# Empire State Realty OP, L.P.: Form 10-Q for the period ended Jun 30, 2015

- Company: [Empire State Realty OP, L.P.](/companies/esba.md) (CIK 1553079)
- Form: 10-Q
- Filed: 2015-08-05
- Accepted by EDGAR: Aug 5, 2015, 14:25 ET
- Period: 2015-06-30
- Accession: 0001628280-15-006099
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1553079/000162828015006099/esrop6-30x1510xq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1553079/000162828015006099/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-04-01 to 2015-06-30 | $164.8m | us-gaap:Revenues |
| Revenue | 6 months, 2015-01-01 to 2015-06-30 | $316.7m | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2015-04-01 to 2015-06-30 | $9.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2015-01-01 to 2015-06-30 | $18.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2015-04-01 to 2015-06-30 | $45.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2015-01-01 to 2015-06-30 | $68.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2015-04-01 to 2015-06-30 | $17.6m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2015-01-01 to 2015-06-30 | $33.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2015-04-01 to 2015-06-30 | $883.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2015-01-01 to 2015-06-30 | $705.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 6 months, 2015-01-01 to 2015-06-30 | $34.5m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2015-04-01 to 2015-06-30 | $0.10 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2015-01-01 to 2015-06-30 | $0.13 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-04-01 to 2015-06-30 | $0.10 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2015-01-01 to 2015-06-30 | $0.13 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-04-01 to 2015-06-30 | 265,867,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2015-01-01 to 2015-06-30 | 265,866,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2015-01-01 to 2015-06-30 | $77.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2015-04-01 to 2015-06-30 | $31.8m | us-gaap:PaymentsToAcquireProductiveAssets |
| Capital expenditure | 6 months, 2015-01-01 to 2015-06-30 | $69.2m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2015-01-01 to 2015-06-30 | $45.9m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2015-06-30 | $34.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2015-06-30 | $3.29bn | us-gaap:Assets |
| Total liabilities | at 2015-06-30 | $1.92bn | us-gaap:Liabilities |
| Long-term debt | at 2015-06-30 | $759.4m | us-gaap:LongTermDebt |

## Management's discussion and analysis

As filed, 61,522 characters.

*Unless the context otherwise requires or indicates, references in this section to "we," "our" and "us" refer to our company and its consolidated subsidiaries.*

### FORWARD-LOOKING STATEMENTS

*This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, we claim the protections of the safe harbor for forward-looking statements contained in such Section. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “contemplates,” “aims,” “continues,” “would” or “anticipates” or the negative of these words and phrases or similar words or phrases. In particular, statements pertaining to our capital resources, portfolio performance, dividend policy and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our portfolio from operations, acquisitions and anticipated market conditions, demographics and results of operations are forward-looking statements.*

*Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all).*

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

- *changes in our industry, the real estate markets, either nationally or in Manhattan or the greater New York metropolitan area;*
- *resolution of the litigations and arbitration involving the company;*
- *reduced demand for office or retail space;*
- *general volatility of the capital and credit markets and the market price of our Class A common stock and our publicly-traded OP Units;*
- *changes in our business strategy;*
- *changes in technology and market competition, which affect utilization of our broadcast or other facilities;*
- *changes in domestic or international tourism, including geopolitical events and currency exchange rates;*
- *defaults on, early terminations of, or non-renewal of leases by tenants;*
- *bankruptcy or insolvency of a major tenant or a significant number of smaller tenants;*
- *fluctuations in interest rates;*
- *increased operating costs;*
- *declining real estate valuations and impairment charges;*
- *termination or expiration of our ground leases;*
- *availability, terms and deployment of capital;*
- *our failure to obtain necessary outside financing, including our unsecured revolving credit facility;*
- *our leverage;*
- *decreased rental rates or increased vacancy rates;*
- *our failure to generate sufficient cash flows to service our outstanding indebtedness;*
- *our failure to redevelop and reposition properties successfully or on the anticipated timeline or at the anticipated costs;*
- *difficulties in identifying properties to acquire and completing acquisitions;*
- *risks of real estate development (including our Metro Tower development site), including the cost of construction delays and cost overruns;*
- *failure to operate properties successfully;*
- *inability to manage our growth effectively;*
- *inability to make distributions to our stockholders in the future;*
- *impact of changes in governmental regulations, tax law and rates and similar matters;*
- *failure to continue to qualify as a real estate investment trust, or REIT;*
- *a future terrorist event in the U.S.;*
- *environmental uncertainties and risks related to adverse weather conditions and natural disasters;*
- *lack, or insufficient amounts, of insurance;*
- *unavailability of, and inability to attract and retain, qualified personnel;*
- *conflicts of interest affecting any of our senior management team;*
- *misunderstanding of our competition;*
- *changes in real estate and zoning laws and increases in real property tax rates;*
- *inability to comply with the laws, rules and regulations applicable to companies and, in particular, public companies; and*
- *other factors discussed under “Item 1A, Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014 and additional factors that may be contained in any filing we make with the SEC, including Part II, Item 1A of our Quarterly Reports on Form 10-Q.*

*While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, or new information, data or methods, future events or other changes after the date of this Quarterly Report on Form 10-Q, except as required by applicable law. For a further discussion of these and other factors that could impact our future results, performance or transactions, see the sections entitled “Risk Factors" in our Annual Report on Form 10-K which we filed with the SEC. You should not place undue reliance on any forward-looking statements, which are based only on information currently available to us.*

### Overview

During the three months ended June 30, 2015:

- Achieved Core Funds From Operations (“Core FFO”) of $0.26 per fully diluted share and net income attributable to the Company of $0.10 per fully diluted share.
- Total portfolio was 88.0% occupied; including signed leases not commenced (“SLNC”), the total portfolio was 90.0% leased at June 30, 2015.
- Manhattan office portfolio (excluding the retail component of these properties) was 86.2% occupied; including SLNC, the Manhattan office portfolio was 88.4% leased at June 30, 2015.
- Retail portfolio was 92.3% occupied; including SLNC, the retail portfolio was 94.1% leased at June 30, 2015.
- Empire State Building was 85.0% occupied; including SLNC, the Empire State Building was 89.6% leased at June 30, 2015.
- Executed 79 leases, representing 254,360 rentable square feet across the total portfolio, achieving a 46.0% increase in mark-to-market rent over previous fully escalated rents on new, renewal, and expansion leases.
- Signed 29 new leases representing 121,145 rentable square feet of new leases in the second quarter 2015 for the Manhattan office portfolio (excluding the retail component of these properties), achieving an increase of 49.4% in mark-to-market rent over previous fully escalated rents.
- The Empire State Building Observatory revenue for the second quarter 2015 grew 0.7% to $30.6 million, from $30.4 million in the second quarter 2014.
- Repaid a $91.0 million mortgage loan on One Grand Central Place.
- Declared a dividend in the amount of $0.085 per share for the second quarter 2015, which was paid on June 30, 2015.

