for issuance under the Plan.
(c) Annual Limitation; Incentive Stock Options.
(1) Notwithstanding anything to the contrary herein, the maximum number of shares of Stock with respect to which Options and Stock Appreciation Rights may be granted to any individual in any one calendar year shall not exceed 1,370,000.
(2) No more than 10,960,000 shares of Stock reserved for issuance hereunder may be issued or transferred upon exercise or settlement of Incentive Stock Options.
(d) Minimum Vesting Period. The vesting period for each Award granted under the Plan must be at least equal to the Minimum Vesting Period; provided, however, nothing in this Section 4(d) shall limit the Committee’s authority to accelerate the vesting of Awards as set forth in Section 3(a)(7) above; and, provided further, notwithstanding the foregoing, up to 5% of the shares of Stock authorized for issuance under the Plan may be utilized for Awards with a vesting period that is less than the Minimum Vesting Period (each such Award, an “Excepted Award”). Notwithstanding the foregoing, in addition to Excepted Awards, the Administrator may grant Awards that vest (or permit previously granted Awards to vest) within the Minimum Vesting Period (i) if such Awards are granted as substitute Awards in replacement of other Awards (or awards previously granted by an entity being acquired (or assets of which are being acquired)) that were scheduled to vest within the Minimum Vesting Period or (ii) if such Awards are being granted in connection with an elective deferral of cash compensation that, absent a deferral election, otherwise would have been paid to the grantee within the Minimum Vesting Period.
(e) Maximum Awards to Non-Employee Directors. Notwithstanding anything to the contrary in this Plan, the value of all Awards awarded under this Plan and all other cash compensation paid by the Company to any non-employee director of the Company in any calendar year shall not exceed $1,000,000. For the purpose of this limitation, the value of any Award shall be its grant date fair value, as determined in accordance with ASC 718 or any successor provision but excluding the impact of estimated forfeitures related to service-based vesting provisions.
5. | Options. | |
(a) General. Certain Options granted under the Plan are intended to qualify as Incentive Stock Options. Options may be granted to Eligible Persons in such form and having such terms and conditions as the Committee shall deem appropriate; provided, however, that Incentive Stock Options may be granted only to Eligible Persons who are employees of the Company or an Affiliate (as such definition is limited pursuant to Section 2(r) hereof) of the Company. The provisions of separate Options shall be set forth in separate Option Agreements, which agreements need not be identical.
(b) Term. The term of each Option shall be set by the Committee at the time of grant; provided, however, that no Option granted hereunder shall be exercisable after the expiration of ten (10) years from the date it was granted.
(c) Exercise Price. The exercise price per share of Stock for each Option shall be set by the Committee at the time of grant; provided, however, that if an Option is intended to qualify as either (1) a “stock right” that does not provide for a “deferral of compensation” within the meaning of Section 409A of the Code, or (2) an Incentive Stock Option, then in each case the applicable exercise price shall not be less than the Fair Market Value on the date of grant, subject to subsection (g) below in the case of any Incentive Stock Option.
(d) Payment for Stock. Payment for shares of Stock acquired pursuant to Options granted hereunder shall be made in full upon exercise of an Option (1) in immediately available funds in United States dollars, or by certified or bank cashier’s check, (2) by delivery of shares of Stock having a value equal to the exercise price, (3) by a broker-assisted cashless exercise in accordance with procedures approved by the Committee, whereby payment of the Option exercise price or tax withholding obligations may be satisfied, in whole or in part, with shares of Stock subject to the Option by delivery of an irrevocable direction to a securities broker (on a form prescribed by the Committee) to sell shares of Stock and to deliver all or part of the sale proceeds to the Company in payment of the aggregate exercise price and, if applicable, the amount necessary to satisfy the Company’s withholding obligations, or (4) by any other means approved by the Committee (including, by delivery of a notice of “net exercise” to the Company, pursuant to which the Participant shall receive the number of shares of Stock underlying the Option so exercised reduced by the number of shares of Stock equal to the aggregate exercise price of the Option divided by the Fair Market Value on the date of exercise). Anything herein to the contrary notwithstanding, if the Committee determines that any form of payment available hereunder would be in violation of Section 402 of the Sarbanes-Oxley Act of 2002, such form of payment shall not be available.
(e) Vesting. Options shall vest and become exercisable in such manner, on such date or dates, or upon the achievement of performance or other conditions, in each case as may be determined by the Committee and set forth in an Option Agreement. Unless otherwise specifically determined by the Committee, the vesting of an Option shall occur only while the Participant is employed by or rendering services to the Service Recipient, and all vesting shall cease upon a Participant’s Termination for any reason. If an Option is exercisable in installments, such installments or portions thereof that become exercisable shall remain exercisable until the Option expires.
