Empire State Realty Trust(ESRT) - 2023 Q2 - Quarterly Report

FORM 10-Q Header TABLE OF CONTENTS PART I. FINANCIAL INFORMATION This section details the company's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and comprehensive notes, along with management's discussion and analysis of financial condition and results of operations ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements of Empire State Realty Trust, Inc. for the quarter and six months ended June 30, 2023, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, acquisitions, debt, equity, and segment performance - The financial statements are unaudited and prepared in conformity with GAAP for interim financial information[29] - The observatory business is subject to seasonality based on tourism trends and weather, with the second quarter typically realizing 26-28% of annual observatory revenue[30][32] - The multifamily business also experiences some seasonality, with slower leasing activity in winter months[32] Condensed Consolidated Balance Sheets The condensed consolidated balance sheets show the financial position of Empire State Realty Trust, Inc. as of June 30, 2023, compared to December 31, 2022, detailing assets, liabilities, and equity Balance Sheet Data | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :--------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | | Total assets | $4,184,768 | $4,163,594 | $21,174 | | Total liabilities | $2,473,156 | $2,480,503 | $(7,347) | | Total equity | $1,711,612 | $1,683,091 | $28,521 | | Cash and cash equivalents | $315,357 | $264,434 | $50,923 | | Commercial real estate properties, net | $2,385,324 | $2,414,182 | $(28,858) | | Assets held for sale | $— | $35,538 | $(35,538) | Condensed Consolidated Statements of Operations The condensed consolidated statements of operations provide a comparative view of revenues, operating expenses, and net income for the three and six months ended June 30, 2023, and 2022 Operations Data | Metric (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change | % Change | | :------------------------------------ | :--------------------------- | :--------------------------- | :----- | :------- | | Total revenues | $190,542 | $198,022 | $(7,480) | (3.8)% | | Total operating expenses | $144,353 | $151,523 | $(7,170) | (4.7)% | | Total operating income | $46,189 | $46,499 | $(310) | (0.7)% | | Net income | $36,955 | $48,695 | $(11,740) | (24.1)% | | Net income attributable to common stockholders | $21,854 | $29,579 | $(7,725) | (26.1)% | | Basic EPS | $0.14 | $0.18 | $(0.04) | (22.2)% | | Diluted EPS | $0.14 | $0.18 | $(0.04) | (22.2)% | | Dividends per share | $0.035 | $0.035 | $0.000 | 0.0% | | Metric (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change | % Change | | :------------------------------------ | :--------------------------- | :--------------------------- | :----- | :------- | | Total revenues | $355,164 | $362,056 | $(6,892) | (1.9)% | | Total operating expenses | $291,487 | $309,509 | $(18,022) | (5.8)% | | Total operating income | $63,677 | $52,547 | $11,130 | 21.2% | | Net income | $48,649 | $31,474 | $17,175 | 54.6% | | Net income attributable to common stockholders | $28,373 | $18,290 | $10,083 | 55.1% | | Basic EPS | $0.18 | $0.11 | $0.07 | 63.6% | | Diluted EPS | $0.18 | $0.11 | $0.07 | 63.6% | | Dividends per share | $0.070 | $0.070 | $0.000 | 0.0% | Condensed Consolidated Statements of Comprehensive Income The condensed consolidated statements of comprehensive income show net income and other comprehensive income components, primarily unrealized gains on interest rate swap agreements, for the three and six months ended June 30, 2023, and 2022 Comprehensive Income Data | Metric (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change | % Change | | :------------------------------------------------ | :--------------------------- | :--------------------------- | :----- | :------- | | Net income | $36,955 | $48,695 | $(11,740) | (24.1)% | | Other comprehensive income | $10,053 | $12,798 | $(2,745) | (21.4)% | | Comprehensive income | $47,008 | $61,493 | $(14,485) | (23.6)% | | Comprehensive income attributable to common stockholders | $27,809 | $36,457 | $(8,648) | (23.7)% | | Metric (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change | % Change | | :------------------------------------------------ | :--------------------------- | :--------------------------- | :----- | :------- | | Net income | $48,649 | $31,474 | $17,175 | 54.6% | | Other comprehensive income | $3,379 | $25,855 | $(22,476) | (87.0)% | | Comprehensive income | $52,028 | $57,329 | $(5,301) | (9.2)% | | Comprehensive income attributable to common stockholders | $30,489 | $33,263 | $(2,774) | (8.3)% | Condensed Consolidated Statements of Stockholders' Equity The condensed consolidated statements of stockholders' equity detail changes in equity for the three and six months ended June 30, 2023, and 2022 Stockholders' Equity Data | Metric (in thousands) | June 30, 2023 | December 31, 2022 | Change | | :------------------------------------ | :------------ | :---------------- | :----- | | Total Empire State Realty Trust, Inc. stockholders' equity | $965,950 | $954,375 | $11,575 | | Non-controlling interests in the Operating Partnership | $700,282 | $683,310 | $16,972 | | Total equity | $1,711,612 | $1,683,091 | $28,521 | - Repurchases of common shares amounted to $7.4 million for the three months ended June 30, 2023, and $13.1 million for the six months ended June 30, 2023[14][16] - Net income attributable to common stockholders was $21.9 million for the three months ended June 30, 2023, and $28.4 million for the six months ended June 30, 2023[14][16] Condensed Consolidated Statements of Cash Flows The condensed consolidated statements of cash flows present the cash generated from or used in operating, investing, and financing activities for the six months ended June 30, 2023, and 2022 Cash Flow Data | Metric (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change | | :------------------------------------ | :--------------------------- | :--------------------------- | :----- | | Net cash provided by operating activities | $105,906 | $83,678 | $22,228 | | Net cash provided by (used in) investing activities | $12,744 | $(56,645) | $69,389 | | Net cash used in financing activities | $(37,520) | $(88,912) | $51,392 | | Net increase (decrease) in cash and cash equivalents and restricted cash | $81,130 | $(61,879) | $143,009 | | Cash and cash equivalents and restricted cash—end of period | $395,808 | $412,759 | $(16,951) | - Cash paid for interest increased to $46.1 million for the six months ended June 30, 2023, from $40.2 million in the prior year[21] Notes to Condensed Consolidated Financial Statements This section provides detailed explanatory notes to the condensed consolidated financial statements, covering the company's business, accounting policies, recent acquisitions and dispositions, debt structure, equity, and segment performance Note 1. Description of Business and Organization Empire State Realty Trust, Inc. (ESRT) is a self-administered and self-managed REIT focused on owning, managing, operating, acquiring, and repositioning office, retail, and multifamily properties in Manhattan and the greater New York metropolitan area, including the iconic Empire State Building and its Observatory Experience - ESRT is a REIT that owns and operates office, retail, and multifamily properties in Manhattan and the greater New York metropolitan area[25] - As of June 30, 2023, the portfolio included 9.4 million rentable square feet of office and retail space, with 11 office properties (8.6 million sq ft), 4 standalone retail properties (0.2 million sq ft), and 3 multifamily properties (721 units)[26] - ESRT owns approximately 59.4% of the aggregate operating partnership units in its Operating Partnership, which holds substantially all assets and conducts business[27] Note 2. Summary of Significant Accounting Policies This note outlines the significant accounting policies used in preparing the unaudited condensed consolidated financial statements, emphasizing conformity with GAAP and SEC rules for interim reporting - Financial statements are prepared in conformity with GAAP for interim information and SEC rules, with certain disclosures condensed or omitted[29] - The observatory business is seasonal, with 26-28% of annual revenue typically realized in Q2, while the multifamily business also experiences seasonality[30][32] - The company consolidates entities where it has a controlling financial interest, including its Operating Partnership, which is identified as a Variable Interest Entity (VIE)[33] Note 3. Acquisitions and Dispositions This note details the company's property disposition activities during the reporting period - Sold 500 Mamaroneck Avenue in Harrison, NY, on April 5, 2023, for a gross asset valuation of $53.0 million, recording a gain of $13.6 million[37] - Sold 69-97 and 103-107 Main Street in Westport, CT, on February 1, 2023, for a gross asset valuation of $40.0 million, recording a gain of $15.7 million[39] Note 4. Deferred Costs, Acquired Lease Intangibles and Goodwill This note provides a breakdown of deferred costs, acquired lease intangibles, and goodwill Deferred Costs, Acquired Lease Intangibles and Goodwill Table | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------------------ | :------------ | :---------------- | | Total deferred costs, net (excluding net deferred financing costs) | $172,754 | $183,977 | | Acquired below-market ground leases, net | $325,157 | $329,073 | | Acquired below-market leases, net | $(15,280) | $(17,849) | | Goodwill | $491,479 | $491,479 | - Amortization expense for deferred leasing costs was $11.9 million for the six months ended June 30, 2023, and $4.6 million for acquired lease intangibles[41] - Goodwill of $491.5 million is allocated $227.5 million to the observatory segment and $264.0 million to the real estate segment[43] - A qualitative assessment for the quarter ended June 30, 2023, indicated no impairment of goodwill for the observatory reportable segment[44][46] Note 5. Debt This note details the company's debt structure, including mortgage notes payable, senior unsecured notes, and unsecured term loan facilities Debt Summary | Debt Type (in thousands) | Principal Balance as of June 30, 2023 | Principal Balance as of December 31, 2022 | | :------------------------------------ | :------------------------------------ | :---------------------------------------- | | Total mortgage debt | $896,361 | $900,630 | | Senior unsecured notes | $875,000 | $875,000 | | Unsecured term loan facility (BofA) | $215,000 | $215,000 | | Unsecured term loan facility (Wells Fargo) | $175,000 | $175,000 | | Total principal | $2,261,361 | $2,265,630 | - Weighted average interest rate on total consolidated indebtedness was 3.9% with a weighted average maturity of 5.9 years as of June 30, 2023[155] - The company was in compliance with all debt covenants as of June 30, 2023[47][54][55] - Aggregate required principal payments for 2024 are $86.5 million, and for 2025 are $321.9 million[49] Note 6. Accounts Payable and Accrued Expenses This note provides a breakdown of accounts payable and accrued expenses, which totaled $71.7 million as of June 30, 2023, a decrease from $80.7 million at December 31, 2022 Accounts Payable and Accrued Expenses Summary | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------------------ | :------------ | :---------------- | | Accrued capital expenditures | $38,677 | $44,293 | | Accounts payable and accrued expenses | $29,468 | $32,927 | | Accrued interest payable | $3,564 | $3,509 | | Total accounts payable and accrued expenses | $71,709 | $80,729 | Note 7. Financial Instruments and Fair Values This note discusses the company's use of derivative financial instruments, primarily interest rate swaps and caps, to manage interest rate risk - The company uses derivative financial instruments (interest rate swaps and caps) to manage interest rate risk, not for speculative purposes[57] Financial Instruments and Fair Values Summary | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------------------ | :------------ | :---------------- | | Notional value of interest rate swaps and caps | $574,000 | $574,800 | | Fair value of derivative instruments (asset position) | $19,361 | $17,936 | | Fair value of outstanding debt | $2,025,794 | $2,038,940 | | Book value of outstanding debt | $2,243,388 | $2,246,137 | - An estimated $8.5 million net gain from accumulated other comprehensive income related to derivatives is expected to be reclassified into interest expense within the next 12 months[60] Note 8. Leases This note covers the company's role as both a lessor and a lessee Lease Revenue Summary | Metric (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Fixed payments (rental revenue) | $138,318 | $134,794 | $262,882 | $268,195 | | Variable payments (rental revenue) | $16,285 | $14,545 | $31,812 | $28,658 | | Total rental revenue | $154,603 | $149,339 | $294,694 | $296,853 | - Future contractual minimum lease payments on non-cancellable operating leases total $4.06 billion, expiring through 2040[68] - As a lessee, right-of-use assets and ground lease liabilities were $28.6 million as of June 30, 2023, with a weighted average remaining lease term of 46.9 years[72][73] - The company reversed $5.8 million of a $6.4 million reserve for Signature Bank's straight-line rent receivable after Flagstar Bank assumed the lease at 1400 Broadway[70] Note 9. Commitments and Contingencies This note addresses legal proceedings, unfunded capital expenditures, concentration of credit risk, asset retirement obligations, and other environmental matters - An arbitration award of approximately $1.2 million (inclusive of interest) was confirmed against the Respondents in litigation related to the IPO and Empire State Building Associates[77] - The company estimates approximately $138.4 million in unfunded capital expenditures (tenant improvements and leasing commissions) for existing lease agreements[79] - The company holds cash and cash equivalents and restricted cash balances in excess of FDIC insured amounts at major financial institutions, posing a concentration of credit risk[81] - The company has identified asbestos in certain properties but has no current plans for removal that would trigger federal regulations, thus the fair value of the associated asset retirement obligation is indeterminable[82] Note 10. Equity This note details the company's equity structure, including common stock, operating partnership units (OP Units), and private perpetual preferred units Equity Structure | Metric | June 30, 2023 | | :------------------------------------ | :------------ | | Class A common stock shares outstanding | 159,842,614 | | Class B common stock shares outstanding | 988,180 | | Operating Partnership Units (OP Units) outstanding | 110,086,858 | | REIT controlling interest in OP | 59.4% | | Noncontrolling interest in OP | 40.6% | - The company's Board authorized a repurchase program of up to $500 million of Class A common stock and OP units from January 1, 2022, through December 31, 2023, with $396.7 million remaining as of June 30, 2023[93][210] - Total dividends paid to common stockholders were $11.3 million for the six months ended June 30, 2023[98] - In May 2023, 237,856 LTIP units with a fair market value of $1.2 million were granted to non-employee directors, vesting over three or four years[100] Note 11. Related Party Transactions This note discloses transactions with related parties, primarily