Empire State Realty OP, L.P. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor provisions. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “contemplates,” “aims,” “continues,” “would” or “anticipates” or the negative of these words and phrases or similar words or phrases. In particular, statements pertaining to our capital resources, portfolio performance, dividend policy and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our portfolio from operations, acquisitions and anticipated market conditions, demographics and results of operations are forward-looking statements. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: (i) economic, political and social impact of, and uncertainty relating to, the COVID-19 pandemic; (ii) resolution of legal proceedings involving the company; (iii) reduced demand for office or retail space, including as a result of the COVID-19 pandemic; (iv) changes in our business strategy; (v) changes in technology and market competition that affect utilization of our office, retail, broadcast or other facilities; (vi) changes in domestic or international tourism, including due to health crises such as the COVID-19 pandemic, geopolitical events and/or currency exchange rates, which may cause a decline in Observatory visitors; (vii) defaults on, early terminations of, or non-renewal of, leases by tenants; (viii) increases in the company’s borrowing costs as a result of changes in interest rates and other factors, including the potential phasing out of LIBOR after 2021; (ix) declining real estate valuations and impairment charges; (x) termination or expiration of our ground leases; (xi) changes in our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due and potential limitations on our ability to borrow additional funds in compliance with drawdown conditions and financial covenants; (xii) decreased rental rates or increased vacancy rates; (xiii) our failure to redevelop and reposition properties, or to execute any newly planned capital project successfully or on the anticipated timeline or at the anticipated costs; (xiv) difficulties in identifying properties to acquire and completing acquisitions; (xv) risks related to our development projects (including our Metro Tower development site) and capital projects, including the cost of construction delays and cost overruns; (xvi) impact of changes in governmental regulations, tax laws and rates and similar matters; (xvii) our failure to qualify as a 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 transactions, see the section entitled “Risk Factors” of this Annual Report on Form 10-K. 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 Annual Report on Form 10-K, 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 Unless the context otherwise requires or indicates, references in this section to "our company," "we," "our" and "us" refer to Empire State Realty OP, L.P. and its consolidated subsidiaries. The following discussion and analysis should be read in conjunction with "Selected Financial Data," and our consolidated financial statements as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018 and the notes related thereto which are included in this Annual Report on Form 10-K. 41 2020 Highlights • Net loss attributable to the company was $22.9 million. • Core FFO was $175.4 million. • Signed 104 leases, new, renewal, and expansion leases, representing 923,379 rentable square feet. There were 28 new leases representing 540,643 rentable square feet for the Manhattan office portfolio. This includes approximately 315,000 rentable square feet from deals with existing tenants within the portfolio. • Reduced property operating expenses by $39 million compared to full year 2019, driven by reduced building utilization and the Company's cost reduction initiatives. • Reopened the Empire State Building 86th floor observation deck on July 20, 2020 and the 102nd floor observation deck on August 24, 2020, as one of the earliest tourist attractions in New York City following earlier pandemic driven closure. As of December 31, 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 0.5 million rentable square feet of premier retail space on their ground floor and/or contiguous levels. Our remaining five office properties are located in Fairfield County, Connecticut and Westchester County, New York, encompassing in the aggregate approximately 1.8 million rentable square feet. The majority of square footage for these five properties is located in densely populated metropolitan communities with immediate access to mass transportation. Additionally, we have entitled land at the Stamford Transportation Center in Stamford, Connecticut, adjacent to one of our office properties, that will support the development of an approximately 0.4 million rentable square foot office building and garage, which we refer to herein as Metro Tower. As of December 31, 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 0.2 million rentable square feet in the aggregate. The Empire State Building is our flagship property. The Empire State Building provides us with a diverse source of revenue through its office and retail leases, observatory operations, and broadcasting licenses and related leased space. Our observatory operations are a separate reporting segment. Our observatory operations are subject to regular patterns of tourist activity in Manhattan. Historically, prior to the outbreak of COVID-19, 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. The components of the Empire State Building revenue are as follows (dollars in thousands): Year Ended December 31, 2020 2019 Office leases $ 140,644 64.7 % $ 143,561 43.8 % Retail leases 7,132 3.3 % 7,500 2.3 % Tenant reimbursements, lease termination fees and other income 20,772 9.6 % 31,030 9.6 % Observatory operations 29,057 13.4 % 128,769 39.2 % Broadcasting licenses and leases 19,767 9.0 % 16,847 5.1 % Total $ 217,372 100.0 % $ 327,707 100.0 % 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 42 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. We believe we will continue to enhance our tenant base and improve rents as our pre-redevelopment leases continue to expire and be re-leased. From 2002 through December 31, 2020, we have invested a total of approximately $948.1 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, short term investments and borrowings. During the second quarter 2017, we commenced a multi-year capital project at the Empire State Building, which we completed during the fourth quarter 2019, that we believe improves the convenience for office tenants and their visitors, increases the value of our 34th Street facing retail space, enhances the Observatory visitor experience, and increases Observatory revenue per capita. In the first phase completed in August 2018, we relocated the Observatory entrance, previously located on Fifth Avenue, to a new, larger, dedicated entrance for Observatory visitors at the western side of the Empire State Building on 34th Street. The new entrance eliminates Observatory visitor flow into the Fifth Avenue lobby and streamlines the visitor exit from that lobby, thereby reducing Observatory traffic in the lobby by 50% and improving Fifth Avenue access for our office tenants and their visitors. During the third quarter 2019, we opened the second phase of the project, the new second floor galleries and in the fourth quarter 2019 we completed the final phase, the redevelopment of the 80th floor and opened the newly renovated 102nd floor observatory. We have now completed all phases of this project. Expenditures for the improvement project, which began during the second quarter 2017, were $157.9 million through December 31, 2020. This investment is an example of continually looking at ways to innovate and enhance the office and retail tenant and visitor experience at the Empire