# Empire State Realty OP, L.P.: Form 10-Q for the period ended Sep 30, 2016

- Company: [Empire State Realty OP, L.P.](/companies/esba.md) (CIK 1553079)
- Form: 10-Q
- Filed: 2016-11-08
- Accepted by EDGAR: Nov 8, 2016, 11:56 ET
- Period: 2016-09-30
- Accession: 0001628280-16-020986
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1553079/000162828016020986/esrop9-30x1610xq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1553079/000162828016020986/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-07-01 to 2016-09-30 | $175.8m | us-gaap:Revenues |
| Revenue | 9 months, 2016-01-01 to 2016-09-30 | $498.7m | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2016-07-01 to 2016-09-30 | $11.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2016-01-01 to 2016-09-30 | $35.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-07-01 to 2016-09-30 | $53.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2016-01-01 to 2016-09-30 | $131.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-07-01 to 2016-09-30 | $17.9m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2016-01-01 to 2016-09-30 | $53.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-07-01 to 2016-09-30 | $2.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2016-01-01 to 2016-09-30 | $4.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 9 months, 2016-01-01 to 2016-09-30 | $74.2m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2016-07-01 to 2016-09-30 | $0.12 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2016-01-01 to 2016-09-30 | $0.27 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-07-01 to 2016-09-30 | $0.12 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2016-01-01 to 2016-09-30 | $0.27 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-07-01 to 2016-09-30 | 280,614,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2016-01-01 to 2016-09-30 | 271,028,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2016-01-01 to 2016-09-30 | $162.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2016-07-01 to 2016-09-30 | $52.8m | us-gaap:PaymentsToAcquireProductiveAssets |
| Capital expenditure | 9 months, 2016-01-01 to 2016-09-30 | $140.1m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2016-01-01 to 2016-09-30 | $83.3m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2016-09-30 | $594.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2016-09-30 | $3.88bn | us-gaap:Assets |
| Total liabilities | at 2016-09-30 | $1.93bn | us-gaap:Liabilities |
| Long-term debt | at 2016-09-30 | $763.5m | us-gaap:LongTermDebt |

## Management's discussion and analysis

As filed, 62,988 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 arbitration involving the company;*
- *reduced demand for office or retail space;*
- *general volatility of the capital and credit markets and the market price of ESRT's Class A common stock and our publicly-traded operating partnership 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;*
- *risks associated with security breaches through cyberattacks, cyber intrusions or otherwise, as well as other significant disruptions of our technology (IT) networks related systems, which support our operations and our buildings;*
- *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, 2015 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 for the year ended December 31, 2015 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

Empire State Realty OP, L.P. is the entity through which Empire State Realty Trust, Inc. (“ESRT”), a self-administered and self-managed real estate investment trust, or REIT, conducts all of its business and owns (either directly or through subsidiaries) substantially all of its assets. We own, manage, operate, acquire and reposition office and retail properties in Manhattan and the greater New York metropolitan area.

Highlights for the three months ended September 30, 2016 included:

- Achieved net income attributable to the Company of $16.0 million and Core Funds From Operations of $71.9 million.
- Occupancy and leased percentages at September 30, 2016:
- Total portfolio was 87.9% occupied; including signed leases not commenced (“SLNC”), the total portfolio was 90.3% leased.
- Manhattan office portfolio (excluding the retail component of these properties) was 86.6% occupied; including SLNC, the Manhattan office portfolio was 89.5% leased.
- Retail portfolio was 86.3% occupied; including SLNC, the retail portfolio was 88.3% leased.
- Empire State Building was 90.1% occupied; including SLNC, the Empire State Building was 91.5% leased.
- Executed 51 leases, representing 348,770 rentable square feet across the total portfolio, achieving a 30.2% increase in mark-to-market rent over previous fully escalated rents on new, renewal, and expansion leases.
- Signed 20 new leases representing 224,125 rentable square feet in the third quarter 2016 for the Manhattan office portfolio (excluding the retail component of these properties), achieving an increase of 59.3% in mark-to-market rent over previous fully escalated rents.
- The Empire State Building Observatory revenue for the third quarter 2016 grew 6.7% to $38.1 million from $35.7 million in the third quarter 2015.
- On August 23, 2016, ESRT issued 29,610,854 ESRT Class A common shares at $21.00 per share in a private placement transaction with QIA which raised approximately $622 million in gross proceeds, which was contributed to us.
- Declared a dividend in the amount of $0.105 per unit for the third quarter 2016.

As of September 30, 2016, our total portfolio contained 10.1 million rentable square feet of office and retail space. We owned 14 office properties (including three long-term ground leasehold interests) encompassing approximately 9.4 million rentable square feet of office space. Nine of these properties are located in the midtown Manhattan market and aggregate approximately 7.6 million rentable square feet of office space, including the Empire State Building. Our Manhattan office properties also contain an aggregate of 502,429 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 September 30, 2016, our portfolio included four standalone retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut, encompassing 204,452 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, approximately 16.0% to 18.0% of our annual observatory revenue was realized in the first quarter, 26.0% to 28.0% was realized in the second quarter, 31.0% to 33.0% was realized in the third quarter, and 23.0% to 25.0% was realized in the fourth quarter.

