Empire State Realty Trust, Inc. 10-K

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our Class A common stock is listed on the New York Stock Exchange (the "NYSE"), under the symbol "ESRT." Our Class B common stock is not listed on any exchange and is not traded. Each share of Class B common stock may be converted to one share of Class A common stock at any time. Our operating partnership has four series of partnership units ("OP Units") - Series PR OP Units, Series ES OP Units, Series 60 OP Units and Series 250 OP Units. The Series ES OP Units, Series 60 OP Units and Series 250 OP Units (together, the "traded OP units") are listed on the NYSE Arca, Inc. exchange ("NYSE Arca") under the symbols "ESBA," "OGCP," and "FISK," respectively. The Series PR OP Units are not listed on any exchange and are not traded. On February 19, 2021, the last sales price for our Class A common stock on the NYSE was $9.89 per share. Holders As of February 19, 2021, we had 579 registered holders of our Class A common stock and 602 registered holders of our Class B common stock. As of February 19, 2021, our operating partnership had 632 registered holders of Series PR OP Units, 1,444 registered holders of Series ES OP Units, 440 registered holders of Series 60 OP Units and 309 registered holders of Series 250 OP Units. Certain shares of common stock and OP Units are held in "street" name and accordingly, the number of beneficial owners of such shares of common stock and OP Units is not known or included in the foregoing totals. Dividends We intend to pay regular quarterly dividends to holders of our Class A common stock and Class B common stock, at least to the extent of our taxable income or as required to maintain our qualification as a REIT. Any distributions we pay in the future will depend upon our taxable income, actual results of operations, economic conditions and other factors that could differ materially from our current expectations. Our actual results of operations will be affected by a number of factors, including the revenue we receive from our properties, our operating expenses, interest expense, the ability of our tenants to meet their obligations and unanticipated expenditures. During August 2020, we announced the suspension of our third and fourth quarter 2020 dividends to holders of our Class A common stock and Class B common stock and to holders of Empire State Realty OP, L.P.’s Series ES, Series 250 and Series 60 operating partnership units and Series PR operating partnership units. We had no taxable income in 2020, and therefore no requirement to pay any dividend on our common stock in either the third or fourth quarter of 2020. During December 2020, we announced the continued dividend suspension for the first and second quarters of 2021. We and our board believe that payment of a dividend is currently not the highest and best use of our balance sheet. Our board regularly reviews our dividend policy. Distributions declared by us will be authorized by our board in its sole discretion out of funds legally available therefore and will be dependent upon a number of factors, including restrictions under applicable law, our capital requirements and the distribution requirements necessary to maintain our qualification as a REIT. See Item 1A, "Risk Factors," and Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations," of this Annual Report on Form 10-K, for information regarding the sources of funds used for dividends and for a discussion of factors, if any, which may adversely affect our ability to make distributions to our securityholders. Earnings and profits, which determine the tax treatment of distributions to securityholders, will differ from income reported for financial reporting purposes due to the differences for federal income tax purposes, including, but not limited to, treatment of loss on extinguishment of debt, revenue recognition, compensation expense, and basis of depreciable assets and estimated useful lives used to compute depreciation. Dividends paid in the first quarter and second quarter of 2020 of $0.21 per share are classified for income tax purposes 100% as taxable ordinary dividends eligible for the Section 199A deduction. Stockholder Return Performance The following graph is a comparison of the cumulative total stockholder return on our Class A common stock, the Standard & Poor's 500 Index (the "S&P 500 Index"), the FTSE NAREIT All Equity Index (the "FTSE NAREIT All Equity Index") and the FTSE NAREIT Equity REIT Office Index ("FTSE NAREIT Equity REIT Office Index"). The graph assumes 36 that $100.00 was invested on December 31, 2015 and dividends were reinvested without the payment of any commissions. There can be no assurance that the performance of our Class A common stock will continue in line with the same or similar trends depicted in the graph below. December 31, 2015 December 31, 2016 December 31, 2017 December 31, 2018 December 31, 2019 December 31, 2020 Empire State Realty Trust, Inc. $ 100.00 $ 116.77 $ 121.18 $ 86.14 $ 86.93 $ 59.54 S&P 500 Index $ 100.00 $ 113.53 $ 138.32 $ 132.25 $ 173.90 $ 205.89 MSCI US REIT Index $ 100.00 $ 109.71 $ 115.27 $ 110.00 $ 138.42 $ 127.94 FTSE NAREIT Equity REIT Office Index $ 100.00 $ 113.49 $ 119.45 $ 102.13 $ 134.22 $ 109.47 The graph is not deemed incorporated by reference into any filing made under the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act regardless of any general statement regarding incorporation by reference in any such filing, and is not otherwise deemed filed under the Securities Act or the Exchange Act. Securities Authorized For Issuance Under Equity Compensation Plans On May 16, 2019, our shareholders approved the Empire State Realty Trust, Inc. Empire State Realty OP, L.P. 