State Building. In the Greater New York metropolitan area office market, we compete with properties that have been redeveloped recently or have planned redevelopment. We have spent approximately $36 million over 2018 through 2020 on our well-maintained and well-located properties’ common areas and amenities to ensure competitiveness and protect our market position. As of December 31, 2020, we had total debt outstanding of approximately $2.2 billion, with a weighted average interest rate of 3.91% and a weighted average maturity of 8.2 years and 94.2% of which is fixed-rate indebtedness. Excluding principal amortization, we have no outstanding debt maturing until November 2024. As of December 31, 2020, we had cash and cash equivalents of $526.7 million. Our consolidated net debt to total market capitalization was approximately 37.2% as of December 31, 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. Liquidity During 2020, we bolstered our balance sheet to ensure proper liquidity by raising $480.0 million in net proceeds in three financings. In March 2020, we drew down $550.0 million under our $1.1 billion unsecured revolving facility and in September 2020, we repaid the $550.0 million draw. We currently hold $526.7 million in cash on our balance sheet and have $1.1 billion undrawn capacity under our revolving credit facility. Our revolving credit facility matures in August 2021 and has two six-month extension options, subject to certain conditions. As expected, we have begun a process to evaluate a potential recast or extension of the credit facility. Property Operations All of our office buildings have remained open during the 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. 43 Our operations team worked diligently to develop plans for tenants' reoccupation of 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 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 June 8, 2020, when government restrictions were lifted. Our spend on such capital improvement work in 2020 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. We believe many tenants 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 December 31, 2020, our portfolio was 88.7% leased, including signed leases not yet commenced, including 6.4% subject to leases scheduled to expire in 2021 and 5.5% subject to leases scheduled to expire in 2022. New leasing activity was impacted during 2020 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 had lower leasing volumes for the third and fourth quarters of 2020 based on current tenant activity. Our smaller food and service type retailers have been hit particularly hard. They provide critical amenities and services to our office tenants. In many instances, we have converted some of their fixed rent to a percentage rent structure, with a payback of the difference between current and percentage rent over a defined period. We intend to support our food and service retailers so that they can service our office tenants when they re-occupy. 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 in May 2020, a 60% reduction. 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 New York State's Phase 4 guidelines, Low-Risk Outdoor Arts and Entertainment, on July 20, 2020. The 102nd observation deck was reopened on August 24, 2020. 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 operated with reduced hours, staffing, services, operating costs, credit card fees and marketing expenses. The closure of our observatory caused us during each quarter of 2020 to choose to perform an impairment test related to goodwill. We engaged a third-party valuation consulting firm to perform the valuation process. Based upon the results of the goodwill impairment test of the stand-alone observatory reporting unit, which is after the intercompany rent expense paid to the Real Estate reporting unit, we determined that the fair value of the observatory reporting unit exceeded its carrying value by less than 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 44 the observatory reporting unit goodwill going forward and that continued assessment may again utilize a third-party valuation consulting firm. Goodwill allocated to the observatory reporting unit was $227.5 million at December 31, 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 ("NEO") compensation: ▪ ($0.4) million from reduction in annual base salary for Anthony E. Malkin, our Chairman, President and Chief Executive Officer, and Thomas P. Durels, our Executive Vice President, Real Estate, 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 the COVID-19 pandemic. • 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 ▪ For the year ended December 31, 2020, we reduced property operating expenses by $39 million compared to the prior year period, driven by reduced tenant utilization and our cost reduction initiatives. ▪ $4 million on an annualized basis of permanent cost reductions due to staffing and other reductions. • Observatory expenses ▪ 2020 expenses totaled $24 million, reduced from 2019 pre-COVID level of $34 million. Results of Operations Overview The discussion below relates to the financial condition and results of operations for the years ended December 31, 2020, 2019, and 2018. Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019 The following table summarizes the historical results of operations for the years ended December 31, 2020 and 2019 (amounts in thousands) : 45 Years Ended December 31, 2020 2019 Change % Revenues: Rental revenue $ 563,071 $ 586,414 $ (23,343) (4.0) % Observatory revenue 29,057 128,769 (99,712) (77.4) % Lease termination fees 9,416 4,352 5,064 116.4 % Third-party management and other fees 1,225 1,254 (29) (2.3) % Other revenues and fees 6,459 10,554 (4,095) (38.8) % Total revenues 609,228 731,343 (122,115) (16.7) % Operating expenses: Property operating expenses 136,141 174,977 38,836 22.2 % Ground rent expenses 9,326 9,326 — — % General and administrative expenses 62,244 61,063 (1,181) (1.9) % Observatory expenses 23,723 33,767 10,044 29.7 % Real estate taxes 121,923 115,916 (6,007) (5.2) % Impairment charges 6,204 — (6,204) — % Depreciation and amortization 191,006 181,588 (9,418) (5.2) % Total operating expenses 550,567 576,637 26,070 4.5 % Operating income 58,661 154,706 (96,045) (62.1) % Other income (expense): Interest income 2,637 11,259 (8,622) (76.6) % Interest expense (89,907) (79,246) (10,661) (13.5) % Loss on early extinguishment of debt (86) — (86) — % IPO litigation expense (1,165) — (1,165) — % Income (loss) before income taxes (29,860) 86,719 (116,579) (134.4) % Income tax benefit (expense) 6,971 (2,429) 9,400 387.0 % Net income (loss) (22,889) 84,290 (107,179) (127.2) % Private perpetual preferred unit distributions (4,197) (1,743) (2,454) (140.8) % Net income (loss) attributable to common unit holders $ (27,086) $ 82,547 $ (109,633) (132.8) % Rental Revenue and Tenant Expense Reimbursement We adopted FASB Topic 842 using the modified retrospective approach as of January 1, 2019 and elected to apply the transition provisions of the standard at adoption. As such, the prior period amounts presented under ASC 840 were not restated to conform with the 2020 and 2019 presentation. We adopted the practical expedient in Topic 842, which allowed us to avoid separating lease and non-lease rental income. Consequently, all rental income earned pursuant to tenant leases in 2020 and 2019 is reflected as one category, “Rental Revenue,” in the 2020 and 2019 consolidated statements of operations. The following table reflects the components of 2020 and 2019 rental revenue: Year Ended Year Ended December 31, 2020 December 31, 2019 Rental revenue Base rent $ 498,258 $ 511,136 Tenant expense reimbursement 64,813 75,278 Total rental revenue $ 563,071 $ 586,414 The preceding table of the components of rental revenue is not, and is not intended to be, a presentation in accordance with GAAP. It is provided here based on our understanding that such information is frequently used by management, investors, securities analysts and other interested parties to evaluate our performance. The decrease in rental revenue was attributable to the write-off of straight-line receivables and uncollectible tenant receivables and lower tenant expense reimbursements, consistent with lower property operating expenses. 