2 0 1 8 A N N U A L R E P O R T
1
4
7
3
6
2
T R U S T E D
P A R T N E R
5
8
9
SUSTAINABILITY MATRIX
Empire
State
Building
One Grand
Central
Place
1400
Broadway
111 West
33rd Street
250 West
57th Street
No central HVAC
No central HVAC
Whole Building Energy Retrofit Analysis
(Replicate ESB Model)
Whole Building Energy Retrofit Implementation
Low-e window retrofit
High Performance Design and Tenant
Installation Required per Lease
Submetering of All New Tenant Spaces
Utilities Billed by Submetering (as installed)
Building Management System (BMS) Status
(i) BMS in place
(ii) No BMS in place
(iii) Partial BMS in place
Energy Star Certification
Energy Star Tenant Spaces Certified Tenants
Indoor Environmental Quality Focus
(i) Low/No VOC offgassing materials
(ii) Regular IEQ Testing and Reporting
(iii) Enhanced filtration and/or air purification
(iv) Demand Controlled Ventilation and CO2
management standard for tenant spaces
Water Conservation Initiatives
(i) Ultra low flow fixtures
(ii) Meter and reduce process/
HVAC water usage
Waste Management/Recycling
(i) Construction waste diversion
target 90%
(ii) Tenant waste education,
engagement, audits
(iii) Separate electronics and bulb
(iv) Dual stream recycling for whole building
Green Cleaning Products and Practices
Green Pest Management Products
and Practices
Demand Response/Peak Load Shaving
Sustainability Committee and
Tenant Engagement
Annual & Long Term Sustainability
Targets and Tracking
Leadership & Sharing
1333
Broadway
1350
Broadway
1359
Broadway
501 Seventh
Avenue
First
Stamford
Place
MerrittView 10 Bank
Street
500
Mamaroneck
Metro
Center
Underway
Pending
Pending
No central HVAC
No central HVAC
No central HVAC
To Our Fellow Stockholders:
It is our pleasure to present Empire State Realty Trust’s annual report.
2018 was another year of accomplishment for us. Our cash rent spread per
square foot for new Manhattan office leases was 27.3%. We redeveloped
300,000 square feet for our full-floor and pre-built offerings. We signed just
over 1 million square feet in 156 lease agreements with tenants including new
leases with Signature Bank, Uber, Nespresso, Diligent and Hospitals Insurance
Company; signed expansion leases including LinkedIn and HNTB; and realized
other significant value through transactions with existing tenants at the end of
their lease terms.
In late August, we completed and opened the first phase of our new
Observatory, a new, larger purpose-built Observatory entrance on 34th Street.
The new visitor journey will completely reimagine and celebrate the Empire
State Building with an authenticity that no other attraction can have. Additional
work continues, and we plan to open the remaining phases by the end of 2019.
FIVE YEAR ANNIVERSARY
When we first went public, skepticism was the best word to use to describe the
market’s view of our plan to redevelop and release our portfolio and the future
of the Empire State Building Observatory. Additionally, there were concerns
that our Class A float was 36% of the operating partnership. There has been so
much internal work to do and value to deliver, we definitely have made that a
priority.
October 2018 marked the 5 year anniversary of Empire State Realty Trust as a
public company listed on the New York Stock Exchange (NYSE: ESRT).
It is fun to share some of the metrics of what we have delivered:
Steadily, energetically, creatively, and successfully vacated and redeveloped
our office and retail spaces and delivered our embedded, derisked growth;
Grown our portfolio with the additions of 111 West 33rd Street and
1400 Broadway;
Built strong relationships with the brokerage community and brought high
quality tenants into our portfolio, and those tenants have grown…since 2013,
the year of our IPO, more than 163 tenants have grown more than 1.1 million
square feet with ESRT;
Since 2013,
the year
of our IPO,
more than
163 tenants
have grown
more than
1.1 million
square feet
with ESRT.
Spent $519 million on the upgrade and improvement of our properties and
maintained a best-in-class balance sheet to allow us to act on external
growth opportunities with plenty of cash, borrowing capacity, and low
leverage;
Raised total revenue by over $96 million to $732 million in 2018, with the
Observatory’s contribution of $19 million since 2014, our first full-year as a
public company;
Reduced net debt-to-EBITDA from 5.4x at year-end 2014 to 3.6x at
year-end 2018 and added substantial cash and liquidity;
Increased our Class A float, which stood at approximately 57% of the
operating partnership at year-end 2018, up from 36% at IPO; and
Created through our four drivers of growth what we estimate to be
$112 million of additional top line revenue over the next five years.
Most importantly, we have maintained discipline, focused on building a strong
base of stakeholder value from the promises of our IPO, and positioned ESRT
very well for new opportunities.
EXTERNAL GROWTH
We feel good about our discipline in our approach to external growth. Capital
dedicated to real estate has contributed to a long period of robust prices.
The returns available for our conservatively levered approach have not been
attractive in comparison to our internal reinvestment strategy. We now see
market conditions which we feel justify our caution.
Urban retail, a major source of growth in office and standalone acquisitions
underwriting, is not healthy. Higher concessions demanded for new office
leases have adjusted expectations on returns. We remain active underwriters of
complicated situations to which we think we can add value, and when we look
at deals on which we have passed which others have purchased, we have seen
nothing which makes us think we missed an opportunity.
Our view remains long-term. ESRT has a fantastic balance sheet, and when
we commit it we want to commit it to something which will be transformative,
accretive, and allow us to do more.
CAPITAL ALLOCATION
We have more redevelopment work, and will still consume cash to do it. Our
investment internally continues in our view to be a great use of our capital. We
look forward to the day on which we not only protect our quarterly dividend,
but increase it. Our significant cash and low leverage have significant strategic
value to us.
Created
through our
four drivers of
growth what
we estimate to
be $112 million
of additional
top line
revenue over
the next five
years.
Stock buybacks are discussed at every meeting of our Board of Directors.
Our stock buyback authorization ensures that ESRT has all of the available
tools to allocate capital prudently to create value for shareholders. That said,
ESRT is more interested in growing our balance sheet than shrinking it.
Our new
Observatory
entrance is the
first harvest
of nearly
three years
of an intense
and creative
project to
reimagine and
present an
entirely new
Observatory
experience.
THE EMPIRE STATE BUILDING OBSERVATORY
Our new Observatory entrance is the first harvest of nearly three years of
an intense and creative project to reimagine and present an entirely new
Observatory experience. The investment is intended to enhance the visitor
experience, the experience and opportunity for our office and retail tenants
at the Empire State Building, and drive per cap revenue, attendance and net
operating income.
The first phase represents only a very small portion of the reimagined
visitor journey, and there is much more to come. The entire experience,
presently projected to be completed by the end of 2019, will be reworked
on the remainder of the 2nd, 80th, 86th and 102nd floors. Through all the
construction, we have been open for business and delivering results.
The Empire State Building’s authenticity, history and iconic status, dwell in the
hearts and minds of people all around the world. More than a view, we believe
the new Observatory will provide a unique visitor experience that cannot be
matched. We hope to maintain our preeminent position amongst New York
City destination attractions.
CO-WORKING / ENTERPRISE SHARED OFFICE SPACE SOLUTIONS
The rapid rise of co-working and enterprise shared office space providers
is one of the more profound challenges to the real estate community this
decade. After careful consideration, ESRT made a decision several years ago to
maintain direct relationships with its tenants and brokers and has not leased to
any of the new wave of co-working or enterprise shared office providers.
We prefer to have a direct relationship with our own tenants rather than work
through an intermediary. We see a mismatch between the short-term nature
of a co-working tenant’s own agreements with their customers and the
long-term lease that ESRT would sign with a shared office provider. We do
not feel landlords are adequately compensated for the risks they assume,
particularly in an economic downturn.
Then there is the operation of our buildings. Enterprise shared office provider
business models bring increased density which strains buildings’ operations
and security and diminish the experience for the rest of the tenants.
In the end, ESRT has not suffered from our policy not to lease to these
companies. In fact, brokers and tenants in many instances gravitate to our
buildings for the fact that we do not have any such users as tenants.
Our properties continue to attract high-quality corporate tenants on
long-term leases at excellent cash spreads. Our pre-built offering provides
smaller companies with their own environments to create their own culture
as a recruiting, retention and brand building tool. We have plans to make our
pre-builts even more easy to lease and attractive to tenants and brokers.
SUSTAINABILITY
The rising focus on responsible investment driven by the incorporation of
Environmental, Social and Governance (ESG) factors and supported by our
stakeholders is a trend set to continue. In addition, disclosure about our ESG
practices permits a holistic view of ESRT and a better understanding of our
trajectory beyond financial metrics. ESRT has been at the forefront of this
development with our industry-leading energy efficiency and sustainability
work, first undertaken at the Empire State Building led by our Chairman
and CEO.
Our sustainability program is structured around quantifiable improvement in
the key areas of energy efficiency, water efficiency, healthy work environments
for our tenants and employees, recycling, and waste diversion. We continue to
integrate portfolio-wide strategies for sustainability and energy efficiency in
both our building redevelopment work and the work undertaken by our tenants.
Tenant engagement is critical to our sustainability work because tenants’ usage
impacts our overall buildings’ performance. We partner with our tenants to drive
return-on-investment-based energy efficiency practices not only to help save
tenants money through reduced direct utility costs, but to also create healthy
workplace environments. We continue to grow our sustainability initiative
based upon innovation and continuous feedback from our tenants and other
constituents.
We focus on reporting the investment details and return-oriented measures
of success on our sustainability programs via our sustainability matrix and
other disclosures rather than participating in certification programs of limited
utility. Our focus on clearly-reported facts and measures of success as well as
our innovation in sustainability gives us a competitive edge as we attract and
compete to lease space to quality tenants, and thus improve shareholder value.
Our proxy has new and expanded coverage of our sustainability efforts.
We also share our sustainability efforts and our self-reported sustainability
matrix at www.empirestaterealtytrust.com/about-us/sustainability.
Our
sustainability
program is
structured
around
quantifiable
improvement
in the key
areas of
energy
efficiency,
water
efficiency,
healthy work
environments
for our
tenants and
employees,
recycling,
and waste
diversion.
LOOK AHEAD TO 2019
We want to thank our Board of Directors and our employees who work every
day to achieve even greater results.
Our service focus on our tenants is the output of ESRT’s culture and the hard
work done by our employees. To that end, we invest in our employees and
enhance our culture. We believe that an investment in our employees yields
more educated, engaged and productive employees that enables us to provide
the best service to our tenants.
All of our colleagues join our excitement in the opportunity ahead of us.
On behalf of all of us here at ESRT, we thank our stockholders and all our
stakeholders for their continued support.
ONWARD AND UPWARD.
Anthony E. Malkin
John B. Kessler
Chairman and Chief Executive Officer
President and Chief Operating Officer
F O R M 1 0 - K
FORWARD-LOOKING STATEMENTS. This Annual Report to Stockholders includes “forward-looking statements.” Forward-looking statements
may be identified by the use of words such as “assumes,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects” or the negative of these words and phrases or
similar words or phrases. 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: the factors included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, including those set
forth under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and “Properties.”
While forward-looking statements reflect the Company’s good faith beliefs, they are not guarantees of future performance. The Company disclaims 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 Annual Report to Stockholders, except as required by applicable law. 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, 2018, and other risks described in documents subsequently filed by the Company from time to time with the Securities and Exchange
Commission. Prospective investors should not place undue reliance on any forward-looking statements, which are based only on information currently available to the
Company (or to third parties making the forward-looking statements).
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
For the transition period from to
Commission File Number: 001-36105
EMPIRE STATE REALTY TRUST, INC.
(Exact name of Registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
37-1645259
(I.R.S. Employer Identification No.)
111 West 33rd Street, 12th Floor
New York, New York 10120
(Address of principal executive offices) (Zip Code)
(212) 687-8700
(Registrant's telephone number, including area code)
Title of Each Class
Class A Common Stock, par value $0.01 per share
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant's most
recently completed second fiscal quarter was $2,849,868,000 based on the June 29, 2018 closing price of our Class A common stock of
$17.10 per share on the New York Stock Exchange.
As of February 22, 2019, there were 175,039,980 shares of the Registrants' Class A Common Stock outstanding and 1,037,574 shares of the
Registrants' Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Empire State Realty Trust, Inc.'s Proxy Statement for its 2019 Annual Stockholders' Meeting (which is scheduled to be held on
May 16, 2019) to be filed within 120 days after the end of the Registrant's fiscal year are incorporated by reference into Part III of this Annual
Report on Form 10-K.
EMPIRE STATE REALTY TRUST, INC.
FORM 10-K
TABLE OF CONTENTS
PART I.
1.
Business
1A. Risk Factors
1B. Unresolved Staff Comments
2.
3.
Properties
Legal Proceedings
Mine Safety Disclosures
4.
PART II.
Market for Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
5.
6.
Management's Discussion and Analysis of Financial Condition and Results of Operations
7.
7A. Quantitative and Qualitative Disclosure about Market Risk
8.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
9.
9A. Controls and Procedures
9B. Other Information
PART III
10.
11.
12.
13.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
14.
PART IV
15.
16.
Exhibits, Financial Statements and Schedules
Form 10-K Summary
PAGE
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1
DEFINITIONS
•
•
•
•
•
•
•
•
•
"annualized rent" represents annualized base rent and current reimbursement for operating expenses and
real estate taxes;
"formation transactions" mean a series of transactions pursuant to which we acquired, substantially
currently with the completion of the Offering through a series of contributions and merger transactions, our
portfolio of real estate assets that were held by the existing entities, the ownership interests in the certain
management entities of our predecessor and one development parcel;
"fully diluted basis" means all outstanding shares of our Class A common stock at such time plus shares of
Class A common stock that may be issuable upon the exchange of operating partnership units on a one-for-
one basis and shares of Class A common stock issuable upon the conversion of Class B common stock on a
one-for-one basis, which is not the same as the meaning of “fully diluted” under generally accepted
accounting principles in the United States of America, or "GAAP";
"enterprise value" means all outstanding shares of our Class A common stock at such time plus shares of
Class A common stock that may be issuable upon the exchange of operating partnership units on a one-for-
one basis and shares of Class A common stock issuable upon the conversion of Class B common stock on a
one-for-one basis multiplied by the Class A common share price at December 31, 2018, plus private
perpetual preferred units plus consolidated debt at December 31, 2018;
"Malkin Group” means all of the following, as a group: Anthony E. Malkin, Peter L. Malkin and each of
their spouses and lineal descendants (including spouses of such descendants), any estates of any of the
foregoing, any trusts now or hereafter established for the benefit of any of the foregoing, or any
corporation, partnership, limited liability company or other legal entity controlled by Anthony E. Malkin or
any permitted successor in such entity for the benefit of any of the foregoing; provided, however that solely
with respect to tax protection rights and parties who entered into the contribution agreements with respect
to the formation transactions, the Malkin Group shall also include the lineal descendants of Lawrence A.
Wien and his spouse (including spouses of such descendants), any estates of the foregoing, any trusts now
or hereafter established for the benefit of any of the foregoing, or any corporation, partnership, limited
liability company or other legal entity controlled by Anthony E. Malkin for the benefit of the foregoing;
the "Offering" means the initial public offering of our Class A common stock which was completed on
October 7, 2013;
"our company," "we," "us" and "our" refer to Empire State Realty Trust, Inc., a Maryland real estate
investment trust, together with its consolidated subsidiaries, including Empire State Realty OP, L.P., a
Delaware limited partnership, which we refer to as "our operating partnership";
"securityholder" means holders of our Class A common stock and Class B common stock and holders of
our operating partnership's Series ES, Series 250, Series 60 and Series PR operating partnership units;
"traded OP units" mean our operating partnership's Series ES, Series 250 and Series 60 operating
partnership units.
2
ITEM 1. BUSINESS
Overview
PART I
We are a self-administered and self-managed real estate investment trust ("REIT") that owns, manages, operates,
acquires and repositions office and retail properties in Manhattan and the greater New York metropolitan area, including the
Empire State Building, the world's most famous building.
As of December 31, 2018, our total portfolio, contained 10.1 million rentable square feet of office and retail space, and
was 88.8% occupied. Including signed leases not yet commenced, our total portfolio was 91.8% leased. As of December 31,
2018, we owned 14 office properties (including three long-term ground leasehold interests) encompassing approximately 9.4
million rentable square feet of office space, which were approximately 88.6% occupied or 91.8% leased including signed leases
not yet commenced. Nine of these properties are located in the midtown Manhattan market and encompass approximately 7.6
million rentable square feet of office space, including the Empire State Building. Our Manhattan office properties also contain
513,606 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 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 380,000 rentable square foot office building and garage, which we refer to herein as Metro Tower. As of
December 31, 2018, our portfolio also included four standalone retail properties located in Manhattan and two standalone retail
properties located in the city center of Westport, Connecticut, encompassing 205,748 rentable square feet in the aggregate. As
of December 31, 2018, our standalone retail properties were 96.3% leased.
The Empire State Building offers panoramic views of New York and neighboring states from its world-famous 86th
and 102nd floor observatories that draw millions of visitors per year. The number of visitors to the observatories was
approximately 3,805,000 and 3,940,000 for the years ended December 31, 2018 and 2017, respectively. The 86th floor
observatory has a 360-degree outdoor deck as well as indoor viewing galleries to accommodate guests day and night, all year-
round. The 102nd floor observatory is entirely indoors and offers a 360-degree view of New York City from 1,250 feet above
ground.
We were organized as a Maryland corporation on July 29, 2011. Our operating partnership holds substantially all of
our assets and conducts substantially all of our business. As of December 31, 2018, we owned approximately 57.7% of the
aggregate operating partnership units in our operating partnership. Our company, as the sole general partner in our operating
partnership, has responsibility and discretion in the management and control in our operating partnership, and the limited
partners in our operating partnership, in such capacity, have no authority to transact business for, or participate in the
management activities of, our operating partnership. We elected to be taxed as a REIT and operate in a manner that we believe
allows us to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31,
2013.
Our Competitive Strengths
We believe that we distinguish ourselves from other owners and operators of office and retail properties as a result of
the following competitive strengths:
•
Irreplaceable Portfolio of Office Properties in Midtown Manhattan. Our Manhattan office properties are located in
one of the most prized office markets in the world due to a combination of supply constraints, high barriers to entry,
near-term and long-term prospects for job creation, vacancy absorption and rental rate growth. Management believes
these properties could not be replaced today on a cost-competitive basis, if at all. As of December 31, 2018, we
owned nine Manhattan office properties (including three long-term ground leasehold interests) encompassing
approximately 7.6 million rentable square feet of office space, including the Empire State Building, our flagship
property. Unlike traditional office buildings, the Empire State Building provides us with a significant source of
income from its observatory and broadcasting operations. All of these properties include premier retail space on their
ground floor and/or contiguous levels, which comprise 513,606 rentable square feet in the aggregate and some of
which have recently undergone significant redevelopments. We believe the high quality of our buildings, services and
amenities, their desirable locations and commuter access to mass transportation should allow us to increase rents and
occupancy to generate positive cash flow and growth.
3
• Expertise in Repositioning and Redeveloping Manhattan Office Properties. We have substantial expertise in
redeveloping and repositioning Manhattan office properties, having invested through December 31, 2018 a total of
approximately $865.7 million (excluding tenant improvement costs and leasing commissions) in our Manhattan office
properties since we assumed full control of the day-to-day management of these properties beginning with One Grand
Central Place in November 2002 through 2006. We have substantial experience in upgrading, redeveloping and
modernizing building lobbies, corridors, bathrooms, elevator cabs and old, antiquated spaces to include new ceilings,
lighting, pantries and base building systems (including electric distribution and air conditioning), as well as enhanced
tenant amenities. We have successfully aggregated and are continuing to aggregate smaller spaces to offer larger
blocks of space, including multiple floors, that are attractive to larger, higher credit-quality tenants and to offer new,
pre-built suites with improved layouts. As part of this program, we have converted some or all of the second and third
floor office space of certain of our Manhattan office properties to higher rent retail space. We believe that the post-
redevelopment high quality of our buildings and the service we provide also attract higher credit-quality tenants for
larger spaces at rents above similar vintage buildings, and below new construction, thus defining a new price point and
allowing us to drive superior returns on invested capital per square foot. In addition, we believe that, based on the
results of our base building energy efficiency retrofit, and energy efficient tenant build-outs, at the Empire State
Building, the lessons of which we are applying throughout our portfolio, we derive cost savings through innovative
energy efficiency retrofitting and sustainability initiatives, reducing direct and indirect energy costs paid both by
tenants and by us throughout our other Manhattan office properties and greater New York metropolitan area office
properties, which improves our competitive position.
• Leader in Energy Efficiency Retrofitting. We have pioneered certain practices in energy efficiency, and at the Empire
State Building we have partnered with the Clinton Climate Initiative, Johnson Controls Inc., Jones Lang LaSalle and
the Rocky Mountain Institute to create and implement a groundbreaking, replicable process for integrating energy
efficiency retrofits in the existing built environment. The reduced energy consumption lowers costs for us and our
tenants, and we believe creates a competitive advantage for our properties. We believe that higher quality tenants in
general place a higher priority on sustainability, controlling costs, and minimizing contributions to greenhouse gases.
We believe our expertise in this area gives us the opportunity to attract higher quality tenants at higher rental rates, in
addition to lowering our expenses. As a result of our efforts, approximately 84.0% of our portfolio square feet is
Energy Star certified, including the Empire State Building. As a result of the energy efficiency retrofits, we estimate
that the Empire State Building has reduced energy use by 45% of its pre-retrofit level of energy use, resulting in over
$5.2 million of annual energy cost savings at pre-retrofit utility rate levels. Johnson Controls Inc. has guaranteed
minimum energy cost savings of $2.2 million annually, from 2010 through 2025, with respect to certain of the retrofits
in which Johnson Controls Inc. was project leader. Actual 2017 energy cost savings was $6.1million for the whole
building retrofits, out of which $5.3 million savings was achieved against the guaranteed savings. We are
implementing cost justified energy efficiency retrofit projects in our Manhattan and greater New York metropolitan
area office properties based on our work at the Empire State Building. Finally, we maintain a series of management
practices utilizing recycling of tenant and construction waste, recycled content carpets, low off-gassing paints and
adhesives, “green” pest control and cleaning solutions and recycled paper products throughout our office portfolio.
We believe that our portfolio’s attractiveness is enhanced by these practices and that this should result in higher rental
rates, longer lease terms and higher quality tenants.
• Attractive Retail Locations in Densely Populated Metropolitan Communities. As of December 31, 2018, our
portfolio also included six standalone retail properties and retail space at the ground floor and/or lower levels of our
Manhattan office properties, encompassing 719,354 rentable square feet in the aggregate, which were approximately
90.8% occupied in the aggregate. All of these properties are located in dynamic retail corridors with convenient
access to mass transportation, a diverse tenant base and high pedestrian traffic and/or main destination locations. Our
retail portfolio includes 697,913 rentable square feet located in Manhattan and 21,441 rentable square feet located in
Westport, Connecticut. Our current retail rents are below current market rents, and as we recapture and redevelop
retail space, we are able to drive strong positive spreads on newly leased space. We have retail expirations in the
coming years that will allow us to further increase our cash flows. Our retail tenants cover a number of industries, and
include Bank of America; Bank Santander (Sovereign Bank); Best Buy Mobile; Charles Schwab; Chipotle; Dr.
Martens AirWair USA; Duane Reade/Walgreen's; FedEx; FootLocker; HSBC; JP Morgan Chase; Lululemon; New
Cingular Wireless; Panera Bread; Potbelly Sandwich Works; Sephora; Shake Shack; Sprint; Starbucks; Target; Theory;
TJ Maxx; and Urban Outfitters. Our Westport, Connecticut retail properties are located on Main Street, the main
pedestrian thoroughfare in Westport, Connecticut, and have the advantage of being adjacent to one of the few available
large-scale parking lots in town.
• Experienced and Committed Management Team with Proven Track Record. Our senior management team is highly
regarded in the real estate community and has extensive relationships with a broad range of brokers, owners, tenants
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and lenders. We have developed relationships we believe enable us to both secure high credit-quality tenants on
attractive terms, as well as provide us with potential acquisition opportunities. We have substantial in-house expertise
and resources in asset and property management, leasing, marketing, acquisitions, construction, development and
financing and a platform that is highly scalable. Members of our senior management team have worked in the real
estate industry for an average of approximately 34 years with extensive experience in greater New York area real
estate, through many economic cycles. We take an intensive, hands-on approach to the management of our portfolio
and quality brand building. As of December 31, 2018, our named executive officers owned 11.3% of our common
stock on a fully diluted basis (including shares of common stock and operating partnership units as to which Anthony
E. Malkin, our chief executive officer, disclaims beneficial ownership except to the extent of his pecuniary interest
therein), and therefore their interests are aligned with those of our securityholders and they are incentivized to
maximize returns to our securityholders.
•
Strong Balance Sheet Supportive of Future Growth. As of December 31, 2018, we had total debt outstanding of
approximately $1.9 billion, with a weighted average interest rate of 3.84% and a weighted average maturity of 8.1
years. Additionally, we had approximately $1.1 billion of available borrowing capacity under our unsecured revolving
and term credit facility as of December 31, 2018. We had cash and cash equivalents and short-term investments of
$605.0 million at December 31, 2018. Our consolidated net debt represented 23.4% of enterprise value. Excluding
principal amortization, we have approximately $250.0 million of debt maturing in 2019 and no debt maturing in 2020.
We continue to extend and ladder our debt maturities, increase our access to a variety of capital sources and maintain
low leverage with significant capacity on our balance sheet. This low level of leverage gives us flexibility to cover our
capital program and to take advantage of opportunities to acquire additional properties as and when we see compelling
opportunities. We believe that lower levered companies outperform over the long term.
Business and Growth Strategies
Our primary business objectives are to maximize cash flow and total returns to our securityholders and to increase the
value of our properties through the pursuit of the following business and growth strategies:
• Vacating, Redeveloping, and Leasing of Redeveloped Space at Our Manhattan Office Properties. As of
December 31, 2018, our Manhattan office properties (excluding the retail component of these properties) were
approximately 88.8% occupied, or 92.7% leased including signed leases not commenced, and had approximately 0.5
million rentable square feet of available space (excluding signed leases not commenced). Our program of
redevelopment necessarily includes vacating older less desirable suites, demolishing them for re-leasing as full or
multi-floor blocks, or as new pre-built suites, and re-leasing them. We believe our redevelopment and repositioning
program for our Manhattan office properties results in our leasing space to better credit tenants and higher rents, while
achieving returns of approximately 8%. Over time, as we have created and redeveloped large blocks of available
space, we have leased them to higher quality tenants at higher rents, and intend to continue to execute on this program
over the years to come. To date we believe these efforts have accelerated our ability to lease space to new higher
credit-quality tenants, many of which have expanded the office space they lease from us over time. We also employ a
pre-built suite strategy in selected portions of some of our properties to appeal to many credit-worthy smaller tenants
by fitting out some available space with new ceilings, lighting, pantries and base building systems (including electric
distribution and air conditioning) for immediate occupancy. These pre-built suites deploy energy efficiency strategies
developed in our work at the Empire State Building and are designed with efficient layouts sought by a wide array of
users which we believe will require only minor painting and carpeting for future re-leasing thus reducing our future
costs. We expect to achieve returns on investment of approximately 8% on our pre-built suites. Over time, as we have
redeveloped the spaces in our buildings, we believe we will increase our occupancy.
•
Increase Existing Below-Market Rents. The purpose of our redevelopment is to sign leases for larger amounts of
space to better credit tenants at higher rents. To date, we have capitalized on this opportunity and we believe we have
significant embedded, de-risked growth that we can capture as we execute on the successful repositioning of our
Manhattan office portfolio and improving market fundamentals to increase rents. For example, we expect to benefit
from the re-leasing of 6.1%, or approximately 464,792 rentable square feet (including month-to-month leases), of our
Manhattan office leases expiring during 2019, which we generally believe are currently at below market rates. These
expiring leases represent a weighted average base rent of $54.33 per square foot based on current measurements. As
older leases expire, we expect to continue to upgrade certain space to further increase rents. Our concentration in
Manhattan and the greater New York metropolitan area should also enable us to benefit from increased rents
associated with current and anticipated near-term improvements in the financial and economic environment in these
areas. We also expect to benefit from our price positioning, as we command prices that are above comparable vintage
properties due to the quality of our newly developed space and our attractive amenities but below new construction.
