What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-05 · 103 added, 330 removed, 259 unchanged (63% of the section changed)

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The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

(i) economic, political and social impact of, and uncertainty relating to, the COVID-19 pandemic;

(ii) resolution of legal proceedings involving the Company;

(iii) reduced demand for office or retail space, including as a result of the COVID-19 pandemic;

(iv) changes in our business strategy;

(v) changes in technology and market competition that affect utilization of our office, retail, broadcast or other facilities;

(vi) changes in domestic or international tourism, including due to health crises such as the COVID-19 pandemic, geopolitical events and/or currency exchange rates, which may cause a decline in Observatory visitors;

(vii) defaults on, early terminations of, or non-renewal of, leases by tenants;

(viii) increases in the Company’s borrowing costs as a result of changes in interest rates and other factors, including the potential phasing out of LIBOR after 2021;

(ix) declining real estate valuations and impairment charges;

(x) termination or expiration of our ground leases;

(xi) changes in our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due and potential limitations on our ability to borrow additional funds in compliance with drawdown conditions and financial covenants;

(xii) decreased rental rates or increased vacancy rates;

(xiii) our failure to redevelop and reposition properties, or to execute any newly planned capital project successfully or on the anticipated timeline or at the anticipated costs;

(xiv) difficulties in identifying properties to acquire and completing acquisitions;

(xv) risks related to our development projects (including our Metro Tower development site) and capital projects, including the cost of construction delays and cost overruns;

(xvi) impact of changes in governmental regulations, tax laws and rates and similar matters;

(xvii) our failure to qualify as a real estate investment trust ("REIT");

(xviii) environmental uncertainties and risks related to adverse weather conditions, rising sea levels and natural disasters, and (xix) the accuracy of our methodologies and estimates regarding ESG metrics, goals and targets, tenant willingness and ability to collaborate towards reporting ESG metrics and meeting ESG goals and targets, and the impact of governmental regulation on our ESG efforts.

For a further discussion of these and other factors that could impact the Company's future results, performance or transactions, see the section entitled “Risk Factors” in the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021, and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and other risks described in documents subsequently filed by the Company from time to time with the Securities and Exchange Commission.

(i) economic, market, political and social impact of, and uncertainty relating to, the COVID-19 pandemic;

(ii) a failure of conditions or performance regarding any event or transaction described herein, (iii) resolution of legal proceedings involving the Company;

(iv) reduced demand for office, multifamily or retail space, including as a result of the COVID-19 pandemic and/or hybrid work schedules which allow work from remote locations other than the employer's office premises;

(v) changes in our business strategy;

(vi) changes in technology and market competition that affect utilization of our office, retail, broadcast or other facilities;

(vii) changes in domestic or international tourism, including due to health crises such as the COVID-19 pandemic, geopolitical events, including global hostilities, currency exchange rates, and/or competition from recently opened observatories in New York City, any or all of which may cause a decline in observatory visitors;

(viii) defaults on, early terminations of, or non-renewal of, leases by tenants;

(ix) increases in the Company’s borrowing costs as a result of changes in interest rates and other factors, including the phasing out of LIBOR after 2021;

(x) declining real estate valuations and impairment charges;

(xi) termination of our ground leases;

(xii) 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;

(xiii) decreased rental rates or increased vacancy rates;

(xiv) our failure to execute any newly planned capital project successfully or on the anticipated timeline or at the anticipated costs;

(xv) difficulties in identifying and completing acquisitions;

(xvi) risks related to our development projects (including our Metro Tower development site);

(xvii) impact of changes in governmental regulations, tax laws and rates and similar matters;

(xviii) our failure to qualify as a REIT;

(xix) environmental uncertainties and risks related to climate change, adverse weather conditions, rising sea levels and natural disasters;

and (xx) accuracy of our methodologies and estimates regarding ESG metrics and goals, tenant willingness and ability to collaborate in reporting ESG metrics and meeting ESG goals, and the impact of governmental regulation on our ESG efforts.

For a further discussion of these and other factors that could impact the Company's future results, performance or transactions, see the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q, and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and other risks described in documents subsequently filed by the Company from time to time with the Securities and Exchange Commission.

While forward-looking statements reflect the Company's good faith beliefs, they are not guarantees of future performance.

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Empire State Realty OP, L.P.

is the entity through which Empire State Realty Trust, Inc.

(“ESRT”), a self-administered and self-managed REIT, conducts all of its business and owns (either directly or through subsidiaries) substantially all of its assets.

We own, manage, operate, acquire and reposition office and retail properties in Manhattan and the greater New York metropolitan area.

Highlights for the three months ended September 30, 2021 included:

is the entity through which ESRT, a self-administered and self-managed REIT, conducts all of its business and owns (either directly or through subsidiaries) substantially all of its assets.

We own and manage a well-positioned property portfolio of office, retail and multifamily assets in Manhattan and the greater New York metropolitan area.

As the owner of the Empire State Building, the World’s Most Famous Building, ESRT also owns and operates its iconic, newly reimagined Observatory Experience.

Highlights for the three months ended March 31, 2022

• Incurred net loss of $18.2 million and achieved Core Funds From Operations ("Core FFO") of $49.2 million.

• Same-Store Property Cash Net Operating Income, excluding lease termination fees, was down 5.7% from the third quarter of 2020 primarily driven by a reduction in revenues due to reduced occupancy, third quarter 2021 revenue from Global Brands Group treated partially as rental revenue and partially as lease termination income and write-offs taken over the one-year period.