46 Observatory Revenue Observatory revenues were lower driven by the closure of the Observatory on March 16, 2020 due to the COVID-19 pandemic. The Observatory reopened on July 20, 2020 but New York tourism continues to be impacted by international, national, and local travel restrictions and quarantines. Prior to the closure, 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 year ended December 31, 2020 compared to the year ended December 31, 2019. Third-Party Management and Other Fees Management fee income was consistent with prior year. Other Revenues and Fees The decrease in other revenues and fees was due to lower food and beverage sales and lower parking income due to the COVID-19 pandemic. Property Operating Expenses The decrease in property operating expenses was primarily due to lower repair and maintenance costs, lower payroll costs, lower utility costs and lower professional fees. Ground Rent Expenses The ground rent expense was consistent with 2019. General and Administrative Expenses The increase in general and administrative expenses was primarily due to severance costs and equity compensation expense, 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, lower payroll costs and lower credit card fees and marketing expenses. Real Estate Taxes The increase in real estate taxes was primarily attributable to higher assessed values for multiple properties. Impairment charges 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. Depreciation and Amortization The increase in depreciation and amortization reflects tenant improvement write-offs due to the early termination of a tenant and depreciation expense on additional assets placed in service in 2020. 47 Interest Income The decrease in interest income was primarily due to lower interest rates in the current year and higher short-term investments in the prior year. Interest Expense Interest expense increased due to new financings entered into in 2020 and a draw on our unsecured revolving credit facility. The draw on our credit facility was fully repaid on September 1, 2020. 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. IPO Litigation Expense 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. Income Taxes The increase in income tax benefit was attributable to a net loss for the Observatory segment. Private Perpetual Preferred Unit Distributions Private perpetual preferred unit distributions increased due to dividends paid on a new series of private perpetual preferred units issued by the operating partnership in December 2019 in connection with the settlement of an exchange offer for outstanding traded OP units. Holders of the new series of private perpetual preferred units are entitled to receive cumulative preferential annual cash distributions of $0.70 per units when, as and if declared by the board of the company. Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018 The following table summarizes the historical results of operations for years ended December 31, 2019 and 2018(amounts in thousands): Years Ended December 31, 2019 2018 Change % Revenues: Rental revenue $ 586,414 $ 493,231 $ 93,183 18.9 % Tenant expense reimbursement — 72,372 (72,372) (100.0) % Observatory revenue 128,769 131,227 (2,458) (1.9) % Lease termination fees 4,352 20,847 (16,495) (79.1) % Third-party management and other fees 1,254 1,440 (186) (12.9) % Other revenues and fees 10,554 12,394 (1,840) (14.8) % Total revenues 731,343 731,511 (168) — % Operating expenses: Property operating expenses 174,977 167,379 (7,598) (4.5) % Ground rent expenses 9,326 9,326 — — % General and administrative expenses 61,063 52,674 (8,389) (15.9) % Observatory expenses 33,767 32,767 (1,000) (3.1) % 48 Real estate taxes 115,916 110,000 (5,916) (5.4) % Depreciation and amortization 181,588 168,508 (13,080) (7.8) % Total operating expenses 576,637 540,654 (35,983) (6.7) % Operating income 154,706 190,857 (36,151) (18.9) % Other income (expense): Interest income 11,259 10,661 598 5.6 % Interest expense (79,246) (79,623) 377 0.5 % Loss on early extinguishment of debt — — — — % Loss from derivative financial instruments — — — — % Income before income taxes 86,719 121,895 (35,176) (28.9) % Income tax expense (2,429) (4,642) 2,213 47.7 % Net income 84,290 117,253 (32,963) (28.1) % Private perpetual preferred unit distributions (1,743) (936) (807) 86.2 % Net income attributable to common unitholders $ 82,547 $ 116,317 $ (33,770) (29.0) % Rental Revenue and Tenant Expense Reimbursement We adopted FASB Topic 842 using the modified retrospective approach as of January 1, 2019 and elected to apply the transition provisions of the standard at adoption. As such, the prior period amounts presented under ASC 840 were not restated to conform with the 2019 presentation. We adopted the practical expedient in Topic 842, which allowed us to avoid separating lease and non-lease rental income. Consequently, all rental income earned pursuant to tenant leases in 2019 is reflected as one category, “Rental Revenue,” in the 2019 consolidated statement of income. The following table reflects the components of 2019 rental revenue: Year Ended December 31, 2019 Rental revenue Base rent $ 511,136 Tenant expense reimbursement 75,278 Total rental revenue $ 586,414 We believe the preceding table of the components of rental revenue is not, and is not intended to be, a presentation in accordance with GAAP. It is provided here based on our understanding that such information is frequently used by management, investors, securities analysts and other interested parties to evaluate our performance. The increase in base rent revenue was attributable to increased rental rates, partially offset by decreased broadcasting licenses and holdover rent. The increase in billed tenant expense reimbursement was primarily due to reimbursements related to higher property operating expenses. Observatory Revenue Observatory revenues were lower primarily driven by the closure of the 102nd floor observation deck for approximately nine months in 2019 as part of the Observatory upgrade program and visitor decline, partially offset by improved pricing. Lease Termination Fees The year ended December 31, 2018 included significantly higher lease termination fees, from a combination of broadcast and office tenants, compared to the year ended December 31, 2019. 