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• Complete the Redevelopment and Repositioning of Our Current Portfolio. We intend to continue to increase
occupancy, improve tenant quality and enhance cash flow and value by completing the redevelopment and
repositioning of our Manhattan office properties. We intend selectively to continue to allow leases for smaller spaces
to expire or relocate smaller tenants in order to aggregate, demolish and re-demise existing office space into larger
blocks of vacant space, which we believe will attract higher credit-quality tenants at higher rental rates. We apply
rigorous underwriting analysis to determine if aggregation of vacant space for future leasing to larger tenants will
improve our cash flows over the long term. In addition, we are a leader in developing economically justified energy
efficiency retrofitting and sustainability and have made it a portfolio-wide initiative. We believe this makes our
properties desirable to high credit-quality tenants at higher rental rates and longer lease terms.
• Pursue Attractive Acquisition and Development Opportunities. We will opportunistically pursue attractive
opportunities to acquire office and retail properties. For the foreseeable future, we intend to focus our acquisition
strategy primarily on Manhattan office properties and, to a lesser extent, office and multi-tenanted retail properties in
densely populated communities in the greater New York metropolitan area and other markets we may identify in the
future. We believe we can utilize our industry relationships (including well-known real estate owners in Manhattan),
brand recognition, and our expertise in redeveloping and repositioning office properties to identify significant
acquisition opportunities where we believe we can increase occupancy and rental rates. We also believe there is
growth opportunity to acquire and reposition additional stand-alone retail spaces. Our strong balance sheet, access to
capital, and ability to offer operating partnership units in tax deferred acquisition transactions should give us
significant flexibility in structuring and consummating acquisitions. Further, we have a development site, Metro Tower
at the Stamford Transportation Center, which is adjacent to our Metro Center property, which we believe to be one of
the premier office buildings in Connecticut. All required zoning approvals have been obtained to allow development
of an approximately 380,000 rentable square foot office tower and garage. We intend to develop this site when we
deem the appropriate combination of market and other conditions are in place.
• Proactively Manage Our Portfolio. We believe our proactive, service-intensive approach to asset and property
management helps increase occupancy and rental rates. We utilize our comprehensive building management services
and our strong commitment to tenant and broker relationships and satisfaction to negotiate attractive leasing deals and
to attract high credit-quality tenants. We proactively manage our rent roll and maintain continuous communication
with our tenants. We foster strong tenant relationships by being responsive to tenant needs. We do this through the
amenities we provide, the quality of our buildings and services, our employee screening and training, energy
efficiency initiatives, and preventative maintenance and prompt repairs. Our attention to detail is integral to serving
our clients and building our brand. Our properties have received numerous industry awards for their operational
efficiency. We believe long-term tenant relationships will improve our operating results over time by reducing leasing,
marketing and tenant improvement costs and reducing tenant turnover. We do extensive diligence on our
tenants’ (current and prospective) balance sheets, businesses and business models to determine if we will establish
long-term relationships in which they will both renew with us and expand over time. We have had 163 tenant
expansions within our portfolio totaling over 1.2 million square feet since 2013.
Leasing
We are focused on maintaining a brand that tenants associate with a consistently high level of quality of services,
installations, maintenance and amenities with long term financial stability. Through our commitment to brokers, we have
developed long-term relationships that focus on negotiating attractive transactions with high credit-quality tenants. We
proactively manage and cultivate our industry relationships and make the most senior members of our management team
available to our constituencies. We believe that our consistent, open dialogue with our tenants and brokers enables us to
maximize our redevelopment and repositioning opportunities. Our focus on performance and perspective allows us to
concentrate on the ongoing management of our portfolio, while seeking opportunities for growth in the future.
Property Management
We protect our investments by regularly monitoring our properties, performing routine preventive maintenance, and
implementing capital improvement programs in connection with property redevelopment and life cycle replacement of
equipment and systems. We presently self-manage all of our properties. We proactively manage our properties and rent rolls to
(i) aggregate smaller demised spaces to create large blocks of vacant space, to attract high credit-quality tenants at higher rental
rates, and (ii) create efficient, modern, pre-built offices that can be rented through several lease cycles and attract better credit-
quality tenants. We aggressively manage and control operating expenses at all of our properties. In addition, we have made
energy efficiency retrofitting and sustainability a portfolio-wide initiative driven by economic return. We pass on cost savings
6
achieved by such improvements to our tenants through lower utility costs and reduced operating expense escalations. We
believe these initiatives make our properties more desirable to a broader tenant base than the properties of our competitors.
Business Segments
Our reportable segments consist of a real estate segment and an observatory segment. Our real estate segment
includes all activities related to the ownership, management, operation, acquisition, repositioning and disposition of our real
estate assets. Our observatory segment operates the 86th and 102nd floor observatories at the Empire State Building. These
two lines of businesses are managed separately because each business requires different support infrastructures, provides
different services and has dissimilar economic characteristics such as investments needed, stream of revenues and different
marketing strategies. We account for intersegment sales and rent as if the sales or rent were to third parties, that is, at current
market prices.
Regulation
General
The properties in our portfolio are subject to various laws, ordinances and regulations, including regulations relating to
common areas. We believe each of the existing properties has the necessary permits and approvals to operate its business.
Americans with Disabilities Act
Our properties must comply with Title III of the Americans with Disabilities Act, or ADA, to the extent that such
properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access
by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe the
existing properties are in substantial compliance with the ADA and that we will not be required to make substantial capital
expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of
fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing
one, and we will continue to assess our properties and to make alterations as appropriate in this respect.
Environmental Matters
Under various federal, state and/or local laws, ordinances and regulations, as a current or former owner or operator of
real property, we may be liable for costs and damages resulting from the presence or release of hazardous substances, waste, or
petroleum products at, on, in, under or from such property, including costs for investigation or remediation, natural resource
damages, or third party liability for personal injury or property damage. These laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence or release of such materials, and the liability may
be joint and several. Some of our properties have been or may be impacted by contamination arising from current or prior uses
of the property or adjacent properties for commercial, industrial or other purposes. Such contamination may arise from spills of
petroleum or hazardous substances or releases from tanks used to store such materials. We also may be liable for the costs of
remediating contamination at off-site disposal or treatment facilities when we arrange for disposal or treatment of hazardous
substances at such facilities, without regard to whether we comply with environmental laws in doing so. The presence of
contamination or the failure to remediate contamination on our properties may adversely affect our ability to attract and/or
retain tenants, and our ability to develop or sell or borrow against those properties. In addition to potential liability for cleanup
costs, private plaintiffs may bring claims for personal injury, property damage or for similar reasons. Environmental laws also
may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such
contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the
manner in which that property may be used or how businesses may be operated on that property.
Some of our properties are adjacent to or near other properties used for industrial or commercial purposes or that have
contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic
substances. Releases from these properties could impact our properties. In addition, some of our properties have previously
been used by former owners or tenants for commercial or industrial activities, e.g., gas stations and dry cleaners, and a portion
of the Metro Tower site is currently used for automobile parking and fueling, that may release petroleum products or other
hazardous or toxic substances at such properties or to surrounding properties. While certain properties contain or contained
uses that could have or have impacted our properties, we are not aware of any liabilities related to environmental contamination
that we believe will have a material adverse effect on our operations.
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Soil contamination has been identified at 69-97 Main Street in Westport, Connecticut. The affected soils are more
than four feet below the ground surface. An Environmental Land Use Restriction has been imposed on this site to ensure the
soil is not exposed, excavated or disturbed such that it could create a risk of migration of pollutants or a potential hazard to
human health or the environment. While the contamination is currently contained, the potential resale value of this property
and our ability to finance or refinance this property in the future may be adversely affected as a result of such contamination.
In addition, pursuant to the Environmental Land Use Restriction, plans for the redevelopment of the property would be subject
to the review of the Town of Westport, Connecticut among other conditions.
The property situated at 500 Mamaroneck Avenue in Harrison, New York was the subject of a voluntary remedial
action work cleanup plan performed by the former owner following its conveyance of title to the present owners under an
agreement with the New York State Department of Environmental Conservation, or NYDEC. As a condition to the issuance of
a “no further action” letter, NYDEC required that certain restrictive and affirmative covenants be recorded against the subject
property. In substantial part, these include prohibition against construction that would disturb the soil cap isolating certain
contaminated subsurface soil, limiting the use of such property to commercial uses, implementing engineering controls to
assure that improvements be kept in good condition, not using ground water at the site for potable purposes without treatment,
implementing safety procedures for workers to follow excavating at the site to protect their health and safety and filing an
annual certification that the controls implemented in accordance with the voluntary remedial action work cleanup plan remain
in place. Furthermore, a substantial portion of the site that had been substantially unimproved prior to acquisition may not be
further developed.
In addition, our properties are subject to various federal, state and local environmental and health and safety laws and
regulations. Noncompliance with these environmental and health and safety laws and regulations could subject us or our
tenants to liability. These liabilities could affect a tenant’s ability to make rental payments to us. Moreover, changes in laws
could increase the potential costs of compliance with such laws and regulations or increase liability for noncompliance. This
may result in significant unanticipated expenditures or may otherwise materially and adversely affect our operations, or those
of our tenants, which could in turn have a material adverse effect on us. We sometimes require our tenants to comply with
environmental and health and safety laws and regulations and to indemnify us for any related liabilities in our leases with them.
But in the event of the bankruptcy or inability of any of our tenants to satisfy such obligations, we may be required to satisfy
such obligations. We are not presently aware of any instances of material non-compliance with environmental or health and
safety laws or regulations at our properties, and we believe that we and/or our tenants have all material permits and approvals
necessary under current laws and regulations to operate our properties.
As the owner or operator of real property, we may also incur liability based on various building conditions. For
example, buildings and other structures on properties that we currently own or operate or those we acquire or operate in the
future contain, may contain, or may have contained, asbestos-containing material, or ACM. Environmental and health and
safety laws require that ACM be properly managed and maintained and may impose fines or penalties on owners, operators or
employers for non-compliance with those requirements. These requirements include special precautions, such as removal,
abatement or air monitoring, if ACM would be disturbed during maintenance, redevelopment or demolition of a building,
potentially resulting in substantial costs. In addition, we may be subject to liability for personal injury or property damage
sustained as a result of releases of ACM into the environment. We are not presently aware of any material liabilities related to
building conditions, including any instances of material non-compliance with asbestos requirements or any material liabilities
related to asbestos.
In addition, our properties may contain or develop harmful mold or suffer from other indoor air quality issues, which
could lead to liability for adverse health effects or property damage or costs for remediation. When excessive moisture
accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains
undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality
issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological
contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be
alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the
presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly
remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase
indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability
from our tenants, employees of our tenants or others if property damage or personal injury occurs. We are not presently aware
of any material adverse indoor air quality issues at our properties.
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Insurance
We carry comprehensive liability, fire, extended coverage, earthquake, terrorism and rental loss insurance covering all
of our Manhattan properties and our greater New York metropolitan area properties under a blanket policy. We carry additional
all-risk property and business insurance, which includes terrorism insurance, on the Empire State Building through ESRT
Captive Insurance Company L.L.C., or ESRT Captive Insurance, our wholly owned captive insurance company. ESRT Captive
Insurance covers terrorism insurance for $1.2 billion in losses in excess of $800 million per occurrence suffered by the Empire
State Building, providing us with aggregate terrorism coverage of $2 billion at that property. ESRT Captive Insurance fully
reinsures the 18% coinsurance under the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) and the
difference between the TRIPRA captive deductible and policy deductible of $25,000 for non-Nuclear, Biological, Chemical and
Radiological exposures. We purchased a $50 million limit of Nuclear, Biological, Chemical and Radiological (NBCR)
insurance in excess of a $1.0 million deductible in the commercial insurance market. ESRT Captive Insurance provides NBCR
insurance with a limit of $1.95 billion in excess of the $50 million policy. As a result, we remain only liable for the 18%
coinsurance under TRIPRA for NBCR exposures within ESRT Captive Insurance, as well as a deductible equal to 20% of
ESRT Captive Insurance’s prior year’s premium. As long as we own ESRT Captive Insurance, we are responsible for ESRT
Captive Insurance’s liquidity and capital resources, and ESRT Captive Insurance’s accounts are part of our consolidated
financial statements. If we experience a loss and ESRT Captive Insurance is required to pay under its insurance policy, we
would ultimately record the loss to the extent of its required payment. The policies described above cover certified terrorism
losses as defined under the Terrorism Risk Insurance Act of 2002 (TRIA) and subsequent extensions. On January 12, 2015, the
President of the United States signed into law TRIPRA, which extends TRIA through December 31, 2020. TRIA provides for a
system of shared public and private compensation for insured losses resulting from acts of terrorism. As a result, the certified
terrorism coverage provided by ESRT Captive Insurance is eligible for 82% coinsurance provided by the United States
Treasury in excess of a statutorily calculated deductible. ESRT Captive Insurance reinsures 100% of its 18% coinsurance for
non-NBCR exposures. The 18% coinsurance on NBCR exposures is retained by ESRT Captive Insurance.
Reinsurance contracts do not relieve ESRT Captive Insurance from its primary obligations to its policyholders.
Additionally, failure of the various reinsurers to honor their obligations could result in significant losses to ESRT Captive
Insurance. The reinsurance has been ceded to reinsurers approved by the State of Vermont. ESRT Captive Insurance continually
evaluates the reinsurers’ financial condition by considering published financial stability ratings of the reinsurers and other
factors. There can be no assurance that reinsurance will continue to be available to ESRT Captive Insurance to the same extent
and at the same cost. ESRT Captive Insurance may choose in the future to reevaluate the use of reinsurance to increase or
decrease the amounts of risk it cedes.
In addition to insurance held through ESRT Captive Insurance described above, we carry terrorism insurance on all of
our properties in an amount and with deductibles which we believe are commercially reasonable.
Competition
The leasing of real estate is highly competitive in Manhattan and the greater New York metropolitan market in which
we operate. We compete with numerous acquirers, developers, owners and operators of commercial real estate, many of which
own or may seek to acquire or develop properties similar to ours in the same markets in which our properties are located. The
principal means of competition are rent charged, location, services provided and the nature and condition of the facility to be
leased. In addition, we face competition from other real estate companies, including other REITs, private real estate funds,
domestic and foreign financial institutions, life insurance companies, pension trusts, partnerships, individual investors and
others, that may have greater financial resources or access to capital than we do or that are willing to acquire properties in
transactions which are more highly leveraged or are less attractive from a financial viewpoint than we are willing to pursue. In
addition, competition from new and existing observatories and/or broadcasting operations could have a negative impact on
revenues from our observatory operations and/or broadcasting revenues. Adverse impacts on domestic and international travel
and changes in foreign currency exchange rates may also decrease demand in the future, which could have a material adverse
effect on our results of operations, financial condition and ability to make distributions to our securityholders. If our
competitors offer space at rental rates below current market rates, below the rental rates we currently charge our tenants, in
better locations within our markets or in higher quality facilities, we may lose potential tenants and we may be pressured to
reduce our rental rates below those we currently charge in order to retain tenants when our tenants’ leases expire.
Our Tax Status
We elected to be taxed as a REIT and operate in a manner that we believe allows us to qualify as a REIT for U.S.
federal income tax purposes commencing with our taxable year ended December 31, 2013. We believe we have been organized
in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code of 1986, as
9
amended, the ("Code"), and that our intended manner of operation will enable us to meet the requirements for qualification and
taxation as a REIT. So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our net
taxable income that we distribute currently to our securityholders. If we fail to qualify as a REIT in any taxable year and do not
qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate rates and may
be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we lost our REIT
qualification. Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our
income or property.
Inflation
Substantially all of our leases provide for separate real estate tax and operating expense escalations. In addition, many
of the leases provide for fixed base rent increases. We believe inflationary increases may be at least partially offset by the
contractual rent increases and expense escalations described above. We do not believe inflation has had a material impact on
our historical financial position or results of operations.
Seasonality
Our observatory business is subject to tourism trends and weather, and therefore does experience some seasonality.
During the past ten years of our annual observatory revenue, approximately 16% to 18% 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. We do not consider the balance of our business to be subject to material seasonal fluctuations.
Employees
As of December 31, 2018, we had 813 employees, 134 of whom were managers and professionals. There are currently
collective bargaining agreements which cover the workforce that services all of our office properties. Management believes that
its relationship with employees is good.
Offices
Our principal executive offices are located at 111 West 33rd Street, 12th floor, New York, New York 10120. In
addition, we have six additional regional leasing and property management offices in Manhattan and the greater New York
metropolitan area. Our current facilities are adequate for our present and future operations, although we may add regional
offices, depending upon our future operations.
Available Information
Our website address is http://www.empirestaterealtytrust.com. The information found on, or otherwise accessible
through, our website is not incorporated information and does not form a part of this Annual Report on Form 10-K or any other
report or document we file with or furnish to the SEC. We make available, free of charge, on or through the SEC Filings
section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We have
also posted on our website the Audit Committee Charter, Compensation Committee Charter, Finance Committee Charter,
Nominating and Corporate Governance Committee Charter, Corporate Governance Guidelines and Code of Business Conduct
and Ethics, which govern our directors, officers and employees. Within the time period required by the SEC, we will post on
our website any amendment to our Code of Business Conduct and Ethics and any waiver applicable to our senior financial
officers, and our executive officers or directors. The SEC maintains an Internet site (http://www.sec.gov) that contains reports,
proxy and information statements, and other information regarding issuers that file electronically with the SEC.
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ITEM 1A. RISK FACTORS
RISK FACTORS
You should carefully consider these risk factors, together with all of the other information included in this Annual
Report on Form 10-K, including our consolidated financial statements and the related notes thereto, before you decide whether
to make an investment in our securities. The risks set out below are not the only risks we face. Additional risks and
uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our
business, prospects, financial condition, cash flows, liquidity, funds from operations, results of operations, share price, ability
to service our indebtedness, and/or ability to make cash distributions to our securityholders (including those necessary to
maintain our REIT qualification). In such case, the value of our common stock and the trading price of our securities could
decline, and you may lose all or a significant part of your investment. Some statements in the following risk factors constitute
forward looking statements. See the section entitled “Forward-Looking Statements.”
Risks Related to Our Properties and Our Business
All of our properties are located in Manhattan and the greater New York metropolitan area, in particular midtown
Manhattan, and adverse economic or regulatory developments in this area could materially and adversely affect us.
All of our properties are located in Manhattan and the greater New York metropolitan area, in particular midtown
Manhattan, as well as nearby markets in Fairfield County, Connecticut and Westchester County, New York. Nine of our 14
office properties are located in midtown Manhattan. As a result, our business is dependent on the condition of the New York
City economy in general and the market for office space in midtown Manhattan in particular, which exposes us to greater
economic risks than if we owned a more geographically diverse portfolio. We are susceptible to adverse developments in the
New York City economic and regulatory environment (such as business layoffs or downsizing, industry slowdowns, relocations
of businesses, increases in real estate and other taxes, costs of complying with governmental regulations or increased
regulation). Such adverse developments could materially reduce the value of our real estate portfolio and our rental revenues,
and thus materially and adversely affect our ability to service current debt and to pay distributions to securityholders. We could
also be impacted by adverse developments in the Fairfield County, Connecticut and Westchester County, New York markets.
We cannot assure you that these markets will grow or that underlying real estate fundamentals will be favorable to owners and
operators of office or retail properties. Our operations may also be affected if competing properties are built in either of these
markets.
Adverse economic and geopolitical conditions in general and in Manhattan and the greater New York metropolitan area
commercial office and retail markets in particular, could have a material adverse effect on our results of operations,
financial condition, ability to service debt and our ability to make distributions to our securityholders.
Our business may be affected by volatility and illiquidity in the financial and credit markets, a general global
economic recession and other market or economic challenges experienced by the real estate industry or the U.S. economy as a
whole. Our business may also be materially and adversely affected by local economic conditions, as substantially all of our
revenues are derived from our properties located in Manhattan and the greater New York metropolitan area, particularly in
Manhattan, Fairfield County and Westchester County.
Because our portfolio consists primarily of commercial office and retail buildings located principally in Manhattan, we
are significantly more vulnerable to risks in these industries and in this geography than if we owned a more diversified real
estate portfolio. In particular, the retail industry is facing reductions in sales revenues and increased bankruptcies throughout
the United States.
General conditions that might materially and adversely affect our results of operations, financial condition, ability to
service current debt and to make distributions to our securityholders include:
•
•
•
the financial condition of our tenants, many of which are consumer goods, financial, legal and other professional
firms, may be adversely affected, which may result in tenant defaults under leases due to bankruptcy, lack of liquidity,
operational failures or other reasons;
significant job losses in the financial and professional services industries have occurred and may continue to occur,
which may decrease demand for our office space, causing market rental rates and property values to be impacted
negatively;
our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our
ability to pursue acquisition and development opportunities, engage in our redevelopment and repositioning activities
and refinance existing debt, reduce our returns from both our existing operations and our acquisition and development
activities and increase our future interest expense;
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•
•
•
reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt
financing secured by our properties and may reduce the availability of unsecured loans;
reduced liquidity in debt markets and increased credit risk premiums for certain market participants may impair our
ability to access capital or make such access more expensive; and
the value and liquidity of our short-term investments and cash deposits could be reduced as a result of a deterioration
of the financial condition of the institutions that hold our cash deposits or the institutions or assets in which we have
made short-term investments, the dislocation of the markets for our short-term investments, increased volatility in
market rates for such investments or other factors.
These conditions may continue or worsen in the future, which could materially and adversely affect our results of
operations, financial condition and ability to make distributions to our securityholders.
There can be no assurance that our redevelopment and repositioning program will be completed in its entirety in
accordance with the anticipated timing or at the anticipated cost, or that we will achieve the results we expect from our
redevelopment and repositioning program, which could materially and adversely affect our financial condition and results
of operations.
We have been undertaking a comprehensive redevelopment and repositioning program of our Manhattan office
properties that has included the physical improvement through upgrades and modernization of, and tenant upgrades in, such
properties. We may experience conditions which delay or preclude program completion. In addition, we may not be able to
lease available space on favorable terms or at all. Further, our redevelopment and repositioning program may lead to temporary
increased vacancy rates at the properties undergoing redevelopment. There can be no assurance that our redevelopment and
repositioning program will be completed in its entirety in accordance with the anticipated timing or at the anticipated cost, or
that we will achieve the results we expect from our redevelopment and repositioning program or that we will be able to achieve
anticipated results which could materially and adversely affect our financial condition and results of operations.
We rely on six properties for a significant portion of our rental revenue.
For the year ended December 31, 2018, six of our properties, the Empire State Building, One Grand Central Place, 111
West 33rd Street, 1400 Broadway, First Stamford Place and 250 West 57th Street together accounted for approximately 72.2%
of our portfolio’s rental revenues, and no other property accounted for more than approximately 5.0% of our portfolio’s rental
revenues. For the year ended December 31, 2018, the Empire State Building individually accounted for approximately 31.9%
of our portfolio’s rental revenues. Our revenue and cash available for distribution to our securityholders would be materially
and adversely affected if the Empire State Building, One Grand Central Place, 111 West 33rd Street, 1400 Broadway, First
Stamford Place or 250 West 57th Street were materially damaged or destroyed. Additionally, our revenue and cash available
for distribution to our securityholders would be materially adversely affected if a significant number of our tenants at these
properties experienced a downturn in their business which may weaken their financial condition and result in their failure to
make timely rental payments, defaulting under their leases or filing for bankruptcy.
The observatory operations at the Empire State Building are not traditional real estate operations, and competition and
changes in tourist trends and adverse weather, among other factors, may subject us to additional risks, which could have a
material adverse effect on our results of operations, financial condition and ability to make distributions to our
securityholders.
During the year ended December 31, 2018, we derived approximately $131.2 million of revenue from the Empire
State Building’s observatory operations, representing approximately 39.0% of the Empire State Building’s total revenue for this
period. The Empire State Building’s observatory is one of New York City’s main destination attractions and we have
undertaken various projects to modernize and optimize visitor experience. We closed the 102nd floor of the Observatory
experience beginning in January 2019 for upgrades that may take as long as nine months, and this will temporarily negatively
impact Observatory revenue. In addition, the Observatory redevelopment project may cause other disruptions to our visitor
experience while we undergo construction, and as part of our ongoing operations once all of the improvements are made, which
in each case may negatively impact Observatory revenue.
We currently compete against two existing observatories in New York City, and additional observatories are in the
construction pipeline, with the Hudson Yards observatory projected to be completed in the first quarter 2020 and the One
Vanderbilt observatory projected to be completed by year end 2020, which could have a negative impact on revenues from our
observatory operations. Despite the Empire State Building’s iconic status, location, and updated visitor experience, existing
and new observatory competition may divert visitors from our observatory and negatively impact observatory revenue. Visitor
demand for our observatory is highly dependent on domestic and overseas tourism. While New York City tourism has been
consistent in recent years, economic and geopolitical factors might negatively impact tourist influx in the future. Additionally,
we are susceptible to reductions in visitor demand due to adverse weather patterns, in particular during peak visitor periods.
Increased competition, a downturn in tourist trends and adverse weather may negatively impact visitor demand for our
observatory, which could have a material adverse effect on our results of operations, financial condition and ability to make
distributions to our securityholders.
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We may be unable to renew leases, lease vacant space or re-lease space on favorable terms or at all as leases expire, which
could materially and adversely affect our financial condition, results of operations and cash flow.
As of December 31, 2018, we had approximately 0.8 million rentable square feet of vacant space (excluding leases
signed but not yet commenced). In addition, leases representing 7.2% and 8.3% of the square footage of the properties in our
portfolio will expire in 2019 and 2020, respectively (including month to month leases). We cannot assure you that expiring
leases will be renewed or that our properties will be re-leased at net effective rental rates equal to or above the current average
net effective rental rates. Above-market rental rates at some of the properties in our portfolio may force us to renew some
expiring leases or re-lease properties at lower rates. If the rental rates of our properties decrease, our existing tenants do not
renew their leases or we do not re-lease a significant portion of our available space and space for which leases will expire, our
financial condition, results of operations, cash flow, per share/unit trading price of our Class A common stock and our traded
OP units and our ability to satisfy our principal and interest obligations and to make distributions to our securityholders would
be materially and adversely affected.
The actual rents we receive for the properties in our portfolio may be less than our asking rents, and we may experience a
decline in realized rental rates from time to time, which could materially and adversely affect our financial condition,
results of operations and cash flow.
As a result of various factors, including competitive pricing pressure in our markets, a general economic downturn and
the desirability of our properties compared to other properties in our markets, we may be unable to realize our asking rents
across the properties in our portfolio. In addition, the degree of discrepancy between our asking rents and the actual rents we
are able to obtain may vary both from property to property and among different leased spaces within a single property. If we
are unable to obtain sufficient rental rates across our portfolio, then our ability to generate cash flow growth will be negatively
impacted. In addition, depending on market rental rates at any given time as compared to expiring leases in our portfolio, from
time to time rental rates for expiring leases may be higher than starting rental rates for new leases.
We are exposed to risks associated with property redevelopment and development that could materially and adversely affect
our financial condition and results of operations.
We have engaged, and continue to engage, in development and redevelopment activities with respect to our Manhattan
office properties. In addition, we own entitled land at the Stamford Transportation Center in Stamford, Connecticut that can
support the development of an approximately 380,000 rentable square foot office building and garage. To the extent that we
continue to engage in development and redevelopment activities, we will be subject to certain risks, including, without
limitation:
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the availability and pricing of financing on favorable terms or at all;
the availability and timely receipt of zoning and other regulatory approvals;
the potential for the fluctuation of occupancy rates and rents at properties due to a number of factors, including market
and economic conditions, which may result in our investment not being profitable;
start up, repositioning and redevelopment costs may be higher than anticipated;
the cost and timely completion of construction (including risks beyond our control, such as weather or labor
conditions, or material shortages);
the potential that we may fail to recover expenses already incurred if we abandon development or redevelopment
opportunities after we begin to explore them;
the potential that we may expend funds on and devote management time to projects which we do not complete;
the inability to complete construction and leasing of a property on schedule, resulting in increased debt service
expense and construction or redevelopment costs; and
the possibility that properties will be leased at below expected rental rates.