• Empire State Building Observatory revenue for the third quarter 2021 increased to $12.8 million, from $8.4 million in the second quarter 2021 as visitation continued to ramp up.

Observatory net operating income was $6.4 million for the third quarter 2021, which is the second consecutive quarter of positive NOI since the onset of the COVID-19 pandemic and more than double second quarter earnings contribution.

• Realized lease termination fees were $11.3 million.

In keeping with historical practice, we include lease termination fees when calculating FFO and Core FFO.

• Signed 34 new, renewal, and expansion leases, representing a total of 268,055 rentable square feet.

This includes 21 leases totaling 212,301 rentable square feet in the Manhattan office portfolio.

• Collected 95% of third quarter 2021 total billings, stable and in line with recent quarters.

• In the third quarter and through October 26, 2021, the Company repurchased $6.5 million of its common stock at a weighted average price of $10.41 per share.

This brings the cumulative total, since the stock repurchase program began on March 5, 2020 through October 26, 2021, to $153.8 million at a weighted average price of $8.41 per share.

As of September 30, 2021, our total portfolio contained 10.1 million rentable square feet of office and retail space.

We owned 14 office properties (including three long-term ground leasehold interests) encompassing approximately 9.4 million rentable square feet of office space.

Nine of these properties are located in the midtown Manhattan market and aggregate approximately 7.6 million rentable square feet of office space, including the Empire State Building.

Our Manhattan office properties also contain an aggregate of approximately 0.5 million rentable square feet of premier retail space on their ground floor and/or contiguous levels.

Our remaining five office properties are located in Fairfield County, Connecticut and Westchester County, New York, encompassing in the aggregate approximately 1.8 million rentable square feet.

The majority of square footage for these five properties is located in densely populated metropolitan communities with immediate access to mass transportation.

Additionally, we have entitled land at the Stamford Transportation Center in Stamford, Connecticut, adjacent to one of our office properties, that will support the development of an approximately 0.4 million rentable square foot office building and garage.

Our portfolio includes four standalone retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut, encompassing approximately 0.2 million rentable square feet in the aggregate.

The Empire State Building is our flagship property.

The Empire State Building provides us with a diverse source of revenue through its office and retail leases, observatory operations and broadcasting licenses and related leased space.

Our observatory operations are a separate reporting segment.

Our observatory operations are subject to regular patterns of tourist activity in Manhattan and currently impacted by the COVID-19 pandemic.

Historically, prior to the outbreak of the COVID-19 pandemic, approximately 16.0% to 18.0% of our annual observatory revenue was realized in the first quarter, 26.0% to 28.0% was realized in the second quarter, 31.0% to 33.0% was realized in the third quarter, and 23.0% to 25.0% was realized in the fourth quarter.

On March 16, 2020, we complied with governmental mandates regarding the closing of non-essential businesses in response to the COVID-19 pandemic and closed the Empire State Building Observatory.

The Observatory reopened on July 20, 2020.

The components of the Empire State Building revenue are as follows (dollars in thousands):

Nine Months Ended September 30,

Office leases $ 105,369 61.8 % $ 106,774 63.9 %

Retail leases 5,138 3.0 % 5,177 3.1 %

Tenant reimbursements & other income 21,806 12.8 % 16,358 9.8 %

Observatory operations 23,758 13.9 % 24,049 14.4 %

Broadcasting licenses and leases 14,648 8.5 % 14,793 8.8 %

Total $ 170,719 100.0 % $ 167,151 100.0 %

We have undertaken a comprehensive redevelopment and repositioning strategy of our Manhattan office properties.

This strategy is designed to improve the overall value and attractiveness of our properties and has contributed significantly to our tenant repositioning efforts, which seek to increase our occupancy, raise our rental rates, increase our rentable square feet, increase our aggregate rental revenue, lengthen our average lease term, increase our average lease size, and improve our tenant credit quality.

These improvements include restored, renovated and upgraded or new lobbies, elevator modernization, renovated public areas and bathrooms, refurbished or new windows, upgrade and standardization of retail storefront and signage, façade restorations, modernization of building-wide systems, and enhanced tenant amenities.

We have also aggregated smaller spaces in order to offer larger blocks of office space, including multiple floors, that are attractive to larger, higher credit-quality tenants as well as to offer new, pre-built suites with improved layouts.

This strategy has shown what we believe to be attractive results to date, and we believe has the potential to improve our operating margins and cash flows in the future.

From 2002 through September 30, 2021, we have invested a total of approximately $959.7 million (excluding tenant improvement costs and leasing commissions) in our Manhattan office properties pursuant to this program.

We intend to fund capital improvements through a combination of operating cash flow, cash on hand, and borrowings.

The Greater New York Metropolitan Area office market is soft, and we compete with properties that have been redeveloped recently or have planned redevelopment.

We have spent approximately $39.3 million over 2018 through 2021 on these well-maintained and our well-located properties’ common areas and amenities to ensure competitiveness and protect our market position.

As of September 30, 2021, we had total debt outstanding of approximately $2.1 billion, with a weighted average interest rate of 3.9%, and a weighted average maturity of 7.4 years.

94.2% of our total debt outstanding is fixed-rate indebtedness.

Excluding principal amortization, we had no outstanding debt maturing until November 2024.