As of June 30, 2015, our total portfolio contained 10.0 million rentable square feet of office and retail space. We owned 14 office properties (including three long-term ground leasehold interests) encompassing approximately 9.3 million rentable square feet of office space. Nine of these properties are located in the midtown Manhattan market and aggregate approximately 7.5 million rentable square feet of office space, including the Empire State Building. Our Manhattan office properties also contain an aggregate of 515,374 rentable square feet of premier retail space on their ground floor and/or contiguous levels. Our remaining five office properties are located in Fairfield County, Connecticut and Westchester County, New York, encompassing in the aggregate approximately 1.9 million rentable square feet. The majority of square footage for these five properties is located in densely populated metropolitan communities with immediate access to mass transportation. Additionally, we have entitled land at the Stamford Transportation Center in Stamford, Connecticut, adjacent to one of our office properties, that will support the development of an approximately 380,000 rentable square foot office building and garage, which we refer to herein as Metro Tower. As of June 30, 2015, our portfolio included four standalone retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut, encompassing 204,175 rentable square feet in the aggregate.

The Empire State Building is our flagship property. The Empire State Building provides us with a diverse source of revenue through its office and retail leases, observatory operations and broadcasting licenses, and related leased space. Our observatory operations are a separate reporting segment. Our observatory operations are subject to regular patterns of tourist activity in Manhattan. During the past ten years of our annual observatory revenue, approximately 16.0% to 18.0% was realized in the first quarter, 26.0% to 28.0% was realized in the second quarter, 31.0% to 33.0% was realized in the third quarter, and 23.0% to 25.0% was realized in the fourth quarter.

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

|  | Six months ended June 30, 2015 |  | 2014 |  |
| --- | ---: | ---: | ---: | ---: |
| Office leases | $53,658 | 39.9% | $52,532 | 40.6% |
| Retail leases | 5,228 | 3.9% | 4,646 | 3.6% |
| Tenant reimbursements & other income | 16,301 | 12.1% | 14,315 | 11.1% |
| Observatory operations | 48,823 | 36.3% | 47,690 | 36.8% |
| Broadcasting licenses and leases | 10,473 | 7.8% | 10,238 | 7.9% |
| Total | $134,483 | 100.0% | $129,421 | 100.0% |

From 2002 through 2006, we gradually gained full control of the day-to-day management of our Manhattan office properties (with the estate of Leona M. Helmsley then continuing to hold certain approval rights on major decisions at some of these properties as a result of its interest in the entities owning the properties). Since then, we have been undertaking a comprehensive redevelopment and repositioning strategy of our Manhattan office properties that has included the physical improvement through upgrades and modernization of, and tenant upgrades in, such properties. Since we assumed full control of the day-to-day management of our Manhattan office properties beginning with One Grand Central Place in 2002, and through June 30, 2015, we have invested a total of approximately $616.0 million (excluding tenant improvement costs and leasing commissions) in our Manhattan office properties pursuant to this program. Of the $616.0 million invested pursuant to this program, $309.0 million was invested at the Empire State Building. We currently estimate that between $55.0 million and $85.0 million of capital is needed beyond June 30, 2015 to complete substantially the redevelopment and repositioning program at our Manhattan office properties. We expect the redevelopment program at the Empire State Building to continue until the end of 2016 due to the size and scope of our remaining work and our desire to minimize tenant disruptions at the property. These estimates are based on our current budgets (which do not include tenant improvement and leasing commission costs) and are subject to change.

We intend to fund these capital improvements through a combination of operating cash flow and borrowings. These improvements, within our redevelopment and repositioning program, include restored, renovated and upgraded or new lobbies; elevator modernization; renovated public areas and bathrooms; refurbished or new windows; upgrade and standardization of retail storefront and signage; façade restorations; modernization of building-wide systems; and enhanced tenant amenities. These improvements are designed to improve the overall value and attractiveness of our properties and have contributed significantly to our tenant repositioning efforts, which seek to increase our occupancy; raise our rental rates; increase our rentable square feet; increase our aggregate rental revenue; lengthen our average lease term; increase our average lease size; and improve our tenant credit quality. We have also aggregated smaller spaces in order to offer larger blocks of office space, including multiple floors, that are attractive to larger, higher credit-quality tenants and to offer new, pre-built suites with improved layouts. This strategy has shown what we believe to be attractive results to date, and we believe has the potential to improve our operating margins and cash flows in the future. We believe we will continue to enhance our tenant base and improve rents as our pre-redevelopment leases continue to expire and be re-leased.

As of June 30, 2015, we have no debt maturing in 2015 and 2016, and we have total debt outstanding of approximately $1.6 billion, with a weighted average interest rate of 4.04% (excluding premiums and discount) and a weighted average maturity of 5.4 years. Our consolidated debt to total market capitalization was approximately 26% as of June 30, 2015.

As of March 27, 2015, we no longer solicited new business for our construction management business. We completed all projects that were in progress.

### Results of Operations

### Overview

The discussion below relates to the financial condition and results of operations for the three and six months ended June 30, 2015 and 2014.