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These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could
prevent the initiation of development and redevelopment activities or the completion of development and redevelopment
activities once undertaken, any of which could have an adverse effect on our financial condition, results of operations, cash
flow, per share/unit trading price of our Class A common stock and our traded OP units and ability to satisfy our principal and
interest obligations and to make distributions to our securityholders.
We may be required to make rent or other concessions and/or significant capital expenditures to improve our properties in
order to retain and attract tenants, which could materially and adversely affect us, including our financial condition, results
of operations and cash flow.
Upon expiration of leases at our properties and with respect to our current vacant space, we may be required to make
rent or other concessions to tenants, accommodate increased requests for renovations, build-to-suit remodeling and other
improvements or provide additional services to our tenants. In addition, eight of our existing properties are pre-war office
properties, which may require more frequent and costly maintenance to retain existing tenants or attract new tenants than newer
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properties. As a result, we may have to make significant capital or other expenditures in order to retain tenants whose leases
expire and to attract new tenants in sufficient numbers. Additionally, we may need to raise capital to make such expenditures.
If we are unable to do so or capital is otherwise unavailable, we may be unable to make the required expenditures. This could
result in non-renewals by tenants upon expiration of their leases and our vacant space remaining untenanted, which could
materially and adversely affect our financial condition, results of operations, cash flow and per share/unit trading price of our
Class A common stock and our traded OP units. As of December 31, 2018, we had approximately 0.8 million rentable square
feet of vacant space (excluding leases signed but not yet commenced), and leases representing 7.2% and 8.3% of the square
footage of the properties in our portfolio will expire in the in 2019 and 2020, respectively (including month to month leases).
We depend on significant tenants in our office portfolio, including Global Brands Group, Coty, Inc., LinkedIn, Sephora and
PVH Corp., which together represented approximately 17.4% of our total portfolio’s annualized rent as of December 31,
2018.
As of December 31, 2018, our five largest tenants together represented 17.4% of our total portfolio’s annualized rent.
As of December 31, 2018, our largest tenant leased an aggregate of 0.7 million rentable square feet of office space at two of our
office properties, representing approximately 6.4% of the total rentable square feet and approximately 6.7% of the annualized
rent in our portfolio. Our rental revenue depends on entering into leases with and collecting rents from tenants. General and
regional economic conditions, may adversely affect our major tenants and potential tenants in our markets. Our major tenants
may experience a material business downturn, weakening their financial condition and potentially resulting in their failure to
make timely rental payments and/or a default under their leases. In many cases, we have made substantial up front investments
in the applicable leases, through tenant improvement allowances and other concessions, as well as typical transaction costs
(including professional fees and commissions) that we may not be able to recover. In the event of any tenant default, we may
experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment.
Our revenue and cash flow could be materially adversely affected if any of our significant tenants were to suffer a
downturn in their business, default under their leases, fail to renew their leases at all or renew on terms less favorable to us than
their current terms, or become bankrupt or insolvent.
The bankruptcy or insolvency of any of our tenants could result in the termination of such tenant’s lease and material losses
to us.
The occurrence of a tenant bankruptcy or insolvency could diminish the income we receive from that tenant’s lease or
leases. In particular, the retail industry is facing reductions in sales revenues and increased bankruptcies throughout the United
States. If a tenant becomes bankrupt or insolvent, federal law may prohibit us from evicting such tenant based solely upon such
bankruptcy or insolvency. In addition, a bankrupt or insolvent tenant may be authorized to reject and terminate its lease or
leases with us. Any claims against such bankrupt tenant for unpaid future rent would be subject to statutory limitations that
would likely result in our receipt of rental revenues that are substantially less than the contractually specified rent we are owed
under the lease or leases. In addition, any claim we have for unpaid past rent, if any, may not be paid in full. We may also be
unable to re-lease a terminated or rejected space or to re-lease it on comparable or more favorable terms. As a result, tenant
bankruptcies may materially and adversely affect us.
Competition may impede our ability to attract or retain tenants or re-let space, which could materially and adversely affect
our results of operations and cash flow.
The leasing of real estate in the greater New York metropolitan area is highly competitive. The principal means of
competition are rent charged, location, services provided and the nature and condition of the premises to be leased. We directly
compete with all lessors and developers of similar space in the areas in which our properties are located as well as properties in
other submarkets. We also see competition from lessors that convert traditional office space to co-working office availabilities.
Demand for retail space may be impacted by the bankruptcy of retail companies, a general trend toward consolidation in the
retail industry, and the impact of internet retailing which could adversely affect the ability of our company to attract and retain
tenants, which could (i) reduce rents payable to us, (ii) reduce our ability to attract and retain tenants at our properties and (iii)
lead to increased vacancy rates at our properties, any of which could materially and adversely affect us.
Our office properties are concentrated in highly developed areas of midtown Manhattan and densely populated
metropolitan communities in Fairfield County and Westchester County. Manhattan is the largest office market in the United
States. The number of competitive office properties in the markets in which our properties are located (which may be newer or
better located than our properties) could have a material adverse effect on our ability to lease office space at our properties, and
on the effective rents we are able to charge.
If our tenants are unable to secure financing necessary to continue to operate their businesses and pay us rent, we could be
materially and adversely affected.
Many of our tenants rely on external sources of financing to operate their businesses. If our tenants are unable to
secure financing necessary to continue to operate their businesses, they may be unable to meet their rent obligations or be
forced to declare bankruptcy and reject their leases, which could materially and adversely affect us.
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Our dependence on smaller businesses to rent our office space could materially and adversely affect our cash flow and
results of operations.
A large number of the tenants in our properties (measured by number of tenants as opposed to aggregate square
footage) are smaller businesses that generally do not have the financial strength of larger corporate tenants. Smaller companies
generally experience a higher rate of failure than large businesses. There is a current risk with these companies of a higher rate
of tenant defaults, turnover and bankruptcies, which could materially and adversely affect our distributable cash flow and
results of operations.
Our dependence on rental income may materially and adversely affect our cash flow and results of operations.
A substantial portion of our income is derived from rental income from real property. As a result, our performance
depends on our ability to collect rent from tenants. Our income and funds for distribution would be negatively affected if a
significant number of our tenants, or any of our major tenants (as discussed in more detail below):
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delay lease commencements;
decline to extend or renew leases upon expiration;
fail to make rental payments when due; or
declare bankruptcy.
Any of these actions could result in the termination of the tenants’ leases and the loss of rental income attributable to
the terminated leases. In these events, we cannot be sure that any tenant whose lease expires will renew that lease or that we
will be able to re-lease space on economically advantageous terms or at all. The loss of rental revenues from a number of our
tenants and our inability to replace such tenants may adversely affect our profitability, our ability to meet debt and other
financial obligations and our ability to make distributions to our securityholders.
The broadcasting operations at the Empire State Building are not traditional real estate operations, and competition and
changes in the broadcasting of signals over air may subject us to additional risks, which could materially and adversely
affect us.
The Empire State Building and its broadcasting mast provides radio and data communications services and supports
delivery of broadcasting signals to cable and satellite systems and television and radio receivers. We license the use of the
broadcasting mast to third party television and radio broadcasters. During the year ended December 31, 2018, we derived
approximately $19.5 million of revenue (excluding tenant reimbursement income) from the Empire State Building’s
broadcasting licenses and related leased space, representing approximately 5.8% of the Empire State Building’s total revenue
for this period. Competition from other broadcasting operations has had a negative impact on revenues from our broadcasting
operations, and lease renewals have yielded reduced revenue, higher operating expenses and higher capital expenditures. Our
broadcast television and radio licensees also face a range of competition from advances in technologies and alternative methods
of content delivery in their respective industries, as well as from changes in consumer behavior driven by new technologies and
methods of content delivery, which may reduce the demand for over-the-air broadcast licenses in the future. New government
regulations affecting broadcasters, including the implementation of the Federal Communications Commission's (the "FCC")
National Broadband Plan, (the "FCC Plan"), also might materially and adversely affect our results of operations by reducing the
demand for broadcast licenses. Among other things, the FCC Plan urges Congress to make more spectrum available for
wireless broadband service providers by encouraging over-the-air broadcast licensees to relinquish spectrum through a
voluntary auction process, which raises many issues that could impact the broadcast industry. At this time we cannot predict
whether Congress or the FCC will adopt or implement any of the FCC Plan’s recommendations or the rule changes as
proposed, or how any such actions might affect our broadcasting operations. Any of these risks might materially and adversely
affect us.
We may not be able to control our operating costs, or our expenses may remain constant or increase, even if income from
our properties decreases, causing our results of operations to be adversely affected.
Our financial results depend substantially on leasing space in our properties to tenants on terms favorable to us. Costs
associated with real estate investment, such as real estate taxes, insurance and maintenance costs, generally are not reduced
even when a property is not fully occupied, rental rates decrease or other circumstances cause a reduction in income from the
property. As a result, cash flow from the operations of our properties may be reduced if a tenant does not pay its rent or we are
unable to rent our properties on favorable terms. Under those circumstances, we might not be able to enforce our rights as
landlord without delays and may incur substantial legal costs. The terms of our leases may also limit our ability to charge our
tenants for all or a portion of these expenses. Additionally, new properties that we may acquire or redevelop may not produce
significant revenue immediately, and the cash flow from existing operations may be insufficient to pay the operating expenses
and principal and interest on debt associated with such properties until they are fully leased.
Our breach of or the expiration of our ground leases could materially and adversely affect our results of operations.
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Our interest in three of our commercial office properties, 1350 Broadway, 111 West 33rd Street and 1400 Broadway
are long-term leaseholds of the land and the improvements, rather than a fee interest in the land and the improvements. If we
are found to be in breach of these ground leases, we could lose the right to use the properties. In addition, unless we purchase
the underlying fee interest in these properties or extend the terms of our leases for these properties before expiration on terms
significantly comparable to our current leases, we will lose our right to operate these properties and our leasehold interests in
these properties upon expiration of the leases or we will continue to operate them at much lower profitability, which would
significantly adversely affect our results of operations. In addition, if we are perceived to have breached the terms of these
leases, the fee owner may initiate proceedings to terminate the leases. The long-term leases, including unilateral extension
rights available to us, expire on July 31, 2050 for 1350 Broadway, December 31, 2063 for 1400 Broadway and June 10, 2077
for 111 West 33rd Street.
Pursuant to the ground leases, we, as tenant under the ground leases, perform the functions traditionally performed by
owners, as landlords, with respect to our subtenants. In addition to collecting rent from our subtenants, we also maintain the
properties and pay expenses relating to the properties. We do not have a right, pursuant to the terms of our leases or otherwise,
to acquire the fee interests in these properties.
We will not recognize any increase in the value of the land or improvements subject to our ground leases, and we may only
receive a portion of compensation paid in any eminent domain proceeding with respect to these properties, which could
materially and adversely affect us.
We have no economic interest in the land or improvements at the expiration of our ground leases at 1350 Broadway,
111 West 33rd Street and 1400 Broadway, and therefore we will not share in any increase in value of the land or improvements
beyond the term of our ground leases, notwithstanding our capital outlay to purchase our interest in the properties.
Furthermore, if the state or federal government seizes the properties subject to the ground leases under its eminent domain
power, we may only be entitled to a portion of any compensation awarded for the seizure. In addition, if the value of the
properties has increased, it may be more expensive for us to renew our ground leases.
We may be unable to identify and successfully complete acquisitions and even if acquisitions are identified and completed,
we may fail to operate successfully acquired properties, which could materially and adversely affect us and impede our
growth.
Our current portfolio consists entirely of properties that we acquired (or received the right to acquire) in connection
with the formation transactions. Our ability to identify and acquire additional properties on favorable terms and successfully
operate or redevelop them may be exposed to the following significant risks:
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even if we enter into agreements for the acquisition of properties, these agreements are subject to customary
conditions to closing, including completion of due diligence investigations to our satisfaction and other conditions that
are not within our control, which may not be satisfied, and we may be unable to complete an acquisition after making
a non-refundable deposit and incurring certain other acquisition-related costs;
• we may be unable to finance the acquisition on favorable terms in the time period we desire, or at all;
• we may spend more than budgeted to make necessary improvements or redevelopments to acquired properties;
• we may not be able to obtain adequate insurance coverage for new properties;
•
acquired properties may be located in new markets where we may face risks associated with a lack of market
knowledge or understanding of the local economy, lack of business relationships in the area and unfamiliarity with
local governmental and permitting procedures;
• we may be unable to integrate quickly and efficiently new acquisitions, particularly acquisitions of portfolios of
properties, into our existing operations, and as a result our results of operations and financial condition could be
adversely affected;
• market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and
• we may incur significant costs and divert management attention in connection with evaluating and negotiating
potential acquisitions, including ones that we are subsequently unable to complete.
Any delay or failure on our part to identify, negotiate, finance and consummate such acquisitions in a timely manner
and on favorable terms, or operate acquired properties to meet our financial expectations, could impede our growth and
adversely affect our financial condition, results of operations, cash flow and per share/unit trading price of our Class A common
stock and traded OP units.
Competition for acquisitions may reduce the number of acquisition opportunities available to us and increase the costs of
those acquisitions, which may impede our growth.
We plan to acquire properties as we are presented with attractive opportunities. We may face significant competition
for acquisition opportunities in the greater New York metropolitan area with other investors, particularly private investors who
can incur more leverage, and this competition may adversely affect us by subjecting us to the following risks:
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an inability to acquire a desired property because of competition from other well-capitalized real estate investors,
including publicly traded and privately held REITs, private real estate funds, domestic and foreign financial
institutions, life insurance companies, sovereign wealth funds, pension trusts, commercial developers, partnerships and
individual investors; and
an increase in the purchase price for such acquisition property, in the event we are able to acquire such desired
property.
The significant competition for acquisitions of commercial office and retail properties in the greater New York
metropolitan area may impede our growth.
Acquired properties may expose us to unknown liability, which could adversely affect our results of operations, cash flow
and the market value of our securities.
We may acquire properties subject to liabilities and without any recourse, or with only limited recourse, against the
prior owners or other third parties with respect to unknown liabilities. As a result, if a liability were asserted against us based
upon ownership of those properties, we might have to pay substantial sums to settle or contest it, which could adversely affect
our results of operations, cash flow and the market value of our securities. Unknown liabilities with respect to acquired
properties might include:
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liabilities for clean-up of undisclosed environmental contamination;
claims by tenants, vendors or other persons against the former owners of the properties;
liabilities incurred in the ordinary course of business; and
claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the
properties.
We may acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in
securityholder dilution and limit our ability to sell such assets.
In the future we may acquire properties or portfolios of properties through tax deferred contribution transactions in
exchange for partnership interests in our operating partnership, which may result in stockholder/unitholder dilution. This
acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct over
the tax life of the acquired properties, and may require that we agree to protect the contributors’ ability to defer recognition of
taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to
the contributors to maintain their tax bases. These restrictions could limit our ability to sell an asset at a time, or on terms, that
would be favorable absent such restrictions.
Should we decide at some point in the future to expand into new markets, we may not be successful, which could adversely
affect our financial condition, result of operations, cash flow and trading price of our Class A common stock and traded OP
units.
If opportunities arise, we may explore acquisitions of properties in new markets. Each of the risks applicable to our
ability to acquire and integrate successfully and operate properties in our current markets is also applicable to our ability to
acquire and integrate successfully and operate properties in new markets. In addition to these risks, we will not possess the
same level of familiarity with the dynamics and market conditions of any new markets that we may enter, which could
adversely affect the results of our expansion into those markets, and we may be unable to build a significant market share or
achieve a desired return on our investments in new markets. If we are unsuccessful in expanding into new markets, it could
adversely affect our financial condition, results of operations, cash flow, trading price of our Class A common stock and traded
OP units and ability to satisfy our principal and interest obligations and to make distributions to our securityholders.
Our growth depends on external sources of capital that are outside of our control, which may affect our ability to seize
strategic opportunities, satisfy debt obligations and make distributions to our securityholders.
In order to qualify as a REIT, we must distribute to our securityholders, on an annual basis, at least 90% of our REIT
taxable income, determined without regard to the deduction for distributions paid and excluding net capital gains. In addition,
we will be subject to U.S. federal income tax at the generally applicable corporate tax rate to the extent that we distribute less
than 100% of our net taxable income (including net capital gains) and will be subject to a 4% nondeductible excise tax on the
amount by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income
tax laws. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary
acquisition financing, from operating cash flow. Consequently, we may need to rely on third-party sources to fund our capital
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needs. We may not be able to obtain financing on favorable terms, in the time period we desire, or at all. Any additional debt
we incur will increase our leverage. Our access to third-party sources of capital depends, in part, on:
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general market conditions;
the market’s perception of our growth potential;
our current debt levels;
our current and expected future earnings;
our cash flow and cash distributions; and
the market price per share/unit of our Class A common stock and traded OP units.
If we cannot obtain capital from third-party sources, we may not be able to acquire or redevelop properties when
strategic opportunities exist, satisfy our principal and interest obligations or make the cash distributions to our securityholders
necessary to maintain our qualification as a REIT.
If we are unable to sell, dispose of or refinance one or more properties in the future, we may be unable to realize our
investment objectives, and our business may be adversely affected.
The real estate investments made, and to be made, by us are relatively difficult to sell quickly. Return of capital and
realization of gains from an investment generally will occur upon disposition or refinancing of the underlying property. In
addition, the Internal Revenue Code of 1986, as amended (the "Code"), imposes restrictions on the ability of a REIT to dispose
of properties that are not applicable to other types of real estate companies. We may be unable to realize our investment
objectives by sale, other disposition or refinancing at attractive prices within any given period of time or may otherwise be
unable to complete any exit strategy. In particular, these risks could arise from weakness in or even the lack of an established
market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or
international economic conditions and changes in laws, regulations or fiscal policies of jurisdictions in which our properties are
located.
Our outstanding indebtedness, including preferred units, reduces cash available for distribution and may expose us to the
risk of default under our debt obligations and may include covenants that restrict our financial and operational
flexibility and our ability to make distributions.
As of December 31, 2018, we had total debt outstanding of approximately $1.9 billion. As of December 31, 2018, we
had approximately $250.0 million of debt maturing in 2019 and no debt maturing in 2020. As of December 31, 2018, our
mortgages had an aggregate estimated principal balance of approximately $614.6 million with maturity dates ranging from
2024 through 2033. See Note 4 to our consolidated financial statements for required payments of our indebtedness. We may
incur significant additional debt to finance future acquisition and redevelopment activities. Payments of principal and interest
on borrowings may leave us with insufficient cash resources to operate our properties or to pay the distributions currently
contemplated or necessary to qualify as a REIT. Our level of debt and the limitations imposed on us by our loan documents
could have significant adverse consequences, including the following:
our cash flow may be insufficient to meet our required principal and interest payments;
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• we may be unable to borrow additional funds as needed or on favorable terms;
• we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the
•
terms of our original indebtedness;
to the extent we borrow debt that bears interest at variable rates, increases in interest rates could materially increase
our interest expense;
• we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;
• we may default on our obligations or violate restrictive covenants, in which case the lenders or mortgagees may
accelerate our debt obligations, foreclose on the properties that secure their loans and/or take control of our properties
that secure their loans and collect rents and other property income;
• we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt
•
obligations or reduce our ability to make, or prohibit us from making, distributions; and
our default under any one of our mortgage loans with cross default provisions could result in a default on other
indebtedness.
In addition, our unsecured revolving credit and term loan facility and our Senior Unsecured Notes require us to
maintain designated ratios, including but not limited to, total debt-to-assets, secured debt-to-assets, adjusted EBITDA to
consolidated fixed charges, net operating income from unencumbered properties to interest expense on unsecured debt, and
unsecured debt to unencumbered assets, and contain a minimum tangible net worth requirement. Our unsecured revolving
credit and term loan facility and our Senior Unsecured Notes do not generally contain restrictions on the payment of dividends
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or other distributions. The indenture governing our outstanding senior unsecured notes - exchangeable does not contain
financial or operational covenants or restrictions on the payments of dividends; however, upon the occurrence of fundamental
changes described in the indenture, holders of our outstanding senior unsecured notes - exchangeable may require our operating
partnership to repurchase for cash all or part of their notes at a repurchase price equal to 100% of the principal amount of the
notes to be repurchased, plus accrued and unpaid interest, subject to certain conditions. Further, upon the occurrence of any
make-whole fundamental change described in the indenture, the exchange rate for holders who exchange their notes in
connection with any such make-whole fundamental change may be increased. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
The provisions in the partnership agreement of our operating partnership that govern the preferred units may restrict
our ability to pay dividends if we fail to pay the cumulative preferential cash distributions thereon. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations - Private Perpetual Preferred Units.”
If any one of these events were to occur, our financial condition, results of operations, cash flow, per share/unit trading
price of our Class A common stock and traded OP units and our ability to satisfy our principal, interest and preferred unit
distribution obligations and to make distributions to our securityholders could be adversely affected. In addition, in connection
with our debt agreements we may enter into lockbox and cash management agreements pursuant to which substantially all of
the income generated by our properties will be deposited directly into lockbox accounts and then swept into cash management
accounts for the benefit of our various lenders and from which cash will be distributed to us only after funding of improvement,
leasing and maintenance reserves and the payment of principal and interest on our debt, insurance, taxes, operating expenses
and extraordinary capital expenditures and leasing expenses. As a result, we may be forced to borrow additional funds in order
to make distributions to our securityholders (including, potentially, to make distributions necessary to allow us to qualify as a
REIT). See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Our degree of leverage and the lack of a limitation on the amount of indebtedness we may incur could materially and
adversely affect us.
Our organizational documents do not contain any limitation on the amount of indebtedness we may incur. We
consider factors other than debt-to-EBITDA in making decisions regarding the incurrence of indebtedness, such as the purchase
price of properties to be acquired with debt financing, the estimated market value of our properties upon refinancing and the
ability of particular properties and our business as a whole to generate cash flow to cover expected debt service.
Our degree of leverage could affect our ability to obtain additional financing for working capital, capital expenditures,
acquisitions, development or other general corporate purposes. Our degree of leverage could also make us more vulnerable to a
downturn in business or the economy generally. If we become more leveraged in the future, the resulting increase in debt
service requirements could cause us to default on our obligations, which could materially and adversely affect us.
Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a
property or group of properties subject to mortgage debt.
Incurring mortgage and other secured debt obligations increases our risk of property losses because defaults on
indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property
securing any loans for which we are in default. Any foreclosure on a mortgaged property or group of properties could
adversely affect the overall value of our portfolio of properties. For tax purposes, a foreclosure of any of our properties that is
subject to a nonrecourse mortgage loan would be treated as a sale of the property for a purchase price equal to the outstanding
balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax
basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could
hinder our ability to meet the distribution requirements applicable to REITs under the Code. Foreclosures could also trigger our
tax indemnification obligations under the terms of our agreements with certain continuing investors with respect to sales of
certain properties, and obligate us to make certain levels of indebtedness available for them to guarantee which, among other
things, allows them to defer the recognition of gain in connection with the formation transactions.
High mortgage rates and/or unavailability of mortgage debt may make it difficult for us to finance or refinance properties,
which could reduce the number of properties we can acquire, our net income and the amount of cash distributions we can
make.
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If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. If we
place mortgage debt on properties, we may be unable to refinance the properties when the loans become due, or to refinance on
favorable terms. If interest rates are higher when we refinance our properties, our income could be reduced. If any of these
events occur, our cash flow could be reduced. This, in turn, could reduce cash available for distribution to our securityholders
and may hinder our ability to raise more capital by issuing more stock or by borrowing more money. In addition, to the extent
we are unable to refinance the properties when the loans become due, we will have fewer debt guarantee opportunities
available to offer under our tax protection agreement. If we are unable to offer certain guarantee opportunities to the protected
parties under the tax protection agreement, or otherwise are unable to allocate sufficient liabilities of our operating partnership
to those parties, it could trigger an indemnification obligation of our company under the tax protection agreement.
Some of our financing arrangements involve balloon payment obligations, which may adversely affect our ability to make
distributions.
As some of our financing arrangements require us to make a lump-sum or "balloon" payment at maturity. Our ability
to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our
ability to sell the property. At the time the balloon payment is due, we may or may not be able to refinance the existing
financing on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. The
effect of a refinancing or sale could affect the rate of return to securityholders and the projected time of disposition of our
assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to make
distributions necessary to meet the distribution requirements applicable to REITs under the Code.
Our tax protection agreements could limit our ability either to sell certain properties or to engage in a strategic transaction,
or to reduce our level of indebtedness, which could materially and adversely affect us.
In connection with the formation transactions, we entered into a tax protection agreement with Anthony E. Malkin and
Peter L. Malkin pursuant to which we have agreed to indemnify the Malkin Group and one additional third party investor in
Metro Center (who was one of the original landowners and was involved in the development of the property) against certain tax
liabilities if those tax liabilities result from (i) the operating partnership’s sale, transfer, conveyance, or other taxable disposition
of four specified properties (First Stamford Place, Metro Center, 10 Bank Street and 1542 Third Avenue) acquired by the
operating partnership in 2013 for a period of 12 years with respect to First Stamford Place and for the later of (x) October 2021
or (y) the death of both Peter L. Malkin and Isabel W. Malkin who are 85 and 82 years old, respectively, for the three other
properties, (ii) the operating partnership failing to maintain until maturity the indebtedness secured by those properties or
failing to use commercially reasonable efforts to refinance such indebtedness upon maturity in an amount equal to the principal
balance of such indebtedness, or, if the operating partnership is unable to refinance such indebtedness at its current principal
amount, at the highest principal amount possible, or (iii) the operating partnership failing to make available to any of these
continuing investors the opportunity to guarantee, or otherwise bear the risk of loss, for U.S. federal income tax purposes, of
their allocable share of $160 million of aggregate indebtedness meeting certain requirements, until such continuing investor
owns less than the aggregate number of operating partnership units and shares of common stock equal to 50% of the aggregate
number of such units and shares such continuing investor received in the formation transactions. In addition, in connection with
our sale of a 9.9% fully diluted interest in our Company to 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", and together with any eligible transferee, "QIA") in August 2016, we agreed, subject to certain minimum thresholds
and conditions, to indemnify QIA for certain applicable U.S. federal and state taxes payable by QIA in connection with any
dividends we pay that are attributable to capital gains from the sale or exchange of any U.S. real property interests. If we were
to trigger our tax indemnification obligations under these agreements, we would be required to pay damages for the resulting
tax consequences to the Malkin Group, the additional third party investor in Metro Center or QIA, as applicable, and we have
acknowledged that a calculation of damages with respect to the tax protection agreement with the Malkin Group and the
additional third party investor in Metro Center will not be based on the time value of money or the time remaining within the
restricted period. Moreover, these obligations may restrict our ability to engage in a strategic transaction, require us to maintain
more or different indebtedness than we would otherwise require for our business, and/or inhibit our selling or disposing of a
property that might otherwise be in the best interest of the securityholders to do so.
We face risks which would arise if any of our tenants were designated “Prohibited Persons” by the Office of Foreign Assets
Control.
Pursuant to Executive Order 13224 and other laws, the Office of Foreign Assets Control of the United States
Department of the Treasury (“OFAC”) maintains a list of persons designated as terrorists or who are otherwise blocked or
banned (“Prohibited Persons”). OFAC regulations and other laws prohibit us from conducting business or engaging in
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transactions with Prohibited Persons (the “OFAC Requirements”). We have established a compliance program whereby tenants
are checked against the OFAC list of Prohibited Persons prior to entering into any lease. Our leases and other agreements, in
general, require the other party to comply with OFAC Requirements. If a tenant or other party with whom we contract is
placed on the OFAC list or is otherwise a party with which we are prohibited from doing business, we may be required by the
OFAC Requirements to terminate the lease or other agreement. Any such termination could result in a loss of revenue or
otherwise negatively affect our financial results and cash flows.
The continuing threat of a terrorist event may materially and adversely affect our properties, their value and our ability to
generate cash flow.