As of September 30, 2021, we had cash and cash equivalents of $582.2 million.

Our consolidated net debt to total market capitalization was 34.7% as of September 30, 2021.

Impact of COVID-19

In March 2020, the outbreak of the novel COVID-19 was recognized as a pandemic by the World Health Organization.

The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented economic, social and political uncertainty, volatility and disruption in the United States and globally.

We have taken the following actions in response to the impact of the COVID-19 pandemic on our business.

We currently hold $582.2 million in cash and cash equivalents on our balance sheet and have $850 million undrawn capacity under our unsecured revolving credit facility.

Our $850 million unsecured revolving credit facility matures in March 2025 and has two six-month extension options, subject to certain conditions.

Property Operations

All of our office buildings have remained open during the COVID-19 pandemic.

We have scaled back certain building operations in cleaning, security, lobby concierge and recurring maintenance, which reduced costs until buildings are repopulated.

A portion of the reduction in operating expenses was offset by a reduction in tenant expense recoveries.

Our operations team worked diligently to develop and implement plans for tenants' reoccupation of our buildings to ensure a safe, clean and healthy work environment.

These plans involved staff reassigned to screen tenants and visitors, changes to cleaning and maintenance standards, and changes to building operations for access by tenants and their guests.

Despite the challenge of the uncertain near-term environment, we continue to believe in the long-term demand for office space.

We believe many tenants have acknowledged the challenges, inequities, and worries about divided workplaces between home and office work, the challenges with onboarding new employees and miss the connectivity and productivity that an office environment provides.

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, increased concessions and potentially lower rental rates.

In addition, potential work from home could negatively impact the office leasing market.

As of September 30, 2021, our portfolio was 86.5% leased, including signed leases not yet commenced, with 2.3% 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 COVID-19 pandemic and shelter-in-place rules that were in effect for much of the period.

On June 15, 2021, New York State ended pandemic-linked restrictions given the broad-based distribution of the COVID-19 vaccine.

During the second quarter 2021, we experienced a sustained increase in leasing tour volume in our Manhattan office portfolio which led to our improved leasing performance in the third quarter 2021.

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.

We intend to support our food and service retailers so that they can service our office tenants as they continue to re-occupy.

Retailers, in general, have been hardest hit by the pandemic.

Our retail-orientated tenants are no exception.

As with all landlords, we are working with some of our tenants that are financially challenged.

Some of these tenants may end up in bankruptcy or default in their leases in the near term.

On July 29, 2021, GBG USA Inc., an indirect wholly-owned subsidiary of Global Brands Group Holding Limited, announced that its North America wholesale business and certain subsidiaries and affiliates (collectively, “GBG USA”) filed for bankruptcy under Chapter 11 (the "GBG Bankruptcy").

At the time of the filing, GBG USA leased 353,325 square feet of office space at 1333 Broadway and the Empire State Building, or 3.5%, of our total portfolio rentable square feet , representing approximately 3.6% of total portfolio annualized rent.

Of that total, all but 191,000 square feet, or 1.9% of our total portfolio rentable square feet, has been sublet to tenants, where both GBG USA and the subtenant are liable for the rent, and we have the right to require the subtenant to pay directly to us.

The sublets are for GBG USA’s entire premises at 1333 Broadway and have been in effect for several years.

We have current discussions to convert the subtenants to direct tenants.

Subsequently, GBG USA filed to reject their leases and both lease rejections were approved by the bankruptcy court during the third quarter.

In the third quarter we recorded a $1.6 million non-cash write-off of the straight-line receivables related to GBG USA's 1333 Broadway lease.

We collected rent from GBG USA through June 2021 and have converted the full balance of its $17.0 million letter of credit to cash, which was applied as follows:

• $5.2 million was applied against GBG USA's straight-line rent receivable balance related to their lease at the Empire State Building,

• $1.7 million was recognized as GAAP rental revenue for the partial period in the third quarter when their lease remained in place, and

• $10.1 million was recognized as lease termination income.

Observatory Operations

On March 16, 2020, we complied with governmental mandates regarding the closing of non-essential businesses in response to the COVID-19 pandemic and closed the Empire State Building Observatory.

The 86th floor observatory deck reopened on July 20, 2020 and the 102nd floor observation deck reopened on August 24, 2020.

Due to the lifting of New York State COVID-19 restrictions, on June 16, 2021, the observatory fully reopened with interactive exhibits.

We continue to operate with reduced hours, staffing, services, operating costs, credit card fees and marketing expenses.

We have seen a higher local visitor mix, followed by a ramp up of nationally sourced travel.

We anticipate this pattern will then be followed by a restoration of our typical visitor mix that is approximately two-thirds international which we do not expect to be achieved until the broad resumption of international air travel some time in 2022.

For the third quarter, visitor recapture versus 2019 was above our hypothetical admissions forecast in July and early August, but below our hypothetical admissions forecast for the balance of the third quarter.

This was primarily due to the resurgent COVID-19 Delta variant and the impact on travel as U.S borders remain closed to international tourism.

The government has announced that the borders will reopen to fully vaccinated international travelers in November 2021.

The closure and slow ramp-up of our observatory operations caused us during each quarter of 2020 and throughout each quarter of 2021 to choose to perform an impairment test related to goodwill.

We engaged a third-party valuation consulting firm to perform the valuation process.