entities affiliated with Anthony E. Malkin (Chairman, President, and CEO) Related Party Transactions Revenue | Revenue Type (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Supervisory fees | $300 | $300 | $500 | $500 | | Property management fees | $50 | $100 | $200 | $100 | | Other revenue (rent/support services) | $100 | $100 | $200 | $200 | - The company advanced a $0.6 million loan to the buyer of Westport retail assets in February 2023, with $0.1 million outstanding as of June 30, 2023[112] Note 12. Segment Reporting This note segments the company's operations into two reportable segments: real estate and observatory - The company operates in two reportable segments: real estate (ownership, management, operation of properties) and observatory (Empire State Building observatories)[113] Segment Performance | Metric (in thousands) | Real Estate Segment (3 Months Ended June 30, 2023) | Observatory Segment (3 Months Ended June 30, 2023) | Total (3 Months Ended June 30, 2023) | | :------------------------------------ | :------------------------------------------------- | :------------------------------------------------- | :----------------------------------- | | Total revenues | $178,051 | $33,433 | $190,542 | | Total operating expenses | $135,653 | $29,642 | $144,353 | | Net income | $33,650 | $3,305 | $36,955 | | Segment assets | $3,928,943 | $255,825 | $4,184,768 | | Metric (in thousands) | Real Estate Segment (6 Months Ended June 30, 2023) | Observatory Segment (6 Months Ended June 30, 2023) | Total (6 Months Ended June 30, 2023) | | :------------------------------------ | :------------------------------------------------- | :------------------------------------------------- | :----------------------------------- | | Total revenues | $336,433 | $55,587 | $355,164 | | Total operating expenses | $274,888 | $53,455 | $291,487 | | Net income | $45,549 | $3,100 | $48,649 | | Expenditures for segment assets | $35,576 | $58 | $35,634 | Note 13. Subsequent Events This note states that there were no subsequent events requiring disclosure after June 30, 2023 - No subsequent events were identified after June 30, 2023[119] 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 condition and results of operations for the three and six months ended June 30, 2023, compared to the prior year - The discussion compares performance for the three and six months ended June 30, 2023, with the corresponding periods in 2022[121] - Forward-looking statements are subject to substantial risks and uncertainties, including economic impact of catastrophic events, reduced demand for space, changes in tourism, increased borrowing costs, and declining real estate valuations[123][124] FORWARD-LOOKING STATEMENTS This section clarifies that the report contains forward-looking statements, which are subject to substantial risks and uncertainties and should not be relied upon as predictions of future events - Forward-looking statements are identified by terms like "aims," "anticipates," "believes," "expects," and "will," and are covered by safe harbor provisions[122] - Key risks include economic impact of catastrophic events, reduced demand for office/multifamily/retail space, changes in tourism, increased borrowing costs, declining real estate valuations, and termination of ground leases[124] - The company assumes no obligation to update or revise publicly any forward-looking statement after the report date[125] Overview This overview highlights key achievements for the three months ended June 30, 2023, including net income attributable to common stockholders of $21.9 million, Core FFO of $69.2 million, a 90.3% leased commercial portfolio, significant leasing activity, and strong observatory performance - Net income attributable to common stockholders: $21.9 million[129] - Core Funds From Operations ("Core FFO") attributable to common stockholders and the operating partnership: $69.2 million[129] - Commercial portfolio 90.3% leased; Manhattan office portfolio 91.6% leased[129] - Signed 336,314 rentable square feet of new, renewal, and expansion leases[129] - Empire State Building Observatory generated $24.8 million of net operating income[129] - Repurchased $7.4 million of common stock in Q2 2023 and through July 25, 2023[129] Results of Operations This section provides a detailed comparison of the company's financial performance for the three and six months ended June 30, 2023, versus 2022, broken down by Real Estate and Observatory segments Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022 For the three months ended June 30, 2023, total revenues decreased by 3.8% to $190.5 million, primarily due to the absence of lease termination fees Results of Operations Summary | Metric (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change | % Change | | :------------------------------------ | :--------------------------- | :--------------------------- | :----- | :------- | | Total revenues | $190,542 | $198,022 | $(7,480) | (3.8)% | | Net income attributable to common stockholders | $21,854 | $29,579 | $(7,725) | (26.1)% | | Rental revenue | $154,603 | $149,339 | $5,264 | 3.5% | | Observatory revenue | $33,433 | $27,368 | $6,065 | 22.2% | | Lease