There may be a decrease in demand for space in Manhattan and the greater New York metropolitan area because it is
considered at risk for a future terrorist event, and this decrease may reduce our revenues from property rentals. In the aftermath
of a terrorist event, tenants in Manhattan and the greater New York metropolitan area may choose to relocate their businesses to
less populated, lower-profile areas of the United States that are not as likely to be targets of future terrorist activity. This in turn
could trigger a decrease in the demand for space in Manhattan and the greater New York metropolitan area, which could
increase vacancies in our properties and force us to lease our properties on less favorable terms. Further, certain of our
properties, including the Empire State Building, may be considered to be susceptible to increased risks of a future terrorist
event due to the high-profile nature of the property. In addition, a terrorist event could cause insurance premiums at certain of
our properties to increase significantly. As a result, the value of our properties and the level of our revenues could materially
decline.
Potential losses, such as those from adverse weather conditions, natural disasters, possible rise in ocean levels, terrorist
events and title claims, may not be fully covered by our insurance policies, and such losses could materially and adversely
affect us.
Our business operations are susceptible to, and could be significantly affected by, adverse weather conditions, terrorist
events, possible rise in ocean levels and natural disasters that could cause significant damage to the properties in our portfolio.
Our insurance may not be adequate to cover business interruption or losses resulting from such events. In addition, our
insurance policies include substantial self-insurance portions and significant deductibles and co-payments for such events, and
hurricanes in the United States have affected the availability and price of such insurance. As a result, we may incur significant
costs in the event of adverse weather conditions, terrorist events and natural disasters. We may discontinue certain insurance
coverage on some or all of our properties in the future if the cost of premiums for any of these policies in our judgment exceeds
the value of the coverage discounted for the risk of loss. See "Item 1. Business - Insurance."
Furthermore, we do not carry insurance for certain losses, including, but not limited to, losses caused by war. In
addition, while our title insurance policies insure for the current aggregate market value of our portfolio, we do not intend to
increase our title insurance policies as the market value of our portfolio increases. As a result, we may not have sufficient
coverage against all losses that we may experience, including from adverse title claims.
If we experience a loss that is uninsured or which exceeds our policy limits, we could incur significant costs and lose
the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if
the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these
properties were irreparably damaged.
In addition, certain of our properties could not be rebuilt to their existing height or size at their existing location under
current land-use laws and policies. In the event that we experience a substantial or comprehensive loss of one of our properties,
we may not be able to rebuild such property to its existing specifications and otherwise may have to upgrade such property to
meet current code requirements.
Our debt instruments, consisting of mortgage loans secured by our properties (which are generally non-recourse to us),
ground leases, our senior unsecured debt and our unsecured revolving credit and term loan facility, contain customary
covenants requiring us to maintain insurance, including terrorism insurance. While we do not believe it will be likely, there can
be no assurance that the lenders or ground lessors under these instruments will not take the position that a total or partial
exclusion from “all-risk” insurance coverage for losses due to terrorist acts is a breach of these debt and ground lease
instruments that allows the lenders or ground lessors to declare an event of default and accelerate repayment of debt or
recapture of ground lease positions for those properties in our portfolio which are not insured against terrorist events. In
addition, if lenders insist on full coverage for these risks and prevail in asserting that we are required to maintain such
coverage, it could result in substantially higher insurance premiums.
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Certain mortgages on our properties contain requirements concerning the financial ratings of the insurers who provide
policies covering the property. We provide the lenders on a regular basis with the identity of the insurance companies in our
insurance programs. While the ratings of our insurers currently satisfy the rating requirements in some of our loan agreements,
in the future, we may be unable to obtain insurance with insurers which satisfy the rating requirements which could give rise to
an event of default under such loan agreements. Additionally, in the future our ability to obtain debt financing secured by
individual properties, or the terms of such financing, may be adversely affected if lenders generally insist on ratings for insurers
which are difficult to obtain or which result in a commercially unreasonable premium.
We may become subject to liability relating to environmental and health and safety matters, which could have a material
and adverse effect on us.
Under various federal, state and/or local laws, ordinances and regulations, as a current or former owner or operator of
real property, we may be liable for costs and damages resulting from the presence or release of hazardous substances, waste, or
petroleum products at, on, in, under or from such property, including costs for investigation or remediation, natural resource
damages, or third party liability for personal injury or property damage. These laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence or release of such materials, and the liability may
be joint and several. Some of our properties have been or may be impacted by contamination arising from current or prior uses
of the property or adjacent properties for commercial, industrial or other purposes. Such contamination may arise from spills of
petroleum or hazardous substances or releases from tanks used to store such materials. We also may be liable for the costs of
remediating contamination at off-site disposal or treatment facilities when we arrange for disposal or treatment of hazardous
substances at such facilities, without regard to whether we comply with environmental laws in doing so. The presence of
contamination or the failure to remediate contamination on our properties may adversely affect our ability to attract and/or
retain tenants and our ability to develop or sell or borrow against those properties. In addition to potential liability for cleanup
costs, private plaintiffs may bring claims for personal injury, property damage or for similar reasons. Environmental laws also
may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such
contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the
manner in which that property may be used or how businesses may be operated on that property. For example, our property at
69-97 Main Street is subject to an Environmental Land Use Restriction that imposes certain restrictions on the use, occupancy
and activities of the affected land beneath the property. This restriction may prevent us from conducting certain redevelopment
activities at the property, which may adversely affect its resale value and may adversely affect our ability to finance or
refinance this property. See “Item 1. Business - Environmental Matters.”
Some of our properties are adjacent to or near other properties used for industrial or commercial purposes or that have
contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic
substances. Releases from these properties could impact our properties. In addition, some of our properties have previously
been used by former owners or tenants for commercial or industrial activities, e.g., gas stations and dry cleaners, and a portion
of the Metro Tower site is currently used for automobile parking and fueling, that may release petroleum products or other
hazardous or toxic substances at such properties or to surrounding properties.
In addition, our properties are subject to various federal, state and local environmental and health and safety laws and
regulations. Noncompliance with these environmental and health and safety laws and regulations could subject us or our
tenants to liability. These liabilities could affect a tenant’s ability to make rental payments to us. Moreover, changes in laws
could increase the potential costs of compliance with such laws and regulations or increase liability for noncompliance. This
may result in significant unanticipated expenditures or may otherwise materially and adversely affect our operations, or those
of our tenants, which could in turn have a material adverse effect on us.
As the owner or operator of real property, we may also incur liability based on various building conditions. For
example, buildings and other structures on properties that we currently own or operate or those we acquire or operate in the
future contain, may contain, or may have contained, asbestos-containing material, or ACM. Environmental and health and
safety laws require that ACM be properly managed and maintained and may impose fines or penalties on owners, operators or
employers for non-compliance with those requirements. These requirements include special precautions, such as removal,
abatement or air monitoring, if ACM would be disturbed during maintenance, redevelopment or demolition of a building,
potentially resulting in substantial costs. In addition, we may be subject to liability for personal injury or property damage
sustained as a result of releases of ACM into the environment.
In addition, our properties may contain or develop harmful mold or suffer from other indoor air quality issues, which
could lead to liability for adverse health effects or property damage or costs for remediation. When excessive moisture
accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains
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undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air
quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other
biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels
can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the
presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly
remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase
indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability
from our tenants, employees of our tenants or others if property damage or personal injury occurs.
We cannot assure you that costs or liabilities incurred as a result of environmental issues will not affect our ability to
make distributions to our securityholders or that such costs, liabilities, or other remedial measures will not have a material
adverse effect on our financial condition and results of operations.
Monetary policy actions by the U.S Federal Reserve could adversely impact our financial condition and our ability to make
distributions to our stockholders.
During 2018, the U.S. Federal Reserve raised the target range for the federal funds rate to a range from 1.50 to 2.50
percent compared to a range from 0.75 to 1.50 in 2017. These decisions ended the low-interest-rate policy that had been in
effect in previous years. The targeted federal funds rate increase will likely result in an increase in market interest rates, which
may increase our interest expense under our unhedged variable-rate borrowings and the costs of refinancing existing
indebtedness or obtaining new debt. In addition, increases in market interest rates may result in a decrease in the value of our
real estate and a decrease in the market price of our common stock. Increases in market interest rates may also adversely affect
the securities markets generally, which could reduce the market price of our common stock without regard to our operating
performance. Any such unfavorable changes to our borrowing costs and stock price could significantly impact our ability to
raise new debt and equity capital going forward.
Failure to hedge interest rates effectively could have a material and adverse effect on us.
We may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements that
involve risk, such as the risk that counterparties may fail to honor their obligations under these arrangements, and that these
arrangements may not be effective in reducing our exposure to interest rate changes. Moreover, there can be no assurance that
our hedging arrangements will qualify for hedge accounting or that our hedging activities will have the desired beneficial
impact on our results of operations. Should we desire to terminate a hedging agreement, there could be significant costs and
cash requirements involved to fulfill our initial obligation under the hedging agreement. Failure to hedge effectively against
interest rate changes may adversely affect our results of operations.
When a hedging agreement is required under the terms of a mortgage loan, it is often a condition that the hedge
counterparty maintains a specified credit rating. When there is volatility in the financial markets, there is an increased risk that
hedge counterparties could have their credit rating downgraded to a level that would not be acceptable under the loan
provisions. If we were unable to renegotiate the credit rating condition with the lender or find an alternative counterparty with
acceptable credit rating, we could be in default under the loan and the lender could seize that property through foreclosure.
We may incur significant costs complying with the ADA and similar laws, which could adversely affect our financial
condition, results of operations, cash flow and per share/unit trading price of our Class A common stock and traded OP
units.
Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet federal
requirements related to access and use by disabled persons. If one or more of the properties in our portfolio is not in
compliance with the ADA, we would be required to incur additional costs to bring the property into compliance. Additional
federal, state and local laws also may require modifications to our properties, or restrict our ability to renovate our properties.
We cannot predict the ultimate cost of compliance with the ADA or other legislation. If we incur substantial costs to comply
with the ADA and any other legislation, our financial condition, results of operations, cash flow, per share/unit trading price of
our Class A common stock and traded OP units and our ability to satisfy our principal and interest obligations and to make
distributions to our securityholders could be adversely affected.
There remains uncertainty as to how the recently-revised partnership tax audits will be applied.
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The Bipartisan Budget Act of 2015, effective for taxable years beginning after December 31, 2017, requires our
operating partnership and any subsidiary partnership to pay the hypothetical increase in partner-level taxes (including interest
and penalties) resulting from an adjustment of partnership tax items on audit or in other tax proceedings, unless the partnership
elects an alternative method under which the taxes resulting from the adjustment (and interest and penalties) are assessed at the
partner level. In addition, Treasury Regulations provide that a partner that is a REIT may be able to use deficiency dividend
procedures with respect to such adjustments. Many uncertainties remain as to the application of these rules, and the impact they
will have on us. However, it is possible, that partnerships in which we invest may be subject to U.S. federal income tax, interest
and penalties in the event of a U.S. federal income tax audit as a result of these law changes.
Our state and local taxes could increase due to property tax rate changes, reassessment and/or changes in state and local
tax laws which could impact our cash flows.
Even if we qualify as a REIT for U.S. federal income tax purposes, we will be required to pay state and local taxes on
our properties. From time to time changes in state and local tax laws or regulations are enacted, which may result in an increase
in our tax liability. A shortfall in tax revenues for states and municipalities in which we operate may lead to an increase in the
frequency and size of such changes. In particular, the federal government has recently limited the ability of individuals to
deduct state and local taxes on their federal tax returns, potentially leading many high-tax states to make significant changes to
their own state and local tax laws. If such changes occur, we may be required to pay additional taxes on our assets or income.
These increased tax costs could adversely affect our financial condition and results of operations and the amount of cash
available for the payment of dividends and distributions to our securityholders.
The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or
reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially from
what we have paid in the past. If the property taxes we pay increase, our financial condition, results of operations, cash flows,
per share trading price of our Class A common stock and our ability to satisfy our principal and interest obligations and to make
distributions to our securityholders could be adversely affected.
We may become subject to litigation, which could have a material and adverse effect on our financial condition, results of
operations, cash flow and per share/unit trading price of our Class A common stock and our traded OP units.
In the future we may become subject to litigation, including claims relating to our operations, offerings, and otherwise
in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant
judgments against us, some of which are not, or cannot be, insured against. We generally intend to defend ourselves
vigorously; however, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of
these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if
uninsured, or if the fines, judgments, and settlements exceed insured levels, could adversely impact our earnings and cash
flows, thereby having an adverse effect on our financial condition, results of operations, cash flow and per share/unit trading
price of our Class A common stock and our traded OP units. Certain litigation or the resolution of certain litigation may affect
the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash
flows, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.
There is currently arbitration pending. We may incur costs for these proceedings. Please see Note 8 “Commitments and
Contingencies” to the financial statements of this Annual Report in Form 10-K for a further description.
We face risks relating to cybersecurity attacks that could cause loss of confidential information and other business
disruptions.
We rely extensively on computer systems to process transactions and manage our business, and our business is
increasingly at risk from and may be impacted by cybersecurity attacks that continue to increase in number, intensity and
sophistication. These could include internal and external attempts to gain unauthorized access to our data and computer
systems to disrupt operations, corrupt data, or steal confidential information. As our reliance on technology has increased, so
have the risks posed to our systems, both internal and those we have outsourced. Attacks can be both individual and/or highly
organized attempts organized by very sophisticated hacking organizations. We employ a number of processes, procedures and
controls to prevent, detect and mitigate these threats, which include password protection, frequent password change events,
firewall detection systems, frequent backups, a redundant data system for core applications and annual penetration testing;
however, there is no guarantee such measures, as well as our increased awareness of a risk of a cybersecurity attack, will be
successful in preventing such an attack. A cybersecurity attack could compromise the confidential information of our
employees, tenants and vendors. A successful attack could disrupt and materially affect our business operations, including
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damaging relationships with tenants, customers and vendors. Any compromise of our security could also result in a violation of
applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, loss or misuse of the
information (which may be confidential, proprietary and/or commercially sensitive in nature) and a loss of confidence in our
security measures, which could harm our business.
Our failure to maintain satisfactory labor relations could have a material adverse effect on our business.
As of December 31, 2018, we employed 813 employees. There are currently collective bargaining agreements which
cover 573 employees, or 70% of our workforce, that service all of our office properties. We have not experienced a strike or
work stoppage at any of our properties and in the opinion of management overall employee relations are good and no labor
stoppages are anticipated. Our inability to negotiate acceptable contracts with any of these unions as existing agreements
expire could result in strikes or work stoppages by the affected workers. If our unionized employees were to engage in a strike
or other work stoppage, we could experience a significant disruption of our operations, which could adversely affect our
business, financial condition and results of operations. In the event of a work stoppage for any extended period of time, we
would likely seek to engage temporary workers to provide tenant services, which would result in increased operating costs.
Risks Related to Our Organization and Structure
Holders of our Class B common stock have a significant vote in matters submitted to a vote of our securityholders.
As part of our formation, original investors were offered the opportunity to contribute their interests to us in exchange
for Class A common stock, operating partnership units, a combination of one share of Class B common stock for each 50
operating partnership units to which an investor was entitled, resulting in one share of Class B common stock and 49 operating
partnership units, or a combination of any of the above. Each outstanding share of Class B common stock, when accompanied
by 49 operating partnership units, entitles the holder thereof to 50 votes on all matters on which Class A common
securityholders are entitled to vote, including the election of directors. Holders of our Class B common stock are entitled to
share equally, on a per share basis, in all distributions payable with respect to shares of our Class A common stock. Holders of
our Class B common stock may have interests that differ from those holders of our Class A common stock, including by reason
of their interest in our operating partnership, and may accordingly vote as a stockholder in ways that may not be consistent with
the interests of holders of our Class A common stock. This significant voting influence over certain matters may have the effect
of delaying, preventing or deterring a change of control of our company, or could deprive holders of our Class A common stock
of an opportunity to receive a premium for their Class A common stock as part of a sale of our company. Class B common
stock has been issued only in connection with the formation transactions, and any such share is automatically converted to a
share of Class A common stock (having a single vote) upon its holder conveying the related 49 operating partnership units to
any person other than a family member, affiliate or controlled entity of such person.
The departure of any of our key personnel could materially and adversely affect us.
Our success depends on the efforts of key personnel, particularly Anthony E. Malkin, our Chairman and Chief
Executive Officer. Among the reasons Anthony E. Malkin is important to our success is that he has a national industry
reputation that benefits us in many ways. He has led the acquisition, operating and repositioning of our assets for the last two
decades. If we lost his services, our external relationships and internal leadership resources would be materially diminished.
Other members of our senior management team also have strong industry reputations and experience, which aid us in
attracting, identifying and exploiting opportunities. The loss of the services of one or more members of our senior management
team, particularly Anthony E. Malkin, could have a material and adverse impact on us.
Tax consequences to holders of operating partnership units upon a sale or refinancing of our properties may cause the
interests of certain members of our senior management team to differ from your own.
As a result of the unrealized built-in gain attributable to a property at the time of contribution, some holders of
operating partnership units, including Anthony E. Malkin and Peter L. Malkin, may suffer different and more adverse tax
consequences than holders of our Class A common stock upon the sale or refinancing of the properties owned by our operating
partnership, including disproportionately greater allocations of items of taxable income and gain upon a realization event. As
those holders will not receive a correspondingly greater distribution of cash proceeds, they may have different objectives
regarding the appropriate pricing, timing and other material terms of any sale or refinancing of certain properties, or whether to
sell or refinance such properties at all. As a result, the effect of certain transactions on Anthony E. Malkin and Peter L. Malkin
may influence their decisions affecting these properties and may cause such members of our senior management team to
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attempt to delay, defer or prevent a transaction that might otherwise be in the best interests of our other securityholders. In
connection with the formation transactions, we entered into a tax protection agreement with Anthony E. Malkin and Peter L.
Malkin pursuant to which we have agreed to indemnify the Malkin Group and one additional third party investor in Metro
Center (who was one of the original landowners and was involved in the development of the property) against certain tax
liabilities if those tax liabilities result from (i) the operating partnership’s sale, transfer, conveyance, or other taxable disposition
of four specified properties (First Stamford Place, Metro Center, 10 Bank Street and 1542 Third Avenue) acquired by the
operating partnership in the consolidation for a period of 12 years from the consolidation in 2013 with respect to First Stamford
Place and for the later of (x) eight years from the consolidation in 2013 or (y) the death of both Peter L. Malkin and Isabel W.
Malkin who are 85 and 82 years old, respectively, for the three other properties, (ii) the operating partnership failing to
maintain until maturity the indebtedness secured by those properties or failing to use commercially reasonable efforts to
refinance such indebtedness upon maturity in an amount equal to the principal balance of such indebtedness, or, if the operating
partnership is unable to refinance such indebtedness at its current principal amount, at the highest principal amount possible, or
(iii) the operating partnership failing to make available to any of these continuing investors the opportunity to guarantee, or
otherwise bear the risk of loss, for U.S. federal income tax purposes, of their allocable share of $160 million of aggregate
indebtedness meeting certain requirements, until such continuing investor owns less than the aggregate number of operating
partnership units and shares of common stock equal to 50% of the aggregate number of such units and shares such continuing
investor received in the formation transactions. As a result of entering into the tax protection agreement, Anthony E. Malkin
and Peter L. Malkin may have an incentive to cause us to enter into transactions from which they may personally benefit.
Our Chairman and Chief Executive Officer has outside business interests that take his time and attention away from us,
which could materially and adversely affect us.
Anthony E. Malkin, our Chairman and Chief Executive Officer, has agreed to devote a majority of his business time
and attention to our business and, under his employment agreement, he may also devote time to the excluded properties, the
excluded businesses and certain family investments to the extent that such activities do not materially interfere with the
performance of his duties to us. He owns interests in the excluded properties and excluded businesses that were not contributed
to us in the formation transactions, some of which are managed by our company and certain non-real estate family investments.
In some cases, Anthony E. Malkin or his affiliates have certain management and fiduciary obligations that may conflict with
such person’s responsibilities as an officer or director of our company and may adversely affect our operations. In addition,
under his employment agreement, Anthony E. Malkin has agreed not to engage in certain business activities in competition
with us (both during, and for a period of time following, his employment with us). We may choose not to enforce, or to enforce
less vigorously, our rights under this agreement because of our desire to maintain our ongoing relationship with our Chairman
and Chief Executive Officer given his significant knowledge of our business, relationships with our customers and significant
equity ownership in us, and this could have a material adverse effect on our business.
Our rights and the rights of our securityholders to take action against our directors and officers are limited, which could
limit your recourse in the event of actions not in your best interest.
Our charter limits the liability of our present and former directors and officers to us and our securityholders for money
damages to the maximum extent permitted under Maryland law. Under current Maryland law, our present and former directors
and officers will not have any liability to us or our securityholders for money damages other than liability resulting from (1)
actual receipt of an improper benefit or profit in money, property or services or (2) active and deliberate dishonesty by the
director or officer that was established by a final judgment and is material to the cause of action. As a result, we and our
securityholders may have limited rights against our present and former directors and officers, as well as persons who served as
members, managers, shareholders, directors, partners, officers, controlling persons certain agents of our predecessor, which
could limit your recourse in the event of actions not in your best interest.
Conflicts of interest exist or could arise in the future between the interests of our securityholders and the interests of holders
of operating partnership units, which may impede business decisions that could benefit our securityholders.
Conflicts of interest exist or could arise in the future as a result of the relationships between us and our affiliates, on
the one hand, and our operating partnership or any partner thereof, on the other. Our directors and officers have duties to our
company under applicable Maryland law in connection with their management of our company. At the same time, we, as the
general partner in our operating partnership, have fiduciary duties and obligations to our operating partnership and its limited
partners under Delaware law and the partnership agreement of our operating partnership in connection with the management of
our operating partnership. Our fiduciary duties and obligations as general partner to our operating partnership and its partners
may come into conflict with the duties of our directors and officers to our company.
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Additionally, the partnership agreement provides that we and our directors and officers will not be liable or
accountable to our operating partnership for losses sustained, liabilities incurred or benefits not derived if we, or such director
or officer acted in good faith. The partnership agreement also provides that we will not be liable to the operating partnership or
any partner for monetary damages for losses sustained, liabilities incurred or benefits not derived by the operating partnership
or any limited partner, except for liability for our intentional harm or gross negligence. Moreover, the partnership agreement
provides that our operating partnership is required to indemnify its directors and officers, us and our directors and officers and
authorizes our operating partnership to indemnify present and former members, managers, shareholders, directors, limited
partners, general partners, officers or controlling persons of our predecessor and authorizes us to indemnify members, partners,
employees and agents of us or our predecessor, in each case for actions taken by them in those capacities from and against any
and all claims that relate to the operations of our operating partnership, except (1) if the act or omission of the person was
material to the matter giving rise to the action and either was committed in bad faith or was the result of active and deliberate
dishonesty, (2) for any transaction for which the indemnified party received an improper personal benefit, in money, property or
services or otherwise, in violation or breach of any provision of the partnership agreement or (3) in the case of a criminal
proceeding, if the indemnified person had reasonable cause to believe that the act or omission was unlawful. No reported
decision of a Delaware appellate court has interpreted provisions similar to the provisions of the partnership agreement of our
operating partnership that modify and reduce our fiduciary duties or obligations as the general partner or reduce or eliminate
our liability for money damages to the operating partnership and its partners, and we have not obtained an opinion of counsel as
to the enforceability of the provisions set forth in the partnership agreement that purport to modify or reduce the fiduciary
duties that would be in effect were it not for the partnership agreement.
We could increase or decrease the number of authorized shares of stock, classify and reclassify unissued stock and issue
stock without stockholder approval, which could prevent a change in our control and negatively affect the market value of
our shares.
Our board of directors, without stockholder approval, has the power under our charter to amend our charter from time
to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series
that we are authorized to issue, to authorize us to issue authorized but unissued shares of our common stock or preferred stock
and to classify or reclassify any unissued shares of our common stock or preferred stock into one or more classes or series of
stock and set the terms of such newly classified or reclassified shares. As a result, we may issue series or classes of common
stock or preferred stock with preferences, distributions, powers and rights, voting or otherwise, that are senior to, or otherwise
conflict with, the rights of holders of our common stock. Any such issuance could dilute our existing securityholders’ interests.
Although our board of directors has no such intention at the present time, it could establish a class or series of preferred stock
that could, depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve
a premium price for our common stock or that our securityholders otherwise believe to be in their best interest.
Our operating partnership may issue additional operating partnership units without the consent of our securityholders,
which could have a dilutive effect on our securityholders.
Our operating partnership may issue additional operating partnership units to third parties without the consent of our
securityholders, which would reduce our ownership percentage in our operating partnership and would have a dilutive effect on
the amount of distributions made to us by our operating partnership and, therefore, the amount of distributions we can make to
our securityholders. Any such issuances, or the perception of such issuances, could materially and adversely affect the market
price of our Class A common stock.
Certain provisions in the partnership agreement of our operating partnership may delay or prevent unsolicited acquisitions
of us.
Provisions in the partnership agreement of our operating partnership may delay or make more difficult unsolicited
•
•
•
acquisitions of us or changes of our control. These provisions could discourage third parties from making proposals involving
an unsolicited acquisition of us or change of our control, although some securityholders might consider such proposals, if
made, desirable. These provisions include, among others:
redemption rights of qualifying parties;
transfer restrictions on operating partnership units;
our ability, as general partner, in some cases, to amend the partnership agreement and to cause the operating
partnership to issue units with terms that could delay, defer or prevent a merger or other change of control of us or our
operating partnership without the consent of the limited partners;
the right of the limited partners to consent to transfers of the general partnership interest and mergers or other
transactions involving us under specified circumstances; and
•
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•
a redemption premium payable to the holders of our operating partnership’s preferred units if our operating partnership
decides, at its option, to redeem preferred units for cash upon the occurrence of certain fundamental transactions, such
as a change of control.
Our charter, bylaws, the partnership agreement of our operating partnership and Maryland law also contain other
provisions that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our
common stock or that our securityholders otherwise believe to be in their best interest.
Our charter contains stock ownership limits, which may delay or prevent a change of control.
In order for us to qualify as a REIT no more than 50% in value of our 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 us in complying with these limitations, among other purposes, our 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 our capital stock or more than 9.8% in value or number of shares, whichever is
more restrictive, of the outstanding shares of our common stock. Our charter also provides that no person can directly or
indirectly own shares of our capital stock to the extent such ownership would result in us owning (directly or indirectly) an
interest in one of our tenants if the income derived by us from such tenant would reasonably be expected to equal or exceed the
lesser of 1% of our gross income or an amount that would cause us to fail to satisfy any of the REIT gross income tests. These
ownership limitations could have the effect of discouraging a takeover or other transaction in which holders of our 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. We have 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 our 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 a 9.9% fully diluted economic
interest in the Company (inclusive of all outstanding common OP units and LTIP units), which currently equals approximately
17.2% of our outstanding Class A common stock.
Our 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. Our charter
also provides that any attempt to own or transfer shares of our common stock or preferred stock (if and when issued) in excess
of the stock ownership limits without the consent of our board of directors or in a manner that would cause us 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 our
shares, any such transfer of our shares will be null and void.
The concentration of our voting power may adversely affect the ability of new investors to influence our policies.
As of December 31, 2018, Anthony E. Malkin, our Chairman and Chief Executive Officer, together with the Malkin
Group, has the right to vote 40,859,706 shares of our common stock, which represents approximately 18.1% of the voting
power of our outstanding common stock. Consequently, Mr. Malkin has the ability to influence the outcome of matters
presented to our securityholders, including the election of our board of directors and approval of significant corporate
transactions, including business combinations, consolidations and mergers and the determination of our day-to-day corporate
and management policies.
As of December 31, 2018, QIA had a 9.9% fully diluted interest in us, which represented 17.2% of the outstanding
Class A common stock. Pursuant to the terms of our stockholders agreement with QIA, QIA generally has the right (but not the
obligation) to maintain its fully diluted economic interest in us by purchasing additional shares of our Class A common stock
when we or our operating partnership issue additional common equity securities from time to time. While QIA has agreed to
limit its voting power on all matters presented to our 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 our board of
directors.
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The interests of Mr. Malkin and QIA could conflict with or differ from your interests as a holder of our common stock,
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 securityholders. This concentration of voting power might also have the effect of
delaying or preventing a change of control that our securityholders may view as beneficial.
Our board of directors may change our strategies, policies or procedures without stockholder consent, which may subject us
to different and more significant risks in the future.