(f) Termination of Employment or Service. Except as provided by the Committee in an Option Agreement, Participant Agreement or otherwise:
(1) In the event of a Participant’s Termination for any reason other than (i) by the Service Recipient for Cause, or (ii) by reason of the Participant’s death or Disability, (A) all vesting with respect to such Participant’s outstanding Options shall cease, (B) each of such Participant’s outstanding unvested Options shall expire as of the date of such Termination, and (C) each of such Participant’s outstanding vested Options shall remain exercisable until the earlier of the applicable Expiration Date and the date that is ninety (90) days after the date of such Termination.
(2) In the event of a Participant’s Termination by reason of such Participant’s death or Disability, (i) all vesting with respect to such Participant’s outstanding Options shall cease, (ii) each of such Participant’s outstanding unvested Options shall expire as of the date of such Termination, and (iii) each of such Participant’s outstanding vested Options shall remain exercisable until the earlier of the applicable Expiration Date and the date that is twelve (12) months after the date of such Termination. In the event of a Participant’s death, such Participant’s Options shall remain exercisable by the person or persons to whom a Participant’s rights under the Options pass by will or by the applicable laws of descent and distribution.
(3) In the event of a Participant’s Termination by the Service Recipient for Cause, all of such Participant’s outstanding Options (whether or not vested) shall immediately expire as of the date of such Termination.
(g) Special Provisions Applicable to Incentive Stock Options.
(1) No Incentive Stock Option may be granted to any Eligible Person who, at the time the Option is granted, owns directly, or indirectly within the meaning of Section 424(d) of the Code, stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any parent or subsidiary thereof, unless such Incentive Stock Option (i) has an exercise price of at least one hundred ten percent (110%) of the Fair Market Value on the date of the grant of such Option and (ii) cannot be exercised more than five (5) years after the date it is granted.
(2) To the extent that the aggregate Fair Market Value (determined as of the date of grant) of Stock for which Incentive Stock Options are exercisable for the first time by any Participant during any calendar year (under all plans of the Company and its Affiliates) exceeds $100,000, such excess Incentive Stock Options shall be deemed Nonqualified Stock Options.
(3) Each Participant who receives an Incentive Stock Option must agree to notify the Company in writing immediately after the Participant makes a Disqualifying Disposition of any Stock acquired pursuant to the exercise of an Incentive Stock Option.
6. | Restricted Stock. | |
(a) General. Restricted Stock may be granted to Eligible Persons in such form and having such terms and conditions as the Committee shall deem appropriate. The provisions of separate Awards of Restricted Stock shall be set forth in separate Restricted Stock Agreements, which agreements need not be identical. Subject to the restrictions set forth in Section 6(b), and except as otherwise set forth in the applicable Restricted Stock Agreement, the Participant shall generally have the rights and privileges of a stockholder as to such Restricted Stock, including the right to vote such Restricted Stock. Unless otherwise set forth in a Participant’s Restricted Stock Agreement (1) cash dividends and stock dividends, if any, with respect to Restricted Stock subject to performance-based vesting shall be withheld by the Company for the Participant’s account, and shall be subject to forfeiture to the same degree as the shares of Restricted Stock to which such dividends relate and (2) cash dividends and stock dividends, if any, with respect to all other Restricted Stock shall be paid to Participants at the same time as such dividends are paid to stockholders. Except as otherwise determined by the Committee, no interest will accrue or be paid on the amount of any cash dividends withheld.
(b) Vesting and Restrictions on Transfer. Restricted Stock shall vest in such manner, on such date or dates, or upon the achievement of performance or other conditions, in each case as may be determined by the Committee and set forth in a Restricted Stock Agreement. Unless otherwise specifically determined by the Committee, the vesting of an Award of Restricted Stock shall occur only while the Participant is employed by or rendering services to the Service Recipient, and all vesting shall cease upon a Participant’s Termination for any reason. In addition to any other restrictions set forth in a Participant’s Restricted Stock Agreement, until such time as the Restricted Stock has vested pursuant to the terms of the Restricted Stock Agreement, the Participant shall not be permitted to sell, transfer, pledge, or otherwise encumber the Restricted Stock.
(c) Termination of Employment or Service. Except as provided by the Committee in a Restricted Stock Agreement, Participant Agreement or otherwise, in the event of a Participant’s Termination for any reason prior to the time that such Participant’s Restricted Stock has vested, all vesting with respect to such Participant’s Restricted Stock shall cease, and all unvested shares of Restricted Stock shall be forfeited to the Company by the Participant for no consideration as of the date of such Termination.
7. | Restricted Stock Units. | |
(a) General. Restricted Stock Units may be granted to Eligible Persons in such form and having such terms and conditions as the Committee shall deem appropriate. The provisions of separate Restricted Stock Units shall be set forth in separate RSU Agreements, which agreements need not be identical.