49 Third-Party Management and Other Fees The decrease reflects lower management fee income due to fewer assets under management. Other Revenues and Fees The decrease in other revenues and fees is primarily due to a $2.8 million settlement with a former broadcast tenant recognized in the year ended December 31, 2018 partially offset by a property tax refund received in the year ended December 31, 2019. Property Operating Expenses The increase in property operating expenses was primarily due to higher repair and labor costs partially offset by lower utility costs. Ground Rent Expenses The ground rent expense was consistent with 2018. General and Administrative Expenses The increase in general and administrative expenses was primarily due to increased equity compensation expenses as well as higher leasing costs which were previously capitalized prior to our adoption of Topic 842, Lease Accounting on January 1, 2019, which requires that non-contingent leasing costs be expensed as incurred. Also contributing to the increase were costs associated with the 2019 private perpetual preferred units exchange offer. Observatory Expenses Observatory expenses increased primarily due to higher information technology consulting fees and higher marketing costs. Real Estate Taxes The increase in real estate taxes was primarily attributable to higher assessed values for multiple properties. Depreciation and Amortization The increase in depreciation and amortization was attributable to additional depreciation on assets newly placed in service during the year as well as the acceleration of depreciation of $2.0 million in connection with a partial termination agreement. Interest Income The increase in interest income was primarily due to higher rates and the timing of short-term time deposits during the year ended December 31, 2019. Interest Expense Interest expense was consistent with 2018. Income Taxes The decrease in income tax expense was attributable to lower revenues and higher operating expenses for the Observatory segment. Private Perpetual Preferred Unit Distributions Private perpetual preferred unit distributions increased due to dividends paid on a new series of private perpetual preferred units issued by the operating partnership in December 2019 in connection with the settlement of an exchange offer for 50 outstanding traded OP units. Holders of the new series of private perpetual preferred units are entitled to receive cumulative preferential annual cash distributions of $0.70 per units when, as and if declared by the board of the company. 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 other general business needs. Based on the historical experience of our management and our business strategy, in the foreseeable future we anticipate we will generate positive cash flows from operations. In order for ESRT to qualify as a REIT, ESRT is required under the Code to 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. 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, short term investments, cash generated from our operating activities, debt issuances and unused borrowing capacity under our unsecured revolving credit and term loan 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 and term loan 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 and term loan 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 December 31, 2020, we had approximately $526.7 million available in cash and cash equivalents and there was $1.1 billion available under our unsecured revolving credit facility. Through August 2021, 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 December 31, 2020, we had approximately $2.2 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 3.91% and a weighted average maturity of 8.2 years. As of December 31, 2020, excluding principal amortization, we had no outstanding debt maturing until November 2024. Our consolidated net debt to total market capitalization was 37.2% as of December 31, 2020. Unsecured Revolving Credit and Term Loan Facilities During March 2020, through the Operating Partnership, 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 in March 2020 which we repaid in September 2020. The amended unsecured revolving credit and term loan facility contains an accordion feature that would allow us to increase the maximum aggregate principal 51 amount to $1.75 billion under specified circumstances. Certain of our Operating Partnership's 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 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. As expected, we have begun a process to evaluate a potential recast or extension of the credit facility . 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, through the Operating Partnership, 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 the Operating Partnership's 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 52 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 also contain customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, invalidity of loan documents, loss of real estate investment trust qualification, and occurrence of a change of control (as defined in the respective Credit Facilities). As of December 31, 2020, we were in compliance with the covenants, as described below: Financial Covenant Required December 31, 2020 In Compliance Maximum total leverage < 60% 35.3 % Yes Maximum secured debt < 40% 12.8 % Yes Minimum fixed charge coverage > 1.50x 2.8x Yes Minimum unencumbered interest coverage > 1.75x 5.8x Yes Maximum unsecured leverage < 60% 26.8 % Yes Mortgage Debt During November 2020, we closed on a $180.0 million mortgage loan for 250 West 57th Street. This new interest-only loan bears a fixed rate of 2.83% and matures in December 2030. As of December 31, 2020, total mortgage notes payable, net, amounted to $775.9 million. The first maturity is in 2024. E xchangeable Senior Notes During August 2019, we settled the $250.0 million principal amount of the 2.625% Exchangeable Senior Notes in cash. Se e Note 4 to our consolidated financial statements. Senior Unsecured Notes Series A, B, C, D, E, F, G and H Senior Notes (collectively, "Senior Unsecured Notes") are senior unsecured obligations with an aggregate principal amount of $975.0 million maturing on various dates from 2025 to 2035. These Senior Unsecured Notes 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 Senior Unsecured Notes include customary covenants, including limitations on liens, investment, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. These terms also require compliance with financial ratios including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a minimum unencumbered interest coverage ratio, and a maximum unsecured leverage ratio. The 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 December 31, 2020, we were in compliance with the covenants under the outstanding Senior Unsecured Notes. 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 has not adopted a policy that limits the total amount of indebtedness that we may incur, we anticipate that ESRT's board 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 53 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 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 tenant improvement costs, leasing commission costs and our capital expenditures for each of the periods presented (dollars in thousands, except per square foot amounts). Office Properties (1) Years Ended December 31, Total New Leases, Expansions, and Renewals 2020 2019 2018 Number of leases signed (2) 90 152 149 Total square feet 854,068 1,216,037 991,576 Leasing commission costs (3) $ 9,969 $ 21,227 $ 19,523 Tenant improvement costs (3) 32,896 70,643 69,886 Total leasing commissions and tenant improvement costs (3) $ 42,865 $ 91,870 $ 89,409 Leasing commission costs per square foot (3) $ 11.67 $ 17.46 $ 19.69 Tenant improvement costs per square foot (3) 38.52 58.09 70.48 Total leasing commissions and tenant improvement costs per square foot (3) $ 50.19 $ 75.55 $ 90.17 Retail Properties (4) Years Ended December 31, Total New Leases, Expansions, and Renewals 2020 2019 2018 Number of leases signed (2) 14 9 7 Total Square Feet 69,311 87,538 12,230 Leasing commission costs (3) $ 2,239 $ 3,557 $ 331 Tenant improvement costs (3) 7,575 3,337 559 Total leasing commissions and tenant improvement costs (3) $ 9,814 $ 6,894 $ 890 Leasing commission costs per square foot (3) $ 32.31 $ 40.71 $ 27.08 Tenant improvement costs per square foot (3) 109.29 38.20 45.71 Total leasing commissions and tenant improvement costs per square foot (3) $ 141.60 $ 78.91 $ 72.79 _______________ (1) Excludes an aggregate of 504,284, 511,984 and 513,606 rentable square feet of retail space in our Manhattan office properties in 2020, 2019 and 2018, respectively. Includes the Empire State Building broadcasting licenses and observatory operations. (2) Presents a renewed and expansion lease as one lease