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

|  | Nine months ended September 30, 2016 |  | 2015 |  |
| --- | ---: | ---: | ---: | ---: |
| Office leases | $89,026 | 38.9% | $80,052 | 37.1% |
| Retail leases | 7,223 | 3.2% | 7,826 | 3.6% |
| Tenant reimbursements & other income | 18,530 | 8.1% | 20,675 | 9.6% |
| Observatory operations | 91,112 | 39.8% | 84,525 | 39.2% |
| Broadcasting licenses and leases | 22,771 | 10.0% | 22,784 | 10.5% |
| Total | $228,662 | 100.0% | $215,862 | 100.0% |

We have been undertaking a comprehensive redevelopment and repositioning strategy of our Manhattan office properties. This strategy is designed to improve the overall value and attractiveness of our properties and has contributed significantly to our tenant repositioning efforts, which seek to increase our occupancy; raise our rental rates; increase our rentable square feet; increase our aggregate rental revenue; lengthen our average lease term; increase our average lease size; and improve our tenant credit quality. These improvements include restored, renovated and upgraded or new lobbies; elevator modernization; renovated public areas and bathrooms; refurbished or new windows; upgrade and standardization of retail storefront and signage; façade restorations; modernization of building-wide systems; and enhanced tenant amenities. We have also aggregated smaller spaces in order to offer larger blocks of office space, including multiple floors, that are attractive to larger, higher credit-quality tenants 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. From 2002 through September 30, 2016, we have invested a total of approximately $698.0 million (excluding tenant improvement costs and leasing commissions) in our Manhattan office properties pursuant to this program. We are in the process of substantially completing the redevelopment and repositioning program as originally contemplated. We intend to fund these capital improvements through a combination of operating cash flow and borrowings.

As of September 30, 2016, excluding principal amortization, we had no debt maturing in 2016 and approximately $336.0 million of debt maturing in 2017, and we had total debt outstanding of approximately $1.6 billion, with a weighted average interest rate of 4.15% (excluding premiums and discount) and a weighted average maturity of 4.9 years. As of September 30, 2016, we had cash and cash equivalents of $594.3 million. Our consolidated net debt to total market capitalization was approximately 14.0% as of September 30, 2016.

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

### Results of Operations

### Overview

The discussion below relates to our financial condition and results of operations for the three and nine months ended September 30, 2016 and 2015, respectively.

### Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015

The following table summarizes our historical results of operations for the three months ended September 30, 2016 and 2015 (dollars in thousands):

| Revenues: | Three Months Ended September 30, 2016 | 2015 | Change% |  |
| --- | ---: | ---: | ---: | ---: |
| Rental revenue | $115,634 | $110,903 | $4,731 | 4.3% |
| Tenant expense reimbursement | 19,176 | 23,096 | (3,920) | (17.0)% |
| Observatory revenue | 38,093 | 35,702 | 2,391 | 6.7% |
| Third-party management and other fees | 404 | 618 | (214) | (34.6)% |
| Other revenues and fees | 2,541 | 5,460 | (2,919) | (53.5)% |
| Total revenues | 175,848 | 175,779 | 69 | —% |
| Operating expenses: |  |  |  |  |
| Property operating expenses | 38,585 | 41,052 | (2,467) | (6.0)% |
| Ground rent expenses | 2,331 | 2,331 | — | —% |
| General and administrative expenses | 11,798 | 10,182 | 1,616 | 15.9% |
| Observatory expenses | 7,250 | 7,896 | (646) | (8.2)% |
| Real estate taxes | 24,691 | 23,613 | 1,078 | 4.6% |
| Acquisition expenses | — | 193 | (193) | 100.0% |
| Depreciation and amortization | 37,607 | 45,169 | (7,562) | (16.7)% |
| Total operating expenses | 122,262 | 130,436 | (8,174) | (6.3)% |
| Operating income | 53,586 | 45,343 | 8,243 | 18.2% |
| Interest expense | (17,939) | (16,680) | (1,259) | 7.5% |
| Income before income taxes | 35,647 | 28,663 | 6,984 | 24.4% |
| Income tax expense | (2,750) | (2,578) | (172) | 6.7% |
| Net income | 32,897 | 26,085 | 6,812 | 26.1% |
| Private perpetual preferred unit distributions | (234) | (234) | — | — |
| Net income attributable to common unitholders | $32,663 | $25,851 | $6,812 | 26.4% |

### Rental Revenue

The increase in rental income was primarily attributable to increased rental rates.

### Tenant Expense Reimbursement

The decrease in tenant expense reimbursements was due to a decrease in property operating expenses, including lower repairs and maintenance costs and lower utility costs in the three months ended September 30, 2016.

### Observatory Revenue

Observatory revenues were higher primarily due to increased tourist visits and an improvement in our ticket mix versus the prior year period.

### Third-Party Management and Other Fees

The decrease reflects lower management fee income in the three months ended September 30, 2016 compared to the third quarter 2016.