(b) Vesting. Restricted Stock Units shall vest in such manner, on such date or dates, or upon the achievement of performance or other conditions, in each case as may be determined by the Committee and set forth in an RSU Agreement. Unless otherwise specifically determined by the Committee, the vesting of a Restricted Stock Unit shall occur only while the Participant is employed by or rendering services to the Service Recipient, and all vesting shall cease upon a Participant’s Termination for any reason.
(c) Settlement. Restricted Stock Units shall be settled in Stock, cash, or property, as determined by the Committee, in its sole discretion, on the date or dates determined by the Committee and set forth in an RSU Agreement. Unless otherwise set forth in a Participant’s RSU Agreement, a Participant shall not be entitled to dividends, if any, with respect to Restricted Stock Units prior to the actual delivery of shares of Stock.
(d) Termination of Employment or Service. Except as provided by the Committee in an RSU Agreement, Participant Agreement or otherwise, in the event of a Participant’s Termination for any reason prior to the time that such Participant’s Restricted Stock Units have been settled, (1) all vesting with respect to such Participant’s Restricted Stock Units shall cease, (2) each of such Participant’s outstanding unvested Restricted Stock Units shall be forfeited for no consideration as
of the date of such Termination, and (3) any shares remaining undelivered with respect to vested Restricted Stock Units then held by such Participant shall be delivered on the delivery date or dates specified in the RSU Agreement.
8. | Stock Appreciation Rights. | |
(a) General. Stock Appreciation Rights may be granted to Eligible Persons in such form and having such terms and conditions as the Committee shall deem appropriate. The provisions of separate Stock Appreciation Rights shall be set forth in separate SAR Agreements, which agreements need not be identical.
(b) Term. The term of each Stock Appreciation Right shall be set by the Committee at the time of grant; provided, however, that no Stock Appreciation Right granted hereunder shall be exercisable after the expiration of ten (10) years from the date it was granted.
(c) Base Price. The base price per share of Stock for each Stock Appreciation Right shall be set by the Committee at the time of grant; provided, however, that if a Stock Appreciation Right is intended to qualify as a “stock right” that does not provide for a “deferral of compensation” within the meaning of Section 409A of the Code, then the applicable base price shall not be less than the Fair Market Value on the date of grant.
(d) Vesting. Stock Appreciation Rights shall vest and become exercisable in such manner, on such date or dates, or upon the achievement of performance or other conditions, in each case as may be determined by the Committee and set forth in a SAR Agreement. Unless otherwise specifically determined by the Committee, the vesting of a Stock Appreciation Right shall occur only while the Participant is employed by or rendering services to the Service Recipient, and all vesting shall cease upon a Participant’s Termination for any reason. If a Stock Appreciation Right is exercisable in installments, such installments or portions thereof that become exercisable shall remain exercisable until the Stock Appreciation Right expires.
(e) Payment upon Exercise. Payment upon exercise of a Stock Appreciation Right may be made in cash, Stock, or property as specified in the SAR Agreement or determined by the Committee, in each case having a value in respect of each share of Stock underlying the portion of the Stock Appreciation Right so exercised, equal to the difference between the base price of such Stock Appreciation Right and the Fair Market Value of one (1) share of Stock on the exercise date. For purposes of clarity, each share of Stock to be issued in settlement of a Stock Appreciation Right is deemed to have a value equal to the Fair Market Value of one (1) share of Stock on the exercise date. In no event shall fractional shares be issuable upon the exercise of a Stock Appreciation Right, and in the event that fractional shares would otherwise be issuable, the number of shares issuable will be rounded down to the next lower whole number of shares, and the Participant will be entitled to receive a cash payment equal to the value of such fractional share.
(f) Termination of Employment or Service. Except as provided by the Committee in a SAR Agreement, Participant Agreement or otherwise:
(1) In the event of a Participant’s Termination for any reason other than (i) by the Service Recipient for Cause, or (ii) by reason of the Participant’s death or Disability, (A) all vesting with respect to such Participant’s outstanding Stock Appreciation Rights shall cease, (B) each of such Participant’s outstanding unvested Stock Appreciation Rights shall expire as of the date of such Termination, and (C) each of such Participant’s outstanding vested Stock Appreciation Rights shall remain exercisable until the earlier of the applicable Expiration Date and the date that is ninety (90) days after the date of such Termination.
(2) In the event of a Participant’s Termination by reason of such Participant’s death or Disability, (i) all vesting with respect to such Participant’s outstanding Stock Appreciation Rights shall cease, (ii) each of such Participant’s outstanding unvested Stock Appreciation Rights shall expire as of the date of such Termination, and (iii) each of such Participant’s outstanding vested Stock Appreciation Rights shall remain exercisable until the earlier of the applicable Expiration Date and the date that is twelve (12) months after the date of such Termination. In the event of a Participant’s death, such Participant’s Stock Appreciation Rights shall remain exercisable by the person or persons to whom a Participant’s rights under the Stock Appreciation Rights pass by will or by the applicable laws of descent and distribution.
