# Empire State Realty OP, L.P.: Form 10-Q for the period ended Mar 31, 2020

- Company: [Empire State Realty OP, L.P.](/companies/esba.md) (CIK 1553079)
- Form: 10-Q
- Filed: 2020-05-06
- Accepted by EDGAR: May 6, 2020, 17:26 ET
- Period: 2020-03-31
- Accession: 0001628280-20-006730
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1553079/000162828020006730/esrop3-31x2010xq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1553079/000162828020006730/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-01-01 to 2020-03-31 | $170.2m | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2020-01-01 to 2020-03-31 | $16.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-01-01 to 2020-03-31 | $27.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-01-01 to 2020-03-31 | $19.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-01-01 to 2020-03-31 | −$382.0k | us-gaap:IncomeTaxExpenseBenefit |
| Diluted EPS | 3 months, 2020-01-01 to 2020-03-31 | $0.02 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-01-01 to 2020-03-31 | $0.02 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-01-01 to 2020-03-31 | 292,645,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2020-01-01 to 2020-03-31 | $64.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2020-01-01 to 2020-03-31 | $27.8m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 3 months, 2020-01-01 to 2020-03-31 | $32.7m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2020-01-01 to 2020-03-31 | $62.7m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-03-31 | $1.01bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2020-03-31 | $4.66bn | us-gaap:Assets |
| Total liabilities | at 2020-03-31 | $2.81bn | us-gaap:Liabilities |

## Management's discussion and analysis

As filed, 66,642 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. The following discussion related to our consolidated financial statements should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2019.*

### 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”). We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor provisions. 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: (i) economic, political and social impact of, and uncertainty relating to, the COVID-19 pandemic, including (a) the effectiveness or lack of effectiveness of governmental relief in providing assistance to businesses that have suffered significant declines in revenues as a result of mandatory business shut-downs, “shelter-in-place” or “stay-at-home” orders and social distancing practices, as well as individuals adversely impacted by the COVID-19 pandemic, (b) the duration of any such orders or other formal recommendations for social distancing and the speed and extent to which revenues of the Company’s tenants, particularly retail, and the Observatory recover following the lifting of any such orders or recommendations, (c) the potential impact of any such events on the obligations of the Company’s tenants to make rent and other payments or honor other commitments, (d) international and national disruption of travel and tourism with a resulting decline in Observatory visitors, and (e) macroeconomic conditions, such as a disruption of, or lack of access to, the capital markets, and general volatility adversely impacting the market price of the Company’s Class A common stock and publicly-traded partnership units of the Operating Partnership; (ii) resolution of legal proceedings involving the Company; (iii) reduced demand for office or retail space; (iv)changes in our business strategy; (v) changes in technology and market competition that affect utilization of our broadcast or other facilities; (vi) changes in domestic or international tourism, including due to health crises such as the COVID-19 pandemic, geopolitical events and/or currency exchange rates, which may cause a decline in Observatory visitors; (vii) defaults on, early terminations of, or non-renewal of, leases by tenants; (viii) increases in the Company’s borrowing costs as a result of changes in interest rates and other factors, including the potential phasing out of LIBOR after 2021; (ix) declining real estate valuations and impairment charges; (x) termination or expiration of our ground leases; (xi) our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due and potential limitations on our ability to borrow additional funds in compliance with drawdown conditions and financial covenants; (xii) decreased rental rates or increased vacancy rates; (xiii) our failure to redevelop and reposition properties, or to execute any newly planned capital project successfully or on the anticipated timeline or at the anticipated costs; (xiv) difficulties in identifying properties to acquire and completing acquisitions; (xv) risks related to our development projects (including our Metro Tower development site) and capital projects, including the cost of construction delays and cost overruns; (xvi) impact of changes in governmental regulations, tax laws and rates and similar matters; (xvii) our failure to qualify as a REIT; and (xviii) environmental uncertainties and risks related to adverse weather conditions, rising sea levels and natural disasters. For a further discussion of these and other factors that could impact the Company's future results, performance or transactions, see the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and other risks described in documents subsequently filed by the Company from time to time with the Securities and Exchange Commission.*

*While forward-looking statements reflect 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, of 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. The risks set forth above are not exhaustive. 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, 2019 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 ("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 March 31, 2020 included:

- Achieved net income of $7.2 million and Core Funds From Operations of $53.7 million.
- Fortified our already strong balance sheet with the completion of several financings that raised $300 million in net incremental proceeds.
- Bolstered our cash balance with $550 million drawn under our unsecured revolving credit facility.
- Repurchased 8.9 million shares at an average price of $9.31 per share, totaling $83.0 million in aggregate, through April 30, 2020.
- Occupancy and leased percentages at March 31, 2020:
- Total portfolio was 88.7% occupied; including signed leases not commenced (“SLNC”), the total portfolio was 91.1% leased.
- Manhattan office portfolio (excluding the retail component of these properties) was 90.0% occupied; including SLNC, the Manhattan office portfolio was 92.6% leased.
- Retail portfolio was 88.5% occupied; including SLNC, the retail portfolio was 94.0% leased.
- Empire State Building was 93.7% occupied; including SLNC, was 95.4% leased.
- Signed 35 leases, representing 149,143 rentable square feet across the total portfolio, and achieved a 3.4% increase in mark-to-market cash rent over previous fully escalated cash rents portfolio-wide on new, renewal, and expansion leases.
- Signed 12 new leases representing 63,153 rentable square feet for the Manhattan office portfolio (excluding the retail component of these properties) and achieved an increase of 19.4% in mark-to-market cash rent over previous fully escalated cash rents.
- Increased Empire State Building Observatory revenues during the first two months of 2020 by 13.2%, after adjusting for the 102nd floor observation deck, to $14.4 million from $12.7 million in the first two months of 2019. On March 16, 2020, the Company complied with the instructions of authorities related to COVID-19 and closed the Empire State Building Observatory.
- Declared a dividend of $0.105 per share.