Based upon the results of the most recent goodwill impairment test of the stand-alone observatory reporting unit, which is after the intercompany rent expense paid to the Real Estate reporting unit, we determined that the fair value of the observatory reporting unit exceeded its carrying value by less than 15.0%.

Many of the factors employed in determining whether or not goodwill is impaired are outside of our control and it is reasonably likely that assumptions and estimates will change in future periods.

We will continue to assess the impairment of the observatory reporting unit goodwill going forward and that continued assessment may again utilize a third-party valuation consulting firm.

Goodwill allocated to the observatory reporting unit was $227.5 million at September 30, 2021.

• Total portfolio 87.0% leased, New York City office portfolio 88.6% leased.

• Signed a total of 318,646 rentable square feet of new, renewal, and expansion leases.

• Empire State Building observatory revenue was $13.2 million and observatory NOI was $7.0 million for the first quarter of 2022.

• Repurchased $23.3 million of our common stock at a weighted average price of $9.34 per share in the first quarter and through April 21, 2022.

Since the stock repurchase program began on March 5, 2020 through April 21, 2022, approximately $215 million at a weighted average price of $8.67 per share has been repurchased.

Results of Operations

The discussion below relates to our financial condition and results of operations for the three and nine months ended September 30, 2021 and 2020, respectively.

Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020

The following table summarizes our historical results of operations for the three months ended September 30, 2021 and 2020 (dollars in thousands):

Three Months Ended September 30,

2021 2020 Change %

Rental revenue

$ 139,558 $ 139,909 $ (351) (0.3) %

Observatory revenue 12,796 4,419 8,377 189.6 %

Lease termination fees 11,321 331 10,990 3,320.2 %

Third-party management and other fees

314 283 31 11.0 %

Other revenues and fees

1,059 1,633 (574) (35.2) %

Total revenues

165,048 146,575 18,473 12.6 %

Operating expenses:

Property operating expenses

33,357 33,836 479 1.4 %

Ground rent expenses

2,331 2,331 — — %

General and administrative expenses

14,427 14,517 90 0.6 %

Observatory expenses

6,370 5,931 (439) (7.4) %

Real estate taxes

29,566 31,196 1,630 5.2 %

Impairment charge

— 2,103 2,103 100.0 %

Depreciation and amortization

65,794 44,733 (21,061) (47.1) %

Total operating expenses

151,845 134,647 (17,198) (12.8) %

Operating income

13,203 11,928 1,275 10.7 %

Other income (expense):

Interest income

211 366 (155) (42.3) %

Interest expense

(23,577) (23,360) (217) (0.9) %

IPO litigation expense

— (1,165) 1,165 100.0 %

Loss before income taxes

(10,163) (12,231) 2,068 16.9 %

Income tax expense

(20) (38) 18 47.4 %

(10,183) (12,269) 2,086 17.0 %

Private perpetual preferred unit distributions (1,050) (1,050) — — %

Net loss attributable to common unitholders

$ (11,233) $ (13,319) $ 2,086 15.7 %

Rental Revenue

Rental revenue was consistent with prior year.

Observatory Revenue

The increase in revenues reflects increased visitors due to the lifting of certain COVID-19 pandemic restrictions in the second quarter 2021.

Lease Termination Fees

Higher termination fees, primarily from one tenant, were earned in the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Third-Party Management and Other Fees

Management fee income was consistent with prior year.

Other Revenues and Fees

The decrease in other revenues and fees was due to a $0.8 million development project reimbursement received in the three months ended September 30, 2020.

Property Operating Expenses

Property operating expenses were consistent with 2020.

Ground Rent Expenses

Ground rent expense was consistent with 2020.

General and Administrative Expenses

General and administrative expenses were consistent with 2020.

Observatory Expenses

With the lifting of certain COVID-19 pandemic restrictions, the observatory operating hours were increased which increased variable costs such as labor, union, security, and cleaning costs.

Real Estate Taxes

The decrease in real estate taxes was primarily due to reduction in assessed value for the tax period July 1, 2021 to June 30, 2022.

Impairment Charge

During the third quarter 2020, we wrote off $2.1 million of prior expenditures on a build-to-suit development project in our real estate segment that was halted due to reconsideration by the user driven by the COVID-19 pandemic.

Depreciation and Amortization

The increase in depreciation and amortization reflects write-offs primarily related to one tenant.

Interest Income

The decrease in interest income reflects higher weighted-average cash investments in 2020 compared to 2021 and lower interest rates in 2021.

Interest Expense

Interest expense was consistent with 2020.

IPO Litigation Expense

The three months ended September 30, 2020 included an accrued expense which reflected an estimated liability associated with the Initial Public Offering-related litigation.

Income taxes were consistent with prior year.

Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020

The following table summarizes our historical results of operations for the nine months ended September 30, 2021 and 2020 (dollars in thousands):

Nine Months Ended September 30,

The discussion below relates to our financial condition and results of operations for the three months ended March 31, 2022 and 2021, respectively.

Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021

The following table summarizes our historical results of operations for the three months ended March 31, 2022 and 2021 (dollars in thousands):

Three Months Ended March 31,

2022 2021 Change %

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30,004 31,447 1,443 4.6 %

Impairment charges

— 6,204 6,204 100.0 %

Depreciation and amortization

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Loss on early extinguishment of debt — (214) 214 100.0 %

IPO litigation expense

— (1,165) 1,165 100.0 %

Loss before income taxes

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Private perpetual preferred unit distributions (1,050) (1,050) — — %

Net loss attributable to non-controlling interests in other partnerships 63 — 63 100.0 %

Net loss attributable to common unitholders

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Rental Revenue

The decrease in rental revenue was primarily driven by write-offs taken over the period.