(3) In the event of a Participant’s Termination by the Service Recipient for Cause, all of such Participant’s outstanding Stock Appreciation Rights (whether or not vested) shall immediately expire as of the date of such Termination.
9. | Performance Awards. | |
(a) General. Performance Awards may be granted to Eligible Persons in such form and having such terms and conditions as the Committee shall deem appropriate. The provisions of separate Performance Awards, including the determination of the Committee with respect to the form of payout of Performance Awards, shall be set forth in separate Performance Award Agreements, which agreements need not be identical.
(b) Value of Performance Units and Performance Shares. Each Performance Unit shall have an initial value that is established by the Committee at the time of grant. Each Performance Share shall have an initial value equal to the Fair Market Value of the Stock on the date of grant. In addition to any other non-performance terms included in the Performance Award Agreement, the Committee shall set the applicable Performance Objectives in its discretion, which objectives, depending on the extent to which they are met, will determine the value and number of Performance Units or Performance Shares, as the case may be, that will be paid out to the Participant.
(c) Earning of Performance Units and Performance Shares. Upon the expiration of the applicable Performance Period or other non-performance-based vesting period, if longer, the holder of Performance Units or Performance Shares, as the case may be, shall be entitled to receive payout on the value and number of the applicable Performance Units or Performance Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding Performance Objectives have been achieved and any other non-performance-based terms met.
(d) Form and Timing of Payment of Performance Units and Performance Shares. Payment of earned Performance Units and Performance Shares shall be as determined by the Committee and as evidenced in the Performance Award Agreement. Subject to the terms of the Plan, the Committee, in its sole discretion, may pay earned Performance Units and Performance Shares in the form of cash, Stock, or other Awards (or in a combination thereof) equal to the value of the earned Performance Units or Performance Shares, as the case may be, at the close of the applicable Performance Period, or as soon as practicable after the end of the Performance Period. Any cash, Stock, or other Awards issued in connection with a Performance Award may be issued subject to any restrictions deemed appropriate by the Committee.
(e) Termination of Employment or Service. Except as provided by the Committee in a Performance Award Agreement, Participant Agreement or otherwise, if, prior to the time that the applicable Performance Period has expired, a Participant undergoes a Termination for any reason, all of such Participant’s Performance Awards shall be forfeited by the Participant to the Company for no consideration.
(f) Performance Objectives.
(1) Each Performance Award shall specify the Performance Objectives that must be achieved before such Award shall become earned. The Company may also specify a minimum acceptable level of achievement below which no payment will be made and may set forth a formula for determining the amount of any payment to be made if performance is at or above such minimum acceptable level but falls short of the maximum achievement of the specified Performance Objectives.
(2) Performance Objectives may be described in terms of Company-wide objectives or objectives that are related to the performance of an individual Participant, the specific Service Recipient, or a division, department, or function within the Company or the Service Recipient. Performance Objectives may be measured on an absolute or relative basis. Relative performance may be measured by comparison to a group of peer companies or to a financial market index.
(3) The Committee shall adjust Performance Objectives and the related minimum acceptable level of achievement if, in the sole judgment of the Committee, events or transactions have occurred after the applicable date of grant of a Performance Award that are unrelated to the performance of the Company or Participant and result in a distortion of the Performance Objectives or the related minimum acceptable level of achievement. Potential transactions or events giving rise to adjustment include, but are not limited to, (i) restructurings, discontinued operations, extraordinary items or events, and other unusual or nonrecurring charges; (ii) an event either not directly related to the operations of the Company or not within the reasonable control of the Company’s management; and (iii) a change in tax law or accounting standards required by generally accepted accounting principles.
10. | Dividend Equivalents | |
The Committee may include in the Award Agreement with respect to any Award (other than an Option or Stock Appreciation Right) a Dividend Equivalent Right in such form and having such terms and conditions as the Committee shall deem appropriate. A Dividend Equivalent Right (if such right is a “dividend equivalent” within the meaning of Treasury
Regulation Section 1.409A-3(e)) shall be treated separately from the right to other amounts under the Award for purposes of Section 409A of the Code. In the event such a provision is included in an Award Agreement, the Committee will determine whether such payments will be made in cash, in shares of Stock or in another form of property, whether they will be conditioned upon the exercise of the Award to which they relate, the time or times at which they will be made, and such other terms and conditions as the Committee will deem appropriate. Notwithstanding the foregoing, unless otherwise provided in an Award Agreement, a Participant’s right under an Award Agreement to dividend equivalent payments in the case of an Award that is subject to vesting conditions shall be treated as unvested so long as such Award remains unvested, and any such dividend equivalent payments that would otherwise have been paid during the vesting period shall instead be accumulated (and, if paid in cash, reinvested in additional shares of Stock based on the Fair Market Value of the Stock on the date of reinvestment) and paid within thirty (30) days following the date on which such Award is determined by the Company to have vested.