As of March 31, 2020, 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 509,244 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 1.8 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 415,000 rentable square foot office building and garage. As of March 31, 2020, our portfolio included four standalone retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut, encompassing 205,488 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. On March 16, 2020, we complied with governmental mandates regarding the closing of non-essential businesses in response to the COVID-19 pandemic and closed the Empire State Building Observatory.

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

|  | Three Months Ended March 31, 2020 |  | 2019 |  |
| --- | ---: | ---: | ---: | ---: |
| Office leases | $37,083 | 53.3% | $35,412 | 51.2% |
| Retail leases | 1,616 | 2.3% | 1,820 | 2.6% |
| Tenant reimbursements & other income | 6,694 | 9.6% | 7,539 | 10.9% |
| Observatory operations | 19,544 | 28.0% | 20,569 | 29.8% |
| Broadcasting licenses and leases | 4,743 | 6.8% | 3,791 | 5.5% |
| Total | $69,680 | 100.0% | $69,131 | 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 as well as 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. From 2002 through March 31, 2020, we have invested a total of approximately $929.5 million (excluding tenant improvement costs and leasing commissions) in our Manhattan office properties pursuant to this program. We intend to fund these capital improvements through a combination of operating cash flow, cash on hand, and borrowings.

The Greater New York Metropolitan Area office market is soft, and we compete with properties that have been redeveloped recently or have planned redevelopment. We expect to spend approximately $40 million over 2018 through 2020 on these well-maintained and our well-located properties’ common areas and amenities to ensure competitiveness and protect our market position. Expenditures, which began during the second quarter 2018, were $29.7 million through March 31, 2020.

As of March 31, 2020, excluding principal amortization, we have no debt maturing until 2021, which has two six- month extension options, and we had total debt outstanding of approximately $2.5 billion, with a weighted average interest rate of 3.60%, and a weighted average maturity of 7.2 years and 78.0% of which is fixed-rate indebtedness and 22.0% of which is variable-rate indebtedness. As of March 31, 2020, we had cash and cash equivalents of approximately $1.0 billion. Our consolidated net debt to total market capitalization was approximately 35.5% as of March 31, 2020.

### Impact of COVID-19

In March 2020, the outbreak of the novel Coronavirus Disease 2019 ("COVID-19") was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented economic, social and political uncertainty, volatility and disruption in the United States and globally. We have taken the following actions in response to the impact of the COVID-19 pandemic impact on our business.

Liquidity

In March 2020, we bolstered our balance sheet to ensure proper liquidity by raising $300.0 million in net proceeds in two financings and drawing down $550.0 million under our $1.1 billion unsecured revolving credit facility. We currently hold over $1.0 billion in cash on our balance sheet and have $550.0 million undrawn capacity under our credit facility.

Property Operations

All of our office buildings have remained open during the current COVID-19 pandemic to tenants that provide essential goods and services, as permitted by the authorities. We have scaled back certain building operations in cleaning, security, lobby concierge and recurring maintenance, which will reduce costs until buildings are repopulated. We estimate that these efforts will reduce operating expenses by approximately 25% from 2019 levels or approximately $40 to 45 million on an annualized basis. A portion of the reduction in operating expenses will be offset by a reduction in tenant expense recoveries.

Our operations team is hard at work to develop plans for when work from home orders are lifted and our tenants reoccupy our buildings to ensure a safe, clean and healthy work environment. These plans involve additional staffing, cleaning and maintenance, and changes to building operations for building access by tenants and their guests.

All New York State capital improvement work, except for essential work as defined by the authorities which includes safety-related work and work to demobilize previously started projects, has been stopped until such time that the government restrictions are lifted. The spend is significantly curtailed under the current restrictions. Work continues in Connecticut as permitted by the authorities.

We have reviewed all of our leases under which we have an obligation to complete capital improvement work. We have notified tenants where appropriate that under the force majeure event clause in our leases, completion deadlines will be extended without penalty.

Despite the challenge of the uncertain near-term environment, we continue to believe in the long-term demand for office space. Many have now experienced the inefficiencies of working from home and miss the connectivity and productivity that an office environment provides. That said, we believe the pandemic may cause some fundamental changes to how tenants use their office space in the future including less densification and smarter open floor plans with appropriate spacing. We also believe current co-working build-outs are too dense and will be poorly positioned for tenant demand in the new paradigm.