Our investment, financing, leverage and distribution policies and our policies with respect to all other activities,
including growth, debt, capitalization and operations, will be determined by our board of directors. These policies may be
amended or revised at any time and from time to time at the discretion of the board of directors without notice to or a vote of
our securityholders. This could result in our conducting operational matters, making investments or pursuing different business
or growth strategies. Under these circumstances, we may expose ourselves to different and more significant risks in the future,
which could have a material adverse effect on our business and growth. In addition, the board of directors may change our
policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements. A
change in these policies could have an adverse effect on our financial condition, results of operations, cash flow, per share/unit
trading price of our Class A common stock and traded OP units and ability to satisfy our principal and interest obligations and
to make distributions to our securityholders.
Risks Related to our Common Stock and Traded OP Units
Our cash available for distribution may not be sufficient to make distributions at expected levels.
We intend to make distributions to holders of shares of our common stock and holders of operating partnership units.
All dividends and distributions will be made at the discretion of our board of directors and will depend on our earnings,
financial condition, maintenance of REIT qualification and other factors as our board of directors may deem relevant from time
to time. If sufficient cash is not available for distribution from our operations, we may have to fund distributions from working
capital or to borrow to provide funds for such distribution, or to reduce the amount of such distribution. We cannot assure you
that our distributions will be made or sustained. Any distributions we pay in the future will depend upon our actual results of
operations, economic conditions and other factors that could differ materially from our current expectations.
The market price of shares of our Class A common stock and traded OP units could be adversely affected by our level of
cash distributions.
The market value of the equity securities of a REIT is based primarily upon the market’s perception of the REIT’s
growth potential and its current and potential future cash distributions, whether from operations, sales or refinancings, and is
secondarily based upon the real estate market value of the underlying assets. For that reason, our Class A common stock and
traded OP units may trade at prices that are higher or lower than our net asset value per share. To the extent we retain operating
cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value
of our underlying assets, may not correspondingly increase the market price of our Class A common stock and traded OP units.
Our failure to meet the market’s expectations with regard to future earnings and cash distributions likely would adversely affect
the market price of our Class A common stock and traded OP units.
The future exercise of registration rights may adversely affect the market price of our common stock.
We cannot predict whether future issuances of shares of our common stock or operating partnership units or the
availability of shares for resale in the open market will decrease the market price per share/unit of our common stock and
traded OP units. In August 2016, we entered into a registration rights agreement with QIA in connection with its purchase of
29,610,854 shares of our Class A common stock, which required us 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. We filed the resale shelf registration statement with the SEC on February 2, 2017 and
renewed it on August 3, 2017. Subsequently, QIA is entitled to cause us to include in the registration statement such additional
shares of our Class A common stock as QIA may acquire from time to time, up to a 9.9% fully diluted interest in us. We 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 our common stock and
could impair our ability to raise additional capital through the sale of equity securities in the future. In particular, as of
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December 31, 2018, QIA owns approximately 17.2% of the outstanding shares of our 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 our common stock.
Future issuances of debt securities or preferred units and future issuances of equity securities (including operating
partnership units), may materially and adversely affect the market price of shares of our Class A common stock and traded
OP units.
In the future, we may issue debt or equity securities or make other borrowings. Upon liquidation, holders of our debt
securities, preferred units and other loans and preferred shares will receive a distribution of our available assets before holders
of shares of our common stock. We are not required to offer any such additional debt or equity securities to existing
securityholders on a preemptive basis. Therefore, additional shares of our common stock issuances, directly or through
convertible or exchangeable securities (including operating partnership units), warrants or options, will dilute the holdings of
our existing common securityholders and such issuances or the perception of such issuances may reduce the market price of
shares of our common stock. Our preferred units or shares, if issued, would likely have a preference on distribution payments,
periodically or upon liquidation, which could limit our ability to make distributions to holders of shares of our common stock.
Because our decision to issue debt or equity securities or otherwise incur debt in the future will depend on market conditions
and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future capital raising
efforts. Thus, holders of shares of our common stock bear the risk that our future issuances of debt or equity securities or our
other borrowings will reduce the market price of shares of our Class A common stock and traded OP units and dilute their
ownership in us.
Our balance sheet includes significant amounts of goodwill. The impairment of a significant portion of this goodwill could
negatively affect our business, financial condition and results of operations.
Our balance sheet includes goodwill of approximately $491.5 million at December 31, 2018. These assets consist
primarily of goodwill associated with our acquisition of the controlling interest in Empire State Building Company L.L.C. and
501 Seventh Avenue Associates L.L.C. We also expect to engage in additional acquisitions, which may result in our
recognition of additional goodwill. Under accounting standards goodwill is not amortized. On an annual basis and whenever
events or changes in circumstances indicate the carrying value or goodwill may be impaired, we are required to assess whether
there have been impairments in the carrying value of goodwill. If the carrying value of the asset is determined to be impaired,
then it is written down to fair value by a charge to operating earnings. An impairment of goodwill could have a material
adverse effect on our business, financial condition and results of operations.
Tax Risks Related to Ownership of Our Shares
Our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and
local taxes, which would reduce the amount of cash available for distribution to our securityholders.
We have been organized and we intend to operate in a manner that we believe will enable us to qualify as a REIT for
U.S. federal income tax purposes commencing with our taxable year ended December 31, 2013. We have not requested and do
not intend to request a ruling from the Internal Revenue Service, or the IRS, that we qualify as a REIT. Qualification as a REIT
involves the application of highly technical and complex Code provisions and Treasury Regulations promulgated thereunder for
which there are limited judicial and administrative interpretations. The complexity of these provisions and of applicable
Treasury Regulations is greater in the case of a REIT that, like us, holds its assets through partnerships. To qualify as a REIT,
we must meet, on an ongoing basis, various tests regarding the nature and diversification of our assets and our income, the
ownership of our outstanding shares, and the amount of our distributions. Our ability to satisfy these asset tests depends upon
our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise
determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly
asset requirements also depends upon our ability to manage successfully the composition of our income and assets on an
ongoing basis. Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive
effect, may make it more difficult or impossible for us to qualify as a REIT. Thus, while we intend to operate so that we will
qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual
determinations, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify for
any particular year. These considerations also might restrict the types of assets that we can acquire in the future.
If we fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we
would be required to pay U.S. federal income tax and additional state and local income taxes, including any applicable
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alternative minimum tax, (which, for corporations, was repealed for tax years beginning after December 31, 2017 under the
TCJA (as defined below)), on our taxable income at the generally applicable corporate tax rate, and distributions to our
securityholders would not be deductible by us in determining our taxable income. In such a case, we might need to borrow
money, sell assets, or reduce or even cease making distributions in order to pay our taxes. Our payment of income tax would
reduce significantly the amount of cash available for distribution to our securityholders. Furthermore, if we fail to maintain our
qualification as a REIT, we no longer would be required to distribute substantially all of our net taxable income to our
securityholders. In addition, unless we were eligible for certain statutory relief provisions, we could not re-elect to qualify as a
REIT until the fifth calendar year following the year in which we failed to qualify.
Failure to qualify as a domestically-controlled REIT could subject our non-U.S. securityholders to adverse federal income
tax consequences.
A foreign person (other than a “qualified shareholder” or 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, we will be a domestically controlled REIT if at all times during a specified testing period, less than 50% in
value of our shares is held directly or indirectly by non-U.S. holders. While we intend to continue to qualify as a "domestically
controlled" REIT, we cannot assure that result, as our Class A common stock is publicly traded, QIA (a non-U.S. holder)
acquired in 2016 more than 19% of our common stock and other non-U.S. holders may now or in the future hold additional
shares. If we were to fail to qualify, gain realized by a foreign investor (other than a “qualified shareholder” or a “qualified
foreign pension plan”) on a sale of our common stock would be subject to FIRPTA unless (a) our common stock was traded 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 our outstanding common stock, or (b) another exemption from FIRPTA were
applicable.
Complying with the REIT requirements may cause us to forego and/or liquidate otherwise attractive investments.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually. In addition, we must ensure
that, at the end of each calendar quarter, at least 75% of the value of our total assets consists of cash, cash items, government
securities and qualified REIT real estate assets, including certain mortgage loans and certain kinds of mortgage-backed
securities. The remainder of our investment in securities (other than government securities, securities of corporations that are
treated as Taxable REIT Subsidiaries ("TRSs") and qualified REIT real estate assets) generally cannot include more than 10%
of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any
one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified
real estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total securities can
be represented by securities of one or more TRSs (25% for taxable years beginning prior to January 1, 2018). If we fail to
comply with these asset requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end
of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering
adverse tax consequences.
To meet these tests, we may be required to take or forego taking actions that we would otherwise consider
advantageous. For instance, in order to satisfy the gross income or asset tests applicable to REITs under the Code, we may be
required to forego investments that we otherwise would make. Furthermore, we may be required to liquidate from our portfolio
otherwise attractive investments. In addition, we may be required to make distributions to securityholders at disadvantageous
times or when we do not have funds readily available for distribution. These actions could have the effect of reducing our
income and amounts available for distribution to our securityholders. Thus, compliance with the REIT requirements may
hinder our investment performance.
The REIT distribution requirements could require us to borrow funds during unfavorable market conditions or subject us to
tax, which would reduce the cash available for distribution to our securityholders.
In order to qualify as a REIT, we must distribute to our securityholders, on an annual basis, at least 90% of our REIT
taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, we
will be subject to U.S. federal income tax at the generally applicable corporate tax rate to the extent that we distribute less than
100% of our net taxable income (including net capital gains) and will be subject to a 4% nondeductible excise tax on the
amount by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income
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tax laws. We intend to distribute our net income to our securityholders in a manner intended to satisfy the REIT 90%
distribution requirement and to avoid U.S. federal income tax and the 4% nondeductible excise tax.
In addition, our taxable income may exceed our net income as determined by GAAP because, for example, realized
capital losses will be deducted in determining our GAAP net income, but may not be deductible in computing our taxable
income. In addition, we may incur nondeductible capital expenditures or be required to make debt or amortization payments or
the effect of limitations on interest (subject to an exception for an electing real property trade or business) and net operating
loss deductibility under the TCJA (as defined below) could cause our taxable income to exceed our net income as determined
by GAAP. As a result of the foregoing, we may generate less cash flow than taxable income in a particular year and we may
incur U.S. federal income tax and the 4% nondeductible excise tax on that income if we do not distribute such income to
securityholders in that year. In that event, we may be required to use cash reserves, incur debt or liquidate assets at rates or
times that we regard as unfavorable or make a taxable distribution of our shares in order to satisfy the REIT 90% distribution
requirement and to avoid U.S. federal income tax and the 4% nondeductible excise tax in that year.
If our operating partnership is treated as a corporation for U.S. federal income tax purposes, we will cease to qualify as a REIT.
We believe our operating partnership qualifies as a partnership for U.S. federal income tax purposes. Assuming that it
qualifies as a partnership for U.S. federal income tax purposes, our operating partnership will not be subject to U.S. federal
income tax on its income. Instead, each of its partners, including us, is required to pay tax on its allocable share of the
operating partnership’s income. However, our operating partnership is treated as a “publicly-traded partnership” for U.S.
federal income tax purposes because interests in our operating partnership are traded on an established securities market.
Accordingly, in order for our operating partnership as a publicly-traded partnership to be treated and taxed as a partnership for
U.S. federal income tax purposes, 90% or more of its gross income must consist of certain passive type income such as rent,
interest, dividends, etc. No assurance can be provided, however, that the IRS will not challenge our operating partnership’s
status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If our operating
partnership were to fail to meet the gross income requirement for treating a publicly-traded partnership as a partnership or the
IRS were successful in treating our operating partnership as a corporation for U.S. federal income tax purposes, we would fail
to meet the gross income tests and certain of the asset tests applicable to REITs and, therefore, cease to qualify as a REIT and
our operating partnership would become subject to U.S. federal, state and local income tax. The payment by our operating
partnership of income tax would reduce significantly the amount of cash available to our partnership to satisfy obligations to
make principal and interest payments on its debt and to make distributions to its partners, including us.
If we are not able to continue to lease the Empire State Building observatory to a TRS in a manner consistent with the ruling
that we have received from the IRS, or if we are not able to maintain our broadcast licenses in a manner consistent with the
ruling we have received from the IRS, we would be required to restructure our operations in a manner that could adversely
affect the value of our stock.
Rents from real property are generally not qualifying income for purposes of the REIT gross income tests if the rent is
treated as “related party rent.” Related party rent generally includes (i) any rent paid by a corporation if the REIT (or any
person who owns 10% or more of the stock of the REIT by value) directly or indirectly owns 10% or more of the stock of the
corporation by vote or value and (ii) rent paid by a partnership if the REIT (or any person who owns 10% or more of the stock
of the REIT by value) directly or indirectly owns an interest of 10% or more in the assets or net profits of the partnership.
Under an exception to this rule, related party rent is treated as qualifying income for purposes of the REIT gross income tests if
it is paid by a TRS of the REIT and (i) at least 90% of the leased space in the relevant property is rented to persons other than
either TRSs or other related parties of the REIT, and (ii) the amounts paid to the REIT as rent from real property are
substantially comparable to the rents paid by unrelated tenants of the REIT for comparable space.
Income from admissions to the Empire State Building observatory, and certain other income generated by the
observatory, would not likely be qualifying income for purposes of the REIT gross income tests. We jointly elected with
Observatory TRS, which is the current lessee and operator of the observatory and which is wholly owned by our operating
partnership, for Observatory TRS to be treated as a TRS of ours for U.S. federal income tax purposes. Observatory TRS leases
the Empire State Building observatory from the operating partnership pursuant to a lease that provides for fixed base rental
payments and variable rental payments equal to certain percentages of Observatory TRS’s gross receipts from the operation of
the observatory. Given the unique nature of the real estate comprising the observatory, we do not believe that there is any space
in the Empire State Building or in the same geographic area as the Empire State Building that is likely to be considered
sufficiently comparable to the observatory for the purpose of applying the exception to related party rent described above. We
have received from the IRS a private letter ruling that the rent that our operating partnership receives from Observatory TRS
pursuant to the lease of the Empire State Building observatory is qualifying income for purposes of the REIT gross income tests
32
so long as such rent reflects the fair market rental value of the Empire State Building observatory as determined by an appraisal
rendered by a qualified third party appraiser.
In addition, our operating partnership has acquired various license agreements (i) granting certain third party
broadcasters the right to use space on the tower on the top of the Empire State Building for certain broadcasting and other
communication purposes and (ii) granting certain third party vendors the right to operate concession stands in the observatory.
We have received from the IRS a private letter ruling that the license fees that our operating partnership receives under the
license agreements described above constitute qualifying income for purposes of the REIT gross income tests.
We are entitled to rely upon these private letter rulings only to the extent that we did not misstate or omit a material
fact in the ruling request and that we continue to operate in accordance with the material facts described in such request, and no
assurance can be given that we will always be able to do so. If we were not able to treat the rent that our operating partnership
receives from Observatory TRS as qualifying income for purposes of the REIT gross income tests, we would be required to
restructure the manner in which we operate the observatory, which would likely require us to cede operating control of the
observatory by leasing the observatory to an affiliate or third party operator. If we were not able to treat the license fees that
our operating partnership will receive from the license agreements described above as qualifying income for purposes of the
REIT gross income tests, we would be required to enter into the license agreements described above through a TRS, which
would cause the license fees to be subject to U.S. federal income tax and accordingly reduce the amount of our cash flow
available to be distributed to our securityholders. In either case, if we are not able to appropriately restructure our operations in
a timely manner, we would likely realize significant income that does not qualify for the REIT gross income tests, which could
cause us to fail to qualify as a REIT.
Although our use of TRSs may partially mitigate the impact of meeting certain requirements necessary to maintain our
qualification as a REIT, there are limits on our ability to own TRSs, and a failure to comply with the limits would jeopardize
our REIT qualification and may result in the application of a 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would
not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to
treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or
value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT’s assets may
consist of securities of one or more TRSs. In addition, the TRS rules limit the deductibility of interest paid or accrued by a
TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a
100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.
We have jointly elected with each of Observatory TRS and Holding TRS, for each of Observatory TRS and Holding
TRS to be treated as a TRS under the Code for U.S. federal income tax purposes in 2013. Observatory TRS, Holding TRS, and
any other TRSs that we form pay U.S. federal, state and local income tax on their taxable income, and their after-tax net income
is available for distribution to us but is not required to be distributed to us unless necessary to maintain our REIT qualification.
Although we monitor the aggregate value of the securities of such TRSs and intend to conduct our affairs so that such securities
will represent less than 20% of the value of our total assets, there can be no assurance that we will be able to comply with the
TRS limitation in all market conditions.
Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations, which
could adversely affect the value of our Class A common stock.
The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. securityholders that are
individuals, trusts and estates is currently 20%. Dividends paid to such securityholders by REITs, however, are generally not
eligible for the reduced qualified dividend rates and therefore may be subject to the higher U.S. federal income tax rate on
ordinary income. However, for taxable years beginning after December 31, 2017 and before January 1, 2026, under the
recently enacted TCJA (as defined below), noncorporate taxpayers may deduct up to 20% of certain qualified business income,
for purposes of determining their U.S. federal income tax (but not for purposes of the 3.8% Medicare tax and self-employment
tax), including “qualified REIT dividends” (generally, dividends received by a REIT shareholder that are not designated as
capital gain dividends or qualified dividend income), subject to certain limitations, resulting in an effective maximum U.S.
federal income tax rate of 29.6% on such income. Although the reduced U.S. federal income tax rate applicable to dividend
income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more
favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to
perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay
dividends, which could adversely affect the value of the shares of REITs, including our Class A common stock.
33
The ability of our board of directors to revoke our REIT election without stockholder approval may cause adverse consequences
to our securityholders.
Our charter provides that the board of directors may revoke or otherwise terminate our REIT election, without the
approval of our securityholders, if the board determines that it is no longer in our best interest to continue to qualify as a REIT.
If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our net taxable income and we
generally would no longer be required to distribute any of our net taxable income to our securityholders, which may have
adverse consequences on our total return to our securityholders.
We may have inherited tax liabilities from the entities that have been merged into our company or our subsidiaries in the
formation transactions.
Pursuant to the formation transactions, Malkin Properties of Connecticut, Inc., a Connecticut corporation, or Malkin
Properties CT, and Malkin Construction Corp., a Connecticut corporation, or Malkin Construction merged with and into a
subsidiary of ours, with the subsidiary surviving, in a transaction that was intended to be treated as a reorganization under the
Code. Each of Malkin Properties CT and Malkin Construction had previously elected to be treated as an S Corporation for U.S.
federal income tax purposes under Section 1361 of the Code with respect to periods preceding our formation transactions. If
either of Malkin Properties CT or Malkin Construction had failed to qualify as an S corporation with respect to periods
preceding our formation transactions, we could have assumed material U.S. federal income tax liabilities in connection with the
formation transactions and/or may be subject to certain other adverse tax consequences. In addition, to qualify as a REIT under
these circumstances, we would be required to distribute, prior to the close of our first taxable year in which we elect to be taxed
as a REIT under the Code, any earnings and profits of these entities to which we were deemed to succeed. No rulings from the
IRS were requested and no opinions of counsel were rendered regarding the U.S. federal income tax treatment of any of Malkin
Properties CT or Malkin Construction with respect to periods preceding our formation transactions. Accordingly, no assurance
can be given that Malkin Properties CT or Malkin Construction qualified as an S corporation for U.S. federal income tax
purposes during such periods, or that these entities did not have any other tax liabilities. In addition, the supervisor merged
with a subsidiary of our operating partnership in the formation transactions, and as a result, we may have inherited any
liabilities, including any tax liabilities, of the supervisor.
Prospective investors are urged to consult with their tax advisors regarding the effects of recently enacted tax legislation and
other legislative, regulatory and administrative developments.
On December 22, 2017, President Trump signed into law H.R. 1, informally titled the Tax Cuts and Jobs Act (the
“TCJA”). The TCJA makes major changes to the Code, including a number of provisions of the Code that affect the taxation of
REITs and their shareholders. Among the changes made by the TCJA are permanently reducing the generally applicable
corporate tax rate, generally reducing the tax rate applicable to individuals and other noncorporate taxpayers for tax years
beginning after December 31, 2017 and before January 1, 2026, eliminating or modifying certain previously allowed
deductions (including substantially limiting interest deductibility and, for individuals, the deduction for non-business state and
local taxes), and, for taxable years beginning after December 31, 2017 and before January 1, 2026, providing for preferential
rates of taxation through a deduction of up to 20% (subject to certain limitations) on most ordinary REIT dividends, allocations
of income from certain publicly-traded partnerships and certain trade or business income of non-corporate taxpayers for
purposes of determining their U.S. federal income tax (but not for purposes of the 3.8% Medicare tax and self-employment
tax). The TCJA also imposes new limitations on the deduction of net operating losses, which may result in our having to make
additional taxable distributions to our shareholders in order to comply with REIT distribution requirements or to avoid taxes on
retained income and gains. The effect of the significant changes made by the TCJA remains uncertain, and administrative
guidance, which has and will continue to be issued on an ongoing basis, is required in order to fully evaluate the effect of many
provisions. The effect of any technical corrections with respect to the TCJA could have an adverse effect on us or our
shareholders and the long-term impact of the TCJA on the overall economy, government revenues, our tenants, us and the real
estate industry cannot be reliably predicted at this stage of the law’s implementation. Furthermore, the TCJA may negatively
impact certain of our tenants’ operating results, financial condition and future business plans. There can be no assurance that the
TCJA will not negatively impact our operating results, financial condition and future business operations. Investors should
consult their tax advisors regarding the implications of the TCJA on their investment in our common stock and debt securities.
Legislative or regulatory tax changes related to REITs and other business entities could materially and adversely affect our
business.
At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations of
those laws or regulations may be changed, possibly with retroactive effect. We cannot predict if or when any new U.S. federal
34
income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law,
regulation or administrative interpretation, will be adopted, promulgated or become effective or whether any such law,
regulation or interpretation may take effect retroactively or subject our operating partnership to the revised partnership audit
rules as described above. We and our securityholders could be adversely affected by any such change in, or any new, U.S.
federal income tax law, regulation or administrative interpretation.
Your investment has various tax risks.
Although this section describes certain tax risks relevant to an investment in shares of our Class A common stock, you
should consult your tax advisor concerning the effects of U.S. federal, state, local and foreign tax laws to you with regard to an
investment in shares of our Class A common stock.
If a transaction intended to qualify as a Section 1031 Exchange is later determined to be taxable, we may face adverse
consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of
properties on a tax deferred basis.
From time to time we may dispose of properties in transactions that are intended to qualify as Section 1031
Exchanges. It is possible that the qualification of a transaction as a Section 1031 Exchange could be successfully challenged
and determined to be currently taxable. In such case, our taxable income and earnings and profits would increase. This could
increase the dividend income to our stockholders by reducing any return of capital they received. In some circumstances, we
may be required to pay additional dividends or, in lieu of that, corporate income tax, possibly including interest and penalties.
As a result, we may be required to borrow funds in order to pay additional dividends or taxes, and the payment of such taxes
could cause us to have less cash available to distribute to our stockholders. In addition, if a Section 1031 Exchange were later
to be determined to be taxable, we may be required to amend our tax returns for the applicable year in question, including any
information reports we sent our stockholders. Moreover, it is possible that legislation could be enacted that could modify or
repeal the laws with respect to Section 1031 Exchanges, which could make it more difficult or impossible for us to dispose of
properties on a tax deferred basis.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As of December 31, 2018, we did not have any unresolved comments with the staff of the SEC.
35
ITEM 2. PROPERTIES
Our Portfolio Summary
As of December 31, 2018, our portfolio consisted of 14 office properties and six standalone retail properties totaling
approximately 10.1 million rentable square feet and was approximately 88.8% occupied, yielding approximately $535.5
million of annualized rent. Giving effect to leases signed but not yet commenced, our portfolio was approximately 91.8%
leased as of December 31, 2018. In addition, we owned entitled land that will support the development of an approximately
380,000 rentable square foot office building and garage ("Metro Tower") at the Stamford Transportation Center in Stamford,
Connecticut, adjacent to one of our office properties. The table below presents an overview of our portfolio as of
December 31, 2018.
Property Name
Location or Sub-Market
Manhattan Office Properties - Office
Rentable
Square
Feet (1)
Percent
Occupied (2)
Annualized
Rent (3)
Annualized
Rent per
Occupied
Square Foot
(4)
Number of
Leases (5)
The Empire State Building (6)
Penn Station -Times Sq. South
2,711,148
94.3 % $
150,529,864
$
58.88
One Grand Central Place
Grand Central
1,247,366
87.5 %
62,462,156
1400 Broadway (7)
111 West 33rd Street (8)
Penn Station -Times Sq. South
914,162
80.5 %
36,996,042
Penn Station -Times Sq. South
639,237
78.0 %
28,556,500
250 West 57th Street
Columbus Circle - West Side
468,525
80.3 %
22,355,109
501 Seventh Avenue
Penn Station -Times Sq. South
460,150
95.7 %
19,825,295
1359 Broadway
Penn Station -Times Sq. South
455,824
97.4 %
23,706,788
1350 Broadway (9)
Penn Station -Times Sq. South
373,205
84.1 %
18,005,509
1333 Broadway
Penn Station -Times Sq. South
292,835
89.4 %
13,732,665
Manhattan Office Properties - Office
7,562,452
88.8%
376,169,928
Manhattan Office Properties - Retail
The Empire State Building (10)
Penn Station -Times Sq. South
104,558
69.8 %
13,364,098
One Grand Central Place
Grand Central
68,732
79.0 %
6,402,538
1400 Broadway (7)
112 West 34th Street (8)
Penn Station -Times Sq. South
20,418
77.4 %
2,020,613
Penn Station -Times Sq. South
90,132
100.0 %
22,596,784
250 West 57th Street
Columbus Circle - West Side
67,927
100.0 %
9,974,747
501 Seventh Avenue
Penn Station -Times Sq. South
35,558
88.3 %
2,016,286
1359 Broadway
1350 Broadway
1333 Broadway
Penn Station -Times Sq. South
27,506
100.0 %
2,263,576
Penn Station -Times Sq. South
31,774
100.0 %
6,799,221
Penn Station -Times Sq. South
67,001
100.0 %
9,006,000
Manhattan Office Properties - Retail
513,606
89.3%
74,443,863
Sub-Total/Weighted Average Manhattan Office Properties - Office
and Retail
8,076,058
88.9%
450,613,791
57.20
50.29
57.30
59.41
45.00
53.40
57.36
52.48
55.99
183.13
117.91
127.78
250.71
146.85
64.20
82.29
213.99
134.42
162.24
62.78
174
210
29
19
54
29
35
60
10
620
14
13
8
4
8
9
6
6
4
72
692
36
Greater New York Metropolitan Area Office Properties
First Stamford Place (11)
Metro Center
383 Main Street
Stamford, CT
Stamford, CT
Norwalk, CT
783,729
88.6 %
30,139,103
281,928
82.5 %
13,576,111
260,657
82.9 %
7,181,693
500 Mamaroneck Avenue
Harrison, NY
288,202
86.5 %
7,217,593
10 Bank Street
White Plains, NY
232,517
96.9 %
7,974,296
Sub-Total/Weighted Average Greater New York Metropolitan
Office Properties
1,847,033
87.6%
66,088,796
43.41
58.36
33.25
28.96
35.38
40.86
48
25
21
31
34
159
Standalone Retail Properties
10 Union Square
Union Square
58,007
100.0 %
7,019,176
121.01
13
1542 Third Avenue
Upper East Side
56,250
100.0 %
3,895,512
1010 Third Avenue
Upper East Side
44,662
100.0 %
3,745,234
77 West 55th Street
Midtown
25,388
100.0 %
2,694,194
69-97 Main Street
103-107 Main Street
Westport, CT
Westport, CT
17,111
32.4 %
708,876
4,330
100.0 %
722,355
Sub-Total/Weighted Average Standalone Retail Properties
205,748
94.4%
18,785,347
69.25
83.86
106.12
127.93
166.83
96.74
Portfolio Total
10,128,839
88.8% $
535,487,934
$
59.57
Total/Weighted Average Office Properties
9,409,485
88.6% $
442,258,724
$
53.05
Total/Weighted Average Retail Properties (12)
719,354
90.8%
93,229,210
142.77
Portfolio Total
10,128,839
88.8% $
535,487,934
$
59.57
4
2
3
2
1
25
876
779
97
876
(1) Excludes (i) 179,350 square feet of space across our portfolio attributable to building management use and tenant amenities and (ii) 69,789 square
feet of space attributable to our observatory.