11. | Other Equity-Based Awards. | |
The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based upon or related to Stock or other equity interests of the Company or the Partnership (including, without limitation, LTIP Units), as deemed by the Committee to be consistent with the purposes of the Plan. The grant of LTIP Units must satisfy the requirements of the Partnership Agreement. The Committee may also grant Stock or other equity interests of the Company or the Partnership (including, without limitation, LTIP Units) as a bonus (whether or not subject to any vesting requirements or other restrictions on transfer), and may grant other awards in lieu of obligations of the Company or an Affiliate to pay cash or deliver other property under this Plan or under other plans or compensatory arrangements, subject to such terms as shall be determined by the Committee. The terms and conditions applicable to such Awards shall be determined by the Committee and evidenced by Award Agreements, which agreements need not be identical.
12. | Adjustment for Recapitalization, Merger, etc. | |
(a) Capitalization Adjustments. The aggregate number of shares of Stock that may be granted or purchased pursuant to Awards (as set forth in Section 4 hereof), the number of shares of Stock or other equity interests (including, without limitation, LTIP Units) covered by each outstanding Award, and the price per share of Stock or other equity interest (including, without limitation, LTIP Units) underlying each such Award shall be equitably and proportionally adjusted or substituted, as determined by the Committee, as to the number, price, or kind of a share of Stock or other equity interest (including, without limitation, LTIP Units) or other consideration subject to such Awards (1) in the event of changes in the outstanding Stock or in the capital structure of the Company by reason of stock splits, reverse stock splits, recapitalizations, reorganizations, mergers, amalgamations, consolidations, combinations, exchanges, or other relevant changes in capitalization occurring after the date of grant of any such Award (including any Corporate Event); (2) in connection with any extraordinary dividend (as determined by the Committee in its sole discretion) declared and paid in respect of shares of Stock, whether payable in the form of cash, stock, or any other form of consideration; or (3) in the event of any change in applicable laws or circumstances that results in or could result in, in either case, as determined by the Committee in its sole discretion, any substantial dilution or enlargement of the rights intended to be granted to, or available for, Participants in the Plan.
(b) Corporate Events. Notwithstanding the foregoing, except as provided by the Committee in an Award Agreement or otherwise, in connection with (i) a merger, amalgamation, or consolidation involving the Company in which the Company is not the surviving corporation, (ii) a merger, amalgamation, or consolidation involving the Company in which the Company is the surviving corporation but the holders of shares of Stock receive securities of another corporation or other property or cash, (iii) a Change in Control, or (iv) the reorganization, dissolution or liquidation of the Company (each, a “Corporate Event”), the Committee may, in its discretion, so long as it determines there is no adverse economic impact on the Participants as of the date any action is taken under this Section 12(b), provide for any one or more of the following:
(1) The assumption or substitution of any or all Awards in connection with such Corporate Event, in which case the Awards shall be subject to the adjustment set forth in subsection (a) above, and to the extent that such Awards are Performance Awards or other Awards that vest subject to the achievement of Performance Objectives or similar performance criteria, such Performance Objectives or similar performance criteria shall be adjusted appropriately to reflect the Corporate Event;
(2) The cancellation of any or all Awards (whether vested or unvested) as of the consummation of such Corporate Event, together with the payment to the Participants holding vested Awards (including any Awards that would vest upon the Corporate Event but for such cancellation) so canceled of an amount in respect of cancellation based upon the per-share consideration being paid for the Stock in connection with such Corporate Event, less, in the case of Options, Stock Appreciation Rights, and other Awards subject to exercise, the applicable exercise or base price; provided, however,
that holders of Options, Stock Appreciation Rights, and other Awards subject to exercise shall be entitled to consideration in respect of cancellation of such Awards only if the per-share consideration less the applicable exercise or base price is greater than zero dollars ($0), and to the extent that the per-share consideration is less than or equal to the applicable exercise or base price, such Awards shall be canceled for no consideration; and
(3) The replacement of any or all Awards (other than Awards that are intended to qualify as “stock rights” that do not provide for a “deferral of compensation” within the meaning of Section 409A of the Code) with a cash incentive program that preserves the value of the Awards so replaced (determined as of the consummation of the Corporate Event), with subsequent payment of cash incentives subject to the same vesting conditions as applicable to the Awards so replaced and payment to be made within thirty (30) days of the applicable vesting date.
Payments to holders pursuant to paragraph (2) above shall be made in cash or, in the sole discretion of the Committee, in the form of such other consideration necessary for a Participant to receive property, cash, or securities (or a combination thereof) as such Participant would have been entitled to receive upon the occurrence of the transaction if the Participant had been, immediately prior to such transaction, the holder of the number of shares of Stock covered by the Award at such time (less any applicable exercise or base price). In addition, in connection with any Corporate Event, prior to any payment or adjustment contemplated under this subsection (b), the Committee may require a Participant to (A) represent and warrant as to the unencumbered title to his Awards, (B) bear such Participant’s pro-rata share of any post-closing indemnity obligations, and be subject to the same post-closing purchase price adjustments, escrow terms, offset rights, holdback terms, and similar conditions as the other holders of Stock, and (C) deliver customary transfer documentation as reasonably determined by the Committee.