### Other Revenues and Fees

The decrease in other revenues and fees was primarily due to a $2.5 million acquisition break-up fee received in the third quarter 2015.

### Property Operating Expenses

The decrease in property operating expenses was primarily due to lower repairs and maintenance costs and lower utility costs in the third quarter 2016.

### General and Administrative Expenses

The increase in general and administrative expenses is due to $0.8 million related to higher 2016 incentive compensation bonus accruals and salaries and $1.2 million related to equity compensation expense. We went public in October 2013 and we are still ramping up, adding layers of amortization of non-cash compensation expense associated with equity incentive compensation. Once we conclude four years as a public company, the equity incentive compensation expense should stabilize.

### Observatory Expenses

The decrease in Observatory expenses primarily reflects lower personnel costs associated with a tenant and onsite ticket reseller whose contract expired in the third quarter 2016. Additionally, the audio tour department was discontinued resulting in lower observatory expenses in the third quarter 2016.

### Real Estate Taxes

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

### Depreciation and Amortization

The decrease in depreciation and amortization was primarily attributable to assets that became fully depreciated during 2015.

### Interest Expense

Interest expense increased due to higher interest rates and higher commitment fees due to higher borrowing capacity on the unsecured revolving credit facility in the third quarter 2016 compared to the prior year period.

### Income taxes

The increase in income tax expense was attributable to activities within our taxable REIT subsidiaries, primarily due to higher Observatory taxable income for the three months ended September 30, 2016.

### Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015

The following table summarizes our historical results of operations for the nine months ended September 30, 2016 and 2015 (dollars in thousands):

| Revenues: | Nine months ended September 30, 2016 | 2015 | Change% |  |
| --- | ---: | ---: | ---: | ---: |
| Rental revenue | $343,155 | $333,827 | $9,328 | 2.8% |
| Tenant expense reimbursement | 56,350 | 59,878 | (3,528) | (5.9)% |
| Observatory revenue | 91,112 | 84,525 | 6,587 | 7.8% |
| Construction revenue | — | 1,981 | (1,981) | (100.0)% |
| Third-party management and other fees | 1,372 | 1,658 | (286) | (17.2)% |
| Other revenues and fees | 6,748 | 10,565 | (3,817) | (36.1)% |
| Total revenues | 498,737 | 492,434 | 6,303 | 1.3% |
| Operating expenses: |  |  |  |  |
| Property operating expenses | 115,075 | 120,341 | (5,266) | (4.4)% |
| Ground rent expenses | 6,994 | 6,994 | — | —% |
| General and administrative expenses | 35,623 | 28,395 | 7,228 | 25.5% |
| Observatory expenses | 21,900 | 23,391 | (1,491) | (6.4)% |
| Construction expenses | — | 3,222 | (3,222) | (100.0)% |
| Real estate taxes | 71,773 | 69,543 | 2,230 | 3.2% |
| Acquisition expenses | 98 | 193 | (95) | (49.2)% |
| Depreciation and amortization | 115,382 | 126,216 | (10,834) | (8.6)% |
| Total operating expenses | 366,845 | 378,295 | (11,450) | (3.0)% |
| Operating income | 131,892 | 114,139 | 17,753 | 15.6% |
| Interest expense | (53,310) | (50,298) | (3,012) | 6.0% |
| Income before income taxes | 78,582 | 63,841 | 14,741 | 23.1% |
| Income tax expense | (4,340) | (3,283) | (1,057) | 32.2% |
| Net income | 74,242 | 60,558 | 13,684 | 22.6% |
| Private perpetual preferred unit distributions | (702) | (702) | — | —% |
| Net income attributable to common unitholders | $73,540 | $59,856 | $13,684 | 22.9% |

### Rental Revenue

The increase in rental income was primarily attributable to increased rental rates.

### Tenant Expense Reimbursement

The decrease in tenant expense reimbursements was due to a decrease in property operating expenses in the nine months ended September 30, 2016.

### Observatory Revenue

Observatory revenues were higher in part due to increased tourist visits, more favorable weather conditions in 2016 and changes in ticket mix.

### Construction Revenue

The construction business ceased operations in 2015 which is reflected in the elimination of construction revenues.

### Third-Party Management and Other Fees

The decrease reflects lower management fee income in the nine months ended September 30, 2016.

### Other Revenues and Fees

The decrease was primarily due to a $2.5 million acquisition break-up fee received in the nine months ended September 30, 2015 and lower lease cancellation income in the nine months ended September 30, 2016.

### Property Operating Expenses

The decrease in property operating expenses was primarily due to lower repairs and maintenance costs and lower utility costs.

### General and Administrative Expenses

The increase in general and administrative expenses is due to $1.7 million of incremental legal costs pertaining to formation transactions litigation, $3.3 million related to higher 2016 incentive compensation bonus accruals and salaries, and $2.9 million related to equity compensation expense. We went public in October 2013 and we are still ramping up, adding layers of amortization of non-cash compensation expense associated with equity incentive compensation. Once we conclude four years as a public company, the equity incentive compensation expense should stabilize.