The increase in rental revenue reflects additional below market lease amortization, net and the inclusion of revenue from our recently acquired multifamily properties.

Observatory Revenue

Observatory revenues were slightly lower due to the COVID-19 pandemic, as the nine months to date September 30, 2020 results included the strong first quarter 2020, pre-COVID-19 performance.

For the nine months ended September, 30, 2021, revenues have been growing with increased visitors due to the lifting of certain COVID-19 pandemic restrictions in the second quarter 2021.

Lease Termination Fees

Higher termination fees, primarily from one tenant, were earned in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Third-Party Management and Other Fees

Management fee income was consistent with prior year.

Observatory revenues were higher driven by increased visitation

Other Revenues and Fees

The decrease in other revenues and fees was due to higher bad debt recovery income received in the nine months ended September 30, 2020 and lower food and beverage sales and lower parking income due to the COVID-19 pandemic in the nine months ended September 30, 2021.

The nine months ended September 30, 2020 also included a $0.8 million development project reimbursement.

The increase in other revenues and fees was due to higher food and beverage sales, parking income, bad debt recovery income and other income.

Property Operating Expenses

The decrease in property operating expenses was primarily due to lower payroll costs, lower cleaning costs, lower repair and maintenance costs, and other lower operating expenses.

The lower costs are primarily driven by lower tenant utilization in our buildings.

Ground Rent Expenses

Ground rent expense was consistent with 2020.

General and Administrative Expenses

The decrease in general and administrative expenses was primarily due to lower equity compensation expense and lower legal leasing costs.

Also contributing to the decrease were higher severance costs recorded in the nine months ended September 30, 2020.

The increase in property operating expenses reflect higher payroll, utilities, repairs and maintenance, cleaning and other operating expenses, and the inclusion of operating expenses from our recently acquired multifamily properties.

Observatory Expenses

The decrease in observatory expenses was driven by cost controls and reduced hours of operation instituted in response to reduced tourist demand due to COVID-19 reduced travel and international travel restrictions.

The increase in observatory expenses was driven by increased operating hours, which increased variable costs such as labor, union, security, cleaning and maintenance costs.

Real Estate Taxes

The increase in real estate taxes was primarily due to higher assessed values for multiple properties.

Impairment charge

The nine months ended September 30, 2020 included a $4.1 million write-off of prior expenditures on a Combined Heat Power/ Redundancy onsite power generation project in our real estate segment that was rendered economically unviable due to New York City’s Local Law 97 and from its measurement of carbon from natural gas combustion generates fines, and a $2.1 million write-off of prior expenditures on a build-to-suit development project in our real estate segment that was halted due to reconsideration by the user driven by the COVID-19 pandemic.

Lower real estate taxes were attributable to the overall reduction in property assessment values due to the impact of COVID-19.

Depreciation and Amortization

The increase in depreciation and amortization reflects tenant improvement write-offs primarily related to one tenant.

Interest Income

The decrease in interest income reflects higher cash investments in 2020 compared to 2021 and lower interest rates in 2021.

The increase in depreciation and amortization reflects accelerated depreciation at one property due to an impairment charge taken in the fourth quarter of 2021 and additional depreciation from our recently acquired multifamily properties.

Interest Expense

Interest expense increased due to higher deferred financing cost amortization reflecting higher deferred financing cost balances associated with new debt.

The increase in income tax benefit was attributable to higher net loss for the Observatory segment.

The increase reflects additional interest expense from our recently acquired multifamily properties.

The decrease in income tax benefit was attributable to lower net operating loss for the observatory segment.

Liquidity and Capital Resources

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ESRT's charter does not restrict the amount of leverage that we may use.

At September 30, 2021, we had $582.2 million available in cash and cash equivalents, and $850 million available under our unsecured revolving credit facility.

As of September 30, 2021, we had approximately $2.1 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 3.9% and a weighted average maturity of 7.4 years.

As of September 30, 2021, excluding principal amortization, we have no outstanding debt maturing until November 2024.

Our consolidated net debt to total market capitalization was 34.7% as of September 30, 2021.

At March 31, 2022, we had $429.7 million available in cash and cash equivalents, and $850 million available under our unsecured revolving credit facility.

As of March 31, 2022, we had approximately $2.3 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 3.9% and a weighted average maturity of 7.2 years.

As of March 31, 2022, excluding principal amortization, we have no outstanding debt maturing until November 2024.

Our consolidated net debt to total market capitalization was 40.0% as of March 31, 2022.

Unsecured Revolving Credit and Term Loan Facilities

As described more fully in our Form 10-Q for the quarterly period ended March 31, 2021 (the "Q1 2021 10-Q"), in Q1 2021, we entered into an amended senior unsecured credit facility (the "Credit Facility") with Bank of America, N.A., as administrative agent and the other lenders party thereto.

On March 31, 2021, we entered into a second amendment to an existing credit agreement ("Amended Credit Agreement") that governs an amended senior unsecured credit facility (the "Credit Facility") with Bank of America, N.A., as administrative agent and the other lenders party thereto.

The Amended Credit Agreement amended the amended and restated

credit agreement dated August 29, 2017 by and among the parties named therein.