(c) Double-Trigger Vesting. Other than as set forth in an existing employment agreement between the Company and its Chairman and Chief Executive Officer, or any renewal thereof, in the event of a Participant’s Termination following the Corporate Event as a result of (i) death, (ii) Disability, (iii) a termination without Cause by the Company or its Affiliates, (iv) a voluntary termination by the Participant that follows the Participant’s Retirement Eligibility Date, or (v) a Termination by a Participant with Good Reason (as defined in, and to the extent that the Participant’s Award Agreement or Participant Agreement includes a definition of Good Reason):
(1) With respect to Awards subject solely to time-based vesting, the Awards shall, unless earlier terminated or forfeited and to the extent not otherwise vested, automatically become fully vested as of such date of Termination; and
(2) With respect to Performance Awards or other Awards that vest subject to the achievement of performance criteria: (i) if such Termination occurs following the completion of the Performance Period, any restrictions on the shares of Stock underlying the Award that have been earned based on achievement of the Performance Objectives or similar performance criteria shall lapse and such shares of Stock shall, unless earlier terminated or forfeited and to the extent not otherwise vested, 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 shares of Stock underlying the Award which become earned shall be determined as set forth in the relevant Award Agreement, and (B) any restrictions and conditions on the shares of Stock that become earned as of the Termination shall lapse and the number of shares of Stock underlying the Award that have been earned based on achievement of the Performance Objectives or similar performance criteria, unless earlier terminated or forfeited, that become vested as of such date of Termination shall be determined by multiplying the number of shares of Stock underlying the Award that have been earned based on achievement of the Performance Objectives or similar performance criteria by a fraction, the numerator of which is the number of days in the shortened Performance Period and the denominator of which is the total number of days in the original Performance Period.
(d) Fractional Shares. Any adjustment provided under this Section 12 may, in the Committee’s discretion, provide for the elimination of any fractional share that might otherwise become subject to an Award.
13. | Use of Proceeds. | |
The proceeds received from the sale of Stock pursuant to the Plan shall be used for general corporate purposes.
14. | Rights and Privileges as a Stockholder. | |
Except as otherwise specifically provided in the Plan, no person shall be entitled to the rights and privileges of Stock ownership in respect of shares of Stock that are subject to Awards hereunder until such shares have been issued to that person.
15. | Transferability of Awards. | |
Awards may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the applicable laws of descent and distribution, and to the extent subject to exercise, Awards may not be exercised during the lifetime of the grantee other than by the grantee. Notwithstanding the foregoing, except with respect to Incentive Stock Options, Awards and a Participant’s rights under the Plan shall be transferable for no value to the extent provided in an Award Agreement or otherwise determined at any time by the Committee.
16. | Employment or Service Rights. | |
No individual shall have any claim or right to be granted an Award under the Plan or, having been selected for the grant of an Award, to be selected for the grant of any other Award. Neither the Plan nor any action taken hereunder shall be construed as giving any individual any right to be retained in the employ or service of the Company or an Affiliate of the Company.
17. | Compliance with Laws. | |
The obligation of the Company to deliver Stock upon vesting, exercise, or settlement of any Award shall be subject to all applicable laws, rules, and regulations, and to such approvals by governmental agencies as may be required. Notwithstanding any terms or conditions of any Award to the contrary, the Company shall be under no obligation to offer to sell or to sell, and shall be prohibited from offering to sell or selling, any shares of Stock pursuant to an Award unless such shares have been properly registered for sale with the Securities and Exchange Commission pursuant to the Securities Act or unless the Company has received an opinion of counsel, satisfactory to the Company, that such shares may be offered or sold without such registration pursuant to an available exemption therefrom and the terms and conditions of such exemption have been fully complied with. The Company shall be under no obligation to register for sale or resale under the Securities Act any of the shares of Stock to be offered or sold under the Plan or any shares of Stock to be issued upon exercise or settlement of Awards. If the shares of Stock offered for sale or sold under the Plan are offered or sold pursuant to an exemption from registration under the Securities Act, the Company may restrict the transfer of such shares and may legend the Stock certificates representing such shares in such manner as it deems advisable to ensure the availability of any such exemption.