### Three Months Ended June 30, 2015 Compared to the Three Months Ended June 30, 2014

The following table summarizes the historical results of operations for the three months ended June 30, 2015 and 2014 (dollars in thousands):

| Revenues: | Three Months Ended June 30, 2015 | 2014 | Change% |  |
| --- | ---: | ---: | ---: | ---: |
| Rental revenue | $112,866 | $92,210 | $20,656 | 22.4% |
| Tenant expense reimbursement | 18,582 | 14,304 | 4,278 | 29.9% |
| Observatory revenue | 30,600 | 30,389 | 211 | 0.7% |
| Construction revenue | 374 | 12,963 | (12,589) | (97.1)% |
| Third-party management and other fees | 594 | 753 | (159) | (21.1)% |
| Other revenues and fees | 1,757 | 4,549 | (2,792) | (61.4)% |
| Total revenues | 164,773 | 155,168 | 9,605 | 6.2% |
| Operating expenses: |  |  |  |  |
| Property operating expenses | 37,935 | 35,149 | 2,786 | 7.9% |
| Ground rent expenses | 2,332 | 447 | 1,885 | 421.7% |
| Marketing, general and administrative expenses | 9,113 | 9,560 | (447) | (4.7)% |
| Observatory expenses | 7,420 | 7,120 | 300 | 4.2% |
| Construction expenses | 353 | 12,795 | (12,442) | (97.2)% |
| Real estate taxes | 22,952 | 18,186 | 4,766 | 26.2% |
| Acquisition expenses | — | 735 | (735) | (100.0)% |
| Depreciation and amortization | 39,629 | 28,637 | 10,992 | 38.4% |
| Total operating expenses | 119,734 | 112,629 | 7,105 | 6.3% |
| Operating income | 45,039 | 42,539 | 2,500 | 5.9% |
| Other income (expense): |  |  |  |  |
| Interest expense | (17,571) | (14,629) | (2,942) | 20.1% |
| Income before income taxes | 27,468 | 27,910 | (442) | (1.6)% |
| Income tax expense | (883) | (2,629) | 1,746 | (66.4)% |
| Net income | 26,585 | 25,281 | 1,304 | 5.2% |
| Private perpetual preferred unit distributions | (234) | — | (234) | 100.0% |
| Net income attributable to common unitholders | $26,351 | $25,281 | $1,070 | 4.2% |

### Rental Revenue

The increase in rental income was primarily attributable to the acquisition of two properties during July 2014 which increased rental income by $18.0 million. The remaining increase is primarily due to higher occupancies and higher rental rates.

### Tenant Expense Reimbursement

The increase in tenant expense reimbursement is primarily attributable to the acquisition of two properties during July 2014 which increased tenant expense reimbursements by $2.5 million. The remaining increase is primarily due to higher real estate tax reimbursement.

### Observatory Revenue

Observatory revenue increased by $0.2 million and is attributable to higher admission prices partially offset by lower admissions. The lower admissions is primarily due to an increase in bad weather days.

### Construction Revenue

Construction revenue declined due to the construction business winding down its operations.

### Third-Party Management and Other Fees

The decrease in third party management and other fees revenue is primarily due to the July 2014 acquisition of 1400 Broadway and 112 West 34th Street and the subsequent elimination of fees due to consolidation of these properties.

### Other Revenues and Fees

The decrease in other revenues and fees is primarily due to $0.7 million of lease cancellation income, $0.6 million property tax refund and a $1.0 million observatory lawsuit settlement, all of which were included in the second quarter 2014 results with none in the current period.

### Property Operating Expenses

The increase in property operating expenses is primarily attributable to the acquisition of two properties during July 2014, which increased property operating expenses by $3.9 million, partially offset by lower repairs and maintenance of $1.2 million.

### Ground Rent Expenses

The increase in ground rent expenses is attributable to the acquisition of two properties during July 2014.

### Marketing, General and Administrative Expenses

Marketing, general and administrative expenses decreased primarily due to lower professional fees incurred in the three months ended June 30, 2015.

### Observatory Expenses

Observatory expenses were consistent with the three months ended June 30, 2014.

### Construction Expenses

The decline in construction expenses correlates with the lower revenues due to the construction business winding down its operations.

### Real Estate Taxes

The increase in real estate taxes is primarily attributable to the acquisition of two properties during July 2014 which increased real estate taxes by $2.7 million, as well as higher taxes of $2.0 million resulting from higher assessed values and rates for several properties.

### Acquisition Expenses

The decrease in acquisition expenses is primarily attributable to the acquisition of two properties during July 2014.

### Depreciation and Amortization

The increase in depreciation and amortization is primarily attributable to the acquisition of two properties during July 2014, which increased depreciation and amortization by $10.5 million.

### Interest Expense

The increase in interest expense is attributable to the acquisition of two properties during July 2014 and the write-off of $0.4 million of deferred finance costs related to the early repayment of a mortgage loan. These higher expenses are partially offset by reductions in interest rates for debt refinanced during 2014 and 2015.

### Income taxes

The decrease in income tax expense is attributable to activities within our taxable REIT subsidiaries, primarily related to our Observatory operations which recognized a higher intercompany rent expense for the three months ended June 30, 2015 compared to the three months ended June 30, 2014.

### Six Months Ended June 30, 2015 Compared to the Six Months Ended June 30, 2014

The following table summarizes the historical results of operations for the six months ended June 30, 2015 and 2014 (dollars in thousands):

| Revenues: | Six months ended June 30, 2015 | 2014 | Change% |  |
| --- | ---: | ---: | ---: | ---: |
| Rental revenue | $222,924 | $182,414 | $40,510 | 22.2% |
| Tenant expense reimbursement | 36,782 | 29,457 | 7,325 | 24.9% |
| Observatory revenue | 48,823 | 47,690 | 1,133 | 2.4% |
| Construction revenue | 1,981 | 27,926 | (25,945) | (92.9)% |
| Third-party management and other fees | 1,040 | 1,364 | (324) | (23.8)% |
| Other revenues and fees | 5,105 | 6,623 | (1,518) | (22.9)% |
| Total revenues | 316,655 | 295,474 | 21,181 | 7.2% |
| Operating expenses: |  |  |  |  |
| Property operating expenses | 80,387 | 71,009 | 9,378 | 13.2% |
| Ground rent expenses | 4,663 | 898 | 3,765 | 419.3% |
| Marketing, general and administrative expenses | 18,213 | 19,715 | (1,502) | (7.6)% |
| Observatory expenses | 14,397 | 14,101 | 296 | 2.1% |
| Construction expenses | 3,222 | 27,078 | (23,856) | (88.1)% |
| Real estate taxes | 45,930 | 36,559 | 9,371 | 25.6% |
| Acquisition expenses | — | 735 | (735) | (100.0)% |
| Depreciation and amortization | 81,047 | 58,752 | 22,295 | 37.9% |
| Total operating expenses | 247,859 | 228,847 | 19,012 | 8.3% |
| Operating income | 68,796 | 66,627 | 2,169 | 3.3% |
| Other income (expense): |  |  |  |  |
| Interest expense | (33,618) | (28,966) | (4,652) | 16.1% |
| Income before income taxes | 35,178 | 37,661 | (2,483) | (6.6)% |
| Income tax expense | (705) | (1,149) | 444 | (38.6)% |
| Net income | 34,473 | 36,512 | (2,039) | (5.6)% |
| Private perpetual preferred unit distributions | (468) | — | (468) | 100.0% |
| Net income attributable to common unitholders | $34,005 | $36,512 | $(2,507) | (6.9)% |

### Rental Revenue

The increase in rental income was primarily attributable to the acquisition of two properties during July 2014 which increased rental income by $36.0 million. The remaining increase is primarily due to higher occupancies and higher rental rates.