The Credit Facility is in the initial maximum principal amount of up to $1.065 billion, which consists of $850.0 million revolving credit facility that matures on March 31, 2025, and a $215.0 million term loan facility that matures on March 19, 2025.

As of September 30, 2021, we had no borrowings under the revolving credit facility and $215.0 million under the term loan facility.

Additionally, as described more fully in the Q1 2021 10-Q, we have outstanding a senior unsecured term loan facility (the "Term Loan Facility") that we entered into on March 19, 2020 with Wells Fargo Bank, National Association, as administrative agent, and the other lenders party thereto.

As of March 31, 2022, we had no borrowings under the revolving credit facility and $215.0 million under the term loan facility.

On March 19, 2020, we entered into a senior unsecured term loan facility (the “Term Loan Facility”) with Wells Fargo Bank, National Association, as administrative agent, and the other lenders party thereto.

The Term loan Facility is in the original principal amount of $175.0 million and matures on December 31, 2026.

As of September 30, 2021, our borrowings amounted to $175.0 million under the Term Loan Facility.

We may request the Term Loan Facility be increased through one or more increases or the addition of new pari passu term loan tranches, for a maximum aggregate principal amount not to exceed $225 million.

As of March 31, 2022, our borrowings amounted to $175.0 million under the Term Loan Facility.

The terms of both the Credit Facility and the Term Loan Facility include customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports.

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The agreements governing both facilities also contain customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, invalidity of loan documents, loss of real estate investment trust qualification, and occurrence of a change of control.

As of September 30, 2021, we were in compliance with the covenants.

As of March 31, 2022, we were in compliance with the covenants.

Mortgage Debt

As of March 31, 2022, mortgage notes payable amounted to $966.7 million.

The first maturity is in 2024.

See Note 4 - Debt for more information on mortgage debt.

Senior Unsecured Notes

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The agreements also contain customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, the occurrence of certain change of control transactions and loss of real estate investment trust qualification.

As of September 30, 2021, we were in compliance with the covenants under the outstanding senior unsecured notes.

As of March 31, 2022, we were in compliance with the covenants under the outstanding senior unsecured notes.

Financial Covenants

As of September 30, 2021, we were in compliance with the following financial covenants:

Financial covenant Required September 30, 2021 In Compliance

As of March 31, 2022, we were in compliance with the following financial covenants:

Financial covenant Required March 31, 2022 In Compliance

Maximum total leverage < 60% 38.9 % Yes

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Although ESRT's board of directors has not adopted a policy that limits the total amount of indebtedness that we may incur, we anticipate that ESRT's board of directors will consider a number of factors in evaluating our level of indebtedness from time to time, as well as the amount of such indebtedness that will be either fixed or floating rate.

ESRT's charter and bylaws do not limit the amount or percentage of indebtedness that we may incur nor do they restrict the form in which our indebtedness will be taken (including, but not limited to, recourse or non-recourse debt and cross-collateralized debt).

ESRT's charter and bylaws do not limit the amount or percentage of indebtedness that we may incur nor do they restrict the form in which our

indebtedness will be taken (including, but not limited to, recourse or non-recourse debt and cross-collateralized debt).

Our overall leverage will depend on our mix of investments and the cost of leverage, however, we initially intend to maintain a level of indebtedness consistent with our plan to seek an investment grade credit rating.

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Office Properties (1)

Nine Months Ended September 30,

Three months ended March 31,

Total New Leases, Expansions, and Renewals 2022 2021

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Retail Properties (4)

Nine Months Ended September 30,

Three months ended March 31,

Total New Leases, Expansions, and Renewals 2022 2021

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Total square feet

16,382 50,990

Leasing commission costs (3)

$ 703 $ 1,997

Tenant improvement costs (3)

Total leasing commissions and tenant improvement costs (3)

$ 1,295 $ 9,342

Leasing commission costs per square foot (3)

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Excludes the Empire State Building broadcasting licenses and observatory operations.

Nine Months Ended September 30,

Three months ended March 31,

Total Portfolio

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(1) Excludes tenant improvements and leasing commission costs.

As of September 30, 2021, we expect to incur additional costs relating to obligations under existing lease agreements of approximately $85.2 million for tenant improvements and leasing commissions.

We intend to fund the tenant improvements and leasing commission costs through a combination of operating cash flow, cash on hand, additional property level mortgage financings and borrowings under the unsecured revolving credit facility.

As of March 31, 2022, we expect to incur additional costs relating to obligations under existing lease agreements of approximately $102.9 million for tenant improvements and leasing commissions.

We intend to fund the tenant improvements

and leasing commission costs through a combination of operating cash flow, cash on hand, additional property level mortgage financings and borrowings under the unsecured revolving credit facility.

Capital expenditures are considered part of both our short-term and long-term liquidity requirements.

We intend to fund capital improvements through a combination of operating cash flow, cash on hand and borrowings under the unsecured revolving credit facility.

Contractual Obligations

Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of our contractual obligations.

There have been no material changes, outside the ordinary course of business, to these contractual obligations during the nine months ended September 30, 2021.

Off-Balance Sheet Arrangements

As of September 30, 2021, we did not have any off-balance sheet arrangements.

As of March 31, 2022, we did not have any off-balance sheet arrangements.

Distribution Policy

In order for ESRT to qualify as a REIT, it must distribute to its securityholders, on an annual basis, at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains.