termination fees | $— | $18,859 | $(18,859) | (100.0)% | | Depreciation and amortization | $46,280 | $58,304 | $12,024 | 20.6% | | Interest income | $3,339 | $431 | $2,908 | 674.7% | | Gain on disposition of property | $13,565 | $27,170 | $(13,605) | (50.1)% | Real Estate Segment For the Real Estate segment in Q2 2023, rental revenue increased by 3.5% primarily due to the reversal of a straight-line rent receivable reserve related to Signature Bank - Rental revenue increased due to the reversal of a one-time straight-line rent receivable reserve tied to Signature Bank[131] - Property operating expenses increased due to higher repairs, maintenance, cleaning, and payroll costs[132] - Real estate taxes increased due to higher assessed values for multiple properties and the inclusion of a recently acquired multifamily property[133] - Depreciation and amortization decreased due to accelerated depreciation in Q2 2022 and the sale of properties[134] - Interest income increased significantly due to higher interest rates[135] - Gain on disposition of property reflects the sale of 500 Mamaroneck in April 2023[136] Observatory Segment The Observatory segment experienced a 22.2% increase in revenue for Q2 2023, driven by higher visitation - Observatory revenues increased by 22.2% due to higher visitation[137] - Observatory expenses increased by 11.3% due to increased operating hours and higher variable costs (marketing, labor, maintenance)[138] - Income tax expense increased due to higher taxable income for the observatory segment[139] Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022 For the six months ended June 30, 2023, total revenues decreased by 1.9% to $355.2 million, primarily due to property dispositions and the absence of lease termination fees Results of Operations Summary | Metric (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change | % Change | | :------------------------------------ | :--------------------------- | :--------------------------- | :----- | :------- | | Total revenues | $355,164 | $362,056 | $(6,892) | (1.9)% | | Net income attributable to common stockholders | $28,373 | $18,290 | $10,083 | 55.1% | | Rental revenue | $294,694 | $296,853 | $(2,159) | (0.7)% | | Observatory revenue | $55,587 | $40,609 | $14,978 | 36.9% | | Lease termination fees | $— | $20,032 | $(20,032) | (100.0)% | | Depreciation and amortization | $93,688 | $125,410 | $31,722 | 25.3% | | Interest income | $5,934 | $580 | $5,354 | 923.1% | | Gain on disposition of property | $29,261 | $27,170 | $2,091 | 7.7% | Real Estate Segment For the Real Estate segment in H1 2023, rental revenue slightly decreased due to property dispositions - Rental revenue decreased primarily due to the dispositions of four properties between April 2022 and April 2023[142] - Property operating expenses increased due to higher repairs, maintenance, cleaning, and payroll costs[143] - General and administrative expenses increased due to higher payroll and equity compensation costs[144] - Real estate taxes increased due to higher assessed values and the inclusion of a recently acquired multifamily property[145] - Depreciation and amortization decreased due to accelerated depreciation in H1 2022 and the sale of properties[147] - Interest income increased due to higher interest rates[148] - Gain on disposition of property reflects the sales of 500 Mamaroneck and Westport retail assets[149] Observatory Segment The Observatory segment's revenue increased by 36.9% for H1 2023, driven by higher visitation - Observatory revenues increased by 36.9% due to increased visitation[150] - Observatory expenses increased due to increased operating hours and higher variable costs (marketing, labor, maintenance)[151] - Income tax benefit decreased due to a lower taxable loss for the observatory segment[152] Liquidity and Capital Resources This section discusses the company's ability to meet its cash requirements, highlighting primary liquidity sources such as cash on hand, operating cash flows, debt issuances, and an $850 million unsecured revolving credit facility - Primary liquidity sources include cash on hand, operating cash flows, debt issuances, and an unsecured revolving credit facility[154] - As of June 30, 2023, the company had $315.4 million in cash and cash equivalents and $850 million available under its unsecured revolving credit facility[155] - Total consolidated indebtedness was approximately $2.3 billion, with a weighted average interest rate of 3.9% and a weighted average maturity of 5.9 years[155] - No outstanding debt matures until November 2024, excluding principal amortization[155] Portfolio Transaction Activity This section summarizes recent property sales, including the disposition of 69-97 and 103-107 Main Street in Westport, Connecticut, for $40.0 million on February 1, 2023, and 500 Mamaroneck Avenue in Harrison, NY, for $53.0 million on April 5, 2023 - Sold 69-97 and 103-107 Main Street in Westport, CT, for $40.0 million on February 1, 2023[156] - Sold 500 Mamaroneck Avenue in Harrison, NY, for $53.0 million on April 5, 2023[157] Unsecured Revolving Credit and Term Loan Facilities The company's BofA Credit Facility includes an $850.0 million revolving credit