What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-03 compared with 2022-08-04 · 75 added, 73 removed, 354 unchanged (29% of the section changed)

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(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;

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

(v) changes in our business strategy;

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

(vi) changes in technology and market competition that affect utilization of our office, retail, Observatory, 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 or uncertainty in interest rates, including the phasing out of LIBOR, which may negatively affect the Company’s borrowing costs and the market valuation of real property assets generally;

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

(x) declining real estate valuations and impairment charges;

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(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;

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

(xv) difficulties in identifying and completing acquisitions;

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

(xvi) risks related to any development project (including our Metro Tower potential development site);

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

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(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;

(xxi) economic cycles involving inflation and/or recession;

(xxii) supply chain disruptions which may limit or delay our timely sourcing of supplies for the maintenance of our facilities and equipment.

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.

(xx) incurrence of taxable capital gain on disposition of an asset due to failure of use or compliance with a 1031 exchange program;

and (xxi) 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 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, see the section entitled “Risk Factors” 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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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 June 30, 2022

Highlights for the three months ended September 30, 2022

• Incurred net income attributable to common unitholders of $9.1 million and achieved Core Funds From Operations attributable to common unitholders ("Core FFO") of $56.5 million.

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• Signed a total of 335,382 rentable square feet of new, renewal, and expansion leases.

• Empire State Building observatory revenue was $27.4 million and observatory net operating income was $19.6 million for the second quarter of 2022.

• ESRT repurchased $53.7 million of its common stock at a weighted average price of $7.90 per share in the second quarter of 2022 and through July 21, 2022.

Since the stock repurchase program began on March 5, 2020 through July 21, 2022, approximately $256 million at a weighted average price of $8.48 per share has been repurchased.

• Empire State Building Observatory generated $24.5 million of net operating income for the third quarter 2022.

• ESRT repurchased $20.1 million of its common stock in the third quarter of 2022 and through October 24, 2022.

Results of Operations

The discussion below relates to our financial condition and results of operations for the three months ended June 30, 2022 and 2021, respectively.

Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021

The following table summarizes our historical results of operations for the three months ended June 30, 2022 and 2021 (amounts in thousands):

Three Months Ended June 30,

The discussion below relates to our financial condition and results of operations for the three months ended September 30, 2022 and 2021, respectively.

Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021

The following table summarizes our historical results of operations for the three months ended September 30, 2022 and 2021 (amounts in thousands):

Three Months Ended September 30,

2022 2021 Change %

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(25,516) (23,577) (1,939) (8.2) %

Gain on disposition of property

27,170 — 27,170 100.0 %

Income before income taxes

Income (loss) before income taxes

11,575 (10,163) 21,738 213.9 %

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(1,457) (20) (1,437) (7,185.0) %

Net income (loss)

10,118 (10,183) 20,301 199.4 %

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Net loss attributable to non-controlling interests in other partnerships 49 — 49 100.0 %

Net income attributable to common unitholders

Net income (loss) attributable to common unitholders

$ 9,117 $ (11,233) $ 20,350 181.2 %

Rental Revenue

The increase in rental revenue reflects the inclusion of revenue from our recently acquired multifamily properties.

The increase in rental revenue reflects the inclusion of revenue from our multifamily properties which were acquired on December 22, 2021.

Observatory Revenue

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Other Revenues and Fees

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

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

Property Operating Expenses

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Real Estate Taxes

Lower real estate taxes were attributable to the overall reduction in property tax assessment values.

Higher real estate taxes primarily attributable to the inclusion of real estate taxes from our recently acquired multifamily properties.

Depreciation and Amortization

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.

The decrease in depreciation and amortization reflects write-offs primarily related to one tenant in the third quarter 2021.

Interest Income

The increase reflects higher interest rates in the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Interest Expense

The increase reflects additional interest expense from our recently acquired multifamily properties, partially offset by the cancellation of debt from 383 Main Avenue, Norwalk CT.

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

Gain on disposition of property

Represents a gain on the transfer of 383 Main Avenue, Norwalk CT, which was encumbered by a $30.0 million mortgage, back to the lender in a consensual foreclosure.

Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021

The following table summarizes our historical results of operations for the six months ended June 30, 2022 and 2021 (dollars in thousands):

Six Months Ended June 30,

The increase was primarily attributable to interest expense from our recently acquired multifamily properties, partially offset by the cancellation of debt from 383 Main Avenue, Norwalk CT.

The increase in income tax expense was attributable to higher net operating income for the observatory segment.

Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021

The following table summarizes our historical results of operations for the nine months ended September 30, 2022 and 2021 (dollars in thousands):

Nine Months Ended September 30,

2022 2021 Change %

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41,816 (12,234) 54,050 441.8 %

Income tax benefit

Income tax (expense) benefit

(224) 3,271 (3,495) (106.8) %

Net income (loss)

41,592 (8,963) 50,555 564.0 %

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Rental Revenue

The increase in rental revenue reflects the inclusion of revenue from our recently acquired multifamily properties.

The increase in rental revenue reflects the inclusion of revenue from our multifamily properties which were acquired on December 22, 2021.

Observatory Revenue

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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

Lower real estate taxes were attributable to the overall reduction in property tax assessment values.

Depreciation and Amortization

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

Interest Income

The increase reflects higher interest rates in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Interest Expense

The increase in interest expense reflects additional interest expense from our recently acquired multifamily properties, partially offset by the cancellation of debt from 383 Main Avenue, Norwalk CT.

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

The increase was primarily attributable to interest expense from our recently acquired multifamily properties, partially offset by the cancellation of debt from 383 Main Avenue, Norwalk CT.

The increase in income tax expense was attributable to higher net operating income for the observatory segment.

Gain on disposition of property

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We expect to meet our short-term liquidity requirements, including distributions, operating expenses, working capital, debt service, and capital expenditures from cash flows from operations, cash on hand, debt issuances, and available borrowing capacity under our unsecured revolving credit facility.

The availability of these borrowings is subject to the conditions set forth in the applicable loan agreements.

The availability of these borrowings is subject to the conditions set forth in the applicable

loan agreements.

We expect to meet our long-term capital requirements, including acquisitions, redevelopments and capital expenditures through our cash flows from operations, cash on hand, our unsecured revolving credit facility, mortgage financings, debt issuances, common and/or preferred equity issuances and asset sales.

Our properties require periodic

investments of capital for individual lease related tenant improvements allowances, general capital improvements and costs associated with capital expenditures.

Our properties require periodic investments of capital for individual lease related tenant improvements allowances, general capital improvements and costs associated with capital expenditures.

Our overall leverage will depend on our mix of investments and the cost of leverage.

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

At June 30, 2022, we had $359.4 million available in cash and cash equivalents, and $850 million available under our unsecured revolving credit facility.

As of June 30, 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 6.9 years.

As of June 30, 2022, excluding principal amortization, we have no outstanding debt maturing until November 2024.

Our consolidated net debt to total market capitalization was 49.0% as of June 30, 2022.

At September 30, 2022, we had $387.2 million available in cash and cash equivalents, and $850 million available under our unsecured revolving credit facility.

As of September 30, 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 6.7 years.

As of September 30, 2022, excluding principal amortization, we have no outstanding debt maturing until November 2024.

Unsecured Revolving Credit and Term Loan Facilities

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Mortgage Debt

As of June 30, 2022, mortgage notes payable amounted to $935.1 million.

The first maturity is in 2024.

As of September 30, 2022, our consolidated mortgage notes payable amounted to $933.1 million.

The first maturity is in November 2024.

See "Financial Statements - Note 5.

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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 June 30, 2022, we were in compliance with the covenants under the outstanding senior unsecured notes.

As of September 30, 2022, we were in compliance with the covenants under the outstanding senior unsecured notes.

Financial Covenants

As of June 30, 2022, we were in compliance with the following financial covenants:

Financial covenant Required June 30, 2022 In Compliance

As of September 30, 2022, we were in compliance with the following financial covenants:

Financial covenant Required September 30, 2022 In Compliance

Maximum total leverage < 60% 39.0 % Yes

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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.

Our overall leverage will depend on our mix of investments and the cost of leverage.

ESRT's board of directors may from time to time modify our leverage policies in light of the then-current economic conditions, relative costs of debt and equity capital, market values of our properties, general market conditions for debt and equity securities, fluctuations in the market price of ESRT's common stock and our traded OP units, growth and acquisition opportunities and other factors.

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Office Properties (1)

Six Months Ended June 30,

Nine Months Ended September 30,

Total New Leases, Expansions, and Renewals 2022 2021

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Retail Properties (4)

Six Months Ended June 30,

Nine Months Ended September 30,

Total New Leases, Expansions, and Renewals 2022 2021

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Total square feet

45,655 16,382

Leasing commission costs per square foot (3)

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Excludes the Empire State Building broadcasting licenses and observatory operations.

Six Months Ended June 30,

Nine Months Ended September 30,

Total Portfolio

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(1) Excludes tenant improvements and leasing commission costs.

As of June 30, 2022, we expect to incur additional costs relating to obligations under existing lease agreements of approximately $105.3 million for tenant improvements and leasing commissions.

As of September 30, 2022, we expect to incur additional costs relating to obligations under existing lease agreements of approximately $117.9 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.

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Off-Balance Sheet Arrangements

As of June 30, 2022, we did not have any off-balance sheet arrangements.

As of September 30, 2022, we did not have any off-balance sheet arrangements.

Distribution Policy

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Distribution to Equity Holders

Distributions and dividends amounting to $21.6 million and $11.6 million have been made to equity holders for the six months ended June 30, 2022 and 2021, respectively.

Distributions and dividends amounting to $32.2 million and $22.6 million have been made to equity holders for the nine months ended September 30, 2022 and 2021, respectively.

Stock and Publicly Traded Operating Partnership Unit Repurchase Program

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The authorization does not obligate ESRT or us to acquire any particular amount of securities, and the program may be suspended or discontinued at ESRT and our discretion without prior notice.

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

See "Financial Statements - Note 10.

Capital" for a summary of ESRT's purchases of equity securities in each of the three months ended June 30, 2022.

Comparison of Six Months Ended June 30, 2022 to the Six Months Ended June 30, 2021

Cash and cash equivalents and restricted cash were $412.8 million and $578.6 million, respectively, as of June 30, 2022 and 2021.

Capital" for a summary of ESRT's purchases of equity securities in each of the three months ended September 30, 2022.

Comparison of Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021

Cash and cash equivalents and restricted cash were $439.8 million and $621.0 million, respectively, as of September 30, 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 was $83.7 million, equal to prior year.

Net cash provided by operating activities increased by $7.0 million to $174.0 million.

Investing activities .

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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.

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 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.

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 June 30, Six Months Ended June 30,

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

2022 2021 2022 2021

(unaudited) (unaudited)

Net income (loss)

$ 10,118 $ (10,183) $ 41,592 $ (8,963)

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We compute FFO in accordance with the “White Paper” on FFO published by the National Association of Real Estate Investment Trusts, or NAREIT, which defines FFO as net income (loss) (determined in accordance with GAAP), excluding impairment write-off of investments in depreciable real estate and investments in in-substance real estate investments, gains or losses from debt restructurings and sales of depreciable operating properties, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs), less distributions to non-controlling interests and gains/losses from discontinued operations and after adjustments for unconsolidated partnerships and joint ventures.

FFO is a widely recognized non-GAAP financial measure for REITs that we believe, when considered with financial statements determined in accordance with GAAP, is useful to investors in understanding financial performance and providing a relevant basis for comparison among REITs.

In addition, 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.

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

Three Months Ended June 30, Six Months Ended June 30,

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

2022 2021 2022 2021

(unaudited) (unaudited)

Net income (loss)

$ 10,118 $ (10,183) $ 41,592 $ (8,963)

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Factors That May Influence Future Results of Operations

Portfolio Transaction Activity

Subsequent to September 30, 2022, we entered into agreements to sell 500 Mamaroneck Avenue in Harrison, NY and 10 Bank Street in White Plains, NY at a gross asset valuation of $95.0 million.

These transactions are expected to close in the first quarter of 2023, subject to customary closing conditions.

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 June 30, 2022, there were approximately 1.2 million rentable square feet of space in our portfolio available to lease (excluding leases signed but not yet commenced) representing 12.2% of the net rentable square footage of the properties in our portfolio.

As of September 30, 2022, 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 11.5% of the net rentable square footage of the properties in our portfolio.

In addition, leases representing 1.4% and 5.5% of net rentable square footage of the properties in our portfolio will expire in 2022 and in 2023, respectively.

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Observatory Operations

For the three months ended June 30, 2022, the observatory hosted 573,000 visitors, compared to 162,000 visitors for the same period in 2021.

For the three months ended September 30, 2022, the observatory hosted 687,000 visitors, compared to 255,000 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 June 30, 2022 was $27.4 million, compared to $8.4 million for the three months ended June 30, 2021.

Observatory revenue for the three months ended September 30, 2022 was $33.1 million, compared to $12.8 million for the three months ended September 30, 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