signed. (3) Presents all tenant improvement and leasing commission costs as if they were incurred in the period in which the lease was signed, which may be different than the period in which they were actually paid. (4) Includes an aggregate of 504,284, 511,984 and 513,606 rentable square feet of retail space in our Manhattan office properties in 2020, 2019 and 2018, respectively. Excludes the Empire State Building broadcasting licenses and observatory operations. Years Ended December 31, 2020 2019 2018 Total Portfolio Capital expenditures (1) $ 43,022 $ 138,560 $ 135,017 _______________ (1) Includes all capital expenditures, excluding tenant improvements and leasing commission costs, which are primarily attributable to the redevelopment and repositioning program conducted at our Manhattan office properties. As of December 31, 2020, we expect to incur additional costs relating to obligations under signed new leases of approximately $121.9 million for tenant improvements and leasing commissions. We intend to fund the tenant improvements 54 and leasing commission costs through a combination of operating cash flow, cash on hand, short term investments and borrowings under the unsecured revolving credit and term loan facilities. Capital expenditures are considered part of both our short-term and long-term liquidity requirements. We intend to fund the capital improvements to complete the redevelopment and repositioning program through a combination of operating cash flow, cash on hand, short term investments and borrowings under the unsecured revolving credit and term loan facilities. Contractual Obligations The following table summarizes the amounts due in connection with our contractual obligations described below for the years ending December 31, 2021 through 2025 and thereafter (amounts in thousands). Years Ending December 31, 2021 2022 2023 2024 2025 Thereafter Total Mortgages and other debt (1) Interest expense $ 80,772 $ 78,559 $ 74,164 $ 73,595 $ 67,695 $ 282,248 $ 657,033 Amortization 4,090 5,628 7,876 7,958 5,826 20,084 51,462 Principal repayment — — — 77,675 315,000 1,707,747 2,100,422 Ground lease 1,518 1,518 1,518 1,518 1,518 65,262 72,852 Tenant improvement and leasing commission costs 77,569 19,641 8,263 5,477 5,477 5,476 121,903 Total (2) $ 163,949 $ 105,346 $ 91,821 $ 166,223 $ 395,516 $ 2,080,817 $ 3,003,672 _______________ (1) Assumes no extension options are exercised. (2) Does not include various standing or renewal service contracts with vendors related to our property management. Off-Balance Sheet Arrangements As of December 31, 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 taxable 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, 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 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. We and our board continue to prioritize balance sheet flexibility and the maximization of our operating runway amidst an uncertain environment. During August 2020, we announced the suspension of our third and fourth quarter 2020 dividends to holders of ESRT's Class A common stock and Class B common stock and to holders of our Series ES, Series 250 and Series 60 operating partnership units and Series PR operating partnership units. During December 2020, we announced the continued dividend suspension for the first and second quarters of 2021. Distribution to Equity Holders Distributions and dividends have been made to equity holders in 2018, 2019 and 2020 as follows (amounts in thousands): 55 Year ended December 31, 2018 126,539 Year ended December 31, 2019 127,761 Year ended December 31, 2020 65,047 Stock and Publicly Traded Operating Partnership Unit Repurchase Program ESRT's board reauthorized the repurchase of up to $500 million of its Class A common stock and our Series ES, Series 250 and Series 60 operating partnership units through December 31, 2021. Under the program, ESRT may purchase its Class A common stock and 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 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 for the year ended December 31, 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) Year ended December 31, 2020 17,279,252 $ 8.32 17,279,252 $ 356,287 Cash Flows Comparison of Year Ended December 31, 2020 to the Year Ended December 31, 2019 Net cash . Cash and cash equivalents and restricted cash were $567.9 million and $271.6 million as of December 31, 2020 and 2019, respectively. The increase was primarily due to the issuance of financings, partially offset by the repurchase of common stock during the year ended December 31, 2020. Operating activities . Net cash provided by operating activities decreased by $50.3 million to $182.3 million for the year ended December 31, 2020 compared to $232.6 million for the year ended December 31, 2019 primarily due to lower observatory revenues and the settlement of a derivative contract, offset by lower operating expenses. Investing activities . Net cash from investing activities decreased by $292.8 million to $143.1 million used in investing activities for the year ended December 31, 2020 compared to $149.7 million net cash provided by investing activities for the year ended December 31, 2019 due to proceeds from maturing short-term time deposits in the year ended December 31, 2019 and lower spending on building and improvements due to COVID-19. Financing activities . Net cash from financing activities increased by $638.7 million to $257.2 million provided by financing activities for the year ended December 31, 2020 compared to $381.5 million used in financing activities for the year ended December 31, 2019, primarily due to the net proceeds from issuance of debt in the year ended December 31, 2020 compared to the payment of debt in the year ended December 31, 2019. Comparison of Year Ended December 31, 2019 to the Year Ended December 31, 2018 Net cash . Cash and cash equivalents and restricted cash were $271.6 million and $270.8 million as of December 31, 2019 and 2018, respectively. During the year ended December 31, 2019, the maturity of investments in short-term time deposits was largely offset by capital improvements and expenditures and the repayment of our exchangeable unsecured senior notes resulting in approximately the same balances for cash and cash equivalents and restricted cash at the end of 2019 when compared to 2018. Operating activities . Net cash provided by operating activities decreased by $46.5 million to $232.6 million for the year ended December 31, 2019 compared to $279.0 million for the year ended December 31, 2018 primarily attributable to the return of security deposits to various tenants and to the settlement of a derivative contract. Investing activities . Net cash provided by investing activities increased by $792.7 million to $149.7 million provided by investing activities for the year ended December 31, 2019 compared to $643.0 million net cash used in investing activities 56 for the year ended December 31, 2018 due to proceeds from maturing short-term time deposits, partially offset by increased expenditures for additions to building and improvements in the year ended December 31, 2019. Financing activities . Net cash provided by financing activities decreased by $486.1 million to $381.5 million used in financing activities for the year ended December 31, 2019 compared to $104.6 million provided by financing activities for the year ended December 31, 2018 due to the repayment of our exchangeable unsecured senior notes in 2019. Additionally, the net proceeds from issuance of debt was higher in 2018 compared to 2019. Net Operating Income Our financial reports include a discussion of property net operating income, or NOI. NOI is a non-GAAP financial measure of performance. NOI is used by our management to evaluate and compare the performance of our properties and to determine trends in earnings and to compute the fair value of our properties as it is not affected by: (i) the cost of funds of the property owner, (ii) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP, (iii) acquisition expenses, loss on early extinguishment of debt and loss from derivative financial instruments, or (iv) general and administrative expenses and other gains and losses that are specific to the property owner. The cost of funds is eliminated from NOI because it is specific to the particular financing capabilities and constraints of the owner and because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital which may have changed or may change in the future. Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our office or retail properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale which will usually change from period to period. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly-timed purchases or sales. We believe that eliminating these costs from net income is useful because the resulting measure captures the actual revenue, generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs. However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, depreciation and amortization expense and gains or losses from the sale of properties, and other gains and losses as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net income which further limits its usefulness. NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income computed in accordance with GAAP and discussions elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding the components of net income that are eliminated in the calculation of NOI. Other companies may use different methods for calculating NOI or similarly titled measures and, accordingly, our NOI may not be comparable to similarly titled measures reported by other companies that do not define the measure exactly as we do. 57 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): Years Ended December 31, 2020 2019 2018 Net income (loss) $ (22,889) $ 84,290 $ 117,253 Add: General and administrative expenses 62,244 61,063 52,674 Depreciation and amortization 191,006 181,588 168,508 Interest expense 89,907 79,246 79,623 Loss on early extinguishment of debt 86 — — Income tax expense (benefit) (6,971) 2,429 4,642 Impairment charges 5,360 — — IPO litigation expense 1,165 — — Less: Interest income (2,637) (11,259) (10,661) Third-party management and other fees (1,225) (1,254) (1,440) Net operating income $ 316,046 $ 396,103 $ 410,599 Other Net Operating Income Data Straight line rental revenue $ 5,238 $ 20,057 $ 22,107 Net increase in rental revenue from the amortization of above and below-market lease assets and liabilities $ 3,627 $ 7,311 $ 6,120 Amortization of acquired below-market ground leases $ 7,831 $ 7,831 $ 7,831 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 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 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 58 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 following our formation transactions as they carry significantly below market ground leases, the amortization of which is material to our overall results. We present Modified FFO because we consider it an important supplemental measure of our operating performance in that it adds back the non-cash amortization of below-market ground leases. There can be no assurance that Modified FFO presented by us is comparable to similarly titled measures of other REITs. Modified FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Modified FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. Core Funds From Operations ("Core FFO") Core FFO adds back to Modified FFO the following items: IPO litigation expense, severance expenses and loss on early extinguishment of debt.. The company presents Core FFO because it considers it an important supplemental measure of its operating performance in that it excludes items associated with its IPO and formation transactions and other non-recurring items. There can be no assurance that Core FFO presented by the company is comparable to similarly titled measures of other REITs. Core FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Core FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. In future periods, we may also exclude other items from Core FFO that we believe may help investors compare our results. The following table presents a reconciliation of net income, the most directly comparable GAAP measure, to FFO, Modified FFO and Core FFO for the periods presented (amounts in thousands): Years Ended December 31, 2020 2019 2018 Net income (loss) $ (22,889) $ 84,290 $ 117,253 Private perpetual preferred unit distributions (4,197) (1,743) (936) Real estate depreciation and amortization 184,245 177,515 166,292 Impairment charges 5,360 — — Funds from operations attributable to common stockholders and non-controlled interests 162,519 260,062 282,609 Amortization of below-market ground leases 7,831 7,831 7,831 Modified funds from operations attributable to common stockholders and non-controlled interests 170,350 267,893 290,440 Loss on early extinguishment of debt 86 — — Severance expenses 3,813 — — IPO litigation expense 1,165 — — Core funds from operations attributable to common stockholders and non-controlled interests $ 175,414 $ 267,893 $ 290,440 Weighted average Operating Partnership units Basic 283,826 297,798 297,258 Diluted 283,837 297,798 297,259 Factors That May Influence Future Results of Operations Impact of COVID-19 See "Overview" section. 59 Rental Revenue We derive revenues primarily from rents, rent escalations, expense reimbursements and other income received from tenants under existing leases at each of our properties. “Escalations and expense reimbursements” consist of payments made by tenants to us under contractual lease obligations to reimburse a portion of the property operating expenses and real estate taxes incurred at each property. We believe that the average rental rates for in-place leases at our properties are generally below the current market rates, although individual leases at particular properties presently may be leased above, at or below the current market rates within its particular submarket. The amount of net rental income and reimbursements that we receive depends principally on our ability to lease currently available space, re-lease space to new tenants upon the scheduled or unscheduled termination of leases or renew expiring leases and to maintain or increase our rental rates. Factors that could affect our rental incomes include, but are not limited to: local, regional or national economic conditions; an oversupply of, or a reduction in demand for, office or retail space; changes in market rental rates; our ability to provide adequate services and maintenance at our properties; and fluctuations in interest rates, all of which could adversely affect our rental income in future periods. Future economic or regional downturns affecting our submarkets, or downturns in our tenants’ industries, could impair our ability to lease vacant space and renew or re-lease space as well as the ability of our tenants to fulfill their lease commitments, and could adversely affect our ability to maintain or increase the occupancy at our properties. Tenant Credit Risk The economic condition of our tenants may also deteriorate, which could negatively impact their ability to fulfill their lease commitments and in turn adversely affect our ability to maintain or increase the occupancy level and/or rental rates of our properties. Potential tenants may look to consolidate, reduce overhead and preserve operating capital and may also defer strategic decisions, including entering into new, long-term leases at properties. Leasing We signed 0.9 million, 1.3 million, and 1.0 million rentable square feet of new leases, expansions