18. | Withholding Obligations. | |
As a condition to the vesting, exercise, or settlement of any Award (or upon the making of an election under Section 83(b) of the Code), the Committee may require that a Participant satisfy, through deduction or withholding from any payment of any kind otherwise due to the Participant, or through such other arrangements as are satisfactory to the Committee, the amount of all federal, state, and local income and other taxes of any kind required or permitted to be withheld in connection with such vesting, exercise, or settlement (or election). A Participant may elect to have such tax withholding satisfied, in whole or in part, by (i) authorizing the Company to withhold a number of shares of Stock to be issued pursuant to an Award with a Fair Market Value as of the vesting, exercise or settlement date of the Award, as applicable equal to the amount of the required withholding tax, (ii) transferring to the Company shares of Stock owned by the Participant with a Fair Market Value as of the vesting, exercise or settlement date of the Award, as applicable, equal to the amount of the required withholding tax, or (iii) in the case of a Participant who is an employee of the Company at the time such withholding is effected, by withholding from the cash compensation payable to such Participant as of such date, equal to the amount of the required withholding tax.
19. | Amendment of the Plan or Awards. | |
(a) Amendment of Plan. The Board or the Committee may amend the Plan at any time and from time to time.
(b) Amendment of Awards. The Board or the Committee may amend the terms of any one or more Awards at any time and from time to time.
(c) Stockholder Approval; No Material Impairment. Notwithstanding anything herein to the contrary, no amendment to the Plan or any Award shall be effective without stockholder approval if such amendment would cause the Plan to fail to comply with any applicable legal requirement or applicable rules of any national securities exchange on which the Stock or OP Units are listed or similar requirement. Additionally, no amendment to the Plan or any Award shall materially
impair a Participant’s rights under any Award unless the Participant consents in writing (it being understood that no action taken by the Board or the Committee that is expressly permitted under the Plan, including, without limitation, any actions described in Section 12 hereof, shall constitute an amendment to the Plan or an Award for such purpose). Notwithstanding the foregoing, subject to the limitations of applicable law, if any, and without an affected Participant’s consent, the Board or the Committee may amend the terms of the Plan or any one or more Awards from time to time as necessary to bring such Awards into compliance with applicable law, including, without limitation, Section 409A of the Code.
(d) No Repricing of Awards Without Stockholder Approval. Notwithstanding subsection (a) or (b) above, or any other provision of the Plan, the repricing of Awards shall not be permitted without stockholder approval. For this purpose, a “repricing” means any of the following (or any other action that has the same effect as any of the following): (1) changing the terms of an Award to lower its exercise or base price (other than on account of capital adjustments resulting from share splits, etc., as described in Section 12(a) hereof), (2) any other action that is treated as a repricing under generally accepted accounting principles, and (3) repurchasing for cash or canceling an Award in exchange for another Award at a time when its exercise or base price is greater than the Fair Market Value of the underlying Stock, unless the cancellation and exchange occurs in connection with an event set forth in Section 12(b) hereof.
20. | Termination or Suspension of the Plan. | |
The Board or the Committee may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the earlier of (i) the date the Plan is adopted by the Board or (ii) the date the stockholders of the Company approve the Plan. No Awards may be granted under the Plan while the Plan is suspended or after it is terminated; provided, however, that following any suspension or termination of the Plan, the Plan shall remain in effect for the purpose of governing all Awards then outstanding hereunder until such time as all Awards under the Plan have been terminated, forfeited, or otherwise canceled, or earned, exercised, settled, or otherwise paid out, in accordance with their terms.
21. | Effective Date of the Plan. | |
The Plan was originally effective as of the Effective Date, subject to stockholder approval. The Plan was amended and restated as of July 13, 2020.
22. | Miscellaneous. | |
(a) Certificates. Stock acquired pursuant to Awards granted under the Plan may be evidenced in such a manner as the Committee shall determine. If certificates representing Stock are registered in the name of the Participant, the Committee may require that (1) such certificates bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Stock, (2) the Company retain physical possession of the certificates, and (3) the Participant deliver a stock power to the Company, endorsed in blank, relating to the Stock. Notwithstanding the foregoing, the Committee may determine, in its sole discretion, that the Stock shall be held in book-entry form rather than delivered to the Participant pending the release of any applicable restrictions.
(b) Clawback/Recoupment Policy. Notwithstanding anything contained herein to the contrary, all Awards granted under the Plan shall be and remain 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. No such policy adoption or amendment shall in any event require the prior consent of any Participant.
(c) Data Privacy. As a condition of receipt of any Award, each Participant explicitly and unambiguously consents to the collection, use, and transfer, in electronic or other form, of personal data as described in this section by and among, as applicable, the Company and its Affiliates for the exclusive purpose of implementing, administering, and managing the Plan and Awards and the Participant’s participation in the Plan. In furtherance of such implementation, administration, and management, the Company and its Affiliates may hold certain personal information about a Participant, including, but not limited to, the Participant’s name, home address, telephone number, date of birth, social security or insurance number or other identification number, salary, nationality, job title(s), information regarding any securities of the Company or any of its Affiliates, and details of all Awards (the “Data”). In addition to transferring the Data amongst themselves as necessary for the purpose of implementation, administration, and management of the Plan and Awards and the Participant’s participation in the Plan, the Company and its Affiliates may each transfer the Data to any third parties assisting the Company in the implementation, administration, and management of the Plan and Awards and the Participant’s participation in the Plan.