(2) Based on leases signed and commenced as of December 31, 2018 and calculated as (i) rentable square feet less available square feet divided by (ii)
rentable square feet.
(3) Represents annualized base rent and current reimbursement for operating expenses and real estate taxes.
(4) Represents annualized rent under leases commenced as of December 31, 2018 divided by occupied square feet.
(5) Represents the number of leases at each property or on a portfolio basis. If a tenant has more than one lease, whether or not at the same property, but
with different expirations, the number of leases is calculated equal to the number of leases with different expirations.
(6) Includes 42,546 rentable square feet of space leased by our broadcasting tenants.
(7) Denotes a ground leasehold interest in the property with a remaining term, including unilateral extension rights available to the Company, of
approximately 45 years (expiring December 31, 2063).
(8) Denotes a ground leasehold interest in the property with a remaining term, including unilateral extension rights available to the Company, of
approximately 59 years (expiring May 31, 2077).
(9) Denotes a ground leasehold interest in the property with a remaining term, including unilateral extension rights available to us, of approximately 32
years (expiring July 31, 2050).
(10) Includes 5,300 rentable square feet of space leased by WDFG North America, a licensee of our observatory.
(11) First Stamford Place consists of three buildings.
(12) Includes 513,606 rentable square feet of retail space in our Manhattan office properties.
37
Tenant Diversification
As of December 31, 2018, our office and retail portfolios were leased to a diverse tenant base consisting of
approximately 876 leases. Our tenants represent a broad array of industries as follows:
Diversification by Industry
Arts and entertainment
Broadcast
Consumer goods
Finance, insurance, real estate
Government entity
Healthcare
Legal services
Media and advertising
Non-profit
Professional services (not including legal services)
Retail
Technology
Others
Total
(1) Based on annualized rent.
Percent (1)
2.1%
1.3%
21.8%
16.1%
1.8%
1.7%
3.7%
3.9%
4.4%
10.8%
17.1%
9.5%
5.8%
100.0%
The following table sets forth information regarding the 20 largest tenants in our portfolio based on annualized rent as
of December 31, 2018.
Tenant
Property
Weighted
Average
Remaining
Lease
Term (2)
Total
Occupied
Square
Feet (3)
Percent of
Portfolio
Rentable
Square
Feet (4)
Lease
Expiration (1)
Global Brands Group
ESB, 1333 Broadway
Oct 2023-Oct. 2028
9.3 years
LinkedIn
Coty Inc.
PVH Corp.
Sephora
Li & Fung
Empire State Building
Empire State Building
501 Seventh Avenue
112 West 34th Street
1359 Broadway
Feb. 2026
Jan. 2030
7.2 years
11.1 years
Dec. 2018-Oct. 2028
9.3 years
Jan. 2029
10.1 years
Oct. 2021-Oct. 2027
5.3 years
668,942
312,947
312,954
237,281
11,334
149,436
Urban Outfitters
1333 Broadway
Sept. 2029
10.8 years
56,730
Federal Deposit Insurance
Corp.
Macy's
Empire State Building
111 West 33rd Street
HNTB Corporation
Empire State Building
Jan. 2020
May 2030
Feb. 2029
1.1 years
11.4 years
10.2 years
Duane Reade/Walgreen's
ESB, 1350 B'Way, 250 West 57th
Feb. 2021-Sept. 2027
5.9 years
Foot Locker
Legg Mason
112 West 34th Street
First Stamford Place
WDFG North America
Empire State Building
Shutterstock
Empire State Building
The Michael J. Fox Foundation 111West 33rd Street
250 West 57th Street
1400 Broadway
ASCAP
Kohl's
The Gap, Inc.
On Deck Capital
Total
Sept. 2031
Sept. 2024
Dec. 2025
Apr. 2029
Nov. 2029
Aug. 2034
May 2029
111West 33rd Street, OGCP
Dec. 2018-Jan. 2030
1400 Broadway
Dec. 2018-Jan. 2026
121,879
131,117
105,143
47,541
34,192
12.8 years
5.8 years
137,583
7.0 years
10.3 years
10.9 years
15.8 years
10.4 years
5.3 years
8.0 years
5,300
104,386
86,492
87,943
118,516
83,408
81,290
Percent of
Portfolio
Annualized
Rent (6)
6.7%
3.4%
3.2%
2.1%
2.0%
1.4%
1.3%
1.3%
1.3%
1.2%
1.2%
1.2%
1.2%
1.1%
1.0%
1.0%
1.0%
1.0%
0.9%
0.8%
Annualized
Rent (5)
$
36,047,748
18,349,123
16,954,249
11,275,477
10,457,709
7,471,631
7,103,124
7,042,014
6,947,109
6,661,814
6,343,147
6,258,212
6,246,888
5,693,074
5,527,630
5,330,672
5,250,464
5,216,894
4,770,844
4,503,015
6.4%
3.0%
3.0%
2.3%
0.1%
1.4%
0.5%
1.2%
1.3%
1.0%
0.5%
0.3%
1.3%
0.1%
1.0%
0.8%
0.8%
1.1%
0.8%
0.8%
(1) Expiration dates are per lease and do not assume exercise of renewal or extension options. For tenants with more than two leases, the lease expiration
is shown as a range.
(2) Represents the weighted average lease term, based on annualized rent.
(3) Based on leases signed and commenced as of December 31, 2018.
38
2,894,414
27.7%
$ 183,450,838
34.3%
(4) Represents the percentage of rentable square feet of our office and retail portfolios in the aggregate.
(5) Represents annualized base rent and current reimbursement for operating expenses and real estate taxes.
(6) Represents the percentage of annualized rent of our office and retail portfolios in the aggregate.
Lease Expirations
We expect to benefit from the re-leasing of 6.1%, or approximately 464,792 rentable square feet, of our Manhattan
office leases expiring during 2019, which we generally believe are currently at below-market rates. During 2016, 2017 and
2018, we generally obtained higher base rents on new and renewed leases at our Manhattan office properties. These
increased rents are partly due to an increase in the total rentable square footage of such space as a result of remeasurement
and application of market loss factors to our space.
The following table sets forth new and renewal leases entered into at our Manhattan office properties (excluding the
retail component of these properties), the weighted average annualized cash rent per square foot of new and renewal leases
executed during the year, the previous weighted average annualized cash rent prior to the renewal or re-leasing of these
leases and the percent increase in mark-to market rent.
New and renewal leases entered into during the year (square feet)
Average cash rent per square foot for new and renewal leases executed during the year
Average cash rent per square foot for previous leases
Year Ended December 31,
2017
865,251
2018
837,487
2016
724,417
$
$
61.39
49.29
$
$
59.26
43.70
$
$
58.83
41.36
Increase in mark-to-market rent
24.5%
35.6%
42.2%
The following tables set forth a summary schedule of the lease expirations for leases in place as of December 31, 2018
plus available space for each of the ten calendar years beginning with the year ending December 31, 2018 at the properties
in our portfolio. The information set forth in the table assumes that tenants exercise no renewal options and all early
termination rights.
All properties
Year of Lease Expiration
Available
Signed leases not commenced
Fourth quarter 2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
Thereafter
Total
Number
of Leases
Expiring (1)
Rentable
Square
Feet
Expiring (2)
Percent of
Portfolio
Rentable
Square Feet
Expiring
Percent of
Annualized Annualized
Rent (3)
Rent
Annualized
Rent Per
Rentable
Square Foot
—
22
17
140
136
106
96
86
62
56
42
45
28
62
831,830
307,407
114,473
725,758
841,127
698,038
540,111
688,230
608,298
380,877
951,180
579,433
977,740
8.2% $
3.0%
1.1%
7.2%
8.3%
6.9%
5.3%
6.8%
6.0%
3.8%
9.4%
5.7%
9.7%
—
—
6,041,172
38,192,092
46,705,137
40,003,243
34,473,377
41,363,802
34,863,683
28,328,373
52,892,285
33,227,941
52,696,279
—% $
—%
1.1%
7.1%
8.7%
7.5%
6.4%
7.7%
6.5%
5.3%
9.9%
6.2%
9.8%
1,884,337
18.6% 126,700,550
23.8%
898
10,128,839
100.0% $535,487,934
100.0% $
—
—
52.77
52.62
55.53
57.31
63.83
60.10
57.31
74.38
55.61
57.35
53.90
67.24
59.57
39
Manhattan Office Properties (4)
Year of Lease Expiration
Available
Signed leases not commenced
Fourth quarter 2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
Thereafter
Total
Number
of Leases
Expiring (1)
Rentable
Square
Feet
Expiring (2)
Percent of
Portfolio
Rentable
Square Feet
Expiring
Annualized
Rent (3)
Percent of
Annualized
Rent
Annualized
Rent Per
Rentable
Square Foot
—
17
15
105
104
67
71
62
41
36
29
31
18
41
549,316
294,114
111,238
464,792
588,087
457,024
363,454
507,038
377,044
241,506
815,416
427,431
908,488
7.3% $
3.9%
1.5%
6.1%
7.8%
6.0%
4.8%
6.7%
5.0%
3.2%
—
—
5,826,063
25,249,960
32,944,552
25,385,479
21,091,665
28,776,689
20,320,919
14,120,004
10.8%
46,344,237
5.7%
23,440,994
12.0%
49,295,900
1,457,504
19.2%
83,373,466
—% $
—%
1.5%
6.7%
8.8%
6.7%
5.6%
7.6%
5.4%
3.8%
12.3%
6.2%
13.1%
22.3%
637
7,562,452
100.0% $ 376,169,928
100.0% $
—
—
52.37
54.33
56.02
55.55
58.03
56.75
53.90
58.47
56.84
54.84
54.26
57.20
55.99
Greater New York Metropolitan Area Office Properties
Year of Lease Expiration
Available
Signed leases not commenced
Fourth quarter 2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
Thereafter
Total
Rentable
Square
Percent of
Portfolio
Rentable
Feet
Expiring (2)
Square Feet
Expiring
Annualized
Rent (3)
Number
of Leases
Expiring (1)
Percent of
Annualized
Annualized
Rent Per
Rentable
Rent
Square Foot
220,095
11.9% $
—
4
1
29
24
31
15
14
10
12
5
6
6
6
9,373
2,772
234,759
224,778
210,934
116,525
126,488
203,298
102,046
65,413
64,229
64,515
—
—
133,135
8,990,325
10,172,305
9,586,651
4,398,892
5,752,523
0.5%
0.2%
12.7%
12.2%
11.4%
6.3%
6.8%
11.0%
8,901,687
5.5%
3.5%
3.5%
3.5%
3,275,709
2,058,298
2,340,864
2,277,599
—% $
—%
0.2%
13.6%
15.4%
14.5%
6.7%
8.7%
13.5%
5.0%
3.1%
3.5%
3.4%
—
—
48.03
38.30
45.25
45.45
37.75
45.48
43.79
32.10
31.47
36.45
35.30
40.64
40.86
201,808
11.0%
8,200,808
12.4%
163
1,847,033
100.0% $ 66,088,796
100.0% $
40
Retail (5)
Year of Lease Expiration
Available
Signed leases not commenced
Fourth quarter 2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
Thereafter
Total
The Empire State Building (6)
Year of Lease Expiration
Available
Signed leases not commenced
Fourth quarter 2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
Thereafter
Total
Rentable
Square
Percent of
Portfolio
Rentable
Feet
Expiring (2)
Square Feet
Expiring
Annualized
Rent (3)
Number
of Leases
Expiring (1)
Percent of
Annualized
Annualized
Rent Per
Rentable
Rent
Square Foot
—
—
1
6
8
8
10
10
11
8
8
8
4
15
97
62,419
3,920
463
26,207
28,262
30,080
60,132
54,704
27,956
37,325
70,351
87,773
4,737
225,025
719,354
—
—
81,974
3,951,807
3,588,280
5,031,113
8,982,820
6,834,590
5,641,077
—% $
—%
0.1%
4.2%
3.8%
5.4%
9.6%
7.3%
6.1%
10,932,660
11.7%
8.7% $
0.5%
0.1%
3.6%
3.9%
4.2%
8.4%
7.6%
3.9%
5.2%
9.8%
4,489,750
12.2%
7,446,083
0.6%
1,122,780
4.8%
8.0%
1.2%
31.3%
35,126,276
37.8%
—
—
177.05
150.79
126.96
167.26
149.39
124.94
201.78
292.90
63.82
84.83
237.02
156.10
100.0% $ 93,229,210
100.0% $
142.77
Rentable
Square
Percent of
Portfolio
Rentable
Feet
Expiring (2)
Square Feet
Expiring
Annualized
Rent (3) (7)
Number
of Leases
Expiring (1)
Percent of
Annualized
Annualized
Rent Per
Rentable
Rent
Square Foot
135,233
5.0% $
—
—
152,250
3,166,194
—% $
—%
0.1%
2.1%
0.7%
0.2%
2.1%
10.9%
17,466,435
11.6%
4.9%
3.5%
3.8%
3.3%
2.5%
7,736,154
6,066,615
6,505,861
5,715,884
3,838,791
16.0%
25,754,154
0.8%
1,398,330
20.1%
30,784,175
26.2%
41,945,021
5.1%
4.0%
4.3%
3.8%
2.6%
17.1%
0.9%
20.5%
27.9%
2,711,148
100.0% $ 150,529,864
100.0% $
—
—
29.34
54.90
59.37
58.66
63.71
62.82
64.84
56.16
59.54
61.83
56.41
58.95
58.88
19,313
5,190
57,671
294,217
131,888
95,218
103,564
88,151
68,349
432,549
22,615
545,713
711,477
—
4
1
15
34
21
21
19
13
8
10
6
4
22
178
41
The Empire State Building Broadcasting Licenses and Leases
Year of Lease Expiration
Fourth quarter 2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
Thereafter
Total
Annualized
Base Rent (8)
Annualized
Expense
Reimbursements
Annualized
Rent (3)
Percent of
Annualized
Rent
$
487,150
$
121,034
$
212,240
828,209
55,685
1,124,545
82,480
47,271
1,496,090
799,969
768,750
253,050
44,297
146,340
105,905
297,964
25,301
57,223
208,282
91,984
67,825
27,637
608,184
256,537
974,549
161,590
1,422,509
107,781
104,494
1,704,372
891,953
836,575
280,687
6,313,154
938,246
7,251,400
$
12,468,593
$
2,132,038
$
14,600,631
4.2%
1.8%
6.7%
1.1%
9.7%
0.7%
0.7%
11.7%
6.1%
5.7%
1.9%
49.7%
100.0%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
If a lease has two different expiration dates, it is considered to be two leases (for the purposes of lease count and square footage).
Excludes (i) 179,350 rentable square feet across our portfolio attributable to building management use and tenant amenities and (ii) 69,789 square
feet of space attributable to our observatory.
Represents annualized base rent and current reimbursement for operating expenses and real estate taxes.
Excludes (i) retail space in our Manhattan office properties and (ii) the Empire State Building broadcasting licenses and observatory operations.
Includes an aggregate of 513,606 rentable square feet of retail space in our Manhattan office properties. Excludes the Empire State Building
broadcasting licenses and observatory operations.
Excludes retail space, broadcasting licenses and observatory operations.
Includes approximately $6.4 million of annualized rent related to physical space occupied by broadcasting tenants for their broadcasting operations.
Does not include license fees charges to broadcast tenants.
Represents license fees for the use of the Empire State Building mast and base rent for the physical space occupied by broadcasting tenants.
Undeveloped Properties
We own entitled land that will support the development of Metro Tower, a 17-story, multi-tenanted commercial office
building that is expected to comprise approximately 380,000 rentable square feet on 13 floors of office space. The site is
directly adjacent to Metro Center, one of our office properties, and the Stamford Transportation Center. All required zoning
approvals have been obtained to allow for development of Metro Tower. We intend to develop Metro Tower when we deem the
appropriate combination of local market and other conditions are in place.
Redevelopment and Repositioning
From 2002 through 2006, we gradually gained full control of the day-to-day management of our Manhattan office
properties (with the estate of Leona M. Helmsley previously holding certain approval rights at some of these properties as a
result of its interest in the entities owning the properties). Since then, we have been undertaking a comprehensive
redevelopment and repositioning strategy of our Manhattan office properties that has included the physical improvement
through upgrades and modernization of, and tenant upgrades in, such properties. Since we assumed full control of the day-to-
day management of our Manhattan office properties beginning with One Grand Central Place in 2002, and through
December 31, 2018, we have invested a total of approximately $865.7 million (excluding tenant improvement costs and leasing
commissions) in our Manhattan office properties pursuant to this program. We intend to fund capital improvements through a
combination of operating cash flow, cash on hand, short term investments and borrowings.
These improvements, within our redevelopment and repositioning program, include restored, renovated and upgraded
or new lobbies; elevator modernization; renovated public areas and bathrooms; refurbished or new windows; upgrade and
standardization of retail storefront and signage; façade restorations; modernization of building-wide systems; and enhanced
tenant amenities. These improvements are designed to improve the overall value and attractiveness of our properties and have
contributed significantly to our tenant repositioning efforts, which seek to increase our occupancy; raise our rental rates;
increase our rentable square feet; increase our aggregate rental revenue; lengthen our average lease term; increase our average
42
lease size; and improve our tenant credit quality. We have also aggregated smaller spaces in order to offer larger blocks of
office space, including multiple floors, that are attractive to larger, higher credit-quality tenants and to offer new, pre-built
suites with improved layouts. This strategy has shown what we believe to be attractive results to date, and we believe has the
potential to improve our operating margins and cash flows in the future. We believe we will continue to enhance our tenant
base and improve rents as our pre-redevelopment leases continue to expire and be re-leased.
During the second quarter of 2017, we commenced a multi-year capital project at the Empire State Building which we
believe will improve convenience for office tenants and their visitors, increase the value of our 34th Street facing retail space,
enhance the Observatory visitor experience, and increase Observatory revenue per capita.
In the first phase of the project, which we completed in August 2018, we relocated the present Observatory entrance,
previously located on Fifth Avenue, to a new, larger, dedicated entrance for Observatory visitors at the western side of the
Empire State Building on 34th Street. The new entrance eliminates Observatory visitor flow into the Fifth Avenue lobby and
streamlines such visitor exit from that lobby, thereby reducing Observatory traffic in such lobby by more than 50% and
improving Fifth Avenue access for our office tenants and their visitors. We believe the resulting new traffic pattern will
increase the value of all of our 34th Street facing retail space and enhance office and Observatory convenience.
We anticipate that we will invest approximately $163 million in total over three years to complete all phases of this
project. Expenditures, which began during the second quarter 2017, were $91.3 million through December 31, 2018. This
investment is an outcome of continually looking at ways to innovate and enhance the office and retail tenant and visitor
experience at the Empire State Building.
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 through 2020 on these
well-maintained and well-located properties’ common areas and amenities to ensure competitiveness and protect our market
position. Expenditures, which began during the second quarter 2018, were $14.1 million through December 31, 2018.
ITEM 3. LEGAL PROCEEDINGS
Please see Note 8 “Commitments and Contingencies” to the financial statements of this Annual Report in Form 10-K
for a description of such legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
43
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Class A common stock is listed on the New York Stock Exchange (the "NYSE"), under the symbol "ESRT." Our
Class B common stock is not listed on any exchange and is not traded. Each share of Class B common stock may be converted
to one share of Class A common stock at any time.
Our operating partnership has four series of partnership units ("OP Units") - Series PR OP Units, Series ES OP Units,
Series 60 OP Units and Series 250 OP Units. The Series ES OP Units, Series 60 OP Units and Series 250 OP Units (together
the "traded OP units") are listed on the NYSE Arca, Inc. exchange ("NYSE Arca") under the symbols "ESBA," "OGCP," and
"FISK," respectively. The Series PR OP Units are not listed on any exchange and are not traded.
On February 22, 2019, the last sales price for our Class A common stock on the NYSE was $15.59 per share.
Holders
As of February 22, 2019, we had 559 registered holders of our Class A common stock and 661 registered holders of
our Class B common stock. As of February 22, 2019, our operating partnership had 748 registered holders of Series PR OP
Units, 1,706 registered holders of Series ES OP Units, 547 registered holders of Series 60 OP Units and 376 registered holders
of Series 250 OP Units. Such information was obtained through our registrar and transfer agent. Certain shares of common
stock and OP Units are held in "street" name and accordingly, the number of beneficial owners of such shares of common stock
and OP Units is not known or included in the foregoing number.
Dividends
We intend to pay regular quarterly dividends to holders of our Class A common stock and Class B common stock.
Any distributions we pay in the future will depend upon our actual results of operations, economic conditions and other factors
that could differ materially from our current expectations. Our actual results of operations will be affected by a number of
factors, including the revenue we receive from our properties, our operating expenses, interest expense, the ability of our
tenants to meet their obligations and unanticipated expenditures.
Distributions declared by us will be authorized by our board of directors in its sole discretion out of funds legally
available therefore and will be dependent upon a number of factors, including restrictions under applicable law, our capital
requirements and the distribution requirements necessary to maintain our qualification as a REIT. See Item 1A, "Risk Factors,"
and Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations," of this Annual Report
on Form 10-K, for information regarding the sources of funds used for dividends and for a discussion of factors, if any, which
may adversely affect our ability to make distributions to our securityholders.
Earnings and profits, which determine the tax treatment of distributions to securityholders, will differ from income
reported for financial reporting purposes due to the differences for federal income tax purposes, including, but not limited to,
treatment of loss on extinguishment of debt, revenue recognition, compensation expense, and basis of depreciable assets and
estimated useful lives used to compute depreciation. The 2018 dividends of $0.42 per share are classified for income tax
purposes 83.8% as taxable ordinary dividends eligible for the Section 199A deduction and 16.2% as a return of capital.
Stockholder Return Performance
The following graph is a comparison of the cumulative total stockholder return on our Class A common stock, the
Standard & Poor's 500 Index (the "S&P 500 Index"), the FTSE NAREIT All Equity Index (the "FTSE NAREIT All Equity
Index") and the FTSE NAREIT Equity REIT Office Index ("FTSE NAREIT Equity REIT Office Index"). The graph assumes
that $100.00 was invested on October 7, 2013 and dividends were reinvested without the payment of any commissions. There
can be no assurance that the performance of our Class A common stock will continue in line with the same or similar trends
depicted in the graph below.
44
October 7,
2013
December 31,
2013
December 31,
2014
December 31,
2015
December 31,
2016
December 31,
2017
December 31,
2018
Empire State Realty Trust, Inc.
S&P 500 Index
FTSE NAREIT All Equity Index
FTSE NAREIT Equity REIT
Office Index
$
$
$
$
100.00
100.00
100.00
100.00
$
$
$
$
115.77
110.84
99.83
100.71
$
$
$
$
135.85
126.01
127.81
126.75
$
$
$
$
142.39
127.75
131.42
127.11
$
$
$
$
162.43
143.03
141.39
141.60
$
$
$
$
167.69
174.26
155.15
151.40
$
$
$
$
119.82
166.62
139.90
129.45
The graph is not deemed incorporated by reference by any general statement of incorporation by reference in any
filing made under the Securities Act of 1933, as amended (the "Securities Act"), or the Securities Exchange Act of 1934, as
amended (the "Exchange Act" and, together with the Securities Act, the "Acts"), and is not otherwise deemed filed under such
Acts.
Securities Authorized For Issuance Under Equity Compensation Plans
During 2013, we adopted the Empire State Realty Trust, Inc. Empire State Realty OP, L.P. 2013 Equity Incentive Plan,
as amended and restated as of April 4, 2016 (the "Plan"). The Plan provides for grants of stock options, shares of restricted
Class A common stock, dividend equivalent rights and other equity-based awards, including LTIP Units, up to an aggregate of
12.2 million shares of our common stock. For a further discussion of the Plan, see Note 9 to the consolidated financial
statements included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
The following table presents certain information about our equity compensation plans as of December 31, 2018:
45
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
Weighted-average
exercise price of
outstanding
options, warrants
and rights
Number of
securities
remaining available
for future issuance
under equity
compensation plans
(excluding
securities reflected
in the first column
of this table)
N/A
N/A
—
N/A
N/A
—
4,323,054
—
4,323,054
Plan Category
Equity compensation plans approved by
securityholders
Equity compensation plans not approved by
securityholders
Total
As of December 31, 2018, we issued 282,631 shares of restricted stock and 7,614,830 LTIP units under the Plan.
Recent Sales of Unregistered Securities Use of Proceeds from Registered Securities; Repurchases
During the second quarter of 2018, pursuant to an August 2016 Stockholders Agreement between ESRT and QIA (the
“Stockholders Agreement”), ESRT sold 284,015 shares of ESRT Class A common stock (the “Top Up Shares”) to QIA pursuant
to its “top-up” right to acquire its 9.9% pro rata share of new equity securities issued during the first quarter of 2018 (in this
case, equity compensation). The aggregate purchase price which QIA paid to ESRT for the Top Up Shares was $4.7 million, or
$16.72 per share of ESRT Class A common stock, in accordance with a formula in the Stockholders Agreement equal to the
average closing price per share during the five (5) consecutive trading days immediately preceding the issuance of the
applicable new equity securities.
46
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth our selected financial data and should be read in conjunction with our Financial
Statements and notes thereto included in Item 8, "Financial Statements and Supplementary Data" and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K.
(amounts in thousands, except per share data)
2018
2017
2016
2015
2014
Year Ended December 31,
Operating Data
Total revenues
Operating expenses:
Property operating expenses
Ground rent expenses
General and administrative expenses
Observatory expenses
Construction expenses
Real estate taxes
Acquisition expenses
Depreciation and amortization
Total operating expenses
Operating income (loss)
Other income (expense):
Interest income
Interest expense
Loss on early extinguishment of debt
Loss from derivative financial instruments
Income before income taxes
Income tax expense
Net income
Private perpetual preferred unit distributions
Net income attributable to non-controlling interests
Net income attributable to common stockholders
Dividends and distributions declared and paid per share
$
$
Net income per share attributable to common stockholders - basic $
Net income per share attributable to common stockholders -
diluted
$
Total weighted average shares - basic
Total weighted average shares - diluted
Balance Sheet Data
Commercial real estate properties, at cost
Total assets
Debt
Equity
Other Data
Funds from operations attributable to common stockholders and
non-controlling interests (1)
Modified funds from operations attributable to common
stockholders and non-controlling interests (2)
Core funds from operations attributable to common stockholders
and non-controlling interests (3)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
$
731,511
$
709,526
$
677,353
$
657,534
$
635,267
167,379
163,531
153,850
158,638
148,676
9,326
52,674
32,767
—
9,326
50,315
30,275
—
110,000
102,466
—
160,710
516,623
192,903
9,326
49,078
29,833
—
96,061
98
155,211
493,457
183,896
—
168,508
540,654
190,857
10,661
(79,623)
—
—
121,895
(4,642)
117,253
(936)
(50,714)
65,603
0.42
0.39
0.39
167,571
297,259
$ 2,884,486
$ 4,195,780
$ 1,918,933
$ 1,991,109
$
$
$
$
$
$
282,609
290,440
290,440
279,022
(643,023)
104,617
47
2,942
647
(68,473)
(70,595)
(2,157)
(289)
124,926
(6,673)
118,253
(936)
(54,670)
62,647
0.42
0.40
0.39
$
$
$
$
(552)
—
113,396
(6,146)
107,250
(936)
(54,858)
51,456
0.40
0.38
0.38
158,380
298,049
133,881
277,568
2,667,655
$ 2,458,629
3,931,347
$ 3,890,953
1,688,721
$ 1,612,331
1,977,737
$ 1,982,863
276,491
284,322
286,925
194,202
(223,013)
(56,877)
$
$
$
$
$
$
260,519
268,350
269,000
214,755
(182,376)
470,941
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
9,326
38,073
32,174
3,222
93,165
193
171,474
506,265
151,269
100
(65,743)
(1,749)
—
83,877
(3,949)
79,928
(936)
(45,262)
33,730
0.34
0.30
0.29
114,245
266,621
2,276,330
3,300,650
1,632,416
1,372,686
249,924
257,755
257,677
208,675
(142,197)
(59,918)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
5,339
39,037
31,413
38,596
82,131
3,382
145,431
494,005
141,262
59
(62,685)
(3,771)
—
74,865
(4,655)
70,210
(476)
(43,067)
26,667
0.34
0.27
0.27
97,941
254,506
2,139,863
3,283,497
1,598,654
1,381,097
214,849
219,452
227,422
148,057
(303,904)
145,488
______________
(1) We compute Funds From Operations ("FFO") in accordance with the “White Paper” on FFO published by the National Association of Real Estate Investment Trusts,
or NAREIT, which defines FFO as net income (loss) (determined in accordance with GAAP), excluding impairment writedowns of investments in depreciable real
estate and investments in in-substance real estate investments, gains or losses from debt restructurings and sales of depreciable operating properties, plus real estate-
related depreciation and amortization (excluding amortization of deferred financing costs), less distributions to non-controlling interests and gains/losses from
discontinued operations and after adjustments for unconsolidated partnerships and joint ventures. FFO is a widely recognized non-GAAP financial measure for REITs
that we believe, when considered with financial statements determined in accordance with GAAP, is useful to investors in understanding financial performance and
providing a relevant basis for comparison among REITs. In addition, FFO is useful to investors as it captures features particular to real estate performance by
recognizing that real estate has generally appreciated over time or maintains residual value to a much greater extent than do other depreciable assets. Investors should
review FFO, along with GAAP net income, when trying to understand an equity REIT’s operating performance. We present FFO because we consider it an important
supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation
of REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or
market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have
real economic effect and could materially impact our results from 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. For a reconciliation of FFO, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -
Funds from Operations."