facility and a $215.0 million term loan, both maturing in March 2025 - BofA Credit Facility includes an $850.0 million revolving credit facility (matures March 2025) and a $215.0 million term loan (matures March 2025)[51] - Wells Term Loan Facility is for $175.0 million (matures December 2026)[52] - Both facilities' terms were revised to replace LIBOR with SOFR and allow multifamily assets as Unencumbered Eligible Property[51][52] - As of June 30, 2023, there were no borrowings under the revolving credit facility and $215.0 million under the BofA term loan, and $175.0 million under the Wells Term Loan Facility[51][52] Mortgage Debt As of June 30, 2023, consolidated mortgage notes payable amounted to $896.4 million - Consolidated mortgage notes payable totaled $896.4 million as of June 30, 2023[159] - The first maturity for mortgage debt is in November 2024[159] Senior Unsecured Notes The company's senior unsecured notes include customary covenants and financial ratios, such as maximum leverage and minimum fixed charge coverage - Senior unsecured notes include customary covenants and financial ratios, such as maximum leverage ratio and minimum fixed charge coverage ratio[160] - As of June 30, 2023, the company was in compliance with all covenants under the outstanding senior unsecured notes[160] Financial Covenants As of June 30, 2023, Empire State Realty Trust was in compliance with all its financial covenants, including maximum total leverage (33.8% vs. <60%), maximum secured leverage (13.2% vs. <40%), minimum fixed charge coverage (3.1x vs. >1.50x), minimum unencumbered interest coverage (5.3x vs. >1.75x), and maximum unsecured leverage (25.1% vs. <60%) Financial Covenants Compliance | Financial covenant | Required | June 30, 2023 | In Compliance | | :------------------------------------ | :------- | :------------ | :------------ | | Maximum total leverage | < 60% | 33.8 % | Yes | | Maximum secured leverage | < 40% | 13.2 % | Yes | | Minimum fixed charge coverage | > 1.50x | 3.1x | Yes | | Minimum unencumbered interest coverage | > 1.75x | 5.3x | Yes | | Maximum unsecured leverage | < 60% | 25.1 % | Yes | Leverage Policies The company's Board of Directors determines the amount of leverage in its capital structure and considers various factors, including economic conditions, cost of capital, market values, and growth opportunities - The Board of Directors determines leverage amounts, considering economic conditions, cost of capital, market values, and growth opportunities[162] - The company's charter and bylaws do not limit the amount or percentage of indebtedness[162] Capital Expenditures This section details capital expenditures, leasing commission costs, and tenant improvement costs for office and retail properties Capital Expenditures and Leasing Costs | Metric | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :------------------------------------ | :--------------------------- | :--------------------------- | | Office Properties: Total square feet leased | 527,295 | 634,582 | | Office Properties: Leasing commission costs per sq ft | $18.52 | $22.14 | | Office Properties: Tenant improvement costs per sq ft | $72.34 | $62.15 | | Retail Properties: Total square feet leased | 11,076 | 4,289 | | Retail Properties: Leasing commission costs per sq ft | $25.95 | $16.64 | | Retail Properties: Tenant improvement costs per sq ft | $26.07 | $— | | Total Portfolio: Capital expenditures (excluding TI & LC) (in thousands) | $25,987 | $19,697 | - The company expects to incur approximately $138.4 million in additional costs for tenant improvements and leasing commissions under existing lease agreements[168] Off-Balance Sheet Arrangements As of June 30, 2023, the company did not have any off-balance sheet arrangements - No off-balance sheet arrangements existed as of June 30, 2023[170] Distribution Policy The company intends to distribute its net taxable income to security holders to satisfy REIT distribution requirements and avoid U.S. federal income tax liability, expecting to make quarterly distributions - The company aims to distribute net taxable income to satisfy REIT distribution requirements and avoid U.S. federal income tax[171] - Quarterly distributions are expected, but may require using cash reserves, incurring debt, or liquidating assets under certain circumstances[172] Distribution to Equity Holders Total distributions and dividends to equity holders amounted to $20.3 million for the six months ended June 30, 2023, a decrease from $21.6 million in the prior year Equity Holder Distributions | Metric (in millions) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change | | :------------------------------------ | :--------------------------- | :--------------------------- | :----- | | Distributions and dividends to equity holders | $20.3 | $21.6 | $(1.3) | Stock and Publicly Traded Operating Partnership Unit Repurchase Program The Board of Directors authorized a repurchase program of up to $500 million for Class A common stock and OP units from January 1, 2022, through December 31, 2023 - Board authorized a $500 million repurchase program for Class A common stock and OP units from Jan 1, 2022, to Dec 31, 2023[174][210] - As of