and lease renewals, for the years ended December 31, 2020, 2019, and 2018, respectively. Due to the relatively small number of leases that are signed in any particular quarter, one or more larger leases may have a disproportionately positive or negative impact on average rent, tenant improvement and leasing commission costs for that period. As a result, we believe it is more appropriate when analyzing trends in average rent and tenant improvement and leasing commission costs to review activity over multiple quarters or years. Tenant improvement costs include expenditures for general improvements occurring concurrently with, but that are not directly related to, the cost of installing a new tenant. Leasing commission costs are similarly subject to significant fluctuations depending upon the length of leases being signed and the mix of tenants from quarter to quarter. As of December 31, 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 11.3% of the net rentable square footage of the properties in our portfolio. In addition, leases representing 6.4% and 5.5% of net rentable square footage of the properties in our portfolio will expire in 2021 and in 2022, respectively. These leases are expected to represent approximately 6.8% and 6.5%, 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, including aggregating smaller spaces to offer large blocks of space, we may experience lower occupancy levels as a result of having to relocate tenants to alternative space and the strategic expiration of existing leases. We believe that despite the short-term lower occupancy levels we may experience, we will continue to experience increased rental revenues as a result of the increased rents which we expect to obtain following the redevelopment and repositioning of our properties. Market Conditions 60 The properties in our portfolio are located in Manhattan and the greater New York metropolitan area, which includes Fairfield County, Connecticut and Westchester County, New York. Positive or negative changes in conditions in these markets, such as business hirings or layoffs or downsizing, industry growth or slowdowns, relocations of businesses, increases or decreases in real estate and other taxes, costs of complying with governmental regulations or changed regulation, can impact our overall performance. Observatory and Broadcasting Operations On March 16, 2020, we complied with governmental mandates regarding the closing of non-essential businesses in response to the COVID-19 pandemic and closed the Empire State Building Observatory. The Observatory was closed for the entirety of the second quarter 2020 and reopened the 86th floor observation deck on July 20, 2020 with new protocols and processes under New York State's Phase 4's Low-Risk Outdoor Arts and Entertainment guidelines. The 102nd floor observation deck reopened on August 24, 2020. Observatory revenue for the first two months of 2020 increased by 13.2%, after adjusting for the 102nd floor observation deck, which was closed for redevelopment in first quarter 2019 and re-opened in the fourth quarter 2019. For the year ended December 31, 2020, the Observatory hosted 507,000 visitors, compared to 3,505,000 visitors for the same period in 2019, a decrease of 85.6%. Against the backdrop of international, national and local travel restrictions, quarantines and a nationwide pandemic surge, the Observatory has seen steady, weekly increases in visitors. Our return of attendance to pre-COVID-19 levels is closely tied to national and international travel trends and these remain adversely impacted by developments around the COVID-19 pandemic. Observatory revenue for the year ended December 31, 2020 was $29.1 million, a 77.4% decrease from $128.8 million for the year ended December 31, 2019. The Observatory revenue decline was driven by low visitation levels and less days of operation during the year due to COVID-19. Observatory revenue 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. We license the use of the Empire State Building mast to third party television and radio broadcasters and providers of data communications. We also lease space in the upper floors of the building to such licensees to house their transmission equipment and related facilities. During the year ended December 31, 2020, we derived $13.5 million of revenue and $6.3 million of expense reimbursements from the Empire State Building’s broadcasting licenses and related leases. Operating Expenses Our operating expenses generally consist of depreciation and amortization, real estate taxes, ground lease expenses, repairs and maintenance, security, utilities, property-related payroll, and insurance. Factors that may affect our ability to control these operating costs include: increases in insurance premiums, tax rates, the cost of periodic repair, redevelopment costs and the cost of re-leasing space, the cost of compliance with governmental regulation, including zoning and tax laws, the potential for liability under applicable laws and interest rate levels. If our operating costs increase as a result of any of the foregoing factors, our future cash flow and results of operations may be adversely affected. The expenses of owning and operating a property are not necessarily reduced when circumstances, such as market factors and competition, cause a reduction in income from the property. If revenues drop, we may not be able to reduce our expenses accordingly. Costs associated with real estate investments, such as real estate taxes and maintenance generally, will not be materially reduced even if a property is not fully occupied or other circumstances cause our revenues to decrease. As a result, if revenues decrease in the future, static operating costs may adversely affect our future cash flow and results of operations. If similar economic conditions exist in the future, we may experience future losses. Cost of Funds and Interest Rates As of December 31, 2020, our variable rate debt was $125.0 million which represented 5.8% of our total indebtedness and 2.6% of our total enterprise value. Our variable rate debt may increase to the extent we use available borrowing capacity from our unsecured credit facility to fund capital improvements. Competition 61 The leasing of real estate is highly competitive in Manhattan and the greater New York metropolitan market in which we operate. We compete with numerous acquirers, developers, owners and operators of commercial real estate, many of which own or may seek to acquire or develop properties similar to ours in the same markets in which our properties are located. The principal means of competition are rent charged, location, services provided and the nature and condition of the facility to be leased. In addition, we face competition from other real estate companies including other REITs, private real estate funds, domestic and foreign financial institutions, life insurance companies, pension trusts, partnerships, individual investors and others that may have greater financial resources or access to capital than we do or that are willing to acquire properties in transactions which are more highly leveraged or are less attractive from a financial viewpoint than we are willing to pursue. In addition, competition from new and existing observatories and/or broadcasting operations could have a negative impact on revenues from our observatory and/or broadcasting operations. Adverse impacts on domestic travel and changes in foreign currency exchange rates may also decrease demand in the future, which could have a material adverse effect on our results of operations. If our competitors offer space at rental rates below current market rates, below the rental rates we currently charge our tenants, in better locations within our markets or in higher quality facilities, we may lose potential tenants and