### Tenant Expense Reimbursement

The increase in tenant expense reimbursement is primarily attributable to the acquisition of two properties during July 2014 which increased tenant expense reimbursements by $4.5 million. The remaining increase is primarily due to higher real estate tax reimbursement.

### Observatory Revenue

Observatory revenue increased by $1.1 million and is attributable to higher admission prices partially offset by lower admissions. The lower admissions is primarily due to an increase in bad weather days over the comparable prior year period, and especially bad weather days on weekends.

### Construction Revenue

Construction revenue declined due to the construction business winding down its operations.

### Third-Party Management and Other Fees

The decrease in third party management and other fees revenue is primarily due to the July 2014 acquisition of 1400 Broadway and 112 West 34th Street and the subsequent elimination of fees due to consolidation of these properties.

### Other Revenues and Fees

The decrease in other revenues and fees is primarily due to $0.6 million property tax refund and a $1.0 million observatory lawsuit settlement, all of which were included in the 2014 results with none in the current period.

### Property Operating Expenses

The increase in property operating expenses is primarily attributable to the acquisition of two properties during July 2014, which increased property operating expenses by $8.2 million.

### Ground Rent Expenses

The increase in ground rent expenses is attributable to the acquisition of two properties during July 2014.

### Marketing, General and Administrative Expenses

Marketing, general and administrative expenses decreased primarily due to lower professional fees incurred in the six months ended June 30, 2015.

### Observatory Expenses

Observatory expenses were consistent with the six months ended June 30, 2014.

### Construction Expenses

The decline in construction expenses correlates with the lower revenues due to the construction business winding down its operations. For the six months ended June 30, 2015 construction expenses include severance expenses of $0.9 million.

### Real Estate Taxes

The increase in real estate taxes is primarily attributable to the acquisition of two properties during July 2014 which increased real estate taxes by $5.3 million, as well as higher taxes of $4.1 million resulting from higher assessed values and rates for several properties.

### Acquisition Expenses

The decrease in acquisition expenses is primarily attributable to the acquisition of two properties during July 2014.

### Depreciation and Amortization

The increase in depreciation and amortization is primarily attributable to the acquisition of two properties during July 2014, which increased depreciation and amortization by $23.0 million.

### Interest Expense

The increase in interest expense is attributable to the acquisition of two properties during July 2014 and the write-off of $1.7 million of deferred finance costs related to the recast of the credit facility and the early repayments of mortgage loans. These higher expenses are partially offset by reductions in interest rates for debt refinanced during 2014 and 2015.

### Income taxes

The decrease in income tax expense is attributable to activities within our taxable REIT subsidiaries, primarily related to our Construction operations which had a net loss for 2015 compared to net income for 2014.

### Liquidity and Capital Resources

At June 30, 2015, we had approximately $34.2 million available in cash and cash equivalents, and there was $515.0 million available under our unsecured revolving credit facility.

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, including lease-up costs, fund our redevelopment and repositioning programs, acquire properties, make distributions to our securityholders and other general business needs. Based on the historical experience of our management and our business strategy, in the foreseeable future we anticipate we will generate positive cash flows from operations. In order for ESRT to qualify as a REIT, ESRT is required under the Internal Revenue Code of 1986 to distribute to its stockholders, on an annual basis, at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We expect to make quarterly distributions to our securityholders.

While we may be able to anticipate and plan for certain liquidity needs, there may be unexpected increases in uses of cash that are beyond our control and which would affect our financial condition and results of operations. For example, we may be required to comply with new laws or regulations that cause us to incur unanticipated capital expenditures for our properties, thereby increasing our liquidity needs. Even if there are no material changes to our anticipated liquidity requirements, our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or needed. Our primary sources of liquidity will generally consist of cash on hand and cash generated from our operating activities, mortgage and debt financings and unused borrowing capacity under our unsecured revolving credit facility. We expect to meet our short-term liquidity requirements, including distributions, operating expenses, working capital, debt service, and capital expenditures from cash flows from operations, 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. We expect to meet our long-term capital requirements, including acquisitions, redevelopments and capital expenditures through our cash flows from operations, 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 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.

As of June 30, 2015, we had approximately $1.6 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 4.04% (excluding premiums and discount) and a weighted average maturity of 5.4 years. We have no debt maturing in 2015 and 2016. Our consolidated debt to total market capitalization was approximately 26% as of June 30, 2015.

### Unsecured Revolving Credit Facility

On January 23, 2015, we entered into an unsecured revolving credit agreement, which is referred to herein as the “unsecured revolving credit facility,” with Bank of America, Merrill Lynch, Goldman Sachs and the other lenders party thereto. Merrill Lynch acted as joint lead arranger; Bank of America acted as administrative agent; and Goldman Sachs acted as syndication agent and joint lead arranger.

Concurrently with entering into the unsecured revolving credit facility, on January 23, 2015, we terminated our previous secured revolving and term credit facility. In connection with the termination of the secured revolving and term credit facility, all of the guarantors thereunder were released from their guaranty obligations, all liens created thereby were terminated, and all collateral pledged thereunder was released.

**Amount.** The unsecured revolving credit facility is comprised of a revolving credit facility in the maximum original principal amount of $800.0 million. The unsecured revolving credit facility contains an accordion feature that would allow us to increase the maximum aggregate principal amount to $1.25 billion under specified circumstances.

**Guarantors.** Certain of our subsidiaries are guarantors of our obligations under the unsecured revolving credit facility.