June 30, 2023, $396.7 million remained available for future repurchases[210] Stock Repurchase Program Activity | Period | Total Number of Shares Purchased | Weighted Average Price Paid per Share | Maximum Approximate Dollar Value Available for Future Purchase (in thousands) | | :----------------------- | :------------------------------- | :------------------------------------ | :-------------------------------------------------------------------------- | | April 1 - April 30, 2023 | 1,214,770 | $6.09 | $396,736 | | May 1 - May 31, 2023 | 2,700 | $6.00 | $396,720 | | June 1 - June 30, 2023 | — | $— | $396,720 | Cash Flows For the six months ended June 30, 2023, cash and cash equivalents and restricted cash decreased to $395.8 million from $412.8 million in the prior year Cash Flow Summary | Metric (in millions) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change | | :------------------------------------ | :--------------------------- | :--------------------------- | :----- | | Cash and cash equivalents and restricted cash | $395.8 | $412.8 | $(17.0) | | Net cash provided by operating activities | $105.9 | $83.7 | $22.2 | | Net cash provided by (used in) investing activities | $12.7 | $(56.6) | $69.3 | | Net cash used in financing activities | $(37.5) | $(88.9) | $51.4 | Net Operating Income ("NOI") Net Operating Income (NOI) is a non-GAAP financial measure used by management to evaluate property performance, excluding factors like financing costs, depreciation, and general administrative expenses - NOI is a non-GAAP measure used to evaluate property performance, excluding cost of funds, depreciation, acquisition expenses, and general & administrative expenses[179] Net Operating Income | Metric (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net operating income | $108,163 | $120,353 | $188,340 | $206,343 | Funds from Operations ("FFO") Funds from Operations (FFO) is a non-GAAP measure defined by NAREIT, used to understand REIT financial performance by excluding certain non-cash items like depreciation and gains/losses from property sales - FFO is a non-GAAP measure defined by NAREIT, excluding impairment write-offs, gains/losses from debt restructurings and property sales, and including real estate-related depreciation and amortization[184] Funds from Operations | Metric (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | FFO attributable to common stockholders and the Operating Partnership | $67,225 | $77,204 | $108,240 | $124,410 | Modified Funds From Operations ("Modified FFO") Modified FFO is a non-GAAP measure that adjusts traditional FFO by adding back amortization of above or below-market ground leases, which is considered material due to non-cash accounting treatment - Modified FFO adds back amortization of above or below-market ground leases to FFO, useful for evaluating operating performance due to non-cash accounting treatment[185] Modified Funds From Operations | Metric (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Modified FFO attributable to common stockholders and the Operating Partnership | $69,183 | $79,162 | $112,156 | $128,326 | Core Funds From Operations ("Core FFO") Core FFO further adjusts Modified FFO by excluding IPO litigation expense, severance expenses, and loss on early extinguishment of debt, providing a supplemental measure of operating performance by removing non-recurring items - Core FFO adds back IPO litigation expense, severance expenses, and loss on early extinguishment of debt to Modified FFO to provide a clearer view of operating performance[187] Core Funds From Operations | Metric (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Core FFO attributable to common stockholders and the Operating Partnership | $69,183 | $79,162 | $112,156 | $128,326 | Factors That May Influence Future Results of Operations This section discusses key factors that could impact future financial results, including leasing activity, observatory operations, and the broader economic outlook Leasing Leasing activity can significantly impact future results due to the small number of large leases signed quarterly, affecting average rent, tenant improvement, and leasing commission costs - Leasing activity, particularly larger leases, can disproportionately impact average rent, tenant improvement, and leasing commission costs[189] - As of June 30, 2023, 0.9 million rentable square feet (9.7% of portfolio) was available to lease[190] - Leases representing 3.4% and 5.4% of net rentable square footage will expire in 2023 and 2024, respectively[190] Observatory Operations Observatory operations are influenced by domestic and international tourism, admission prices, seasonal trends, competition, and weather - The observatory hosted 666,000 visitors for the three months ended June 30, 2023, up from 573,000 in the prior year[191] - Observatory revenue for the three months ended June 30, 2023, was $33.4 million, compared to $27.4 million in the prior year, driven by higher visitation[192] - Revenues and admissions are dependent on tourism trends, admission prices, seasonality, competition, and weather[193] Outlook Despite global economic uncertainties, including inflation, rising interest rates, and commercial real estate market softening, the company believes its modernized, energy-efficient New York City-focused portfolio is well-positioned - The global economy faces uncertainty from inflation, rising interest rates, real estate loan weakness, and geopolitical unrest[195] - Concerns exist about the softening commercial real estate market, particularly office, due to refinancing challenges and the gradual return-to-office[195] - The company's modernized, amenitized, energy-efficient NYC-focused portfolio is in a good competitive position, characterized by competitive rental rates, strong leased percentage, and diversified income[196] - The Empire State Building Observatory was ranked the 1 attraction in the U.S. by Tripadvisor's 2023 Travelers' Choice Best of the Best Awards for a second consecutive year[196] - The business is supported by a strong balance sheet, modest leverage, and absence of near-term debt maturities or floating rate debt exposure[197] Critical Accounting Estimates This section refers to the Annual Report for a discussion of critical accounting estimates, noting that there were no material changes to these estimates during the period - No material changes to critical accounting estimates were disclosed in the Annual Report[198] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's exposure to market risks, primarily interest rate risk on its unsecured revolving credit facility and debt refinancings - The company is exposed to interest rate changes on its unsecured revolving credit facility and debt refinancings[200] - To mitigate interest rate risk, the company uses interest rate SOFR swap and cap agreements with an aggregate notional value of $574.0 million, maturing between October 2024 and November 2033[201] - The weighted average interest rate on $2.3 billion of fixed-rate indebtedness outstanding was 3.9% per annum as of June 30, 2023[202] - The fair value of outstanding debt was approximately $2.0 billion, which was $217.6 million less than the book value as of June 30, 2023[203] ITEM 4. CONTROLS AND PROCEDURES Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of June 30, 2023, and concluded they were effective - Management concluded that disclosure controls and procedures were effective as of June 30, 2023[205] - No material changes to internal control over financial reporting were identified during the period[206] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, defaults, mine safety, other information, and a list of exhibits ITEM 1. LEGAL PROCEEDINGS This section refers to Note 9 of the financial statements for a description of legal proceedings, indicating that the company is involved in ongoing litigation related to its IPO and Empire State Building Associates - Legal proceedings are described in Note 9, primarily involving arbitration claims related to the IPO and Empire State Building Associates[207][77] ITEM 1A. RISK FACTORS As of June 30, 2023, there have been no material changes to the risk factors previously disclosed in the company's Annual Report and the quarterly report for Q1 2023 - No material changes to risk factors were disclosed as of June 30, 2023, compared to previous reports[208] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section reports no recent unregistered sales of equity securities - No recent unregistered sales of equity securities[209] - The Board authorized a $500 million repurchase program for Class A common stock and OP units from Jan 1, 2022, to Dec 31, 2023, with $396.7 million remaining as of June 30, 2023[210] Equity Repurchase Activity | Period | Total Number of Shares Purchased | Weighted Average Price Paid per Share | Maximum Approximate Dollar Value Available for Future Purchase (in thousands) | | :----------------------- | :------------------------------- | :------------------------------------ | :-------------------------------------------------------------------------- | | April 1 - April 30, 2023 | 1,214,770 | $6.09 | $396,736 | | May 1 - May 31, 2023 | 2,700 | $6.00 | $396,720 | | June 1 - June 30, 2023 | — | $— | $396,720 | ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section states that there were no defaults upon senior securities - No defaults upon senior securities[212] ITEM 4. MINE SAFETY DISCLOSURES This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[213] ITEM 5. OTHER INFORMATION This section states that there is no other information to report - No other information to report[214] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and Principal Financial Officer, and XBRL interactive data files - Includes certifications from the CEO and Principal Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2)[216] - XBRL interactive data files are provided (Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[216] SIGNATURES This section contains the required signatures for the Form 10-Q report, confirming its submission on behalf of Empire State Realty Trust, Inc. by its Executive Vice President, Chief Operating Officer and Chief Financial Officer, and its Senior Vice President, Chief Accounting Officer - The report is signed by Christina Chiu (EVP, COO, CFO) and Stephen V. Horn (SVP, Chief Accounting Officer) on August 4, 2023[220]