Recipients of the Data may be located in the Participant’s country or elsewhere, and the Participant’s country and any given recipient’s country may have different data privacy laws and protections. By accepting an Award, each Participant authorizes such recipients to receive, possess, use, retain, and transfer the Data, in electronic or other form, for the purposes of assisting the Company in the implementation, administration, and management of the Plan and Awards and the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Company or the Participant may elect to deposit any shares of Stock. The Data related to a Participant will be held only as long as is necessary to implement, administer, and manage the Plan and Awards and the Participant’s participation in the Plan. A Participant may, at any time, view the Data held by the Company with respect to such Participant, request additional information about the storage and processing of the Data with respect to such Participant, recommend any necessary corrections to the Data with respect to the Participant, or refuse or withdraw the consents herein in writing, in any case without cost, by contacting his local human resources representative. The Company may cancel the Participant’s eligibility to participate in the Plan, and in the Committee’s discretion, the Participant may forfeit any outstanding Awards if the Participant refuses or withdraws the consents described herein. For more information on the consequences of refusal to consent or withdrawal of consent, Participants may contact their local human resources representative.
(d) Participants Outside of the United States. The Committee may modify the terms of any Award under the Plan made to or held by a Participant who is then a resident, or is primarily employed or providing services, outside of the United States in any manner deemed by the Committee to be necessary or appropriate in order that such Award shall conform to laws, regulations, and customs of the country in which the Participant is then a resident or primarily employed or providing services, or so that the value and other benefits of the Award to the Participant, as affected by non-United States tax laws and other restrictions applicable as a result of the Participant’s residence, employment, or providing services abroad, shall be comparable to the value of such Award to a Participant who is a resident, or is primarily employed or providing services, in the United States. An Award may be modified under this Section 22(d) in a manner that is inconsistent with the express terms of the Plan, so long as such modifications will not contravene any applicable law or regulation or result in actual liability under Section 16(b) of the Exchange Act for the Participant whose Award is modified. Additionally, the Committee may adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by Eligible Persons who are non-United States nationals or are primarily employed or providing services outside the United States.
(e) No Liability of Committee Members. Neither any member of the Committee nor any of the Committee’s permitted delegates shall be liable personally by reason of any contract or other instrument executed by such member or on his behalf in his capacity as a member of the Committee or for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless each member of the Committee and each other employee, officer, or director of the Company to whom any duty or power relating to the administration or interpretation of the Plan may be allocated or delegated, against all costs and expenses (including counsel fees) and liabilities (including sums paid in settlement of a claim) arising out of any act or omission to act in connection with the Plan, unless arising out of such person’s own fraud or willful misconduct; provided, however, that approval of the Board shall be required for the payment of any amount in settlement of a claim against any such person. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s certificate or articles of incorporation or bylaws, each as may be amended from time to time, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
(f) Payments Following Accidents or Illness. If the Committee shall find that any person to whom any amount is payable under the Plan is unable to care for his affairs because of illness or accident, or is a minor, or has died, then any payment due to such person or his estate (unless a prior claim therefor has been made by a duly appointed legal representative) may, if the Committee so directs the Company, be paid to his spouse, child, relative, an institution maintaining or having custody of such person, or any other person deemed by the Committee to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be a complete discharge of the liability of the Committee and the Company therefor.
(g) Governing Law. The Plan shall be governed by and construed in accordance with the internal laws of the State of Maryland without reference to the principles of conflicts of laws thereof.
(h) Funding. No provision of the Plan shall require the Company, for the purpose of satisfying any obligations under the Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets, nor shall the Company be required to maintain separate bank accounts, books, records, or other evidence of the existence of a segregated or separately maintained or administered fund for such purposes. Participants shall have no rights under the Plan other than as unsecured general creditors of the Company, except that insofar as they may have become entitled to payment of additional compensation by performance of services, they shall have the same rights as other employees and service providers under general law.
(i) Reliance on Reports. Each member of the Committee and each member of the Board shall be fully justified in relying, acting, or failing to act, and shall not be liable for having so relied, acted, or failed to act in good faith, upon any report made by the independent public accountant of the Company and its Affiliates and upon any other information furnished in connection with the Plan by any Person or Persons other than such member.
(j) Titles and Headings. The titles and headings of the sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
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 10, 2020 | By: /s/ Anthony E. Malkin Anthony E. Malkin Chairman 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 10, 2020 | By: /s/ Christina Chiu Christina Chiu Executive Vice President and Chief Financial Officer |
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 March 31, 2020 (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 10, 2020 | By: /s/ Anthony E. Malkin Anthony E. Malkin Chairman 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 March 31, 2020 (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 10, 2020 | By: /s/ Christina Chiu Christina Chiu Executive Vice President and Chief Financial Officer |