In addition, it will be subject to U.S.

federal income tax at regular corporate rates to the extent that it distributes less than 100% of its net taxable income (including net capital gains) and will be subject to a 4% nondeductible excise tax on the amount, if any, by which its distributions in any calendar year are less than a minimum amount specified under U.S.

federal income tax laws.

We intend to distribute our net income to our securityholders in a manner intended to allow ESRT to satisfy its REIT 90% distribution requirement and to allow ESRT to avoid U.S.

federal income tax liability on its income and the 4% nondeductible excise tax.

We intend to distribute our net taxable income to our security holders in a manner intended to satisfy REIT distribution requirements and to avoid U.S.

federal income tax liability on our income.

Before we pay any distribution, whether for U.S.

federal income tax purposes or otherwise, we must first meet both our operating requirements and obligations to make payments of principal and interest, if any.

However, under some circumstances, we may be required to use cash reserves, incur debt or liquidate assets at rates or times that we regard as unfavorable or make a taxable distribution of our units in order to allow ESRT to satisfy its REIT 90% distribution requirement and to avoid U.S.

federal income tax and the 4% nondeductible excise tax in that year.

In 2020, we had a unique situation whereby we had no requirement to pay a dividend beyond the quarterly dividends paid in the first and second quarters of 2020 due to two primary factors:

(i) the significant decline in revenue due to lower levels of observatory visitation, and (ii) ESRT had a net operating loss carryforward available to reduce the amount of REIT taxable income otherwise required to be distributed by ESRT to meet REIT requirements.

After careful consideration and focus on long-term shareholder value creation and preservation of our balance sheet strength and flexibility, our management and the Board of Directors concluded the best course of action was to temporarily suspend our quarterly dividend and to activate our share repurchase program.

During August 2020, we announced the suspension of our third and fourth quarter 2020 dividends to holders of ESRT's Class A common stock and Class B common stock and to holders of our Series ES, Series 250 and Series 60 operating partnership units and Series PR operating partnership units.

During December 2020, we announced the continued dividend suspension for the first and second quarters of 2021.

During May 2021, we announced our decision to reinstate the quarterly dividend, one quarter earlier than previously announced, driven by confidence in the New York City recovery and improvement in our results and liquidity.

We declared a dividend of $0.035 per share for the third quarter of 2021, which equates to an annualized rate of $0.14 per share.

The Board of Directors will continue its regular review of its dividend and capital allocation policies at each Board meeting.

As of September 30, 2021, our parent and general partner, Empire State Realty Trust, Inc., had net operating loss ("NOL") carryforwards that may be used in the future to reduce the amount otherwise required to be distributed by ESRT to meet REIT requirements.

However, for federal income tax purposes, the NOL will not be able to offset more than 80% of ESRT’s REIT taxable income and, therefore, may not be able to reduce the amount required to be distributed by ESRT to meet REIT requirements to zero, except for the tax year ended December 31, 2020, of which ESRT was able to offset 100% of its taxable income in accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The federal NOL may be carried forward indefinitely.

Other limitations may apply to ESRT’s ability to use its NOL to offset taxable income.

Distribution to Securityholders

Distributions and dividends amounting to $22.6 million and $65.4 million have been made to securityholders for the nine months ended September 30, 2021 and 2020, respectively.

However, under some circumstances, we may be required to use cash reserves, incur debt or liquidate assets at rates or times that we regard as unfavorable or make a taxable distribution of our shares in order to satisfy REIT distribution requirements.

Distribution to Equity Holders

Distributions and dividends amounting to $10.8 million and $1.1 million have been made to equity holders for the three months ended March 31, 2022 and 2021, respectively.

Stock and Publicly Traded Operating Partnership Unit Repurchase Program

ESRT's Board of Directors authorized the repurchase of up to $500 million of ESRT Class A common stock and the Operating Partnership’s Series ES, Series 250 and Series 60 operating partnership units through December 31, 2023.

program, ESRT may purchase ESRT Class A common stock and we may purchase our Series ES, Series 250 and Series 60 operating partnership units in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions.

Under the program, ESRT may purchase ESRT Class A common stock and we may purchase our Series ES, Series 250 and Series 60 operating partnership units in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions.

The timing, manner, price and amount of any repurchases will be determined by ESRT and us at our discretion and will be subject to stock price, availability, trading volume and general market conditions.

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re any particular amount of securities, and the program may be suspended or discontinued at our discretion without prior notice.

See "Financial Statements - Note 9- Capital" for a summary of ESRT's purchases of equity securities in each of the three months ended September 30, 2021.

Comparison of Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020

Cash and cash equivalents and restricted cash were $621.0 million and $428.0 million, respectively, as of September 30, 2021 and 2020.

The increase was primarily due to lower spending for capital expenditures, lower dividends paid and lower repurchases of common shares in 2021.

See "Financial Statements - Note 9.

Capital" for a summary of ESRT's purchases of equity securities in each of the three months ended March 31, 2022.

Comparison of Three Months Ended March 31, 2022 to the Three Months Ended March 31, 2021

Cash and cash equivalents and restricted cash were $482.7 million and $607.4 million, respectively, as of March 31, 2022 and 2021.

The decrease was primarily due to the acquisition of real estate property at the end of 2021 and higher spending for capital expenditures, higher repurchases of common shares and higher dividends paid in 2022.

Operating activities .