Leasing

The economic uncertainty relating to the COVID-19 pandemic has slowed the pace our leasing activity and could result in higher vacancy than we otherwise would have experienced, a longer amount of time to fill vacancies and potentially lower rental rates. As of March 31, 2020, our portfolio was 91.1% leased, including SLNC, including 6.8% subject to leases scheduled to expire in 2020 and 6.6% subject to leases scheduled to expire in 2021.

Except for lease transactions that were in negotiation prior to New York’s order to shelter in place, as of April 30, 2020, in-person lease prospect tours have stopped but we remain fully engaged with the brokerage community to offer virtual space tours.

Rent Collections

As of April 30, 2020, we collected 72% of our total April rent charges with 78% for office tenants, and 46% for retail tenants. To the extent we apply the applicable portion of security deposits which we hold in the form of cash or letters of credit, we will have collected 79% of the total April rent charges with 86% for office tenants and 46% for retail tenants. Such application is currently in process and will require impacted tenants to restore their full security deposits. As of April 30, 2020, we have received requests for rent deferral from 186 office and retail tenants that represent approximately 32% of our annual rental revenue. Three tenants represent approximately 8.8% of annualized rent and have agreed to deferral terms in documentation.

Before any consideration to any tenant request for rent deferral, we request that the tenant provide:

- an explanation of the actions taken to mitigate the impacts of COVID-19 on their business,
- current financial statements including recent monthly comparisons to prior year,
- proof that the tenant has applied for financial relief through the CARES Act if eligible, and
- verification that a claim under their insurance policy has been submitted, in the event that the federal government supplements the typical exclusions and limitations on business interruption insurance in response to the COVID-19 pandemic.

We then assess each request on an individual basis. Deferral requests to date have generally been for no more than three months. Our smaller food and service type retailers have been hit particularly hard. They provide critical amenities and services to our office tenants. Our plan is to convert their remaining 2020 fixed rent to a percentage rent structure, with a payback of the difference between current and percentage rent over a defined period. We intend to support our food and service retailers in re-opening so that they can service our office tenants when they re-occupy.

Observatory Operations

On March 16, 2020, we complied with governmental mandates regarding the closing of non-essential businesses in response to the COVID-19 pandemic and closed the Empire State Building Observatory. Due to the closure, we have reduced our annualized operating expense run-rate from $35 million in February 2020 to approximately $14 million, a 60% reduction. There have been certain wind down costs that have continued in April 2020, and we expect to reach this reduced run-rate in May 2020. Approximately two-thirds of the reduction is attributable to lower payroll expenses as we furloughed staff and the balance is due to lower operational and other costs. We anticipate we will initially reopen the Observatory on a reduced hours basis and most of these expenses will come back when we reopen. Our remaining costs relate to payroll for our management and sales staff, certain fixed operating costs, skeleton custodial and security crew, and other contracted costs.

With respect to our outlook for a reopening, our current base case for admissions ramp-up is as follows. We assume 2019 monthly levels as the baseline visitation comparison reference point and that we reopen on July 1st. We anticipate an opening of July 1 with admissions at 20% of the 2019 level and subsequently that admissions will ramp up to 40% for the August 2020 through March 2021 period. By Easter 2021, we expect admissions to be at 60% of the 2019 level. Admissions are then expected to ramp to 75% by June 2021 followed by 90% by August 2021 and hold for the remainder of 2021. We anticipate return to full admissions by January 2022. These estimated visitation levels are entirely of our own derivation and happen to align with certain independent consultant work of which we are aware that was prepared for other market participants. We anticipate that initially we will have a higher local visitor mix, followed by a ramp up of nationally sourced travel, which will then be followed by a restoration of our typical visitor mix that is approximately two-thirds international which we do not expect to be achieved until the broad resumption of international air travel some time in 2022.

### Results of Operations

### Overview

The discussion below relates to our financial condition and results of operations for the three months ended March 31, 2020 and 2019, respectively.

30

### Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

The following table summarizes our historical results of operations for the three months ended March 31, 2020 and 2019 (dollars in thousands):

| Revenues: | Three Months Ended March 31, 2020 | 2019 | Change% |  |
| --- | ---: | ---: | ---: | ---: |
| Rental revenue | $148,113 | $143,417 | $4,696 | 3.3% |
| Observatory revenue | 19,544 | 20,569 | (1,025) | (5.0)% |
| Lease termination fees | 211 | 388 | (177) | (45.6)% |
| Third-party management and other fees | 346 | 320 | 26 | 8.1% |
| Other revenues and fees | 2,010 | 2,599 | (589) | (22.7)% |
| Total revenues | 170,224 | 167,293 | 2,931 | 1.8% |
| Operating expenses: |  |  |  |  |
| Property operating expenses | 41,468 | 42,955 | 1,487 | 3.5% |
| Ground rent expenses | 2,331 | 2,331 | — | —% |
| General and administrative expenses | 15,951 | 14,026 | (1,925) | (13.7)% |
| Observatory expenses | 8,154 | 7,575 | (579) | (7.6)% |
| Real estate taxes | 29,254 | 28,232 | (1,022) | (3.6)% |
| Depreciation and amortization | 46,093 | 46,098 | 5 | —% |
| Total operating expenses | 143,251 | 141,217 | (2,034) | (1.4)% |
| Operating income | 26,973 | 26,076 | 897 | 3.4% |
| Other income (expense): |  |  |  |  |
| Interest income | 637 | 3,739 | (3,102) | (83.0)% |
| Interest expense | (19,618) | (20,689) | 1,071 | 5.2% |
| Loss on early extinguishment of debt | (86) | — | (86) | —% |
| Income before income taxes | 7,906 | 9,126 | (1,220) | (13.4)% |
| Income tax expense | 382 | 730 | (348) | 47.7% |
| Net income | 8,288 | 9,856 | (1,568) | (15.9)% |
| Private perpetual preferred unit distributions | (1,050) | (234) | (816) | (348.7)% |
| Net income attributable to common unitholders | $7,238 | $9,622 | $(2,384) | (24.8)% |

### Rental Revenue

The increase in base rent revenue was attributable to increased rental rates.

### Observatory Revenue

Observatory revenues were lower primarily driven by the closure of the Observatory on March 16, 2020 due to the COVID-19 pandemic. Observatory revenues increased during the first two months of 2020 by 13.2%, after adjusting for the 102nd floor observation deck, to $14.4 million from $12.7 million in the first two months of 2019.

### Lease Termination Fees

Lower termination fees were earned in the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

### Third-Party Management and Other Fees

***M***anagement fee income was consistent with prior year.

### Other Revenues and Fees

The decrease in other revenues and fees is primarily due to settlement income received in the three months ended March 31, 2019.

### Property Operating Expenses

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

### Ground Rent Expenses

Ground rent expense was consistent with 2019.

### General and Administrative Expenses

The increase in general and administrative expenses was primarily due to higher non-cash equity compensation expenses as well as higher cash compensation costs and legal fees.

### Observatory Expenses

Observatory expenses increased primarily due to higher marketing and payroll costs.

### Real Estate Taxes

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

### Depreciation and Amortization

Depreciation and amortization was consistent with 2019.

### Interest Income

The decrease in interest income was primarily due to lower interest rates and higher short-term investments in the prior year.

### Interest Expense

Interest expense decreased due to the repayment of a $250.0 million exchangeable senior note in the third quarter 2019, partially offset by new financings entered into in March 2020 and a draw on our unsecured revolving credit facility.

### Loss on Early Extinguishment of Debt

Loss on early extinguishment of debt was incurred in connection with the refinancing of the term loan in the first quarter 2020.

### Income Taxes

The decrease in income tax benefit was attributable to lower net loss for the Observatory segment.

### 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 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, debt issuances 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, cash on hand, debt issuances, and available borrowing capacity under our unsecured revolving credit facility. The availability of these borrowings is subject to the conditions set forth in the applicable loan agreements. 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 March 31, 2020, we had approximately $1,009.0 million available in cash and cash equivalents and there was $550.0 million available under our unsecured revolving credit facility.

Through August 2021, Q REIT Holding LLC, a Qatar Financial Centre limited liability company and a wholly owned

subsidiary of the Qatar Investment Authority, a governmental authority of the State of Qatar (“QREIT”, together with any eligible transferee, “QIA”) will have a 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 in real estate investment opportunities. 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 March 31, 2020, we had approximately $2.5 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 3.60% and a weighted average maturity of 7.2 years. As of March 31, 2020, exclusive of principal amortization, we have no debt maturing until 2021, which has two six-month extension options. Our consolidated net debt to total market capitalization was approximately 35.5% as of March 31, 2020.

### Unsecured Revolving Credit and Term Loan Facilities

During March 2020, we entered into an amendment to an existing credit agreement with the lenders party thereto, Bank of America, N.A., as administrative agent, and Bank of America, Wells Fargo Bank, National Association and Capital One, National Association, as the letter of credit issuers party thereto. The amendment amends the amended and restated senior unsecured revolving credit and term loan facility, entered into in August 2017, with Bank of America, N.A., as administrative agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC as Joint Lead Arrangers and Joint Bookrunners, Wells Fargo, National Association and Capital One, National Association, as co-syndication agents, and the lenders party thereto.

This new amended unsecured revolving credit and term loan facility is comprised of a $1.1 billion revolving credit facility and a $215 million term loan facility. We borrowed the term loan facility in full at closing. We also borrowed $550.0 million on the revolving credit facility. The amended unsecured revolving credit and term loan facility contains an accordion feature that would allow us to increase the maximum aggregate principal amount to $1.75 billion under specified circumstances. Certain of our subsidiaries are guarantors of our obligations under the amended unsecured revolving credit and term loan facility.

Amounts outstanding under the term loan facility bear interest at a floating rate equal to, at our election, (x) the Eurodollar rate, plus a spread that will range from 1.20% to 1.75% depending upon our leverage ratio, or (y) a base rate, plus a spread that will range from 0.20% to 0.75% depending upon our leverage ratio. If we achieve investment-grade ratings, subject to the terms of the amended unsecured revolving credit and term loan facility, we may elect for amounts outstanding to bear interest at a floating rate equal to, at our election, (x) the Eurodollar rate, plus a spread that will range from 0.85% to 1.65% depending upon our credit rating, or (y) a base rate, plus a spread that will range from 0.0% to 0.65% depending upon our credit rating. Amounts under the revolving credit facility bear interest at a floating rate equal to, at our election, (x) the Eurodollar rate, plus a spread that will range from 1.10% to 1.50% depending upon our leverage ratio or (y) a base rate, plus a spread that will range from 0.10% to 0.50% depending upon our leverage ratio. If we achieve investment-grade ratings, subject to the terms of the amended unsecured revolving credit and term loan facility, we may elect for the amounts outstanding to bear interest at a floating rate equal to, at our election, (x) the Eurodollar rate, plus a spread that will range from 0.825% to 1.55% depending upon our credit rating, or (y) a base rate, plus a spread that will range from 0.0% to 0.55% depending upon our credit rating.

We paid certain customary fees and expense reimbursements in connection with the amended unsecured revolving credit and term loan facility, including a facility fee on commitments under the revolving credit facility that range from 0.125% to 0.35%, subject to the terms of the amended unsecured revolving credit and term loan facility.

The initial maturity of the unsecured revolving credit facility is August 2021. We have the option to extend the initial term for up to two additional six-month periods, subject to certain conditions, including the payment of an extension fee equal to 0.0625% and 0.075% of the then outstanding commitments under the unsecured revolving credit facility on the first and the second extensions, respectively. The term loan facility matures on March 2025. We may prepay the loans under the amended unsecured revolving credit and term loan facility at any time in whole or in part, subject to reimbursement of the lenders’ breakage and redeployment costs in the case of prepayment of Eurodollar Rate borrowings.

Also during March 2020, we entered into a senior unsecured term loan facility (the “Term Loan Facility”) with Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC as sole bookrunner, Wells Fargo Securities, LLC, Capital One, National Association, U.S. Bank National Association and SunTrust Robinson Humphrey, Inc. as Joint Lead Arrangers, Capital One, National Association, as syndication agent, U.S. Bank National Association and Truist Bank, as documentation agents, and the lenders party thereto.

The Term Loan Facility is in the original principal amount of $175 million which we borrowed in full at closing. We may request the Term Loan Facility be increased through one or more increases or the addition of new pari passu term loan tranches, for a maximum aggregate principal amount not to exceed $225 million. Certain of our subsidiaries are guarantors of our obligations under the Term Loan Facility.

Amounts outstanding under the Term Loan Facility bear interest at a floating rate equal to, at our election, (x) the LIBOR rate, plus a spread that will range from 1.5% to 2.2% depending upon our leverage ratio, or (y) a base rate, plus a spread that will range from 0.5% to 1.2% depending upon our leverage ratio. If we achieve investment-grade ratings, subject to the terms of the Term Loan Facility, we may elect for amounts outstanding to bear interest at a floating rate equal to, at our election, (x) the LIBOR rate, plus a spread that will range from 1.4% to 2.25% depending upon our credit rating, or (y) a base rate, plus a spread that will range from 0.4% to 1.25% depending upon our credit rating.

The Term Loan Facility matures on December 31, 2026. We may prepay loans under the Term Loan Facility at any time, in whole or in part, subject to reimbursement of the lenders’ breakage and redeployment costs in the case of prepayment of Eurodollar rate borrowings and, if the prepayment occurs on or before December 31, 2021, a prepayment fee. If the prepayment occurs on or prior to December 31, 2020, the prepayment fee is equal to 2.0% of the principal amount prepaid, and if the prepayment occurs after December 31, 2020 but on or prior to December 31, 2021, the prepayment fee is equal to 1.0% of the principal amount prepaid.

Both the amended revolving credit and term loan facility and the Term Loan Facility (collectively, the "Credit Facilities") include the following financial covenants, subject to customary qualifications and cushions: (i) maximum leverage ratio of total indebtedness to total asset value 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) adjusted EBITDA (as defined in the agreement) to consolidated fixed charges will not be less than 1.50x, (iv) 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, and (v) the ratio of total unsecured indebtedness to unencumbered asset value will not exceed 60%.

The Credit Facilities contain customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates, and requires certain customary financial reports.

The Credit Facilities contain customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, invalidity of loan documents, loss of real estate investment trust qualification, and occurrence of a change of control (as defined in the respective Credit Facilities). As of March 31, 2020, we were in compliance with the covenants.

### Senior Unsecured Notes

On March 17, 2020, we entered into an agreement to issue and sell an aggregate $175 million of senior unsecured notes, consisting of (a) $100 million aggregate principal amount of 3.61% Series G Senior Notes due March 17, 2032 (the “Series G Notes”) and (b) $75 million aggregate principal amount of 3.73% Series H Senior Notes due March 17, 2035 (the

“Series H Notes”), in a private placement to entities affiliated with Prudential Capital Group, AIG Asset Management and MetLife Investment Management, LLC. The issue price for the Series G Notes and Series H Notes was 100% of the aggregate principal amount thereof.

The senior unsecured notes are senior unsecured obligations and are unconditionally guaranteed by each of our subsidiaries that guarantees indebtedness under the unsecured revolving credit and term loan facility. Interest on the senior unsecured notes is payable quarterly.

The terms of the Series G Notes and Series H Notes agreement include customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. It also requires compliance with financial ratios including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a minimum unencumbered interest coverage ratio, and a maximum unsecured leverage ratio. The agreement also 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, the occurrence of certain change of control transactions and loss of real estate investment trust qualification. As of March 31, 2020, we were in compliance with the covenants under the outstanding senior unsecured notes.

### Financial Covenants

As of March 31, 2020, we were in compliance with the following financial covenants:

| Financial covenant | Required | March 31, 2020 | In Compliance |
| --- | --- | ---: | --- |
| Maximum total leverage | \< 60% | 35.4% | Yes |
| Maximum secured debt | \< 40% | 8.4% | Yes |
| Minimum fixed charge coverage | \> 1.50x | 3.6x | Yes |
| Minimum unencumbered interest coverage | \> 1.75x | 6.9x | Yes |
| Maximum unsecured leverage | \< 60% | 30.7% | Yes |

### 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 leasing commission costs, tenant improvement 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 | Three Months Ended March 31 2020 | 2019 |
| --- | ---: | ---: |
| Number of leases signed(2) | 31 | 32 |
| Total square feet | 117,481 | 300,408 |
| Leasing commission costs(3) | $1,546 | $4,342 |
| Tenant improvement costs(3) | 7,818 | 16,569 |
| Total leasing commissions and tenant improvement costs(3) | $9,364 | $20,911 |
| Leasing commission costs per square foot(3) | $13.16 | $14.45 |
| Tenant improvement costs per square foot(3) | 66.55 | 55.15 |
| Total leasing commissions and tenant improvement costs per square foot(3) | $79.71 | $69.60 |

### Retail Properties(4)

| Total New Leases, Expansions, and Renewals | Three Months Ended March 31 2020 | 2019 |
| --- | ---: | ---: |
| Number of leases signed(2) | 4 | 2 |
| Total square feet | 31,662 | 7,643 |
| Leasing commission costs(3) | $1,465 | $277 |
| Tenant improvement costs(3) | 7,215 | 401 |
| Total leasing commissions and tenant improvement costs(3) | $8,680 | $678 |
| Leasing commission costs per square foot(3) | $46.28 | $36.25 |
| Tenant improvement costs per square foot(3) | 227.86 | 52.44 |
| Total leasing commissions and tenant improvement costs per square foot(3) | $274.14 | $88.69 |

(1) Excludes an aggregate of 509,244 and 512,632 rentable square feet of retail space in our Manhattan office properties in 2020 and 2019, respectively. 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 509,244 and 512,632 rentable square feet of retail space in our Manhattan office properties in 2020 and 2019, respectively. Excludes the Empire State Building broadcasting licenses and observatory operations.

| Total Portfolio | Three Months Ended March 31 2020 | 2019 |
| --- | ---: | ---: |
| Capital expenditures (1) | $13,933 | $30,149 |

(1) Excludes tenant improvements and leasing commission costs.

As of March 31, 2020, we expect to incur additional costs relating to obligations under existing lease agreements of approximately $146.1 million for tenant improvements and leasing commissions. We intend to fund the tenant improvements and leasing commission costs through a combination of operating cash flow, cash on hand, additional property level mortgage financings and borrowings under the unsecured revolving credit facility.

Capital expenditures are considered part of both our short-term and long-term liquidity requirements. We intend to fund capital improvements 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, 2019 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 months ended March 31, 2020.

### Off-Balance Sheet Arrangements

As of March 31, 2020, 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 securityholders, 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 $32.7 million and $31.9 million have been made to securityholders for the three months ended March 31, 2020 and 2019, respectively.

### Stock and Publicly Traded Operating Partnership Unit Repurchase Program

ESRT's Board of Directors reauthorized the repurchase of up to $500 million of ESRT Class A common stock and the Operating Partnership’s Series ES, Series 250 and Series 60 operating partnership units through December 31, 2020. Under the program, ESRT may purchase ESRT Class A common stock and we may purchase our Series ES, Series 250 and Series 60 operating partnership units in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by ESRT and us at our discretion and will be subject to stock price, availability, trading volume and general market conditions. The authorization does not obligate ESRT or us to acquire any particular amount of securities, and the program may be suspended or discontinued at ESRT and our discretion without prior notice.

The following table summarizes ESRT's purchases of equity securities in each of the three months ended March 31, 2020 and the month of April 2020:

| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Maximum Approximate Dollar Value Available for Future Purchase (in thousands) |
| --- | ---: | ---: | ---: | ---: |
| March 2020 | 6,570,778 | $9.54 | 6,570,778 | $437,334 |
| April 2020 | 2,345,129 | $8.66 | 2,345,129 | $417,023 |

### Cash Flows

### Comparison of Three Months Ended March 31, 2020 to the Three Months Ended March 31, 2019

*Net cash*. Cash and cash equivalents and restricted cash were $1,045.9 million and $304.7 million, respectively, as of March 31, 2020 and 2019. The increase was primarily due to the issuance of financings and draws on the unsecured revolving credit facility, partially offset by capital improvements and expenditures during the three months ended March 31, 2020.

*Operating activities*. Net cash provided by operating activities decreased by $13.1 million to $64.8 million for the three months ended March 31, 2020 compared to $77.9 million for the three months ended March 31, 2019, primarily due to changes in working capital.

*Investing activities*. Net cash used in investing activities increased by $29.4 million to $40.6 million used in investing activities for the three months ended March 31, 2020 compared to $11.2 million net cash used in investing activities for the three months ended March 31, 2019, due to redeeming short-term time deposits and adding to cash and cash equivalents in the three months ended March 31, 2019.

*Financing activities*. Net cash provided by financing activities increased by $783.0 million to $750.1 million provided by financing activities for the three months ended March 31, 2020 compared to $32.9 million used in financing activities for the three months ended March 31, 2019, primarily due the net proceeds from issuance of debt and a draw on our unsecured revolving credit facility in the three months ended March 31, 2020 compared to none for the three months ended March 31, 2019.

### 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, loss on early extinguishment of debt and loss from derivative instruments, 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)*

|  | Three Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Net income | $8,288 | $9,856 |
| Add: |  |  |
| General and administrative expenses | 15,951 | 14,026 |
| Depreciation and amortization | 46,093 | 46,098 |
| Interest expense | 19,704 | 20,689 |
| Income tax expense (benefit) | (382) | (730) |
| Less: |  |  |
| Third-party management and other fees | (346) | (320) |
| Interest income | (637) | (3,739) |
| **Net operating income** | $88,671 | $85,880 |
| **Other Net Operating Income Data** |  |  |
| Straight-line rental revenue | $8,193 | $5,404 |
| Net increase in rental revenue from the amortization of above- and below-market lease assets and liabilities | $908 | $2,354 |
| Amortization of acquired below-market ground leases | $1,958 | $1,958 |

### 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 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 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 third quarter 2014 acquisition of two option 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: deferred tax asset write-off, loss on early extinguishment of debt and acquisition expenses. 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):

*(unaudited)*

|  | Three Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Net income | $8,288 | $9,856 |
| Private perpetual preferred unit distributions | (1,050) | (234) |
| Real estate depreciation and amortization | 44,430 | 45,092 |
| **FFO attributable to common stockholders** | 51,668 | 54,714 |
| Amortization of below-market ground leases | 1,958 | 1,958 |
| **Modified FFO attributable to common stockholders** | 53,626 | 56,672 |
| Loss on early extinguishment of debt | 86 | — |
| **Core FFO attributable to common stockholders** | $53,712 | $56,672 |
| **Weighted average Operating Partnership units** |  |  |
| Basic | 292,645 | 298,049 |
| Diluted | 292,645 | 298,049 |

### Factors That May Influence Future Results of Operations

### Impact of COVID-19

See "Overview" section.

### Leasing

We signed 1.3 million rentable square feet of new leases, expansions and lease renewals for the year ended December 31, 2019. During the three months ended March 31, 2020, we signed 0.1 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 March 31, 2020, there were approximately 0.9 million rentable square feet of space in our portfolio available to lease (excluding leases signed but not yet commenced) representing 8.9% of the net rentable square footage of the properties in our portfolio. In addition, leases representing 6.8% and 6.6% of net rentable square footage of the properties in our portfolio will expire in 2020 and in 2021, respectively. These leases are expected to represent approximately 6.8% and 6.9%, 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.

Despite the challenge of the uncertain near-term environment, we continue to 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 Operations

On March 16, 2020, we complied with governmental mandates regarding the closing of non-essential businesses in response to the COVID-19 pandemic and closed the Empire State Building Observatory. Observatory revenues for the first two months of 2020 increased by 13.2%, after adjusting the for the 102nd observation deck which was closed during the first quarter of 2019.

The Empire State Building Observatory revenue for the first quarter 2020 was $19.5 million, a 5.0% decrease from $20.6 million for the first quarter 2019. The Observatory hosted approximately 422,000 visitors in the first quarter 2020 versus 601,000 visitors in the first quarter 2019, a decrease of 29.8%. The Observatory revenue decline was primarily attributable to the 15 days the Observatory was closed in the quarter due to COVID-19 pandemic. In the first quarter 2020, while open, there were 15 bad weather days compared to 15 bad weather days in the first quarter 2019.

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 other new and existing observatories; and (v) weather trends.

### Critical Accounting Estimates

Refer to our Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of our 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, 2019.

## Market risk

As filed, 4,336 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 March 31, 2020, our floating rate debt represented 10.4% of our total enterprise value. This floating rate debt consist of $550 million of borrowings under the unsecured revolving credit facility. As of March 31, 2020, we had no other variable rate debt as the LIBOR rates on our unsecured term loan facilities of $390.0 million were fixed at 2.1485% and 2.958% under variable to fixed interest rate swap agreements.

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 and debt refinancings. 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.

We entered into interest rate LIBOR swap agreements with an aggregate notional value of $390.0 million, which fix LIBOR interest rates between 2.1485% and 2.9580% and mature between August 24, 2022 and July 1, 2026. All interest rate swaps as of March 31, 2020 have been designated as cash flow hedges and are deemed highly effective with a fair value of ($30.4 million) which is included in accounts payable and accrued expenses on the condensed consolidated balance sheet.

As of March 31, 2020, the weighted average interest rate on the $2.0 billion of fixed-rate indebtedness outstanding was 3.60% per annum, with maturities at various dates through March 17, 2035.

As of March 31, 2020, the fair value of our outstanding debt was approximately $2.6 billion, which was approximately $104.6 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. In the event that LIBOR is discontinued, the interest rates for our unsecured revolving credit facility and our unsecured term loan facility and the swap rate for our interest rate swaps following such event will be based on an alternative variable rate as specified in the applicable documentation governing such debt or swaps or as otherwise agreed upon with our bankers. Such an event would not affect our ability to borrow or maintain already outstanding borrowings or our ability to maintain our outstanding swaps, but the alternative variable rate could be higher and more volatile than LIBOR prior to its discontinuance. We understand that LIBOR is expected to remain available through the end of 2021 but may be discontinued or otherwise become unavailable thereafter.

## Controls and procedures

As filed, 2,344 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 Principal 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 March 31, 2020, 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 Principal 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 Principal 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 Principal 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, 5,355 characters.

There have been no material changes to the risk factors included in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, except as disclosed below.

**The current COVID-19 pandemic and any future pandemics, epidemics or other public health crises could have a material adverse effect on our and our tenants’ business, results of operations, cash flow and financial condition.**

The COVID-19 pandemic has had, and another pandemics, epidemics and other public health care crises in the future could have, repercussions across regional, national and global economies and financial markets. The spread of COVID-19 in many countries, including the United States, has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the pandemic has been rapidly evolving and many countries, including the United States, have reacted by instituting “stay-at-home” or “shelter-in-place” orders, mandating business and school closures and restricting travel.

Certain U.S. states, including New York and Connecticut where we own assets and operate the Observatory, have reacted by instituting quarantines, restrictions on travel, “stay-at-home” or “shelter-in-place” orders, social distancing practices, restrictions on types of business that may continue to operate and/or restrictions on the types of construction projects that may continue. We cannot predict when restrictions currently in place will expire. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including industries in which we and our tenants operate, particularly retail tenants. A number of our tenants have requested rent relief during this pandemic. In addition, many of our employees are currently working remotely. An extended period of remote work arrangements could strain our business strategy, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business.

The COVID-19 pandemic, or any future pandemic, epidemic and other public health care crisis, could also have a material adverse effect on our ability to successfully operate and on our results of operations, cash flows and financial condition due to, among other factors:

- the complete or partial closure or restriction of operating capacity of our Observatory resulting from government actions, including limits on public assembly,
- international and national disruption of travel and tourism, geopolitical events, and/or currency exchange rates which may cause a decline in Observatory visitors,
- prolonged reduction in general economic activity, which could severely impact our tenants’ businesses, financial condition and liquidity and cause one or more of them to default in obligations to us, and/or press for modification of such obligations;
- prolonged reduction in business vitality which could impair our prospects for new and renewal leases, decrease demand for office and retail space, decrease rental rates, and/or increase lease terminations and vacancy rates-all with an adverse impact on the value or market price of our assets;
- new obstacles to our plans to redevelop and reposition properties, or to execute any newly planned capital project, successfully or on the anticipated timeline or at the anticipated costs;
- impairment of our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due, to comply with covenants in existing credit agreements, to borrow additional funds in compliance with drawdown conditions of existing facilities, or to enter into new financings;
- volatility and downward pressure on the market price of our Class A common stock and publicly traded partnership units of the Operating Partnership which also reduces our access to capital;
- sickness and fear of sickness for our employees, which carries a human cost and also affects productivity and business continuity;
- reduction of our cash flows and diminished ability to pay dividends at expected levels or at all.

The full extent of the foregoing risks and related consequences will depend on future developments, which cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain or mitigate its impact, and the direct and indirect economic effects.

The COVID-19 pandemic has had a significant adverse impact on economic and market conditions around the world, including the United States and markets where our properties are located and could further trigger a period of sustained global and U.S. economic downturn or recession. While the rapid developments regarding the COVID-19 pandemic preclude any prediction as to its ultimate adverse impact, the current economic, political and social environment presents material risks and uncertainties with respect to our and our tenants’ business, financial condition, results of operations, cash flows, liquidity and ability to access the capital markets and satisfy debt service obligations. Many risk factors which were described in our 2019 Annual Report, prior to the emergence of the pandemic, now should be considered to have heightened significance as a result of the COVID-19 pandemic.

Filed May 6, 2020.
Source: SEC EDGAR, the filing index for accession 0001628280-20-006730. Last ingested by Listed: Nov 2, 2026, 20:18 ET. No prices; not investment advice.