### Observatory Expenses

The decrease in Observatory expenses primarily reflects lower personnel costs and lower legal fees.

### Construction Expenses

The construction business ceased operations in 2015 which is reflected in the elimination of construction expenses.

### Real Estate Taxes

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

### Depreciation and Amortization

The decrease in depreciation and amortization was primarily attributable to assets that became fully depreciated during 2015.

### Interest Expense

The increase in interest expense was due to higher debt balances as well as higher interest rates. In March 2015, we issued $350.0 million of senior unsecured notes with a weighted average fixed interest rate of 4.08%. The proceeds were partially used to repay our unsecured revolving credit facility which had a variable interest rate of 1.33% in the first quarter 2015.

### Income taxes

The increase in income tax expense was attributable to activities within our taxable REIT subsidiaries, primarily due to higher Observatory taxable income for the nine months ended September 30, 2016.

### Liquidity and Capital Resources

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 fulfill other general business needs. Based on the historical experience of our management and our business strategy, in the foreseeable future we anticipate that 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, cash on hand, our unsecured revolving credit facility, mortgage financings, debt issuances, common and/or preferred equity issuances and asset sales. Our properties require periodic investments of capital for individual lease related tenant improvements allowances, general capital improvements and costs associated with capital expenditures. Our overall leverage will depend on our mix of investments and the cost of leverage. ESRT's charter does not restrict the amount of leverage that we may use.

At September 30, 2016, we had approximately $594.3 million available in cash and cash equivalents, and there was $1.1 billion available under our unsecured revolving credit facility.

On August 23, 2016, QIA purchased 29,610,854 newly issued ESRT Class A common shares at $21.00 per share, resulting in gross proceeds of $621.8 million. The proceeds were contributed to us and we issued 29,610,854 Series PR units to ESRT. At August 23, 2016, the 29,610,854 units were equivalent to a 9.9% economic interest in us. QIA has a top-up right to maintain their ownership stake at 9.9% over time. Proceeds from the investment were used to pay down the $45.0 million balance on our revolving credit facility. We intend to use the remaining proceeds for general corporate purposes, including redevelopment of the portfolio and future investments.

In addition, for an initial period of five years from August 23, 2016, QIA will have the right of first offer to co-invest with us as a joint venture partner in real estate investment opportunities initiated by us where we have elected, at our discretion, to seek out a joint venture partner. The right of first offer period will be extended for 30 months so long as at least one joint venture transaction is consummated by us and QIA during the initial term, and will be extended for a further 30 month term if at least one more joint venture transaction is consummated during such initial extension period.

As of September 30, 2016, we had approximately $1.6 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 4.15% (excluding premiums and discount) and a weighted average maturity of 4.9 years. Excluding principal amortization, we have no debt maturing in 2016 and approximately $336.0 million of debt maturing in 2017. Our consolidated net debt to total market capitalization was approximately 14.0% as of September 30, 2016.

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

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. On July 6, 2016, we partially exercised the accordion feature and increased our borrowing capacity under the unsecured revolving credit facility from $800 million to $1.1 billion. 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 our leverage ratio and credit rating; or (y) a base rate, plus a spread that will range from 0.000% to 0.600% depending upon our leverage ratio and credit rating. In addition, the unsecured revolving credit facility permits us to borrow at competitive bid rates determined in accordance with procedures described in the unsecured revolving credit facility agreement.

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.

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 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 September 30, 2016, we were in compliance with the covenants (dollars in thousands):

| Financial covenant | Required | September 30, 2016 | In Compliance |
| --- | --- | ---: | --- |
| Maximum total leverage | \< 60% | 27.0% | Yes |
| Maximum secured debt | \< 40% | 12.5% | Yes |
| Minimum fixed charge coverage | \> 1.50x | 3.3x | Yes |
| Minimum unencumbered interest coverage | \> 1.75x | 7.0x | Yes |
| Maximum unsecured leverage | \< 60% | 23.6% | Yes |
| Maximum secured recourse indebtedness | \< 10% | 0.0% | Yes |
| Minimum tangible net worth | $1,203,815 | $1,596,702 | Yes |

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

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 (as defined in the agreement 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 revolving 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 require certain customary financial reports. The Series A, B and C Senior Notes also require 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 September 30, 2016, we were in compliance with the covenants under the Series A, B and C Senior Notes.

### Unsecured Term Loan Facility

During August 2015, we entered into a new seven year $265.0 million senior unsecured term loan facility ("term loan facility"). The term loan facility matures on August 24, 2022. The term loan facility bears interest at a floating rate equal to, at our election, a LIBOR rate, plus a spread ranging from 1.400% to 2.350%; or a base rate, plus a spread ranging from 0.400% to 1.350%. In each case the spread is determined by our leverage ratio and credit rating. Pursuant to a forward interest rate swap agreement, we effectively fixed LIBOR at 2.1485% for $265.0 million of the term loan facility for the period from August 31, 2017 through maturity. The proceeds from the term loan facility were used to repay borrowings made under our unsecured revolving credit facility.