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan provides for grants to directors, employees and consultants of our company and operating partnership, including options, restricted stock, restricted stock units, stock appreciation rights, performance awards, dividend equivalents and other equity-based awards, including LTIP units. An aggregate of approximately 11.0 million shares of our common stock are authorized for issuance under awards granted pursuant to the 2019 Plan. Following adoption by our shareholders of the 2019 Plan, we agreed not to 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"), which we adopted upon our IPO in 2013. The shares of 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 Class A common stock available for issuance under the 37 2019 Plan. For a further discussion of the Plans, see Note 9 to the consolidated financial statements included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. The following table presents certain information about our equity compensation plans as of December 31, 2020: Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column of this table) Equity compensation plans approved by securityholders (1) N/A N/A 8,545,088 (2) Equity compensation plans not approved by securityholders — — — Total N/A N/A 8,545,088 ______________ (1) These consist of the Empire State Realty Trust, Inc. Empire State Realty OP, L.P. 2019 Equity Incentive Plan and the First Amended and Restated Empire State Realty Trust, Inc. and Empire State Realty OP, L.P. 2013 Equity Incentive Plan. (2) The number of securities remaining available for future issuance consists of shares remaining available for issuance under the Empire State Realty Trust, Inc. Empire State Realty OP, L.P. 2019 Equity Incentive Plan adjusted for awards that have been forfeited, canceled or otherwise terminated, other than by exercise under the Empire State Realty Trust, Inc. Empire State Realty OP, L.P. 2019 Equity Incentive Plan and the First Amended and Restated Empire State Realty Trust, Inc. and Empire State Realty OP, L.P. 2013 Equity Incentive Plan . As of December 31, 2020, we have issued 503,223 shares of restricted stock and 11,313,387 LTIP units under the Plans since 2013. Recent Sales of Unregistered Securities Use of Proceeds from Registered Securities; Not applicable. Repurchases of Equity Securities Stock and Publicly Traded Operating Partnership Unit Repurchase Program On December 13, 2019, our board authorized the repurchase of up to $500 million of our Class A common stock and the Operating Partnership’s Series ES, Series 250 and Series 60 operating partnership units from January 1, 2020 through December 31, 2020 ("the 2020 Repurchase Program"). On December 11, 2020, our board approved a new authorization for the repurchase of up to $500 million of such securities from January 1, 2021 through December 31, 2021. Under the repurchase program, we may purchase our Class A common stock and the Operating Partnership’s 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 us at our discretion and will be subject to stock price, availability, trading volume and general market conditions. The authorization does not obligate us to acquire any particular amount of securities, and the program may be suspended or discontinued at our discretion without prior notice. The following table summarizes our purchases of equity securities in each of the three months of the fourth quarter 2020 under the 2020 Repurchase Program: 38 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) October 2020 1,952,013 $ 6.21 1,952,013 $ 365,934 November 2020 747,074 $ 8.08 747,074 $ 359,900 December 2020 375,615 $ 9.62 375,615 $ 356,287 39 ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth our selected financial data and should be read in conjunction with our Financial Statements and notes thereto included in Item 8, "Financial Statements and Supplementary Data" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K. Year Ended December 31, (amounts in thousands, except per share data) 2020 2019 2018 2017 2016 Operating Data Total revenues $ 609,228 $ 731,343 $ 731,511 $ 709,526 $ 677,353 Operating expenses: Property operating expenses 136,141 174,977 167,379 163,531 153,850 Ground rent expenses 9,326 9,326 9,326 9,326 9,326 General and administrative expenses 62,244 61,063 