**Interest.** Amounts outstanding under the unsecured revolving credit facility bear interest at a floating rate equal to, at our election, (x) a Eurodollar rate, plus a spread that will range from 0.875% to 1.600% depending upon its leverage ratio and credit rating; or (y) a base rate, plus a spread that will range from 0.000% to 0.600% depending upon its leverage ratio and credit rating. In addition, the unsecured revolving credit facility permits us to borrow at competitive bid rates determined in accordance with the procedures described in the unsecured revolving credit facility.

**Fees.** We paid certain customary fees and expense reimbursements.

**Maturity.** The unsecured revolving credit facility has an initial maturity in January 2019. We have the option to extend the initial term of the unsecured revolving credit facility for up to two additional six-month periods, subject to certain conditions, including the payment of an extension fee equal to 0.075% of the then outstanding commitments under the unsecured revolving credit facility.

**Financial Covenants.** The unsecured revolving credit facility includes the following financial covenants: (i) maximum leverage ratio of total indebtedness to total asset value (as defined in the agreement) of the loan parties and their consolidated subsidiaries will not exceed 60%, (ii) consolidated secured indebtedness will not exceed 40% of total asset value, (iii) tangible net worth will not be less than $745.4 million plus 75% of net equity proceeds received by the operating partnership (other than proceeds received within ninety (90) days after the redemption, retirement or repurchase of ownership or equity interests in the operating partnership up to the amount paid by the operating partnership in connection with such redemption, retirement or repurchase, where, the net effect is that the operating partnership shall not have increased its net worth as a result of any such proceeds), (iv) adjusted EBITDA (as defined in the unsecured revolving credit facility) to consolidated fixed charges will not be less than 1.50x, (v) the aggregate net operating income with respect to all unencumbered eligible properties to the portion of interest expense attributable to unsecured indebtedness will not be less than 1.75x, (vi) the ratio of total unsecured indebtedness to unencumbered asset value will not exceed 60%, and (vii) consolidated secured recourse indebtedness will not exceed 10% of total asset value (provided, however, this covenant shall not apply at any time after either the company or the operating partnership achieves a debt ratings from at least two of Moody’s, S&P and Fitch, and such debt ratings are Baa3 or better (in the case of a rating by Moody’s) or BBB- or better (in the case of a rating by S&P or Fitch)). As of June 30, 2015, we were in compliance with the covenants:

| Financial covenant | Required | June 30, 2015 | In Compliance |
| --- | --- | ---: | --- |
| Maximum total leverage | \< 60% | 29.7% | Yes |
| Maximum secured debt | \< 40% | 13.8% | Yes |
| Minimum fixed charge coverage | \> 1.50x | 3.9x | Yes |
| Minimum unencumbered interest coverage | \> 1.75x | 7.1x | Yes |
| Maximum unsecured leverage | \< 60% | 25.0% | Yes |
| Maximum secured recourse indebtedness | \< 10% | 0.0% | Yes |
| Minimum tangible net worth | $745,356 | $941,927 | Yes |

**Other Covenants.** The unsecured revolving credit facility contains customary covenants, including limitations on liens, investment, debt, fundamental changes, and transactions with affiliates, and will require certain customary financial reports.

**Events of Default.** The unsecured revolving credit facility contains customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, invalidity of loan documents, loss of real estate investment trust qualification, and occurrence of a change of control (defined in the definitive documentation for the unsecured credit facility).

### Senior Unsecured Notes

During March 2015, we issued and sold an aggregate principal amount of $350.0 million of senior unsecured notes ("Series A, B and C Senior Notes") in a private placement to entities affiliated with Prudential Capital Group. The Series A, B and C Senior Notes consist of $100 million of 3.93% Series A Senior Notes due 2025, $125 million of 4.09% Series B Senior Notes due 2027, and $125 million of 4.18% Series C Senior Notes due 2030. The proceeds were used to repay outstanding mortgage debt, to reduce amounts outstanding under our unsecured credit facility and for other general corporate purposes.

The Series A, B and C Senior Notes are senior unsecured obligations and are unconditionally guaranteed by each of our subsidiaries that guarantees indebtedness under the senior unsecured revolving credit facility. Interest on the Series A, B and C Senior Notes is payable quarterly.

The terms of the Series A, B and C Senior Notes include customary covenants, including limitations on liens, investment, debt, fundamental changes, and transactions with affiliates and will require certain customary financial reports. It also requires compliance with financial ratios consistent with the unsecured credit facility including a maximum leverage ratio, a maximum secured leverage ratio, a minimum amount of tangible net worth, a minimum fixed charge coverage ratio, a minimum unencumbered interest coverage ratio, a maximum unsecured leverage ratio and a maximum amount of secured recourse indebtedness. As of June 30, 2015, we were in compliance with the covenants under the Series A, B and C Senior Notes.

### Mortgage debt

As of June 30, 2015, we had mortgage debt outstanding of $741.1 million. During 2015, we repaid the mortgages collateralized by 1359 Broadway and One Grand Central Place.

### Leverage Policies

We expect to employ leverage in our capital structure in amounts determined from time to time by ESRT's board of directors. Although ESRT's board of directors has not adopted a policy that limits the total amount of indebtedness that we may incur, we anticipate that ESRT's board of directors will consider a number of factors in evaluating our level of indebtedness from time to time, as well as the amount of such indebtedness that will be either fixed or floating rate. ESRT's charter and bylaws do not limit the amount or percentage of indebtedness that we may incur nor do they restrict the form in which our indebtedness will be taken (including, but not limited to, recourse or non-recourse debt and cross collateralized debt). 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. 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.

### Capital Expenditures

The following tables summarize our tenant improvement costs, leasing commission costs and our capital expenditures for each of the periods presented (dollars in thousands, except per square foot amounts).

### Office Properties(1)

| Total New Leases, Expansions, and Renewals | Six months ended June 30, 2015 | 2014 |
| --- | ---: | ---: |
| Number of leases signed(2) | 129 | 116 |
| Total square feet | 604,085 | 400,644 |
| Leasing commission costs(3) | $8,798 | $6,022 |
| Tenant improvement costs(3) | 31,672 | 19,853 |
| Total leasing commissions and tenant improvement costs(3) | $40,470 | $25,875 |
| Leasing commission costs per square foot(3) | $14.56 | $15.03 |
| Tenant improvement costs per square foot(3) | 52.43 | 49.55 |
| Total leasing commissions and tenant improvement costs per square foot(3) | $66.99 | $64.58 |

### Retail Properties(4)

| Total New Leases, Expansions, and Renewals | Six months ended June 30, 2015 | 2014 |
| --- | ---: | ---: |
| Number of leases signed(2) | 10 | 3 |
| Total square feet | 68,367 | 1,934 |
| Leasing commission costs(3) | $10,048 | $13 |
| Tenant improvement costs(3) | 2,234 | — |
| Total leasing commissions and tenant improvement costs(3) | $12,282 | $13 |
| Leasing commission costs per square foot(3) | $146.97 | $6.59 |
| Tenant improvement costs per square foot(3) | 32.68 | — |
| Total leasing commissions and tenant improvement costs per square foot(3) | $179.65 | $6.59 |

(1) Excludes an aggregate of 515,374 rentable square feet of retail space in our Manhattan office properties. Includes the Empire State Building broadcasting licenses and observatory operations.

(2) Presents a renewed and expansion lease as one lease signed.

(3) Presents all tenant improvement and leasing commission costs as if they were incurred in the period in which the lease was signed, which may be different than the period in which they were actually paid.

(4) Includes an aggregate of 515,374 rentable square feet of retail space in our Manhattan office properties. Excludes the Empire State Building broadcasting licenses and observatory operations.

| Total Portfolio | Six months ended June 30, 2015 | 2014 |
| --- | ---: | ---: |
| Capital expenditures (1) | $23,514 | $23,498 |

(1) Includes all capital expenditures, excluding tenant improvements and leasing commission costs, which are primarily attributable to the redevelopment and repositioning program conducted at our Manhattan office properties.

As of June 30, 2015, we expect to incur additional costs relating to obligations under signed new leases of approximately $64.5 million during the 12 months ending June 30, 2016. This consists of approximately $63.1 million for tenant improvements and other improvements related to new leases and approximately $1.4 million for leasing commissions. We intend to fund the tenant improvements and leasing commission costs through a combination of operating cash flow and borrowings under the unsecured revolving credit facility.

Capital expenditures are considered part of both our short-term and long-term liquidity requirements. We currently estimate that between $55.0 million and $85.0 million of capital is needed beyond June 30, 2015 to complete substantially the redevelopment program at our Manhattan office properties, which we expect to occur by the end of 2016 due to the size and scope of our remaining work and our desire to minimize tenant disruptions. However, these estimates are based on current budgets and are subject to change. We intend to fund the capital improvements to complete the redevelopment and repositioning program through a combination of operating cash flow and borrowings under the unsecured revolving credit facility.

### Contractual Obligations

Refer to our 2014 Annual Report on Form 10-K for a discussion of our contractual obligations. There have been no material changes, outside the ordinary course of business, to these contractual obligations during the three and six months ended June 30, 2015.

### Off-Balance Sheet Arrangements

As of June 30, 2015, we did not have any off-balance sheet arrangements.

### Distribution Policy

In order for ESRT to qualify as a REIT, it must distribute to its stockholders, on an annual basis, at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, it will be subject to U.S. federal income tax at regular corporate rates to the extent that it distributes less than 100% of its net taxable income (including net capital gains) and will be subject to a 4% nondeductible excise tax on the amount, if any, by which its distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws.

We intend to distribute our net income to our securityholders in a manner intended to allow ESRT to satisfy its REIT 90% distribution requirement and to allow ESRT to avoid U.S. federal income tax liability on its income and the 4% nondeductible excise tax.

Before we pay any distribution, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and obligations to make payments of principal and interest, if any. However, under some circumstances, we may be required to use cash reserves, incur debt or liquidate assets at rates or times that we regard as unfavorable or make a taxable distribution of our shares in order to satisfy the REIT 90% distribution requirement and to avoid U.S. federal income tax and the 4% nondeductible excise tax in that year.

### Distributions to Equity Holders

Distributions and dividends amounting to $45.9 million have been made to equity holders for the six months ended June 30, 2015.

### Cash Flows

### Comparison of Six Months Ended June 30, 2015 to the Six Months Ended June 30, 2014

*Net cash*. Cash and cash equivalents were $34.2 million and $41.8 million, respectively, as of June 30, 2015 and 2014.

*Operating activities*. Net cash provided by operating activities increased by $31.0 million to $77.1 million for the six months ended June 30, 2015 compared to $46.1 million for the six months ended June 30, 2014 primarily due to the acquisition of two properties in July 2014 and the expirations of free rent periods.

*Investing activities*. Net cash used in investing activities increased by $17.8 million to $63.1 million for the six months ended June 30, 2015 compared to $45.3 million for the six months ended June 30, 2014 primarily due to higher expenditures on tenant improvements.

*Financing activities*. Net cash used in financing activities increased by $5.7 million to $25.5 million for the six months ended June 30, 2015 compared to $19.8 million for the six months ended June 30, 2014. The increase is primarily due to deferred financing costs and higher dividends and distributions which were partially offset by higher net loan proceeds.

### Net Operating Income ("NOI")

Our financial reports include a discussion of property net operating income. NOI is a non-GAAP financial measure of performance. NOI is used by investors and our management to evaluate and compare the performance of our properties and to determine trends in earnings and to compute the fair value of our properties as it is not affected by; (i) the cost of funds of the property owner, (i) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP, (iii) acquisition expenses, or (iv) general and administrative expenses and other gains and losses that are specific to the property owner. The cost of funds is eliminated from net operating income because it is specific to the particular financing capabilities and constraints of the owner. The cost of funds is also eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital which may have changed or may change in the future. Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our office or retail properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale which will usually change from period to period. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly timed, purchases or sales. We believe that eliminating these costs from net income is useful because the resulting measure captures the actual revenue, generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs.

However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, depreciation and amortization expense and gains or losses from the sale of properties, and other gains and losses as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net income which further limits its usefulness.

NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income computed in accordance with GAAP and discussions elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding the components of net income that are eliminated in the calculation of NOI. Other companies may use different methods for calculating NOI or similarly entitled measures and, accordingly, our NOI may not-be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.

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):

*(unaudited)*

*(unaudited)*

|  | Three months ended June 30, 2015 | 2014 | Six months ended June 30, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $26,585 | $25,281 | $34,473 | $36,512 |
| Add: |  |  |  |  |
| Marketing, general and administrative expenses | 9,113 | 9,560 | 18,213 | 19,715 |
| Depreciation and amortization | 39,629 | 28,637 | 81,047 | 58,752 |
| Interest expense | 17,571 | 14,629 | 33,618 | 28,966 |
| Construction expenses | 353 | 12,795 | 3,222 | 27,078 |
| Acquisition expenses | — | 735 | — | 735 |
| Income tax expense | 883 | 2,629 | 705 | 1,149 |
| Less: |  |  |  |  |
| Construction revenue | (374) | (12,963) | (1,981) | (27,926) |
| Third-party management and other fees | (594) | (753) | (1,040) | (1,364) |
| Gain on settlement of lawsuit related to the Observatory | — | (975) | — | (975) |
| **Net operating income** | $93,166 | $79,575 | $168,257 | $142,642 |
| **Other Net Operating Income Data** |  |  |  |  |
| Straight-line rental revenue | $5,622 | $10,979 | $9,724 | $23,559 |
| Net increase in rental revenue from the amortization of above- and below-market lease assets and liabilities | $4,576 | $2,028 | $9,867 | $3,912 |
| Amortization of acquired below-market ground leases | $1,958 | $426 | $3,916 | $852 |

### Funds from Operations ("FFO")

We present below a discussion of FFO. We compute FFO in accordance with the “White Paper” on FFO published by the National Association of Real Estate Investment Trusts, or NAREIT, which defines FFO as net income (loss) (determined in accordance with GAAP), excluding impairment writedowns of investments in depreciable real estate and investments in in-substance real estate investments, gains or losses from debt restructurings and sales of depreciable operating properties, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs), less distributions to non-controlling interests and gains/losses from discontinued operations and after adjustments for unconsolidated partnerships and joint ventures. FFO is a widely recognized non-GAAP financial measure for REITs that we believe, when considered with financial statements determined in accordance with GAAP, is useful to investors in understanding financial performance and providing a relevant basis for comparison among REITs. In addition, FFO is useful to investors as it captures features particular to real estate performance by recognizing that real estate has generally appreciated over time or maintains residual value to a much greater extent than do other depreciable assets. Investors should review FFO, along with GAAP net income, when trying to understand an equity REIT’s operating performance. We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results of operations, the utility of FFO as a measure of its performance is limited. There can be no assurance that FFO presented by us is comparable to similarly titled measures of other REITs. FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. Although FFO is a measure used for comparability in assessing the performance of REITs, as the NAREIT White Paper only provides guidelines for computing FFO, the computation of FFO may vary from one company to another.

### Modified Funds From Operations ("Modified FFO")

Modified FFO adds back an adjustment for any above or below-market ground lease amortization to traditionally defined FFO. We consider this a useful supplemental measure in evaluating our operating performance due to the non-cash accounting treatment under GAAP, which stems from the July 2014 acquisition of two properties as they carry significantly below market ground leases, the amortization of which is material to our overall results. We present Modified FFO because we consider it an important supplemental measure of our operating performance in that it adds back the non-cash amortization of below-market ground leases. There can be no assurance that Modified FFO presented by us is comparable to similarly titled measures of other REITs. Modified FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Modified FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions.

### Core Funds From Operations ("Core FFO")

Core FFO adds back to Modified FFO the following items associated with the Company's initial public offering, or IPO, and formation transactions: gain on consolidation of non-controlling entities, acquisition expenses, severance expenses and retirement equity compensation expenses. It also adds back private perpetual preferred exchange offering expenses, acquisition expenses, and gain on settlement of lawsuit related to the Observatory, net of income taxes, deferred financing cost write-off, prepayment penalties and construction severance expenses. The Company presents Core FFO because it considers it an important supplemental measure of its operating performance in that it excludes items associated with its IPO and formation transactions and other non-recurring items. There can be no assurance that Core FFO presented by the Company is comparable to similarly titled measures of other REITs. Core FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Core FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. In future periods, we may also exclude other items from Core FFO that we believe may help investors compare our results.

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

*(unaudited)*

*(unaudited)*

|  | Three months ended June 30, 2015 | 2014 | Six months ended June 30, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $26,585 | $25,281 | $34,473 | $36,512 |
| Private perpetual preferred unit distributions | (234) | — | (468) | — |
| Real estate depreciation and amortization | 39,542 | 28,556 | 80,775 | 58,608 |
| **Funds from operations** | 65,893 | 53,837 | 114,780 | 95,120 |
| Amortization of below-market ground leases | 1,958 | 426 | 3,916 | 852 |
| **Modified funds from operations** | 67,851 | 54,263 | 118,696 | 95,972 |
| Deferred financing costs write-off | 404 | — | 1,749 | — |
| Construction severance expenses, net of taxes | — | — | 480 | — |
| Gain on settlement of lawsuit related to the Observatory, net of income taxes | — | (540) | — | (540) |
| Private perpetual preferred exchange offering expenses | — | 950 | — | 950 |
| Acquisition expenses | — | 735 |  | 735 |
| **Core funds from operations** | $68,255 | $55,408 | $120,925 | $97,117 |
| **Weighted average Operating Partnership units** |  |  |  |  |
| Basic | 265,867 | 244,436 | 265,866 | $244,431 |
| Diluted | 265,867 | 244,436 | 265,866 | $244,431 |
| **FFO per unit** |  |  |  |  |
| Basic | $0.25 | $0.22 | $0.43 | $0.39 |
| Diluted | $0.25 | $0.22 | $0.43 | $0.39 |
| **Modified FFO per unit** |  |  |  |  |
| Basic | $0.26 | $0.22 | $0.45 | $0.39 |
| Diluted | $0.26 | $0.22 | $0.45 | $0.39 |
| **Core FFO per unit** |  |  |  |  |
| Basic | $0.26 | $0.23 | $0.45 | $0.40 |
| Diluted | $0.26 | $0.23 | $0.45 | $0.40 |

### Factors That May Influence Future Results of Operations

### Leasing

We signed 0.8 million rentable square feet of new leases, expansions and lease renewals for the year ended December 31, 2014. During the six months ended June 30, 2015, we signed 0.7 million rentable square feet of new leases, expansions and renewals.