The terms of the term loan facility agreement include customary covenants, including limitations on liens, investment, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. The term loan facility requires compliance with financial ratios 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. It also contains customary events of default (subject in certain cases to specified cure periods). These terms in the term loan facility agreement are consistent with the terms in our unsecured revolving credit facility agreement. As of September 30, 2016, we were in compliance with the covenants under the term loan facility.

### Mortgage Debt

As of September 30, 2016, we had mortgage debt outstanding of $763.5 million. During the first quarter of 2016, we refinanced at a lower rate a $20.2 million 6.0% mortgage loan secured by 10 Union Square East. The new $50.0 million mortgage loan has a ten year maturity and bears interest at a fixed rate of 3.7%. As a result of the refinancing, we expensed $0.2 million of unamortized deferred financing costs and incurred a $0.4 million prepayment penalty which will be offset by interest cost savings.

### 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 currently 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 | Nine months ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Number of leases signed(2) | 130 | 194 |
| Total square feet | 741,843 | 939,989 |
| Leasing commission costs(3) | $13,105 | $13,516 |
| Tenant improvement costs(3) | 44,788 | 50,342 |
| Total leasing commissions and tenant improvement costs(3) | $57,893 | $63,858 |
| Leasing commission costs per square foot(3) | $17.67 | $14.38 |
| Tenant improvement costs per square foot(3) | 60.37 | 53.56 |
| Total leasing commissions and tenant improvement costs per square foot(3) | $78.04 | $67.94 |

### Retail Properties(4)

| Total New Leases, Expansions, and Renewals | Nine months ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Number of leases signed(2) | 13 | 12 |
| Total square feet | 39,183 | 70,940 |
| Leasing commission costs(3) | $2,221 | $10,263 |
| Tenant improvement costs(3) | 4,433 | 2,234 |
| Total leasing commissions and tenant improvement costs(3) | $6,654 | $12,497 |
| Leasing commission costs per square foot(3) | $56.69 | $144.67 |
| Tenant improvement costs per square foot(3) | 113.13 | 31.49 |
| Total leasing commissions and tenant improvement costs per square foot(3) | $169.82 | $176.16 |

(1) Excludes an aggregate of 502,429 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 502,429 rentable square feet of retail space in our Manhattan office properties. Excludes the Empire State Building broadcasting licenses and observatory operations.

| Total Portfolio | Nine months ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Capital expenditures (1) | $54,975 | $36,718 |

(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 September 30, 2016, we expect to incur additional costs relating to obligations under signed new leases of approximately $57.1 million, consisting of approximately $56.5 million for tenant improvements and other improvements related to new leases and approximately $0.6 million for leasing commissions. We intend to fund the tenant improvements and leasing commission costs through a combination of operating cash flow, cash on hand and borrowings under the unsecured revolving credit facility.

Capital expenditures are considered part of both our short-term and long-term liquidity requirements. We intend to fund the capital improvements to complete the redevelopment and repositioning program through a combination of operating cash flow, cash on hand and borrowings under the unsecured revolving credit facility.

### Contractual Obligations

Refer to our Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of our contractual obligations. There has been no material changes, outside the ordinary course of business, to these contractual obligations during the nine months ended September 30, 2016.

### Off-Balance Sheet Arrangements

As of September 30, 2016, 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 units in order to allow ESRT to satisfy its REIT 90% distribution requirement and to avoid U.S. federal income tax and the 4% nondeductible excise tax in that year.

### Distributions to Securityholders

Distributions and dividends amounting to $83.3 million have been made to securityholders for the nine months ended September 30, 2016.

### Cash Flows

### Comparison of Nine Months Ended September 30, 2016 to the Nine Months Ended September 30, 2015

*Net cash*. Cash and cash equivalents were $594.3 million and $46.4 million, respectively, as of September 30, 2016 and 2015.

*Operating activities*. Net cash provided by operating activities increased by $2.5 million, to $162.1 million, for the nine months ended September 30, 2016 compared to $159.6 million for the nine months ended September 30, 2015, primarily due to higher cash rents.

*Investing activities*. Net cash used in investing activities increased by $15.3 million, to $120.3 million, for the nine months ended September 30, 2016 compared to $105.0 million for the nine months ended September 30, 2015, primarily due to higher expenditures on building and tenant improvements.

*Financing activities*. Net cash provided by financing activities increased by $559.8 million, to $505.8 million, for the nine months ended September 30, 2016 compared to $54.0 million used in financing activities for the nine months ended September 30, 2015. The increase was from the net proceeds on issuance of common stock in the third quarter 2016.

### Net Operating Income ("NOI")

Our internal financial reports include a discussion of property net operating income. NOI is a non-GAAP financial measure of performance. NOI is used by our management to evaluate and compare the performance of our properties and to determine trends in earnings and to compute the fair value of our properties as it is not affected by: (i) the cost of funds of the property owner, (ii) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP, (iii) acquisition expenses and break-up fee, 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 titled measures and, accordingly, our NOI may not be comparable to similarly titled 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 September 30, 2016 | 2015 | Nine months ended September 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $32,897 | $26,085 | $74,242 | $60,558 |
| Add: |  |  |  |  |
| General and administrative expenses | 11,798 | 10,182 | 35,623 | 28,395 |
| Depreciation and amortization | 37,607 | 45,169 | 115,382 | 126,216 |
| Interest expense | 17,939 | 16,680 | 53,310 | 50,298 |
| Construction expenses | — | — | — | 3,222 |
| Acquisition expenses | — | 193 | 98 | 193 |
| Income tax expense | 2,750 | 2,578 | 4,340 | 3,283 |
| Less: |  |  |  |  |
| Construction revenue | — | — | — | (1,981) |
| Acquisition break-up fee | — | (2,500) | — | (2,500) |
| Third-party management and other fees | (404) | (618) | (1,372) | (1,658) |
| **Net operating income** | $102,587 | $97,769 | $281,623 | $266,026 |
| **Other Net Operating Income Data** |  |  |  |  |
| Straight-line rental revenue | $9,619 | $5,441 | $21,495 | $15,165 |
| Net increase in rental revenue from the amortization of above- and below-market lease assets and liabilities | $1,210 | $4,795 | $6,285 | $14,662 |
| Amortization of acquired below-market ground leases | $1,957 | $1,957 | $5,873 | $5,873 |

43

### 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 write-downs of investments in depreciable real estate and investments in in-substance real estate investments, gains or losses from 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 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: private perpetual preferred exchange offering expenses, acquisition expenses, gain on settlement of lawsuit related to the Observatory, net of income taxes, deferred financing costs write-offs, prepayment penalties, construction severance expenses and acquisition break-up fee. The Company presents Core FFO because it considers it an important supplemental measure of its operating performance in that it excludes 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 September 30, 2016 | 2015 | Nine months ended September 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $32,897 | $26,085 | $74,242 | $60,558 |
| Private perpetual preferred unit distributions | (234) | (234) | (702) | (702) |
| Real estate depreciation and amortization | 37,318 | 45,072 | 114,779 | 125,847 |
| **FFO attributable to common stockholders and non-controlled interests** | 69,981 | 70,923 | 188,319 | 185,703 |
| Amortization of below-market ground leases | 1,957 | 1,957 | 5,873 | 5,873 |
| **Modified FFO attributable to common stockholders and non-controlled interests** | 71,938 | 72,880 | 194,192 | 191,576 |
| Acquisition break-up fee | — | (2,500) | — | (2,500) |
| Deferred financing costs write-off and prepayment penalty | — | — | 552 | 1,749 |
| Acquisition expenses | — | 193 | 98 | 193 |
| Construction severance expenses, net of taxes | — | — | — | 480 |
| **Core FFO attributable to common stockholders and non-controlled interests** | $71,938 | $70,573 | $194,842 | $191,498 |
| **Weighted average Operating Partnership units** |  |  |  |  |
| Basic | 278,739 | 265,873 | 270,388 | 265,868 |
| Diluted | 280,614 | 265,873 | 271,028 | 265,868 |

### Factors That May Influence Future Results of Operations

### Leasing

We signed 1.2 million rentable square feet of new leases, expansions and lease renewals for the year ended December 31, 2015. During the nine months ended September 30, 2016, we signed 0.8 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 September 30, 2016, 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 9.7% of the net rentable square footage of the properties in our portfolio. In addition, leases representing 1.7% and 6.7% of net rentable square footage of the properties in our portfolio will expire in 2016 and in 2017, respectively. These leases are expected to represent approximately 1.8% and 7.0%, 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 third quarter 2016 was $38.1 million, compared to $35.7 million for the third quarter 2015. The Observatory hosted approximately 1,340,000 visitors in the third quarter 2016 versus 1,327,000 visitors in the third quarter 2015. In the third quarter 2016, there were ten bad weather days, four of which fell on weekend days, compared to six bad weather days, zero of which fell on weekend days, in the third quarter 2015.

For the nine months ended September 30, 2016, the Empire State Building Observatory hosted 3,183,000 visitors versus 3,114,000 visitors from the same period in 2015. Observatory revenue was $91.1 million for the nine months ended September 30, 2016, a 7.8% increase from $84.5 million for the nine months ended September 30, 2015. For the nine months ended September 30, 2016, there were 31 bad weather days, eight of which fell on weekend days, compared to 52 bad weather days, 15 of which fell on weekend days, in the nine months ended September 30, 2015.

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 nine months ended September 30, 2016, we derived $16.6 million of revenue and $6.2 million of expense reimbursements from the Empire State Building’s broadcasting licenses and related leases. The broadcasting licenses and related leases generally expire between 2016 and 2031. The business of broadcasting TV and radio signals over the air is in flux, due to deteriorating industry fundamentals and the upcoming Federal Communications Commission spectrum auction, and there is a new competitor in the market at One World Trade Center. We have made preliminary renewal proposals which, if accepted, would yield reduced revenues and higher capital expenditures.

We have renewed and extended our leases and licenses with Univision Television Group from their current expirations in 2016 and 2018 to a new expiration in December 2025. Three of our existing broadcast tenants, CBS Broadcasting, NBC Universal Media, and WNET have notified us that they will vacate the Empire State Building at the end of their current lease terms. The non-renewing leases with CBS, NBC and WNET generated approximately $6.3 million in aggregate revenue in 2015, inclusive of expense reimbursements, and their leases expire in 2017 and 2018. Revenue from Univision totaled approximately $2.9 million, inclusive of expense reimbursements in 2015. Effective January 2016, annual revenue from Univision adjusted to an initial amount of $1.9 million, and is subject to escalations.

We renewed and extended our lease and licenses with Emmis Communications, which operates three FM radio stations at the Empire State Building, for 16 years. For the year ended December 31, 2015, revenue from Emmis Communications totaled approximately $1.7 million (inclusive of expense reimbursements). Effective January 2016, annual revenue from Emmis Communications adjusted to an initial amount of $1.3 million, and is subject to escalations.

We have renewed and extended an additional lease and license with a broadcast tenant with terms subject to a confidentiality agreement.

### Critical Accounting Estimates

There were no material changes to our critical accounting estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.

## Market risk

As filed, 3,502 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 variable rate indebtedness. As of September 30, 2016, our variable rate debt of $265.0 million represented 3.3% of our total enterprise value.

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 term loan, unsecured revolving credit facility and mortgage refinancing. 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.

During 2015 we entered into three interest rate LIBOR swaps with effective dates of July 5, 2017 and August 31, 2017 and an aggregate notional value of $465.0 million, which fixes interest rates at 2.1485% and 2.5050%, and mature between August 24, 2022 and July 5, 2027. These interest rate swaps have been designated as cash flow hedges and are deemed effective as of September 30, 2016 with a net liability fair value of $31.2 million which is included in accounts payable and accrued expenses on the condensed consolidated balance sheet.

Based on our variable rate debt balances, interest expense would have increased by approximately $2.6 million if short-term interest rates had been 1% higher. As of September 30, 2016, the weighted average interest rate on the $1.4 billion of fixed-rate indebtedness outstanding was 4.55% per annum, each with maturities at various dates through March 27, 2030.

As of September 30, 2016, the fair value of our outstanding debt was approximately $1.7 billion, which was approximately $74.9 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, 2,332 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 September 30, 2016, 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, 10,175 characters.

The following updates and supersedes our risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”). These supplemental risk factors specifically provide an update in connection with our and ESRT's sale of a 9.9% fully diluted interest in us to QIA in August 2016. For a discussion of our additional risk factors, see Item 1A (Risk Factors) in Part I of the 2015 Form 10-K. Except as disclosed below, there have been no material changes from the risk factors and uncertainties disclosed in our 2015 Annual Report.

**Tax protection agreement with QIA could limit our ability either to sell certain properties or to engage in a strategic transaction, which could materially and adversely affect us.**

In connection with our and ESRT's sale of a 9.9% fully diluted interest in us to QIA in August 2016, ESRT agreed, subject to certain minimum thresholds and conditions, to indemnify QIA for certain applicable U.S. federal and state taxes paid by QIA in connection with any dividends ESRT pays that are attributable to capital gains from the sale or exchange of any U.S. real property interests. If ESRT were to trigger the tax indemnification obligations under this agreement, we and ESRT would be required to pay QIA for the resulting tax consequences, as applicable. Moreover, this obligation may restrict our and ESRT's ability to engage in a strategic transaction, and/or inhibit our selling or disposing of a property that might otherwise be in the best interest of the securityholders to do so.

**ESRT's charter contains stock ownership limits, which may delay or prevent a change of control.**

In order for ESRT to qualify as a REIT no more than 50% in value of ESRT's outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year, and at least 100 persons must beneficially own our stock during at least 335 days of a taxable year of 12 months, or during a proportionate portion of a shorter taxable year. “Individuals” for this purpose include natural persons, private foundations, some employee benefit plans and trusts and some charitable trusts. To assist ESRT in complying with these limitations, among other purposes, ESRT's charter generally prohibits any person from directly or indirectly owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of ESRT's capital stock or more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of ESRT's common stock. These ownership limitations could have the effect of discouraging a takeover or other transaction in which holders of ESRT's common stock might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests. ESRT has entered into a waiver of the 9.8% ownership limit with an institutional investor to permit this investor to own up to 15% of the outstanding shares of ESRT's Class A common stock, as well as an additional waiver to permit affiliates of QIA to own an aggregate amount of Class A common stock equal to up to a 9.9% fully diluted economic interest in ESRT (inclusive of all outstanding common OP units and LTIP units), which currently equals in excess of 19.4% of ESRT's outstanding Class A Common stock.

ESRT's charter’s constructive ownership rules are complex and may cause the outstanding shares owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than these percentages of the outstanding shares by an individual or entity could cause that individual or entity to own constructively in excess of these percentages of the outstanding shares and thus violate the share ownership limits. ESRT's charter also provides that any attempt to own or transfer shares of ESRT's common stock or preferred stock (if and when issued) in excess of the stock ownership limits without the consent of ESRT's board of directors or in a manner that would cause ESRT to be “closely held” under Section 856(h) of the Code (without regard to whether the shares are held during the last half of a taxable year) will result in the shares being deemed to be transferred to a trustee for a charitable trust or, if the transfer to the charitable trust is not automatically effective to prevent a violation of the share ownership limits or the restrictions on ownership and transfer of ESRT shares, any such transfer of ESRT shares will be null and void.

**The concentration of ESRT's voting power may adversely affect the ability of new investors to influence ESRT's policies.**

As of September 30, 2016, Anthony E. Malkin, ESRT's Chairman and Chief Executive Officer, together with the Malkin Group, has the right to vote 42,101,592 shares of ESRT's common stock, which represents approximately 20.2% of the voting power of ESRT's outstanding common stock. Consequently, Mr. Malkin has the ability to influence the outcome of matters presented to ESRT' securityholders, including the election of ESRT's board of directors and approval of significant corporate transactions, such as business combinations, consolidations and mergers and the determination of ESRT's day-to-day corporate and management policies.

In August 2016, we and ESRT sold a 9.9% fully diluted interest in us to QIA, which initially represented 19.4% of the outstanding ESRT Class A common stock. Pursuant to the terms of ESRT's stockholders agreement with QIA, QIA generally has the right (but not the obligation) to maintain its fully diluted economic interest in ESRT by purchasing additional shares of ESRT's Class A common stock when ESRT or we issue additional common equity securities from time to time. While QIA has agreed to limit its voting power on all matters presented to ESRT's securityholders to no more than 9.9% of total number of votes entitled to be cast, QIA has also agreed to vote its shares in favor of the election of all director nominees recommended by ESRT's board of directors.

The interests of Mr. Malkin and QIA could conflict with or differ from your interests as a securityholder, and these large securityholders may exercise their right as securityholders to restrict our ability to take certain actions that may otherwise be in the best interests of our and ESRT's securityholders. This concentration of voting power might also have the effect of delaying or preventing a change of control that our or ESRT's securityholders may view as beneficial.

**The future exercise of registration rights may adversely affect the market price of our common stock.**

We or ESRT cannot predict whether future issuances of shares of ESRT's common stock or our operating partnership units or the availability of shares for resale in the open market will decrease the market price per share/unit of ESRT's common stock and traded OP units. In August 2016, ESRT entered into a registration rights agreement with QIA in connection with its purchase of 29,610,854 shares of ESRT Class A common stock, which requires ESRT to use commercially reasonable efforts to file with the Securities and Exchange Commission within 180 days following the closing of the sale, a resale shelf registration statement providing for the resale of QIA’s shares. Subsequently, QIA will be entitled to cause ESRT to include in the registration statement such additional shares of ESRT's Class A common stock as QIA may acquire from time to time, up to a 9.9% fully diluted interest in ESRT. We and ESRT will bear the costs of registering the securities subject to the registration rights agreement, and once these shares are registered, they will be freely tradable, subject to any applicable lock-up agreements. The registration and availability of such a significant number of securities for trading in the public market may have an adverse effect on the market price of ESRT's common stock and our traded OP units and could impair ESRT's and our ability to raise additional capital through the sale of equity securities in the future. In particular, QIA currently owns in excess of 19.4% of the outstanding shares of ESRT's Class A common stock. If QIA decides to sell all or a substantial portion of its shares, it could have a material adverse impact on the market price of ESRT's common stock and our traded OP units. In addition, future sales of shares of ESRT common stock may be dilutive to our securityholders.

**Failure to qualify as a domestically-controlled REIT could subject ESRT's non-U.S. securityholders to adverse federal income tax consequences.**

A foreign person (other than a “qualified foreign pension plan”) disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S. property interests, is generally subject to tax under the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") on the gain recognized on the disposition. FIRPTA does not apply, however, to the disposition of stock in a REIT if the REIT is a “domestically controlled REIT.” In general, ESRT will be a domestically controlled REIT if at all times during a specified testing period, less than 50% in value of ESRT shares are held directly or indirectly by non-U.S. holders. While ESRT intends to continue to qualify as a "domestically controlled" REIT, we and ESRT cannot assure that result, as ESRT Class A common stock is publicly traded, QIA (a non-U.S. holder) recently acquired more than 19% of ESRT common stock and other non-U.S. holders may now or in the future hold additional shares. If ESRT were to fail to qualify, gain realized by a foreign investor (other than a “qualified foreign pension plan”) on a sale of ESRT common stock would be subject to FIRPTA unless (a) ESRT common stock was on an established securities market and the foreign investor did not at any time during a specific testing period directly or indirectly own more than 10% of the value of ESRT outstanding common stock, or (b) another exemption from FIRPTA were applicable.

Filed Nov 8, 2016.
Source: SEC EDGAR, the filing index for accession 0001628280-16-020986. Last ingested by Listed: Nov 2, 2026, 20:18 ET. No prices; not investment advice.