Net cash provided by operating activities increased by $3.4 million to $167.0 million for the nine months ended September 30, 2021 compared to $163.6 million for the nine months ended September 30, 2020, primarily due to changes in working capital.

Net cash provided by operating activities decreased by $5.7 million to $67.7 million primarily due to changes in working capital.

Investing activities .

Net cash used in investing activities decreased by $42.6 million to $70.8 million for the nine months ended September 30, 2021 compared to $113.4 million for the nine months ended September 30, 2020, due to lower capital expenditures.

Net cash used in investing activities increased by $14.2 million to $35.0 million due to higher capital expenditures.

Financing activities .

Net cash used in financing activities decreased by $149.4 million to $43.2 million used in financing activities for the nine months ended September 30, 2021 compared to $106.2 million provided by financing activities for the nine months ended September 30, 2020, primarily due to $300.0 million of net proceeds from issuance of debt, partially offset by higher repurchases of common shares of $111.9 million and higher dividends and distributions of $42.8 million which occurred in the nine months ended September 30, 2020.

Net cash used in financing activities increased by $11.6 million to $24.7 million primarily due to higher repurchases of common shares and higher dividends and distributions.

Net Operating Income ("NOI")

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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:

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.

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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.

We believe that eliminating these costs from net income is useful to investors 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.

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The following table presents a reconciliation of our net income, the most directly comparable GAAP measure, to NOI for the periods presented (amounts in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

(unaudited) (unaudited)

Three months ended March 31,

$ (17,221) $ (3,191)

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25,014 23,768

Loss on early extinguishment of debt

Income tax expense (benefit)

(1,596) (2,106)

Impairment charges

— 1,259 — 5,360

IPO litigation expense

— 1,165 — 1,165

Third-party management and other fees

(314) (283) (917) (930)

Interest income

(211) (366) (497) (2,529)

Net operating income

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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.

In addition, we believe 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.

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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.

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.

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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.

We believe 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 believe it is 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 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.

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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.

The company believes Core FFO is an important supplemental measure of its operating performance because 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.

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The following table presents a reconciliation of our net income, the most directly comparable GAAP measure, to FFO, Modified FFO and Core FFO for the periods presented (amounts in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

(unaudited) (unaudited)

Three months ended March 31,

$ (17,221) $ (3,191)

Noncontrolling interests in other partnerships 63 —

Private perpetual preferred unit distributions

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65,414 43,104

Impairment charges

— 1,259 — 5,360

FFO attributable to common stockholders

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Amortization of below-market ground leases

1,957 1,957 5,873 5,873

Modified FFO attributable to common stockholders

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Loss on early extinguishment of debt

Severance expenses

— 805 — 3,813

IPO litigation expense

— 1,165 — 1,165

Core FFO attributable to common stockholders

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Factors That May Influence Future Results of Operations

Impact of COVID-19

See "Overview" section.

We signed 1.0 million rentable square feet of new leases, expansions and lease renewals for the year ended December 31, 2021.

During the nine months ended September 30, 2021, we signed 0.6 million rentable square feet of new leases, expansions and renewals.

During the three months ended March 31, 2022, we signed 0.3 million rentable square feet of new leases, expansions and renewals.

Due to the relatively small number of leases that are signed in any particular quarter, one or more larger leases may have a disproportionately positive or negative impact on average rent, tenant improvement and leasing commission costs for that period.

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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 September 30, 2021, there were approximately 1.4 million rentable square feet of space in our portfolio available to lease (excluding leases signed but not yet commenced) representing 13.5% of the net rentable square footage of the properties in our portfolio.

As of March 31, 2022, there were approximately 1.3 million rentable square feet of space in our portfolio available to lease (excluding leases signed but not yet commenced) representing 13.0% of the net rentable square footage of the properties in our portfolio.

In addition, leases representing 4.8% and 6.6% of net rentable square footage of the properties in our portfolio will expire in 2022 and in 2023, respectively.

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Further, our revenues and results of operations can also be affected by the costs we incur to re-lease available space, including payment of leasing commissions, redevelopments and build-to-suit remodeling that may not be borne by the tenant.

Despite the challenge of the uncertain near-term environment, we continue to believe that as we have largely completed the redevelopment and repositioning of our properties we will, over the long-term, experience increased occupancy levels and rents.

Over the short-term, as we renovate and reposition our properties, including aggregating smaller spaces to offer large blocks of space, we may experience lower occupancy levels as a result of having to relocate tenants to alternative space and the strategic expiration of existing leases.

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Observatory Operations

On March 16, 2020, we complied with governmental mandates regarding the closing of non-essential businesses in response to the COVID-19 pandemic and closed the Empire State Building Observatory.

The observatory was closed for the entirety of the second quarter 2020 and reopened the 86th floor observation deck on July 20, 2020 with new protocols and processes under New York State's Phase 4's Low-Risk Outdoor Arts and Entertainment guidelines.

The 102nd floor observation deck reopened on August 24, 2020.

The Observatory hosted approximately 255,000 visitors in the third quarter of 2021, compared to 162,000 visitors in the second quarter of 2021 and 30,000 visitors in the third quarter of 2020.

For the three months ended March 31, 2022, the observatory hosted 269,000 visitors, compared to 51,000 visitors for the same period in 2021.

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 three months ended March 31, 2022 was $13.2 million, compared to $2.6 million for the three months ended March 31, 2021.

Observatory revenues and admissions are dependent upon the following:

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis