Empire State Realty Trust(ESRT) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for Empire State Realty Trust, Inc ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements for Empire State Realty Trust, Inc., including balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, property dispositions, debt, financial instruments, leases, commitments, equity, related party transactions, and segment reporting Condensed Consolidated Balance Sheets The balance sheets show a slight decrease in total assets and liabilities from December 31, 2021, to September 30, 2022, with commercial real estate properties (net) and cash and cash equivalents decreasing, while total equity also saw a minor reduction Condensed Consolidated Balance Sheets (thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | |:---|:---|:---| | Total Assets | $4,201,140 | $4,282,447 | | Commercial real estate properties, net | $2,378,183 | $2,427,979 | | Cash and cash equivalents | $387,248 | $423,695 | | Total Liabilities | $2,527,311 | $2,598,115 | | Total Equity | $1,673,829 | $1,684,332 | Condensed Consolidated Statements of Operations For the three and nine months ended September 30, 2022, the company reported a significant turnaround from net loss to net income, driven by substantial increases in observatory revenue and a gain on property disposition for the nine-month period, despite higher operating expenses and interest expenses Condensed Consolidated Statements of Operations (thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | |:---|:---|:---|:---|:---| | Total Revenues | $183,712 | $165,048 | $545,768 | $463,760 | | Total Operating Expenses | $148,185 | $151,845 | $457,694 | $405,724 | | Total Operating Income | $35,527 | $13,203 | $88,074 | $58,036 | | Net Income (Loss) | $10,118 | $(10,183) | $41,592 | $(8,963) | | Net Income (Loss) Attributable to Common Stockholders | $5,557 | $(6,977) | $23,847 | $(7,523) | | Basic EPS | $0.03 | $(0.04) | $0.14 | $(0.04) | | Diluted EPS | $0.03 | $(0.04) | $0.14 | $(0.04) | | Dividends per share | $0.035 | $0.035 | $0.105 | $0.070 | Condensed Consolidated Statements of Comprehensive Income (Loss) The company reported a significant increase in comprehensive income for both the three and nine months ended September 30, 2022, primarily due to unrealized gains on interest rate swap agreements, contrasting with losses in the prior year Condensed Consolidated Statements of Comprehensive Income (Loss) (thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | |:---|:---|:---|:---|:---| | Net Income (Loss) | $10,118 | $(10,183) | $41,592 | $(8,963) | | Unrealized gain (loss) on valuation of interest rate swap agreements | $19,588 | $(103) | $39,407 | $(139) | | Other comprehensive income | $20,980 | $2,817 | $46,835 | $8,548 | | Comprehensive income (loss) | $31,098 | $(7,366) | $88,427 | $(415) | | Comprehensive income (loss) attributable to common stockholders | $18,019 | $(5,221) | $51,281 | $(2,214) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased slightly from December 31, 2021, to September 30, 2022, primarily due to common share repurchases and dividends, partially offset by net income and other comprehensive income Condensed Consolidated Statements of Stockholders' Equity (thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | |:---|:---|:---| | Total Stockholders' Equity | $952,379 | $998,128 | | Non-controlling interests in the Operating Partnership | $676,008 | $643,012 | | Total Equity | $1,673,829 | $1,684,332 | - The company repurchased $18.1 million of common shares during the three months ended September 30, 2022, contributing to the decrease in total stockholders' equity[14] - For the nine months ended September 30, 2022, common share repurchases amounted to $82.5 million, and dividends and distributions totaled $32.2 million[18] Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, net cash provided by operating activities increased, but net cash used in investing and financing activities also increased significantly, leading to an overall decrease in cash and cash equivalents and restricted cash Condensed Consolidated Statements of Cash Flows (thousands) | Cash Flow Activity | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | |:---|:---|:---| | Net cash provided by operating activities | $173,985 | $167,027 | | Net cash used in investing activities | $(89,116) | $(70,760) | | Net cash used in financing activities | $(119,692) | $(43,239) | | Net increase (decrease) in cash and cash equivalents and restricted cash | $(34,823) | $53,028 | | Cash and cash equivalents and restricted cash—end of period | $439,815 | $620,967 | - Cash paid for interest increased to $67.7 million for the nine months ended September 30, 2022, from $58.2 million in the prior year[25] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures for the condensed consolidated financial statements, covering business operations, accounting policies, property transactions, debt structure, financial instruments, lease agreements, legal matters, equity, related party dealings, and segment performance 1. Description of Business and Organization Empire State Realty Trust, Inc. (ESRT) is a New York City-focused REIT that owns and manages a portfolio of office, retail, and multifamily assets, including the iconic Empire State Building and its Observatory Experience. The company operates primarily through its Operating Partnership, in which it holds a 59.3% interest - ESRT is a New York City-focused REIT owning and managing office, retail, and multifamily assets, including the Empire State Building and its Observatory Experience[28] - As of September 30, 2022, the total portfolio included 9.9 million rentable square feet of office and retail space, 13 office properties, 6 standalone retail properties, and 2 multifamily properties (625 units)[29] - ESRT owned approximately 59.3% of the aggregate operating partnership units in its Operating Partnership as of September 30, 2022, and elected to be taxed as a REIT[30] 2. Summary of Significant Accounting Policies The company's unaudited condensed consolidated financial statements are prepared in accordance with GAAP and SEC regulations, with no material changes to significant accounting policies from the prior annual report. The observatory business is subject to tourism seasonality, with the third quarter historically generating the highest revenue - No material changes to significant accounting policies were reported compared to the December 31, 2021 Annual Report on Form 10-K[31] - The observatory business is subject to tourism seasonality, with 31.0% to 33.0% of annual observatory revenue historically realized in the third quarter[35] - The company consolidates entities where it has a controlling financial interest, including its Operating Partnership, which is identified as a Variable Interest Entity (VIE)[36] 3. Property Disposition In April 2022, the company transferred 383 Main Avenue, Norwalk CT, back to the lender in a consensual foreclosure, recognizing a non-cash gain of $27.2 million. Additionally, agreements were made to sell two other properties for $95.0 million, expected to close in Q1 2023 - In April 2022, the company transferred 383 Main Avenue, Norwalk CT, to the lender, resulting in a non-cash gain of $27.2 million[40] - Subsequent to September 30, 2022, agreements were made to sell 500 Mamaroneck Avenue and 10 Bank Street for a gross asset valuation of $95.0 million, with closings expected in Q1 2023[41] 4. Deferred Costs, Acquired Lease Intangibles and Goodwill Deferred costs, net, decreased to $183.2 million as of September 30, 2022, from $195.2 million at December 31, 2021. The company holds $491.5 million in goodwill, allocated between the observatory and real estate segments, and performed a qualitative assessment for goodwill impairment for the observatory segment, concluding no impairment Deferred Costs, Acquired Lease Intangibles and Goodwill (thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | |:---|:---|:---| | Total deferred costs, net, excluding net deferred financing costs | $183,210 | $195,205 | | Acquired below-market ground leases, net | $331,030 | $336,904 | | Acquired below-market leases, net | $(18,897) | $(24,941) | - Goodwill amounted to $491.5 million as of September 30, 2022, with $227.5 million allocated to the observatory segment and $264.0 million to the real estate segment[45] - A qualitative assessment for the quarter ended September 30, 2022, indicated no impairment of goodwill for the observatory reportable segment[48] 5. Debt Total principal debt decreased slightly to $2.3 billion as of September 30, 2022, from $2.33 billion at December 31, 2021. The company has various mortgage notes, senior unsecured notes, and unsecured term loan facilities, with no significant maturities until November 2024. The benchmark interest rate for credit facilities was converted from LIBOR to SOFR Debt (thousands) | Debt Type | Principal Sep 30, 2022 | Balance Dec 31, 2021 | |:---|:---|:---| | Total mortgage debt | $933,088 | $968,793 | | Senior unsecured notes | $875,000 | $875,000 | | Unsecured term loan facilities | $390,000 | $390,000 | | Total principal | $2,298,088 | $2,333,793 | - Aggregate required principal payments show no maturities in 2022 or 2023, with significant maturities starting in 2024 ($77.7 million) and 2025 ($315.0 million)[53] - The benchmark interest rate for the BofA Credit Facility and Wells Term Loan Facility was converted from LIBOR to SOFR as of August 29, 2022[55][56][57] 6. Accounts Payable and Accrued Expenses Total accounts payable and accrued expenses decreased to $94.4 million as of September 30, 2022, from $120.8 million at December 31, 2021, primarily due to the absence of interest rate swaps liability Accounts Payable and Accrued Expenses (thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | |:---|:---|:---| | Accrued capital expenditures | $55,320 | $49,247 | | Accounts payable and accrued expenses | $36,353 | $41,664 | | Interest rate swaps liability | — | $25,308 | | Total accounts payable and accrued expenses | $94,436 | $120,810 | 7. Financial Instruments and Fair Values The company uses derivative financial instruments, primarily interest rate swaps, to manage interest rate risk. As of September 30, 2022, the fair value of interest rate swaps was a net asset of $18.5 million, a significant improvement from a net liability of $(25.3) million at December 31, 2021, reflecting unrealized gains - In May 2022, the company entered into forward interest rate swaps with an aggregate notional value of $390.0 million, fixing the interest rate on 100% of its term loans[62] Financial Instruments and Fair Values (thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | |:---|:---|:---| | Fair value of interest rate swaps (asset) | $18,515 | $13 | | Fair value of interest rate swaps (liability) | — | $(25,308) | | Aggregate notional value of interest rate swaps and caps | $576,300 | $451,300 | - Cash flow hedges were deemed highly effective, resulting in a net unrealized gain of $21.0 million for the three months and $46.8 million for the nine months ended September 30, 2022[65] 8. Leases The company acts as both a lessor and a lessee. As a lessor, rental revenue from fixed payments increased for both the three and nine months ended September 30, 2022. As a lessee, operating lease agreements relate to three ground lease assets, with a weighted average remaining lease term of 47.7 years Rental Revenue (thousands) | Rental Revenue | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | |:---|:---|:---|:---|:---| | Fixed payments | $131,800 | $124,764 | $399,995 | $374,968 | | Variable payments | $16,490 | $14,794 | $45,148 | $45,618 | | Total rental revenue | $148,290 | $139,558 | $445,143 | $420,586 | - Future minimum lease payments from non-cancellable operating leases to tenants total $3.88 billion through 2039[74] - Ground lease liabilities are $28.7 million as of September 30, 2022, with a weighted average remaining lease term of 47.7 years and a weighted average incremental borrowing rate of 4.5%[75][76] 9. Commitments and Contingencies The company is involved in ongoing legal proceedings related to the 2013 IPO and formation transactions, with an appeal pending regarding a $1.2 million arbitration award. It also estimates $117.9 million in unfunded capital expenditures for existing lease agreements and manages environmental matters, including asbestos, with no material impact expected - An arbitration panel awarded claimants approximately $1.2 million in August 2020 related to the company's IPO and formation transactions; the company has appealed the ruling[80][81] - The company estimates approximately $117.9 million in unfunded capital expenditures (tenant improvements and leasing commissions) for existing lease agreements, to be funded by operating cash flow, mortgage financings, and credit facilities[83] - Environmental site assessments have identified asbestos in certain properties, but management has no plans to remove or alter them in a manner that would trigger removal obligations, and ongoing maintenance costs are expensed as incurred[85][87] 10. Equity The company has Class A and Class B common stock, OP Units, and private perpetual preferred units. A $500 million stock and OP unit repurchase program is authorized through December 31, 2023, with $417.5 million remaining. Equity compensation plans include LTIP units and restricted stock, with associated noncash compensation expense recognized over vesting periods - As of September 30, 2022, there were 160.6 million Class A common shares, 0.99 million Class B common shares, and 111.0 million OP Units outstanding[96] - A $500 million stock and OP unit repurchase program is authorized from January 1, 2022, through December 31, 2023, with approximately $417.5 million remaining as of September 30, 2022[97][224] Equity Repurchases (thousands) | Equity Repurchases | July 2022 | August 2022 | September 2022 | |:---|:---|:---|:---| | Total Number of Shares Purchased | 184,045 | 621,314 | 1,761,561 | | Weighted Average Price Paid per Share | $6.92 | $7.32 | $6.97 | - Total dividends paid to common stockholders were $5.7 million and $17.4 million for the three and nine months ended September 30, 2022, respectively[100] 11. Related Party Transactions The company engages in related party transactions, including supervisory fees, property management fees, and rent from entities affiliated with its Chairman, President, and CEO, Anthony E. Malkin. These transactions generated minor revenue for the company Related Party Revenue (thousands) | Related Party Revenue | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | |:---|:---|:---|:---|:---| | Supervisory fees | $0.2 | $0.3 | $0.8 | $0.8 | | Property management fees | $0.1 | $0.1 | $0.2 | $0.2 | | Other revenue (rent, computer support) | $0.1 | $0.1 | $0.2 | $0.2 | 12. Segment Reporting The company operates in two reportable segments: real estate and observatory. For the three and nine months ended September 30, 2022, both segments contributed positively to net income, with the observatory segment showing significant revenue growth - The company has two reportable segments: real estate (ownership, management, operation of traditional real estate assets) and observatory (operation of the Empire State Building observatories)[113] Segment Net Income (thousands) | Segment Net Income | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | |:---|:---|:---|:---|:---| | Real Estate | $5,770 | $(11,329) | $37,020 | $(3,906) | | Observatory | $4,348 | $1,146 | $4,572 | $(5,057) | | Total Net Income (Loss) | $10,118 | $(10,183) | $41,592 | $(8,963) | - Observatory revenue for the three months ended September 30, 2022, was $33.1 million, a substantial increase from $12.8 million in the prior year, reflecting increased visitation[115][117] 13. Subsequent Events No material subsequent events were reported after September 30, 2022 - No subsequent events were reported[122] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial performance, condition, and future outlook, highlighting key operational achievements, revenue and expense drivers, liquidity, capital resources, and non-GAAP financial measures like NOI, FFO, Modified FFO, and Core FFO FORWARD-LOOKING STATEMENTS This section contains forward-looking statements regarding capital resources, portfolio performance, dividend policy, and anticipated market conditions, emphasizing that these statements are subject to substantial risks and uncertainties and are not guarantees of future performance - Forward-looking statements cover capital resources, portfolio performance, dividend policy, and results of operations, and are subject to substantial risks and uncertainties[125][126] - Key risk factors include the economic impact of COVID-19, reduced demand for space, changes in tourism, increased borrowing costs, declining real estate valuations, and failure to qualify as a REIT[127] Overview The company, a NYC-focused REIT, reported net income of $5.6 million and Core FFO of $56.5 million for Q3 2022, with its commercial portfolio 88.5% leased and the Empire State Building Observatory generating $24.5 million in net operating income - Net income attributable to common stockholders was $5.6 million for the three months ended September 30, 2022[132] - Core Funds From Operations (Core FFO) attributable to common stockholders and the operating partnership reached $56.5 million[132] - The total commercial portfolio was 88.5% leased, with the New York City office portfolio at 89.4% leased. The Empire State Building Observatory generated $24.5 million of net operating income[132][134] Results of Operations The company experienced significant revenue growth for both the three and nine months ended September 30, 2022, primarily driven by increased observatory visitation and the inclusion of multifamily property revenues. This led to a substantial improvement in net income compared to the prior year, despite higher operating and interest expenses Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021 For Q3 2022, total revenues increased by 11.3% to $183.7 million, primarily due to a 158.3% surge in observatory revenue and a 6.3% rise in rental revenue. Net income attributable to common stockholders turned positive at $5.6 million, a 179.6% increase from a loss in Q3 2021, despite higher property operating and observatory expenses Results of Operations - Three Months (thousands) | Metric | 2022 | 2021 | Change | % Change | |:---|:---|:---|:---|:---| | Rental revenue | $148,290 | $139,558 | $8,732 | 6.3% | | Observatory revenue | $33,051 | $12,796 | $20,255 | 158.3% | | Total revenues | $183,712 | $165,048 | $18,664 | 11.3% | | Total operating expenses | $148,185 | $151,845 | $3,660 | 2.4% | | Net income (loss) attributable to common stockholders | $5,557 | $(6,977) | $12,534 | 179.6% | - The increase in rental revenue was due to the inclusion of revenue from multifamily properties acquired in December 2021[138] - Property operating expenses increased by 28.3% due to higher payroll, utilities, cleaning, and the inclusion of multifamily property expenses[141] Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021 For the nine months ended September 30, 2022, total revenues grew by 17.7% to $545.8 million, primarily driven by a 210.0% increase in observatory revenue and a 5.8% increase in rental revenue. Net income attributable to common stockholders significantly improved to $23.8 million from a loss of $7.5 million in the prior year, also benefiting from a $27.2 million gain on property disposition Results of Operations - Nine Months (thousands) | Metric | 2022 | 2021 | Change | % Change | |:---|:---|:---|:---|:---| | Rental revenue | $445,143 | $420,586 | $24,557 | 5.8% | | Observatory revenue | $73,660 | $23,758 | $49,902 | 210.0% | | Total revenues | $545,768 | $463,760 | $82,008 | 17.7% | | Total operating expenses | $457,694 | $405,724 | $(51,970) | (12.8)% | | Gain on disposition of property | $27,170 | — | $27,170 | 100.0% | | Net income (loss) attributable to common stockholders | $23,847 | $(7,523) | $31,370 | 417.0% | - The increase in rental revenue reflects the inclusion of revenue from multifamily properties acquired on December 22, 2021[152] - Property operating expenses increased by 28.6% due to higher payroll, utilities, repairs, maintenance, cleaning, and the inclusion of multifamily property expenses[156] Liquidity and Capital Resources The company maintains liquidity through cash on hand, operating cash flows, debt issuances, and an unsecured revolving credit facility. As of September 30, 2022, it had $387.2 million in cash and equivalents and $850 million available under its credit facility, with total consolidated indebtedness of $2.3 billion and no significant maturities until November 2024. The company was in compliance with all financial covenants - Primary liquidity sources include cash on hand, cash from operations, debt issuances, and an unsecured revolving credit facility[166][167] - As of September 30, 2022, the company had $387.2 million in cash and cash equivalents and $850 million available under its unsecured revolving credit facility[167] Financial Covenant Compliance | Financial Covenant | Required | Sep 30, 2022 | In Compliance | |:---|:---|:---|:---| | Maximum total leverage | < 60% | 39.0% | Yes | | Maximum secured leverage | < 40% | 15.6% | Yes | | Minimum fixed charge coverage | > 1.50x | 2.6x | Yes | | Minimum unencumbered interest coverage | > 1.75x | 4.7x | Yes | | Maximum unsecured leverage | < 60% | 28.5% | Yes | - Total consolidated indebtedness was approximately $2.3 billion with a weighted average interest rate of 3.9% and a weighted average maturity of 6.7 years, with no outstanding debt maturing until November 2024 (excluding principal amortization)[168] Net Operating Income ("NOI") NOI, a non-GAAP measure, is used by management to evaluate property performance by excluding financing costs, depreciation, amortization, acquisition expenses, and general and administrative expenses. For the three and nine months ended September 30, 2022, NOI increased to $97.8 million and $304.7 million, respectively - NOI is a non-GAAP measure used to evaluate property performance, excluding costs like interest expense, depreciation, and general and administrative expenses[188][191] Net Operating Income (thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | |:---|:---|:---|:---|:---| | Net income (loss) | $10,118 | $(10,183) | $41,592 | $(8,963) | | Net operating income | $97,847 | $93,110 | $304,730 | $254,827 | Funds from Operations ("FFO") FFO, a non-GAAP measure defined by NAREIT, is presented as a supplemental measure of operating performance for REITs, excluding items like depreciation and gains/losses from property sales. For the three and nine months ended September 30, 2022, FFO attributable to common stockholders and the Operating Partnership was $54.6 million and $179.0 million, respectively - FFO is a non-GAAP financial measure for REITs, defined by NAREIT, useful for understanding financial performance and comparison among REITs[195][196] Funds from Operations (thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | |:---|:---|:---|:---|:---| | Net income (loss) | $10,118 | $(10,183) | $41,592 | $(8,963) | | FFO attributable to common stockholders and the Operating Partnership | $54,578 | $53,332 | $178,988 | $139,035 | Modified Funds From Operations ("Modified FFO") Modified FFO is a supplemental non-GAAP measure that adjusts FFO by adding back the amortization of below-market ground leases, which is material to the company's results due to non-cash accounting treatment. For the three and nine months ended September 30, 2022, Modified FFO was $56.5 million and $184.9 million, respectively - Modified FFO adjusts FFO by adding back the amortization of below-market ground leases, which is a material non-cash item[199] Modified Funds From Operations (thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | |:---|:---|:---|:---|:---| | FFO attributable to common stockholders and the Operating Partnership | $54,578 | $53,332 | $178,988 | $139,035 | | Amortization of below-market ground leases | $1,957 | $1,957 | $5,873 | $5,873 | | Modified FFO attributable to common stockholders and the Operating Partnership | $56,535 | $55,289 | $184,861 | $144,908 | Core Funds From Operations Core FFO is a non-GAAP measure that further adjusts Modified FFO by excluding IPO litigation expense, severance expenses, and loss on early extinguishment of debt, providing a clearer view of core operating performance. For the three and nine months ended September 30, 2022, Core FFO was $56.5 million and $184.9 million, respectively - Core FFO adjusts Modified FFO by excluding IPO litigation expense, severance expenses, and loss on early extinguishment of debt to reflect core operating performance[200] Core Funds From Operations (thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | |:---|:---|:---|:---|:---| | Modified FFO attributable to common stockholders and the Operating Partnership | $56,535 | $55,289 | $184,861 | $144,908 | | Loss on early extinguishment of debt | — | — | — | $214 | | Core FFO attributable to common stockholders and the Operating Partnership | $56,535 | $55,289 | $184,861 | $145,122 | Factors That May Influence Future Results of Operations Future results will be influenced by portfolio transaction activity, leasing trends, and observatory operations. The company expects to close $95.0 million in property sales in Q1 2023 and anticipates increased occupancy and rental revenues long-term, despite short-term fluctuations from repositioning efforts. Observatory performance remains tied to tourism trends Portfolio Transaction Activity Subsequent to September 30, 2022, the company entered into agreements to sell two properties, 500 Mamaroneck Avenue and 10 Bank Street, for a gross asset valuation of $95.0 million, with closings anticipated in the first quarter of 2023 - Agreements were made to sell 500 Mamaroneck Avenue and 10 Bank Street for $95.0 million, expected to close in Q1 2023[203] Leasing As of September 30, 2022, 11.5% of the portfolio's rentable square footage was available to lease, with 1.4% and 5.5% of leases expiring in 2022 and 2023, respectively. The company anticipates long-term increases in occupancy and rental revenues from redevelopment efforts, despite potential short-term lower occupancy - As of September 30, 2022, approximately 1.1 million rentable square feet (11.5% of portfolio) was available to lease[205] - Leases representing 1.4% and 5.5% of net rentable square footage will expire in 2022 and 2023, respectively[205] - The company expects increased occupancy levels and rental revenues over the long-term due to redevelopment and repositioning of properties, despite potential short-term lower occupancy[206][208] Observatory Operations Observatory visitation significantly increased to 687,000 visitors in Q3 2022 from 255,000 in Q3 2021, driving revenue growth. Future performance remains dependent on domestic and international tourism trends, pricing, seasonality, competition, and weather - The observatory hosted 687,000 visitors in Q3 2022, a significant increase from 255,000 visitors in Q3 2021[209] - Observatory revenue for Q3 2022 was $33.1 million, up from $12.8 