52,674 50,315 49,078 Observatory expenses 23,723 33,767 32,767 30,275 29,833 Real estate taxes 121,923 115,916 110,000 102,466 96,061 Acquisition expenses — — — — 98 Impairment charges (4) 6,204 — — — — Depreciation and amortization 191,006 181,588 168,508 160,710 155,211 Total operating expenses 550,567 576,637 540,654 516,623 493,457 Operating income (loss) 58,661 154,706 190,857 192,903 183,896 Other income (expense): Interest income 2,637 11,259 10,661 2,942 647 Interest expense (89,907) (79,246) (79,623) (68,473) (70,595) Loss on early extinguishment of debt (86) — — (2,157) (552) IPO litigation expense (5) (1,165) — — — — Loss from derivative financial instruments — — — (289) — Income (loss) before income taxes (29,860) 86,719 121,895 124,926 113,396 Income tax benefit (expense) 6,971 (2,429) (4,642) (6,673) (6,146) Net income (loss) (22,889) 84,290 117,253 118,253 107,250 Private perpetual preferred unit distributions (4,197) (1,743) (936) (936) (936) Net (income) loss attributable to non-controlling interests 10,374 (33,102) (50,714) (54,670) (54,858) Net income (loss) attributable to common stockholders $ (16,712) $ 49,445 $ 65,603 $ 62,647 $ 51,456 Dividends and distributions declared and paid per share $ 0.21 $ 0.42 $ 0.42 $ 0.42 $ 0.40 Net income (loss) per share attributable to common stockholders - basic $ (0.10) $ 0.28 $ 0.39 $ 0.40 $ 0.38 Net income (loss) per share attributable to common stockholders - diluted $ (0.10) $ 0.28 $ 0.39 $ 0.39 $ 0.38 Total weighted average shares - basic 175,169 178,340 167,571 158,380 133,881 Total weighted average shares - diluted 283,837 297,798 297,259 298,049 277,568 Balance Sheet Data Commercial real estate properties, at cost $ 3,133,966 $ 3,109,433 $ 2,884,486 $ 2,667,655 $ 2,458,629 Total assets $ 4,150,695 $ 3,931,834 $ 4,195,780 $ 3,931,347 $ 3,890,953 Debt $ 2,136,649 $ 1,668,574 $ 1,918,933 $ 1,688,721 $ 1,612,331 Equity $ 1,731,307 $ 1,947,913 $ 1,991,109 $ 1,977,737 $ 1,982,863 Other Data Funds from operations attributable to common stockholders and non-controlling interests (1) $ 162,519 $ 260,062 $ 282,609 $ 276,491 $ 260,519 Modified funds from operations attributable to common stockholders and non-controlling interests (2) $ 170,350 $ 267,893 $ 290,440 $ 284,322 $ 268,350 Core funds from operations attributable to common stockholders and non-controlling interests (3) $ 175,414 $ 267,893 $ 290,440 $ 286,925 $ 269,000 Net cash provided by operating activities $ 182,293 $ 232,591 $ 279,022 $ 194,202 $ 214,755 Net cash provided by (used in) investing activities $ (143,118) $ 149,744 $ (643,023) $ (223,013) $ (182,376) Net cash provided by (used in) financing activities $ 257,167 $ (381,551) $ 104,617 $ (56,877) $ 470,941 ______________ 40 (1) We compute Funds From Operations ("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 writedowns 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 from 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. For a reconciliation of FFO, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Funds from Operations." (2) 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 following our formation transactions as they carry significantly below market ground leases, the amortization of which is material to our overall results. We present Modified FFO because we consider it an important supplemental measure of our operating performance in that it adds back the non-cash amortization of below-market ground leases. There can be no assurance that Modified FFO presented by us is comparable to similarly titled measures of other REITs. Modified FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Modified FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. (3) Core FFO adds back to traditionally defined FFO the following items: acquisition expenses, severance expenses and retirement equity compensation expenses, private perpetual preferred exchange offering expenses, deferred tax asset write-off, acquisition expenses, loss on early extinguishment of debt, gain on settlement of lawsuit related to the Observatory, net of income taxes and ground lease amortization, construction severance expenses and acquisition break-up fee. We present Core FFO because we consider it an important supplemental measure of our operating performance in that it excludes items associated with the Offering and formation transactions. There can be no assurance that Core FFO presented by us 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. For a reconciliation of Core FFO, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Core Funds from Operations." (4) 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 and a $2.1 million write-off of prior expenditures on a development project that is unlikely to continue. (5) Represents an accrued expense which reflects an estimated liability associated with the Initial Public Offering-related litigation. Refer to “Financial Statements-Note 8-Commitments and Contingencies” in this Annual Report on Form 10-K for a description of relevant legal proceedings. 41