Due to the relatively small number of leases that are signed in any particular quarter, one or more larger leases may have a disproportionately positive or negative impact on average rent, tenant improvement and leasing commission costs for that period. As a result, we believe it is more appropriate when analyzing trends in average rent and tenant improvement and leasing commission costs to review activity over multiple quarters or years. Tenant improvement costs include expenditures for general improvements occurring concurrently with, but that are not directly related to, the cost of installing a new tenant. Leasing commission costs are similarly subject to significant fluctuations depending upon the length of leases being signed and the mix of tenants from quarter to quarter.

As of June 30, 2015, there were approximately 1.0 million rentable square feet of space in our portfolio available to lease (excluding leases signed but not yet commenced) representing 10.0% of the net rentable square footage of the properties in our portfolio. In addition, leases representing 5.5% and 7.1% of net rentable square footage of the properties in our portfolio will expire in 2015 and in 2016, respectively. These leases are expected to represent approximately 5.7% and 7.6%, respectively, of our annualized rent for such periods. Our revenues and results of operations can be impacted by expiring leases that are not renewed or re-leased or that are renewed or re-leased at base rental rates equal to, above or below the current average base rental rates. Further, our revenues and results of operations can also be affected by the costs we incur to re-lease available space, including payment of leasing commissions, redevelopments and build-to-suit remodeling that may not be borne by the tenant.

We believe that as we complete the redevelopment and repositioning of our properties we will, over the long-term, experience increased occupancy levels and rents. Over the short term, as we renovate and reposition our properties, which includes aggregating smaller spaces to offer large blocks of space, we may experience lower occupancy levels as a result of having to relocate tenants to alternative space and the strategic expiration of existing leases. We believe that despite the short-term lower occupancy levels we may experience, we will continue to experience increased rental revenues as a result of the increased rents which we expect to obtain following the redevelopment and repositioning of our properties.

### Observatory and Broadcasting Operations

The Empire State Building Observatory revenue for the second quarter 2015 grew 0.7% to $30.6 million, from $30.4 million in the second quarter of 2014, due to higher admission prices. The Observatory hosted approximately 1,165,000 visitors in the second quarter 2015 versus 1,222,000 visitors in the second quarter of 2014. In the second quarter of 2015, there were 21 bad weather days, five of which fell on weekend days. This compares to the second quarter 2014, in which there were 18 bad weather days, one of which fell on a weekend day.

For the six months ended June 30, 2015, the Empire State Building Observatory hosted 1,787,000 visitors versus 1,886,000 visitors from the same period in 2014. Observatory revenue was $48.8 million for the six months ended June 30, 2015, a 2.3% increase from $47.7 million for the six months ended June 30, 2014. For the six months of 2015, there were 46 bad weather days, 14 of which fell on weekend days. This compares to the six months of 2014, in which there were 39 bad weather days, nine of which fell on weekend days.

Observatory revenues and admissions are dependent upon the following: (i) the number of tourists (domestic and international) that come to New York City and visit the observatory, as well as any related tourism trends; (ii) the prices per admission that can be charged; (iii) seasonal trends affecting the number of visitors to the observatory; (iv) competition, in particular from the One World Trade Center and Rockefeller Center observatories; and (v) weather trends.

We license the use of the Empire State Building mast to third party television and radio broadcasters and providers of data communications. We also lease space in the upper floors of the Building to such licensees to house their transmission equipment and related facilities. During the six months ended June 30, 2015, we derived $10.5 million of revenue (excluding tenant expense reimbursements) from the Empire State Building’s broadcasting licenses and related leases. The broadcasting licenses and related leases generally expire between 2016 and 2023. In view of potential competition from broadcasting operations at One World Trade Center and, to a lesser extent, Four Times Square, we have made preliminary renewal proposals which could yield reduced revenues and/or higher capital expenditures.

## Market risk

As filed, 3,134 characters.

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. One of the principal market risks facing us is interest rate risk on our floating rate indebtedness. As of June 30, 2015, our floating rate mortgage debt represented 4.6% of our total enterprise value. This floating rate debt reflected $285.0 million of borrowings under the unsecured revolving credit facility.

Subject to maintaining ESRT's qualification as a REIT for U.S. federal income tax purposes, we may mitigate the risk of interest rate volatility through the use of hedging instruments, such as interest rate swap agreements and interest rate cap agreements. Our primary objectives when undertaking hedging transactions and derivative positions will be to reduce our floating rate exposure and to fix a portion of the interest rate for anticipated financing and refinancing transactions. This in turn will reduce the risk that the variability of cash flows will impose on floating rate debt. However, we can provide no assurances that our efforts to manage interest rate volatility will successfully mitigate the risks of such volatility on our portfolio. We are not subject to foreign currency risk.

We are exposed to interest rate changes primarily on our unsecured revolving credit facility. Our objectives with respect to interest rate risk are to limit the impact of interest rate changes on operations and cash flows, and to lower our overall borrowing costs. To achieve these objectives, we may borrow at fixed rates and may enter into derivative financial instruments such as interest rate swaps or caps in order to mitigate our interest rate risk on a related floating rate financial instrument. We do not enter into derivative or interest rate transactions for speculative purposes.

As of June 30, 2015, we had total outstanding floating rate debt obligations of $285.0 million. Based on our variable balances, interest expense would have increased by approximately $1.4 million for the six months ended June 30, 2015, if short-term interest rates had been 1% higher. As of June 30, 2015, the weighted average interest rate on the $1.3 billion of fixed-rate indebtedness outstanding was 4.61% per annum, each with maturities at various dates through March 27, 2030.

As of June 30, 2015, the fair value of our outstanding debt was approximately $1.6 billion, which was approximately $8.5 million more than the historical book value as of such date. Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

## Controls and procedures

As filed, 2,327 characters.

### Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations and that such information is accumulated and communicated to management, including ESRT's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of June 30, 2015, the end of the period covered by this Report, we carried out an evaluation, under the supervision and with the participation of ESRT management, including ESRT's Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures at the end of the period covered by this Report. Based on the foregoing, ESRT's Chief Executive Officer and Chief Financial Officer concluded, as of that time, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including ESRT's Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

No changes to our internal control over financial reporting were identified in connection with the evaluation referenced above that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 156 characters.

There have been no material changes to the risk factors included in the section entitled "Risk Factors" in our December 31, 2014 Annual Report on Form 10-K.

Filed Aug 5, 2015.
Source: SEC EDGAR, the filing index for accession 0001628280-15-006099. Last ingested by Listed: Nov 2, 2026, 20:18 ET. No prices; not investment advice.