million in Q3 2021[210] - Observatory revenues and admissions are dependent on tourism trends (domestic and international), admission prices, seasonal trends, competition, and weather[210] Critical Accounting Estimates There were no material changes to the critical accounting estimates disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021 - No material changes to critical accounting estimates were reported[211] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to interest rate risk, primarily on its unsecured revolving credit facility and debt refinancings, which it mitigates through fixed-rate borrowings and derivative financial instruments like interest rate swaps and caps. As of September 30, 2022, the company had $576.3 million in notional value of interest rate swap and cap agreements, with a fair value of $18.5 million, and is transitioning from LIBOR to SOFR swap agreements - The company uses derivative financial instruments (interest rate swaps and caps) to manage interest rate risk on its unsecured revolving credit facility and debt refinancings[213] - As of September 30, 2022, the company had $576.3 million in aggregate notional value of interest rate LIBOR swap and cap agreements and SOFR swap agreements, with a fair value of $18.5 million[214] - The weighted average interest rate on $2.3 billion of fixed-rate indebtedness was 3.9% per annum as of September 30, 2022[215] ITEM 4. CONTROLS AND PROCEDURES As of September 30, 2022, the company's management, including the CEO and CFO, concluded that its disclosure controls and procedures were effective. No changes in internal control over financial reporting were identified that materially affected or are reasonably likely to materially affect these controls - The company's disclosure controls and procedures were evaluated and deemed effective as of September 30, 2022[217] - No material changes to internal control over financial reporting were identified during the period[218] PART II. OTHER INFORMATION This section provides additional disclosures including legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits ITEM 1. LEGAL PROCEEDINGS The company's legal proceedings are detailed in Note 9 to the Condensed Consolidated Financial Statements, which primarily involve an ongoing arbitration appeal related to the 2013 IPO and formation transactions - Legal proceedings are described in Note 9 to the Condensed Consolidated Financial Statements[220] ITEM 1A. RISK FACTORS There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021 - No material changes to risk factors were reported compared to the Annual Report on Form 10-K for the year ended December 31, 2021[222] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company reported no unregistered sales of equity securities. It continued its $500 million stock and OP unit repurchase program, with approximately $417.5 million remaining authorized as of September 30, 2022, and detailed repurchases made during Q3 2022 - No unregistered sales of equity securities were reported[223] - A $500 million stock and OP unit repurchase program is authorized through December 31, 2023, with approximately $417.5 million remaining as of September 30, 2022[224] Equity Repurchases | Period | Total Number of Shares Purchased | Weighted Average Price Paid per Share | |:---|:---|:---|\ | July 1-31, 2022 | 184,045 | $6.92 | | August 1-31, 2022 | 621,314 | $7.32 | | September 1-30, 2022 | 1,761,561 | $6.97 | ITEM 3. DEFAULTS UPON SENIOR SECURITIES The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[227] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company - Mine safety disclosures are not applicable to the company[228] ITEM 5. OTHER INFORMATION No other information was reported under this item - No other information was reported[229] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including amendments to credit agreements, certifications from the CEO and CFO, and XBRL-related documents - Exhibits include amendments to credit agreements (10.62*, 10.63*), CEO and CFO certifications (31.1*, 31.2*, 32.1*, 32.2*), and XBRL documents (101.INS* to 101.PRE*, 104)[231] SIGNATURES The report is duly signed on behalf of Empire State Realty Trust, Inc. by its Executive Vice President and Chief Financial Officer, Christina Chiu, and Senior Vice President, Chief Accounting Officer, Stephen V. Horn, on November 3, 2022 - The report was signed by Christina Chiu, Executive Vice President and Chief Financial Officer, and Stephen V. Horn, Senior Vice President, Chief Accounting Officer, on November 3, 2022[236]