may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when our tenants’ leases expire. Critical Accounting Estimates Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements have been prepared in conformity with GAAP and with the rules and regulations of the SEC represent our assets and liabilities and operating results. The consolidated financial statements include our accounts and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 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 consider factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity (“VIE”) and we are 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 December 31, 2020 and 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 consolidated balance sheets and in the consolidated statements of income by requiring earnings and other comprehensive income to be attributed to controlling and non-controlling interests. Goodwill Goodwill is tested annually for impairment and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount, including goodwill, exceeds the reporting unit’s fair value and the implied fair value of goodwill is less than the carrying amount of that goodwill. Non-amortizing intangible assets, such as trade names and trademarks, are subject to an annual impairment test based on fair value and amortizing intangible assets are tested whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In compliance with the requirements of authorities, we closed the Empire State Building Observatory on March 16, 2020 due to the COVID-19 pandemic and it remained closed until the 86th floor observation deck was reopened on July 20, 2020. The 102nd observation deck was reopened on August 24, 2020. The closure of our Observatory and subsequent 62 reopening under international, national, and local travel restrictions and quarantines caused us during the quarter to choose to perform an impairment test related to goodwill. We engaged a third-party valuation consulting firm to perform the valuation process. The analysis used a combination of the discounted cash flow method (a form of the income approach) utilizing Level 3 unobservable inputs and the guideline company method (a form of the market approach). Significant assumptions under the former included revenue and cost projections, weighted average cost of capital, long-term growth rate and income tax considerations while the latter included guideline company enterprise values, revenue multiples and control premium rates. Our methodology to review goodwill impairment, which included a significant amount of judgment and estimates, provided a reasonable basis to determine whether impairment had occurred. Based upon the results of the goodwill impairment test of the stand-alone Observatory reporting unit, which is after the intercompany rent expense paid to the Real Estate reporting unit, we determined that the fair value of the Observatory reporting unit exceeded its carrying value by less than 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 the Observatory reporting unit goodwill going forward and that continued assessment may again utilize a third-party valuation consulting firm. Income Taxes We are generally not subject to federal and state income taxes as our taxable income or loss is reportable by our partners. Accordingly, no provision has been made for federal and state income taxes. ESRT elected, together with ESRT Observatory TRS, L.L.C., our subsidiary which holds our observatory operations, to treat ESRT Observatory TRS, L.L.C. as a taxable REIT subsidiary ("TRS"), and ESRT has elected, together with ESRT Holdings TRS, L.L.C., our subsidiary that holds our third party management, construction (through cessation of our construction business in the first quarter of 2015), restaurant, cafeteria, health clubs and certain cleaning operations, to treat ESRT Holdings TRS, L.L.C. as a TRS. TRSs may participate in non-real estate activities and/or perform non-customary services for tenants and their operations are generally subject to regular corporate income taxes. Each of our TRSs account for their income taxes in accordance with GAAP, which includes an estimate of the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. The calculation of the TRSs tax provisions may require interpreting tax laws and regulations and could result in the use of judgments or estimates which could cause its recorded tax liability to differ from the actual amount due. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The TRSs periodically assess the realizability of deferred tax assets and the adequacy of deferred tax liabilities, including the results of local, state, or federal tax audits or estimates and judgments used. As of December 31, 2020, our parent and general partner, Empire State Realty Trust, Inc., had $67.9 million of net operating loss ("NOL") carryforwards that may be used in the future to reduce the amount otherwise required to be distributed by ESRT to meet REIT requirements. However, for federal income tax purposes, the NOL will not be able to offset more than 80% of ESRT’s REIT taxable income and, therefore, may not be able to reduce the amount required to be distributed by ESRT to meet REIT requirements to zero, except for the tax year ended December 31, 2020, of which ESRT was able to offset 100% of its taxable income in accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The federal NOL may be carried forward indefinitely. Other limitations may apply to ESRT’s ability to use its NOL to offset taxable income. As of December 31, 2020, the Observatory TRS had a federal, state, and local income tax receivable of $8.1 million due to a NOL for the year ended December 31, 2020. Under special provisions of the CARES Act, the NOL can be carried back five years for federal income tax purposes. Due to limitations on the use of net operating loss carrybacks for state and local tax, the Observatory TRS will carry forward $3.8 million of NOL to offset future taxable income, if any. The state and local NOL can be carried forward for up to 20 years. We apply provisions for measuring and recognizing tax benefits associated with uncertain income tax positions. Penalties and interest, if incurred, would be recorded as a component of income tax expense. As of December 31, 2020 and 2019, we do not have a liability for uncertain tax positions. As of December 31, 2020, the tax years ended December 31, 2017 through December 31, 2020 remain open for an audit by the Internal Revenue Service, state or local authorities. Share-Based Compensation 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 the stated vesting period, which is generally three or four years, depending on retirement eligibility. 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. The determination of fair value of these awards is subjective and involves significant estimates and assumptions including expected volatility of ESRT stock, expected dividend yield, expected term, and 63 assumptions of whether these awards will achieve parity with other operating partnership units or achieve performance thresholds. We believe that the assumptions and estimates utilized are appropriate based on the information available to management at the time of grant. 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, repositioning and disposition of our real estate assets. Our observatory segment operates 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 different marketing strategies. We account for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. For more information about our segments, refer to “Financial Statements-Note 12-Segment Reporting” in this Annual Report on Form 10-K. Accounting Standards Update Reference is made to Note 2 in the accompanying consolidated financial statements for information about recently issued and recently adopted accounting standards.