(2) 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 following our formation transactions 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.
(3) Core FFO adds back to traditionally defined FFO the following items: acquisition expenses, severance expenses and retirement equity compensation expenses, private
perpetual preferred exchange offering expenses, deferred tax asset write-off, acquisition expenses, loss on early extinguishment of debt, gain on settlement of lawsuit
related to the Observatory, net of income taxes and ground lease amortization, construction severance expenses and acquisition break-up fee. We present Core FFO
because we consider it an important supplemental measure of our operating performance in that it excludes items associated with the Offering and formation
transactions. There can be no assurance that Core FFO presented by us 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. For a reconciliation of Core FFO, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Core Funds
from Operations."
48
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act,
and Section 21E of the Exchange Act. For these statements, we claim the protections of the safe harbor for forward-looking
statements contained in such Section. Forward-looking statements are subject to substantial risks and uncertainties, many of
which are difficult to predict and are generally beyond our control. 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 involve numerous risks
and uncertainties and you should not rely on them as predictions of future events. 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. 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:
• the factors included in this Annual Report on Form 10-K, including those set forth under the heading "Business,"
Risk Factors," and "Management’s Discussion and Analysis of Financial Condition and Results of Operations";
• changes in our industry, the real estate markets, either nationally or in Manhattan or the greater New York
metropolitan area;
• resolution of legal proceedings involving the company;
• reduced demand for office or retail space;
• fluctuations in attendance at the observatory and adverse weather;
• new office or observatory development in our market;
• general volatility of the capital and credit markets and the market price of our Class A common stock and our
publicly-traded OP Units;
• changes in our business strategy;
• changes in technology and market competition, which affect utilization of our broadcast or other facilities;
• changes in domestic or international tourism, including geopolitical and currency exchange rates events;
• defaults on, early terminations of, or non-renewal of leases by, tenants;
• 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;
• inability to continue to raise additional debt or equity financing on attractive terms, or at all;
• 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, or to execute any newly planned capital project, 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 and capital projects, including construction delays and cost overruns;
• inability to manage our properties and our growth effectively;
• inability to make distributions to our securityholders 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;
• misunderstanding of our competition;
• changes in real estate and zoning laws and increases in real property tax rates;
• inability to comply with the laws, rules and regulations applicable to similar companies; and
49
• damages resulting from security breaches through cyberattacks, cyber intrusions or otherwise, as well as other
significant disruptions of our technology (IT) networks related systems.
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. Actual
results may differ materially from our current projection. 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 Annual Report on Form 10-K, 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 section entitled “Risk
Factors" of this Annual Report on Form 10-K. You should not place undue reliance on any forward-looking statements, which
are based only on information currently available to us.
Overview
Unless the context otherwise requires or indicates, references in this section to "we," "our" and "us" refer to (i) our
company and its consolidated subsidiaries.
The following discussion and analysis should be read in conjunction with "Selected Financial Data," and our
consolidated financial statements as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and
2016 and the notes related thereto which are included in this Annual Report on Form 10-K.
2018 Highlights
• Achieved net income attributable to the Company of $65.6 million.
• Core FFO was $290.4 million.
• Occupancy and leased percentages at December 31, 2018:
• Total portfolio was 88.8% occupied; including signed leases not commenced (“SLNC”), the total portfolio was
91.8% leased.
• Manhattan office portfolio (excluding the retail component of these properties) was 88.8% occupied; including
SLNC, the Manhattan office portfolio was 92.7% leased.
• Retail portfolio was 90.8% occupied; including SLNC, the retail portfolio was 91.3% leased.
• Empire State Building was 93.4% occupied; including SLNC, the Empire State Building was 94.1% leased.
•
Signed 156 leases, representing 1,003,806 rentable square feet across the total portfolio, achieving a 19.8% increase in
mark-to-market cash rent over previous fully escalated cash rents on new, renewal, and expansion leases; 122 of these
leases, representing 837,487 rentable square feet, were within the Manhattan office portfolio (excluding the retail
component of these properties), achieving a 24.5% increase in mark-to-market cash rent over previous fully escalated
cash rents on new, renewal and expansion leases.
•
Signed 78 new leases representing 729,026 rentable square feet in 2018 for the Manhattan office portfolio (excluding the
retail component of these properties), achieving an increase of 27.3% in mark-to-market cash rent over expired previous
fully escalated cash rents.
• Amended our lease with our largest tenant and in the process increased our annual cash rent by approximately $4 million.
• Realized lease termination fee income of $20.8 million, or approximately $0.07 per fully diluted share, from a combination
of broadcast and office tenants. This fee income was partially offset by the write-off of straight line rent receivables
associated with the terminated leases of $2.1 million, or approximately $0.01 per fully diluted share.
• Opened the new Observatory entrance, which is the first phase of the fully reimagined Observatory experience.
• Achieved Empire State Building Observatory revenue growth of 3.2% to $131.2 million from $127.1 million in 2017
while net operating income increased 1.7% due to improved pricing partially offset by increased expenses related to
Observatory redevelopment and public relations expense allocations.
50
•
Issued long-term, fixed rate unsecured financing of $335 million that increased weighted average term to maturity to 8.1
years, from 6.2 years, at December 31, 2017.
• Authorized a $500 million stock and publicly traded operating partnership unit repurchase program through December
31, 2019.
• Declared and paid aggregate dividends of $0.42 per share during 2018.
As of December 31, 2018, 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 513,606 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 380,000 rentable square foot office building and
garage, which we refer to herein as Metro Tower. As of December 31, 2018, our portfolio included four standalone retail
properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut,
encompassing 205,748 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% to 18% 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):
Office leases
Retail leases
Tenant reimbursements, lease termination fees and other income
Observatory operations
Broadcasting licenses and leases
Total
Year Ended December 31,
2018
2017
$ 130,583
38.9% $
127,389
7,483
44,264
131,227
22,401
2.2%
13.2%
39.0%
6.7%
7,932
26,541
127,118
25,538
40.5%
2.5%
8.5%
40.4%
8.1%
$ 335,958
100.0% $
314,518
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 December 31, 2018, we have invested a total of approximately $865.7 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, short term investments
and borrowings.
51
During the second quarter 2017, we commenced a multi-year capital project at the Empire State Building which we
believe will improve convenience for office tenants and their visitors, increase the value of our 34th Street facing retail space,
enhance the Observatory visitor experience, and increase Observatory revenue per capita.
In the first phase completed in August 2018 we relocated the Observatory entrance, previously located on Fifth
Avenue, to a new, larger, dedicated entrance for Observatory visitors at the western side of the Empire State Building on 34th
Street. The new entrance eliminates Observatory visitor flow into the Fifth Avenue lobby and streamlines such visitor exit from
that lobby, thereby reducing Observatory traffic in such lobby by more than 50% and improving Fifth Avenue access for our
office tenants and their visitors. We believe the resulting new traffic pattern will increase the value of all of our 34th Street
facing retail space and enhance office and Observatory convenience.
We anticipate that we will invest approximately $163 million in total over three years to complete all phases of this
project. Expenditures, which began during the second quarter 2017, were $91.3 million through December 31, 2018. This
investment is an outcome of continually looking at ways to innovate and enhance the office and retail tenant and visitor
experience at the Empire State Building.
The elevator servicing the 102nd floor Observatory was closed to visitors during the first quarter of 2018 for planned
replacement of the original machinery and a new glass cab for the elevator which serves it. We have more work to do on the
102nd floor component of our Observatory upgrade program and we closed the 102nd floor in January 2019. The 102nd floor
may stay closed for as long as nine months during the upgrade. Revenue for the 102nd floor observatory was $11.4 million in
2017 and $8.6 million in 2018.
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 through 2020 on these
well-maintained and well-located properties’ common areas and amenities to ensure competitiveness and protect our market
position. Expenditures, which began during the second quarter 2018, were $14.1 million through December 31, 2018.
As of December 31, 2018, excluding principal amortization, we had approximately $250.0 million of debt maturing in
2019 and no debt maturing in 2020, and we had total debt outstanding of approximately $1.9 billion, with a weighted average
interest rate of 3.84% (excluding premiums and discount) and a weighted average maturity of 8.1 years and 100.0% of which is
fixed-rate indebtedness. As of December 31, 2018, we had cash and cash equivalents and short-term investments of $605.0
million. Our consolidated net debt to total market capitalization was approximately 23.4% as of December 31, 2018.
Results of Operations
Overview
The discussion below relates to the financial condition and results of operations for the years ended December 31,
2018, 2017, and 2016.
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017
The following table summarizes the historical results of operations for the years ended December 31, 2018 and 2017
(amounts in thousands):
52
Years Ended December 31,
2018
2017
Change
%
Revenues:
Rental revenue
Tenant expense reimbursement
Observatory revenue
Lease termination fees
Third-party management and other fees
Other revenues and fees
Total revenues
Operating expenses:
Property operating expenses
Ground rent expenses
General and administrative expenses
Observatory expenses
Real estate taxes
Depreciation and amortization
Total operating expenses
Operating income
Other income (expense):
Interest income
Interest expense
Loss on early extinguishment of debt
Loss from derivative financial instruments
Income before income taxes
Income tax expense
Net income
Private perpetual preferred unit distributions
Net income attributable to non-controlling interests
Net income attributable to common shareholders
Rental Revenue
$
$
493,231
72,372
131,227
20,847
1,440
12,394
731,511
167,379
9,326
52,674
32,767
110,000
168,508
540,654
190,857
10,661
(79,623)
—
—
121,895
(4,642)
117,253
(936)
(50,714)
65,603
$
$ 483,944
73,679
127,118
13,551
1,400
9,834
709,526
163,531
9,326
50,315
30,275
102,466
160,710
516,623
192,903
2,942
(68,473)
(2,157)
(289)
124,926
(6,673)
118,253
(936)
(54,670)
62,647
$
9,287
(1,307)
4,109
7,296
40
2,560
21,985
(3,848)
—
(2,359)
(2,492)
(7,534)
(7,798)
(24,031)
1.9 %
(1.8)%
3.2 %
53.8 %
2.9 %
26.0 %
3.1 %
(2.4)%
— %
(4.7)%
(8.2)%
(7.4)%
(4.9)%
(4.7)%
(2,046)
(1.1)%
7,719
(11,150)
2,157
289
(3,031)
2,031
(1,000)
—
3,956
2,956
262.4 %
(16.3)%
100.0 %
100.0 %
(2.4)%
30.4 %
(0.8)%
— %
7.2 %
4.7 %
$
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 reduction in broadcasting expense reimbursements.
Observatory Revenue
Observatory revenues were higher primarily due to an improvement in our ticket mix and higher per person average
ticket price, partially offset by the scheduled closure of the 102nd floor observation deck in the first quarter 2018 for
replacement of original elevator machinery.
Lease Termination Fees
The year ended December 31, 2018 included significantly higher lease termination fees, from a combination of
broadcast and office tenants, compared to the year ended December 31, 2017.
Third-Party Management and Other Fees
Third-party management and other fees were consistent with 2017.
53
Other Revenues and Fees
The increase in other revenues and fees for the year ended December 31, 2018 was primarily due to a $2.8
million settlement with a former broadcast tenant.
Property Operating Expenses
The increase in property operating expenses was primarily due to higher repairs and maintenance costs and higher
labor costs.
Ground Rent Expenses
The ground rent expense was consistent with 2017.
General and Administrative Expenses
The increase in general and administrative expenses was primarily due to increased equity compensation expense.
Observatory Expenses
The increase in Observatory expenses was primarily due to higher payroll costs of $0.8 million, higher technology
costs of $0.7 million and higher marketing costs of $0.6 million.
Real Estate Taxes
The increase in real estate taxes was primarily attributable to higher assessed values for multiple properties.
Depreciation and Amortization
The increase in depreciation and amortization was primarily due to depreciation of assets newly placed in service
together with the accelerated depreciation of retired assets, partially offset by lower amortization of purchase accounting
deferred leasing costs associated with 2013 and 2014 acquisitions as these costs become fully amortized.
Interest Income
Interest income increased primarily due to higher interest rates on cash balances and short term investments.
Interest Expense
Interest expense increased due to higher outstanding principal balances.
Loss on Early Extinguishment of Debt
There was no loss on early extinguishment of debt for the year ended December 31, 2018.
Loss from Derivative Financial Instruments
There was no loss from derivative financial instruments for the year ended December 31, 2018.
Income Taxes
The decrease in income tax expense was primarily attributable to a reduction in the federal corporate tax rate.
Private Perpetual Preferred Unit Distributions
The private perpetual preferred unit distributions were consistent with 2017.
Net Income Attributable to Non-controlling Interests
The decrease represents lower non-controlling ownership percentage due to the redemption of operating partnership
units into Class A common shares.
54
Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016
The following table summarizes the historical results of operations for years ended December 31, 2017 and 2016
(amounts in thousands):
Years Ended December 31,
2017
2016
Change
%
Revenues:
Rental revenue
Tenant expense reimbursement
Observatory revenue
Lease termination fees
Third-party management and other fees
Other revenues and fees
Total revenues
Operating expenses:
Property operating expenses
Ground rent expenses
General and administrative expenses
Observatory expenses
Real estate taxes
Acquisition expenses
Depreciation and amortization
Total operating expenses
Operating income
Other income (expense):
Interest income
Interest expense
Loss on early extinguishment of debt
Loss from derivative financial instruments
Income before income taxes
Income tax (expense) benefit
Net income
Private perpetual preferred unit distributions
Net income attributable to non-controlling interests
Net income attributable to common shareholders
$
$
483,944
$
460,653
$
23,291
73,679
127,118
13,551
1,400
9,834
73,459
124,814
7,676
1,766
8,985
220
2,304
5,875
(366)
849
709,526
677,353
32,173
163,531
9,326
50,315
30,275
102,466
—
160,710
516,623
192,903
2,942
(68,473)
(2,157)
(289)
124,926
(6,673)
118,253
(936)
(54,670)
62,647
$
153,850
9,326
49,078
29,833
96,061
98
155,211
493,457
183,896
647
(70,595)
(552)
—
113,396
(6,146)
107,250
(936)
(54,858)
51,456
(9,681)
—
(1,237)
(442)
(6,405)
98
(5,499)
(23,166)
9,007
2,295
2,122
(1,605)
(289)
11,530
(527)
11,003
—
188
$
11,191
5.1 %
0.3 %
1.8 %
76.5 %
(20.7)%
9.4 %
4.7 %
(6.3)%
— %
(2.5)%
(1.5)%
(6.7)%
100.0 %
(3.5)%
(4.7)%
4.9 %
354.7 %
3.0 %
(290.8)%
— %
10.2 %
(8.6)%
10.3 %
— %
0.3 %
21.7 %
Rental Revenue
The increase in rental income was primarily attributable to increased rental rates and higher occupancy.
Tenant Expense Reimbursement
Tenant expense reimbursements were consistent with 2016.
Observatory Revenue
Observatory revenues were higher primarily due to an improvement in our ticket mix and higher per person average
ticket price. The increase was partially offset by an increased number of bad weather days.
55
Lease Termination Fees
Lease termination fee income increased in 2017 as there were more tenants with higher lease termination fees for the
year ended December 31, 2017 compared to the year ended December 31, 2016.
Third-Party Management and Other Fees
The decrease reflects lower management fee income due to the wind-down of activities in certain managed entities.
Other Revenues and Fees
The increase in other revenues and fees was primarily due to a real estate tax refund of $1.1 million.
Property Operating Expenses
The increase in property operating expenses was primarily due to higher repairs and maintenance costs and higher
payroll costs, partially offset by lower bad debt expense.
Ground Rent Expenses
The ground rent expense was consistent with 2016.
General and Administrative Expenses
The increase in general and administrative expenses was primarily due to increased equity compensation expense
partially offset by lower cash incentive compensation expense.
Observatory Expenses
The increase in Observatory expenses was primarily due to higher payroll and repair and maintenance costs, partially
offset by lower marketing costs.
Real Estate Taxes
The increase in real estate taxes was primarily attributable to higher assessed values for several properties.
Acquisition Expenses
No acquisition expenses were incurred in 2017.
Depreciation and Amortization
The increase in depreciation and amortization was primarily attributable to assets that were placed in service towards
the end of 2016 and hence, subject to a full year's depreciation for the year ended December 31, 2017.
Interest Income
Interest income increased due to higher average cash balances during 2017 as compared to 2016. Cash proceeds from
issuance of shares were received in the second half of 2016.
Interest Expense
Interest expense declined due to lower interest rates on new mortgage loan refinancings which occurred during the
year ended December 31, 2017.
Loss on Early Extinguishment of Debt
The loss on early extinguishment of debt reflects deferred financing costs written off in connection with the
modification of the unsecured revolving credit and term loan facility in August 2017.
Loss from Derivative Financial Instruments
The loss from derivative financial instruments consists of the ineffectiveness attributable to a partial termination and
re-designation of related cash flow hedges during the year ended December 31, 2017.
56
Income Taxes
The increase in income tax expense was attributable to a write-off of a deferred tax asset resulting from the reduction
of the federal corporate tax rate from 34% to 21%.
Private Perpetual Preferred Unit Distributions
The private perpetual preferred unit distributions were consistent with 2016.
Net Income Attributable to Non-controlling Interests
An increase due to an increase in net income was offset by a lower non-controlling ownership percentage due to the
redemption of operating partnership units into Class A common shares.
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 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 to qualify as a REIT, we are required under the Code to distribute to our
securityholders, on an annual basis, at least 90% of our 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, short term investments, cash
generated from our operating activities, debt issuances and unused borrowing capacity under our unsecured revolving credit and
term loan 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 and short term investments, debt
issuances, and available borrowing capacity under our unsecured revolving credit and term loan 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, short term investments, our unsecured revolving credit and term loan 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. Our charter does not restrict
the amount of leverage that we may use.
At December 31, 2018, we had approximately $605.0 million available in cash and cash equivalents and short-term
investments and there was $1.1 billion available under our unsecured revolving credit facility.
Through August 2021, 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 December 31, 2018, we had approximately $1.9 billion of total consolidated indebtedness outstanding, with a
weighted average interest rate of 3.84% and a weighted average maturity of 8.1 years. As of December 31, 2018, exclusive of
principal amortization, we have approximately $250.0 million of debt maturing in 2019 and no debt maturing in 2020. Our
consolidated net debt to total market capitalization was approximately 23.4% as of December 31, 2018.
During January 2018, we refinanced and increased our mortgage debt on 1333 Broadway from $66.6 million to $160.0
million, due February 2033 with interest fixed at 4.21%. A portion of this increase was applied to release the $75.8 million
mortgage lien on 1400 Broadway.
57
During December 2017, we entered into an agreement to issue and sell an aggregate principal amount of $450 million
of our senior unsecured notes in a private placement, of which $115 million was sold and purchased in December 2017 and
$335 million was sold and purchased in March 2018. We used the net proceeds from the March 2018 issuance to repay our
mortgage indebtedness on 111 West 33rd Street and 1350 Broadway and to add to cash balances.
Given our current liquidity, including availability under our unsecured revolving credit and term loan facility, we
believe we will be able to refinance future maturing debt.
Unsecured Revolving Credit and Term Loan Facility
During August 2017, we entered into an amended and restated senior unsecured revolving credit and term loan
facility 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.
Amount. The unsecured revolving credit and term loan facility is comprised of a $1.1 billion revolving credit
facility and a $265 million term loan facility. The new revolving facility replaced our existing credit facility which was due to
mature in January 2019 and was undrawn at the time of the amendment. The term loan facility was borrowed in full at
closing and used to repay an existing $265 million term loan. The 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.
Guarantors. Certain of our subsidiaries are guarantors of our obligations under the unsecured revolving credit and
term loan facility.
Interest. Amounts outstanding under the (a) term loan facility bear interest at a floating rate equal to, at our
election, (x) the Eurodollar rate, plus a spread that we expect will range from 0.900% to 1.800% depending upon our
leverage ratio and credit rating, or (y) a base rate, plus a spread that we expect will range from 0.000% to 0.800% depending
upon our leverage ratio and credit rating and (b) revolving credit facility bear interest at a floating rate equal to, at our
election, (x) the Eurodollar rate, plus a spread that we expect will range from 0.825% to 1.550% depending upon our
leverage ratio and credit rating or (y) a base rate, plus a spread that we expect will range from 0.000% to 0.550% depending
upon our leverage ratio and credit rating.
Maturity. 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 in August 2022.
Financial Covenants. The unsecured revolving credit and term loan 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 $1.2 billion plus 75% of net equity proceeds received by the
Operating Partnership (other than proceeds received within ninety 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, and (vi) the ratio of total unsecured indebtedness to unencumbered asset value will not exceed 60%.
58
As of December 31, 2018, we were in compliance with the covenants, as described below (dollars in thousands):
Financial Covenant
Maximum total leverage
Maximum secured debt
Minimum fixed charge coverage
Minimum unencumbered interest coverage
Maximum unsecured leverage
Minimum tangible net worth
Required
December 31,
2018
In Compliance
< 60%
< 40%
> 1.50x
> 1.75x
< 60%
24.4%
7.7%
4.8x
7.1x
19.1%
$
1,252,954 $
1,803,812
Yes
Yes
Yes
Yes
Yes
Yes
Other Covenants. The unsecured revolving credit and term loan facility contains customary covenants, including
limitations on liens, investment, debt, fundamental changes, and transactions with affiliates, and requires certain customary
financial reports.
Events of Default. The unsecured revolving credit and term loan facility contains customary events of default
(subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants,
representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, invalidity of
loan documents, loss of real estate investment trust qualification, and occurrence of a change of control (defined in the
definitive documentation for the unsecured revolving credit and term loan facility).
Senior Unsecured Notes
During December 2017, we entered into an agreement to issue and sell an aggregate principal amount of $450.0
million of senior unsecured notes (“Series D, E and F Senior Notes”) in a private placement to entities affiliated with Prudential
Capital Group, AIG Asset Management, MetLife Investment Advisors, LLC and Teachers Insurance and Annuity Association of
America. The Series D, E and F Senior Notes consist of $115.0 million of 4.08% Series D Senior Notes due 2028, $160.0
million of 4.26% Series E Senior Notes due 2030, and $175.0 million of 4.44% Series F Senior Notes due 2033. We issued and
sold the Series D Senior Notes in December 2017 and the Series E and F Senior Notes in March 2018.
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 Senior Unsecured Notes include customary covenants, including limitations on liens, investment,
debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. The Senior
Unsecured Notes also require 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, and a maximum unsecured leverage ratio. As of December 31, 2018, we were in compliance with the
covenants under the outstanding Senior Unsecured Notes.
Mortgage Debt
As of December 31, 2018, we had mortgage notes payable, net of $608.6 million.
During January 2018, we refinanced and increased our mortgage debt on 1333 Broadway from $66.6 million to $160.0
million, due February 2033 with interest fixed at 4.21%. A portion of this increase was applied to release the $75.8 million
mortgage lien on 1400 Broadway.
During March 2018, we repaid our mortgage indebtedness on 111 West 33rd Street and 1350 Broadway.
Leverage Policies
We expect to employ leverage in our capital structure in amounts determined from time to time by our board of
directors. Although our board of directors has not adopted a policy that limits the total amount of indebtedness that we may
incur, we anticipate that our 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. Our 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
59
be taken (including, but not limited to, recourse or non-recourse debt and cross collateralized debt). Our overall leverage
depends on our mix of investments and the cost of leverage, however, we maintain a level of indebtedness consistent with our
plan to seek an investment grade credit rating. Our 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 our common stock, 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
Number of leases signed(2)
Total square feet
Leasing commission costs(3)
Tenant improvement costs(3)
Total leasing commissions and tenant improvement costs(3)
Leasing commission costs per square foot(3)
Tenant improvement costs per square foot(3)
Total leasing commissions and tenant improvement costs per square foot(3)
Retail Properties(4)
Total New Leases, Expansions, and Renewals
Number of leases signed(2)
Total Square Feet
Leasing commission costs(3)
Tenant improvement costs(3)
Total leasing commissions and tenant improvement costs(3)
Leasing commission costs per square foot(3)
Years Ended December 31,
2018
2017
2016
149
155
187
991,576
1,198,340
941,008
19,523
69,886
89,409
19.69
70.48
90.17
$
$
$
$
22,836
83,051
105,887
19.06
69.31
88.37
$
$
$
$
15,408
55,088
70,496
16.37
58.54
74.91
Years Ended December 31,
2018
2017
2016
7
12,230
331
559
890
27.08
$
$
$
12
95,360
4,418
2,989
7,407
46.33
$
$
$
20
50,798
2,847
4,744
7,591
56.03
$
$
$
$
$
$
$
Tenant improvement costs per square foot(3)
Total leasing commissions and tenant improvement costs per square foot(3)
_______________
(1) Excludes an aggregate of 513,606 rentable square feet of retail space in our Manhattan office properties. Includes the Empire State Building broadcasting licenses
45.71
72.79
31.35
77.68
93.40
149.43
$
$
$
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 513,606 rentable square feet of retail space in our Manhattan office properties. Excludes the Empire State Building broadcasting licenses
and observatory operations.
Total Portfolio
Capital expenditures (1)
_______________
(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.
60
Years Ended December 31,
2018
2017
2016
$
135,017
$
126,624
$
80,043
As of December 31, 2018, we expect to incur additional costs relating to obligations under signed new leases of
approximately $88.4 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, short term investments and borrowings
under the unsecured revolving credit and term loan 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, short term investments and borrowings under the unsecured revolving credit and term loan facility.
Contractual Obligations
The following table summarizes the amounts due in connection with our contractual obligations described below for
the years ending December 31, 2019 through 2023 and thereafter (amounts in thousands).
2019
2020
2021
2022
2023
Thereafter
Total
Years Ended December 31,
Mortgages and other debt(1)
Interest expense
Amortization
Principal repayment
Ground lease
Tenant improvement and
leasing commission costs
Total (2)
$
73,893
$
67,227
$
67,030
$
64,001
$
59,685
$ 318,426
$ 650,262
3,790
250,000
1,518
3,938
—
1,518
4,090
—
1,518
5,628
265,000
1,518
7,876
33,868
— 1,355,422
59,190
1,870,422
1,518
68,298
75,888
68,578
19,823
34
—
—
—
88,435
$ 397,779
$
92,506
$
72,672
$ 336,147
$
69,079
$1,776,014
$2,744,197
_______________
(1) Assumes no extension options are exercised.
(2) Does not include various standing or renewal service contracts with vendors related to our property management.
Off-Balance Sheet Arrangements
As of December 31, 2018, we did not have any off-balance sheet arrangements.
Distribution Policy
In order to qualify as a REIT, we must distribute to our securityholders, on an annual basis, at least 90% of our REIT
taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, we
will be subject to U.S. federal income tax at regular corporate rates to the extent that we distribute less than 100% of our net
taxable income (including net capital gains) and will be subject to a 4% nondeductible excise tax on the amount, if any, by
which our 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 taxable income to our securityholders in a manner intended to satisfy the REIT 90% distribution
requirement and to avoid U.S. federal income tax liability on our income and the 4% nondeductible excise tax.
Before we pay any distribution, whether for U.S. federal income tax purposes or otherwise, we must first meet both
our operating requirements and obligations to make payments of principal and interest, if any. However, under some
circumstances, we may be required to use cash reserves, incur debt or liquidate assets at rates or times that we regard as
unfavorable or make a taxable distribution of our shares in order to satisfy the REIT 90% distribution requirement and to avoid
U.S. federal income tax and the 4% nondeductible excise tax in that year.
Distribution to Equity Holders
Distributions and dividends have been made to equity holders in 2016, 2017 and 2018 as follows (amounts in
thousands):
Year ended December 31, 2016
Year ended December 31, 2017
Year ended December 31, 2018
61
114,954
126,963
126,539
Stock and Publicly Traded Operating Partnership Unit Repurchase Program
Our Board of Directors authorized the repurchase of up to $500 million of our Class A common stock and Empire
State Realty OP, L.P.’s Series ES, Series 250 and Series 60 operating partnership units through December 31, 2019.
Under the program, we may purchase our Class A common stock and Empire State Realty OP, L.P.’s 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
us at our discretion and will be subject to stock price, availability, trading volume and general market conditions. The
authorization does not obligate us to acquire any particular amount of securities, and the program may be suspended or
discontinued at our discretion without prior notice.
Cash Flows
Comparison of Year Ended December 31, 2018 to the Year Ended December 31, 2017
Net cash. Cash and cash equivalents and restricted cash were $270.8 million and $530.2 million as of December 31,
2018 and 2017, respectively. The decrease was primarily due to investments in short-term time deposits and capital
improvements and expenditures offset by net proceeds from the issuance of debt during the year ended December 31, 2018.
Operating activities. Net cash provided by operating activities increased by $84.8 million to $279.0 million for the
year ended December 31, 2018 compared to $194.2 million for the year ended December 31, 2017 mainly attributable to
payments of operating liabilities that occurred in 2017 which were absent in 2018. 2017 included a payment of an amount
owed to the estate of Leona M. Helmsley, as required under our formation agreements, equal to the New York City transfer
taxes which would have been payable by us in absence of the estate's exemption from such tax. This amount had been accrued
as a liability at our formation in October 2013 and became payable upon the taxing authority's final approval of such exemption
in September 2017, so the reduction in our liabilities matched the reduction in our cash.
Investing activities. Net cash used in investing activities increased by $420.0 million to $643.0 million for the year
ended December 31, 2018 compared to $223.0 million for the year ended December 31, 2017 due to investments in short-term
time deposits made during 2018.
Financing activities. Net cash provided by financing activities increased by $161.5 million to $104.6 million provided
by financing activities for the year ended December 31, 2018 compared to $56.9 million used in financing activities for the year
ended December 31, 2017. The net proceeds from issuance of debt was higher in 2018 compared to 2017.
Comparison of Year Ended December 31, 2017 to the Year Ended December 31, 2016
Net cash. Cash and cash equivalents and restricted cash were $530.2 million and $615.9 million as of December 31,
2017 and 2016, respectively. The decrease was primarily due to capital expenditures in 2017.
Operating activities. Net cash provided by operating activities decreased by $20.6 million to $194.2 million for the
year ended December 31, 2017 compared to $214.8 million for the year ended December 31, 2016 primarily due to the payment
of an amount owed to the estate of Leona M. Helmsley, as required under our formation agreements, equal to the New York
City transfer taxes which would have been payable by us in absence of the estate's exemption from such tax. This amount had
been accrued as a liability at our formation in October 2013 and became payable upon the taxing authority's final approval of
such exemption in September 2017, so the reduction in our liabilities matched the reduction in our cash.
Investing activities. Net cash used in investing activities increased by $40.6 million to $223.0 million for the year
ended December 31, 2017 compared to $182.4 million for the year ended December 31, 2016. The increase was primarily due
to higher expenditures related to the Observatory capital project.
Financing activities. Net cash used in financing activities decreased by $527.8 million. In 2017 net cash used by
financing was $56.9 million compared to 2016 net cash provided by financing of $470.9 million. The decrease related to the
issuance of common stock to QIA in 2016.
Net Operating Income
Our financial reports include a discussion of property net operating income, or NOI. 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
62
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 financial 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 NOI because it is specific to the
particular financing capabilities and constraints of the owner. The cost of funds is 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):
63
Years Ended December 31,
2017
2018
2016
Net income
Add:
General and administrative expenses
Depreciation and amortization
Interest expense
Loss on early extinguishment of debt
Loss from derivative financial instruments
Acquisition expenses
Income tax expense
Less:
Interest income
Third-party management and other fees
Net operating income
Other Net Operating Income Data
Straight line rental revenue
Net increase in rental revenue from the amortization of above and below-
market lease assets and liabilities
Amortization of acquired below-market ground leases
Funds from Operations ("FFO")
$
117,253
$ 118,253
$
107,250
52,674
168,508
79,623
—
—
—
4,642
50,315
160,710
68,473
2,157
289
—
6,673
(10,661)
(1,440)
410,599
(2,942)
(1,400)
$ 402,528
22,107
6,120
7,831
$
$
$
26,544
5,721
7,831
49,078
155,211
71,147
—
—
98
6,146
(647)
(1,766)
386,517
30,147
8,794
7,831
$
$
$
$
$
$
$
$
We present below a discussion of FFO. We compute FFO in accordance with the “White Paper” on FFO published
by the National Association of Real Estate Investment Trusts, or NAREIT, which defines FFO as net income (loss)
(determined in accordance with GAAP), excluding impairment writedowns of investments in depreciable real estate and
investments in in-substance real estate investments, gains or losses from debt restructurings and sales of depreciable
operating properties, plus real estate-related depreciation and amortization (excluding amortization of deferred financing
costs), less distributions to non-controlling interests and gains/losses from discontinued operations and after adjustments for
unconsolidated partnerships and joint ventures. FFO is a widely recognized non-GAAP financial measure for REITs that we
believe, when considered with financial statements determined in accordance with GAAP, is useful to investors in
understanding financial performance and providing a relevant basis for comparison among REITS. In addition, FFO is useful
to investors as it captures features particular to real estate performance by recognizing that real estate has generally
appreciated over time or maintains residual value to a much greater extent than do other depreciable assets. Investors should
review FFO, along with GAAP net income, when trying to understand an equity REIT’s operating performance. We present
FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently
used by securities analysts, investors and other interested parties in the evaluation of REITs. However, because FFO excludes
depreciation and amortization and captures neither the changes in the value of our properties that result from use or market
conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of
our properties, all of which have real economic effect and could materially impact our results of operations, the utility of FFO
as a measure of 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 following
our formation transactions as they carry significantly below market ground leases, the amortization of which is material to
64
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 traditionally defined FFO the following items: acquisition expenses, severance expenses,
retirement equity compensation expenses, private perpetual preferred exchange offering expenses, deferred tax asset write-off,
loss on early extinguishment of debt, acquisition expenses, gain on settlement of lawsuit related to the Observatory, net of
income taxes, ground lease amortization, 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 items
associated with its IPO and formation transactions and other non-recurring items. There can be no assurance that Core FFO
presented by the Company is comparable to similarly titled measures of other REITs. Core FFO does not represent cash
generated from operating activities and should not be considered as an alternative to net income (loss) determined in
accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Core FFO is not
indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. In future periods, we
may also exclude other items from Core FFO that we believe may help investors compare our results.
The following table presents a reconciliation of net income, the most directly comparable GAAP measure, to FFO,
Modified FFO and Core FFO for the periods presented (amounts in thousands):
Years Ended December 31,
2017
2018
2016
Net income
Private perpetual preferred unit distributions
Real estate depreciation and amortization
Funds from operations attributable to common stockholders and non-
controlled interests
Amortization of below-market ground leases
Modified funds from operations attributable to common stockholders
and non-controlled interests
Deferred tax asset write-off
Loss on early extinguishment of debt
Acquisition expenses
Core funds from operations attributable to common stockholders and
non-controlled interests
$
$
117,253
(936)
166,292
$
118,253
(936)
159,174
107,250
(936)
154,205
282,609
7,831
276,491
7,831
260,519
7,831
290,440
284,322
268,350
—
—
—
446
2,157
—
—
552
98
$
290,440
$
286,925
$
269,000
Weighted average shares and Operating Partnership units
Basic
Diluted
Factors That May Influence Future Results of Operations
Rental Revenue
297,258
297,259
296,455
298,049
276,848
277,568
We derive revenues primarily from rents, rent escalations, expense reimbursements and other income received from
tenants under existing leases at each of our properties. “Escalations and expense reimbursements” consist of payments made by
tenants to us under contractual lease obligations to reimburse a portion of the property operating expenses and real estate taxes
incurred at each property.
We believe that the average rental rates for in-place leases at our properties are generally below the current market
rates, although individual leases at particular properties presently may be leased above, at or below the current market rates
within its particular submarket.
65
The amount of net rental income and reimbursements that we receive depends principally on our ability to lease
currently available space, re-lease space to new tenants upon the scheduled or unscheduled termination of leases or renew
expiring leases and to maintain or increase our rental rates. Factors that could affect our rental incomes include, but are not
limited to: local, regional or national economic conditions; an oversupply of, or a reduction in demand for, office or retail space;
changes in market rental rates; our ability to provide adequate services and maintenance at our properties; and fluctuations in
interest rates, all of which could adversely affect our rental income in future periods. Future economic or regional downturns
affecting our submarkets, or downturns in our tenants’ industries, could impair our ability to lease vacant space and renew or re-
lease space as well as the ability of our tenants to fulfill their lease commitments, and could adversely affect our ability to
maintain or increase the occupancy at our properties.
Tenant Credit Risk
The economic condition of our tenants may also deteriorate, which could negatively impact their ability to fulfill their
lease commitments and in turn adversely affect our ability to maintain or increase the occupancy level and/or rental rates of our
properties. Potential tenants may look to consolidate, reduce overhead and preserve operating capital and may also defer
strategic decisions, including entering into new, long-term leases at properties.
Leasing
We signed 1.0 million, 1.3 million, and 1.0 million rentable square feet of new leases, expansions and lease renewals,
for the years ended December 31, 2018, 2017, and 2016, respectively.
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 December 31, 2018, there were approximately 0.8 million rentable square feet of space in our portfolio available
to lease (excluding leases signed but not yet commenced) representing 8.2% of the net rentable square footage of the properties
in our portfolio. In addition, leases representing 7.2% and 8.3% of net rentable square footage of the properties in our portfolio
will expire in 2019 and in 2020, respectively. These leases are expected to represent approximately 7.1% and 8.7%,
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 in following the redevelopment and repositioning of our properties.
Market Conditions
The properties in our portfolio are located in Manhattan and the greater New York metropolitan area, which includes
Fairfield County, Connecticut and Westchester County, New York. Positive or negative changes in conditions in these markets,
such as business hirings or layoffs or downsizing, industry growth or slowdowns, relocations of businesses, increases or
decreases in real estate and other taxes, costs of complying with governmental regulations or changed regulation, can impact
our overall performance.
Observatory and Broadcasting Operations
For the year ended December 31, 2018, the Empire State Building Observatory hosted 3,805,000 visitors, compared to
3,940,000 visitors for the same period in 2017, a decrease of 3.4%. Observatory revenue for the year ended December 31,
2018 was $131.2 million, a 3.2% increase from $127.1 million for the year ended December 31, 2017. The 102nd floor
66
Observatory was closed during the first quarter 2018 for replacement of original elevator machinery with a new, higher speed
glass elevator. In the year ended December 31, 2018, there were 56 bad weather days, with more of those days falling in peak
visitor periods, compared to 61 bad weather days, with fewer of those days falling in peak visitor periods in the year ended
December 31, 2017.
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.
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 year ended December 31, 2018, we derived $19.5 million of revenue and $2.9
million of expense reimbursements from the Empire State Building’s broadcasting licenses and related leases. In 2019 and
2020, licenses and related leases totaling $0.3 million and $1.0 million, respectively, are expected to expire.
Operating Expenses
Our operating expenses generally consist of depreciation and amortization, real estate taxes, ground lease expenses,
repairs and maintenance, security, utilities, property-related payroll, insurance and bad debt expense. Factors that may affect our
ability to control these operating costs include: increases in insurance premiums, tax rates, the cost of periodic repair,
redevelopment costs and the cost of re-leasing space, the cost of compliance with governmental regulation, including zoning
and tax laws, the potential for liability under applicable laws and interest rate levels. If our operating costs increase as a result
of any of the foregoing factors, our future cash flow and results of operations may be adversely affected.
The expenses of owning and operating a property are not necessarily reduced when circumstances, such as market
factors and competition, cause a reduction in income from the property. If revenues drop, we may not be able to reduce our
expenses accordingly. Costs associated with real estate investments, such as real estate taxes and maintenance generally, will
not be materially reduced even if a property is not fully occupied or other circumstances cause our revenues to decrease. As a
result, if revenues decrease in the future, static operating costs may adversely affect our future cash flow and results of
operations. If similar economic conditions exist in the future, we may experience future losses.
Cost of Funds and Interest Rates
As of December 31, 2018, we had no variable rate debt outstanding as the LIBOR rate on our unsecured term loan
facility of $265.0 million was fixed at 2.1485% under a variable to fixed interest rate swap agreement. Our variable rate debt
may increase to the extent we use available borrowing capacity from our unsecured credit facility to fund capital improvements.
Competition
The leasing of real estate is highly competitive in Manhattan and the greater New York metropolitan market in which
we operate. We compete with numerous acquirers, developers, owners and operators of commercial real estate, many of which
own or may seek to acquire or develop properties similar to ours in the same markets in which our properties are located. The
principal means of competition are rent charged, location, services provided and the nature and condition of the facility to be
leased. In addition, we face competition from other real estate companies including other REITs, private real estate funds,
domestic and foreign financial institutions, life insurance companies, pension trusts, partnerships, individual investors and
others that may have greater financial resources or access to capital than we do or that are willing to acquire properties in
transactions which are more highly leveraged or are less attractive from a financial viewpoint than we are willing to pursue. In
addition, competition from new and existing observatories and/or broadcasting operations could have a negative impact on
revenues from our observatory and/or broadcasting operations. Adverse impacts on domestic travel and changes in foreign
currency exchange rates may also decrease demand in the future, which could have a material adverse effect on our results of
operations. If our competitors offer space at rental rates below current market rates, below the rental rates we currently charge
our tenants, in better locations within our markets or in higher quality facilities, we may lose potential tenants and may be
pressured to reduce our rental rates below those we currently charge in order to retain tenants when our tenants’ leases expire.
67
Critical Accounting Estimates
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in conformity with GAAP and with the rules
and regulations of the SEC represent our assets and liabilities and operating results. The consolidated financial statements
include our accounts and our wholly owned subsidiaries as well as our operating partnership and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation. For purposes of comparison, certain items
shown in the 2016 and 2017 consolidated financial statements have been reclassified to conform to the presentation used for
2018.
We consolidate entities in which we have a controlling financial interest. In determining whether we have a controlling
financial interest in a partially owned entity and the requirement to consolidate the accounts of that entity, we consider factors
such as ownership interest, board representation, management representation, authority to make decisions, and contractual and
substantive participating rights of the partners/members as well as whether the entity is a variable interest entity (“VIE”) and we
are the primary beneficiary. The primary beneficiary of a VIE is the entity that has (i) the power to direct the activities that most
significantly impact the entity's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive
benefits from the VIE that could be significant to the VIE. The primary beneficiary is required to consolidate the VIE.
We will assess the accounting treatment for each investment we may have in the future. This assessment will include a
review of each entity’s organizational agreement to determine which party has what rights and whether those rights are
protective or participating. For all VIEs, we will review such agreements in order to determine which party has the power to
direct the activities that most significantly impact the entity’s economic performance and benefit. In situations where we or our
partner could approve, among other things, the annual budget, or leases that cover more than a nominal amount of space
relative to the total rentable space at each property, we would not consolidate the investment as we consider these to be
substantive participation rights that result in shared power of the activities that would most significantly impact the performance
and benefit of such joint venture investment.
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary
not attributable, directly or indirectly, to a parent. Non-controlling interests are required to be presented as a separate
component of equity in the consolidated balance sheets and in the consolidated statements of income by requiring earnings and
other comprehensive income to be attributed to controlling and non-controlling interests.
Goodwill
Goodwill is tested annually for impairment and is tested for impairment more frequently if events and circumstances
indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount, including
goodwill, exceeds the reporting unit’s fair value and the implied fair value of goodwill is less than the carrying amount of that
goodwill. Non-amortizing intangible assets, such as trade names and trademarks, are subject to an annual impairment test
based on fair value and amortizing intangible assets are tested whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.
We performed an annual review of goodwill for impairment and concluded there was no impairment of goodwill. Our
methodology to review goodwill impairment, which includes a significant amount of judgment and estimates, provides a
reasonable basis to determine whether impairment has occurred. However, many of the factors employed in determining
whether or not goodwill is impaired are outside of our control and it is reasonably likely that assumptions and estimates will
change in future periods.
Income Taxes
We elected to be taxed as a REIT under sections 856 through 860 of the Internal Revenue Code of 1986, as amended,
commencing with the taxable year ended December 31, 2013 and believe we qualify as a REIT at December 31, 2018. REITs are
subject to a number of organizational and operational requirements, including a requirement that 90% of ordinary “REIT taxable
income” (as determined without regard to the dividends paid deduction or net capital gains) be distributed. As a REIT, we will
generally not be subject to U.S. federal income tax to the extent that we meet the organizational and operational requirements and
our distributions equal or exceed REIT taxable income. For all periods subsequent to the effective date of our REIT election, we
have met the organizational and operational requirements and distributions have exceeded net taxable income. Accordingly, no
provision has been made for federal and state income taxes.
68
We have elected to treat ESRT Observatory TRS, L.L.C., our subsidiary which holds our observatory operations, and
ESRT Holdings TRS, L.L.C., our subsidiary that holds our third party management, construction (through cessation of our
construction business in the first quarter of 2015), restaurant, cafeterias, health clubs and certain cleaning operations, as taxable
REIT subsidiaries. Taxable REIT subsidiaries may participate in non-real estate activities and/or perform non-customary
services for tenants and their operations are generally subject to regular corporate income taxes. Our taxable REIT subsidiaries
account for their income taxes in accordance with GAAP, which includes an estimate of the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been
recognized in our financial statements or tax returns. The calculation of the taxable REIT subsidiaries' tax provisions may
require interpreting tax laws and regulations and could result in the use of judgments or estimates which could cause its
recorded tax liability to differ from the actual amount due. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. The taxable REIT subsidiaries periodically assess the realizability of deferred tax assets and the adequacy
of deferred tax liabilities, including the results of local, state, or federal tax audits or estimates and judgments used.
We apply provisions for measuring and recognizing tax benefits associated with uncertain income tax positions.
Penalties and interest, if incurred, would be recorded as a component of income tax expense. As of December 31, 2018 and
2017, we do not have a liability for uncertain tax positions. As of December 31, 2018, the tax years ended December 31, 2015
through December 31, 2018 remain open for an audit by the Internal Revenue Service, state or local authorities.
Share-Based Compensation
Share-based compensation is measured at the fair value of the award on the date of grant and recognized as an expense
on a straight-line basis over the vesting period. The determination of fair value of these awards is subjective and involves
significant estimates and assumptions including expected volatility of our stock, expected dividend yield, expected term, and
assumptions of whether these awards will achieve parity with other operating partnership units or achieve performance
thresholds. We believe that the assumptions and estimates utilized are appropriate based on the information available to
management at the time of grant.
Segment Reporting
We have identified two reportable segments: (1) Real Estate and (2) Observatory. Our real estate segment includes all
activities related to the ownership, management, operation, acquisition, repositioning and disposition of our real estate assets.
Our observatory segment operates the 86th and 102nd floor observatories at the Empire State Building. These two lines of
businesses are managed separately because each business requires different support infrastructures, provides different services
and has dissimilar economic characteristics such as investments needed, stream of revenues and different marketing strategies.
We account for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices.
Accounting Standards Update
Reference is made to Note 2 in the accompanying consolidated financial statements for information about recently
issued and recently adopted accounting standards.
69
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 December 31, 2018, we had no variable rate
debt as the LIBOR rate on our unsecured term loan facility of $265.0 million was fixed at 2.1485% under a variable to fixed
interest rate swap agreement.
Subject to maintaining our 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.
As of December 31, 2018, we had interest rate LIBOR swap agreements with an aggregate notional value of $515.0
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 have been designated as cash flow hedges and are deemed highly effective with a fair value of $2.5
million which is included in prepaid expenses and other assets and ($5.2 million) which is included in accounts payable and
accrued expenses on the consolidated balance sheet as of December 31, 2018.
As of December 31, 2018, the weighted average interest rate on the $1.9 billion of fixed-rate indebtedness outstanding
was 3.84% per annum, each with maturities at various dates through March 22, 2033.
As of December 31, 2018, the fair value of our outstanding debt was approximately $1.9 billion which was
approximately $10.2 million less 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.
Our exposures to market risk have not changed materially since December 31, 2018.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements beginning on Page F-1 of this Annual Report on Form 10-K are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
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 our 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,
70
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 December 31, 2018, the end of the period covered by this Report, we carried out an evaluation, under the
supervision and with the participation of management, including our 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, our 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 our Chief Executive Officer and our Chief
Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
No significant 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.
(a) Management's Report on Internal Control over Financial Reporting
Management of Empire State Realty Trust, Inc. is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13(a)-15(f). Under the
supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018 as
required by the Securities Exchange Act of 1934 Rule 13(a)-15(c). In making this assessment, we used the criteria set forth in
the framework in Internal Control–Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the "COSO criteria"). Based on our evaluation under the COSO criteria, our management concluded
that our internal control over financial reporting was effective as of December 31, 2018 to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles.
Ernst & Young LLP, an independent registered public accounting firm that audited our Financial Statements included
in this Annual Report, has issued an attestation report on our internal control over financial reporting as of December 31, 2018,
which appears in paragraph (b) of this Item 9A.
(b) Attestation report of the independent registered public accounting firm
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Empire State Realty Trust, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Empire State Realty Trust, Inc.’s internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Empire State Realty Trust, Inc. (the
Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the 2018 consolidated financial statements of the Company and our report dated February 28, 2019
expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
71
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
New York, New York
February 28, 2019
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 will be set forth in our definitive proxy statement for our 2018 Annual Meeting
of Stockholders (which is scheduled to be held on May 16, 2019), to be filed pursuant to Regulation 14A under the Securities
and Exchange Act of 1934, as amended, or our Proxy Statement, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 will be set forth in our Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by Item 12 will be set forth in our Proxy Statement and is incorporated herein by reference.
72
The information under Item 5 of this Form 10-K under the heading “Securities Authorized For Issuance Under Equity
Compensation Plans” is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 will be set forth in our Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 will be set forth in our Proxy Statement and is incorporated herein by reference.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
(a) The following documents are filed as part of this report:
PART IV
1. The consolidated financial statements are set forth in Item 8 of this Annual Report on Form 10-K.
2. The following financial statement schedules should be read in conjunction with the financial statements included in
Item 8 of this Annual Report on Form 10-K.
Schedule II-Valuation and Qualifying Accounts for the years ended December 31, 2018, 2017 and 2016 on page F-42.
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2018 on page F-43.
Schedules other than those listed are omitted as they are not applicable or the required or equivalent information has been inclu
ded in the financial statements or notes thereto.
(b) The exhibits required by Item 601 of Regulation S-K (§229.601 of this chapter) are listed below:
Exhibit No. Description
Exhibit Index
3.1
3.2
4.1
4.2
4.3
4.4
10.1
10.2
Articles of Amendment and Restatement of Empire State Realty Trust, Inc., incorporated by reference to
Exhibit 3.1 to Amendment No. 8 to the Registrant's Form S-11 (Registration No. 333-179485), filed with the
SEC on September 27, 2013.
Second Amended and Restated Bylaws of Empire State Realty Trust, Inc., incorporated by reference to Exhibit
3.1 to the Registrant’s Form 8-K filed with the SEC on March 7, 2018.
Specimen Class A Common Stock Certificate of Empire State Realty Trust, Inc., incorporated by reference to
Exhibit 4.1 to Amendment No. 3 to the Registrant's Form S-11 (Registration No. 333-179485), filed with the
SEC on November 2, 2012.
Specimen Class B Common Stock Certificate of Empire State Realty Trust, Inc., incorporated by reference to
Exhibit 4.2 to Amendment No. 3 to the Registrant's Form S-11 (Registration No. 333-179485), filed with the
SEC on November 2, 2012.
Indenture, dated August 12, 2014, by and among Empire State Realty OP, L.P., as issuer, Empire State Realty
Trust, Inc., and Wilmington Trust, National Association, as trustee, incorporated by reference to Exhibit 4.1 to
the Registrant’s Form 8-K filed with the SEC on August 12, 2014.
Form of Global Note representing Empire State Realty OP, L.P.’s 2.625% Exchangeable Senior Notes due
2019 (included in Exhibit 4.3).
Contribution Agreement among Empire Realty Trust, Inc., Empire Realty Trust, L.P. and certain members of
the Malkin Group listed on the signature pages thereto, dated November 28, 2011, incorporated by reference to
Exhibit 10.8 to the Registrant's Form S-11 (Registration No. 333-179485), filed with the SEC on February 13,
2012.
Amended and Restated Contribution Agreement among Empire Realty Trust, Inc., Empire Realty Trust, L.P.
and certain entities affiliated with the Helmsley estate listed on the signature pages thereto, dated July 2, 2012,
incorporated by reference to Exhibit 10.11 to Amendment No. 7 to the Registrant's Form S-11 (Registration
No. 333-179485), filed with the SEC on September 19, 2013.
73
10.3
10.4
10.5
10.6
10.7+
10.8+
10.9+
10.10+
10.11+
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.29+
Form of Contribution Agreement among Empire Realty Trust, Inc., Empire Realty Trust, L.P. and each of the
private existing entities that contributed properties in the consolidation, incorporated by reference to Exhibit
10.10 to the Registrant's Form S-11 (Registration No. 333-179485), filed with the SEC on February 13, 2012.
Form of Contribution Agreement among Empire State Realty Trust, Inc., Empire Realty OP, L.P. and each of
the public existing entities that contributed properties in the consolidation, incorporated by reference to Exhibit
10.11 to the Registrant's Form S-11 (Registration No. 333-179485), filed with the SEC on February 13, 2012.
Representation, Warranty and Indemnity Agreement among Empire Realty Trust, Inc., Empire Realty Trust,
L.P., Anthony E. Malkin, Cynthia M. Blumenthal and Scott D. Malkin, dated November 28, 2011, incorporated
by reference to Exhibit 10.13 to the Registrant's Form S-11 (Registration No. 333-179485), filed with the SEC
on February 13, 2012.
Form of Merger Agreement among Empire Realty Trust, Inc., Empire Realty Trust, L.P. and each of the
predecessor management companies, incorporated by reference to Exhibit 10.12 to the Registrant's Form S-11
(Registration No. 333-179485), filed with the SEC on February 13, 2012.
First Amended and Restated Empire State Realty Trust, Inc. Empire State Realty OP, L.P. 2013 Equity
Incentive Plan (as amended and restated as of April 4, 2016), incorporated by reference to Exhibit 10.10 to the
Registrant's Form 10-Q filed with the SEC on May 5, 2016.
Form of Restricted Stock Agreement (Performance-Based)), incorporated by reference to Exhibit 10.11 to the
Registrant’s Form 10-K, filed with the SEC on March 24, 2014.
Form of Restricted Stock Agreement (Time-Based), incorporated by reference to Exhibit 10.12 to the
Registrant’s Form 10-K, filed with the SEC on March 24, 2014.
Form of LTIP Agreement (Performance-Based), incorporated by reference to Exhibit 10.13 to the Registrant’s
Form 10-K, filed with the SEC on March 24, 2014.
Form of LTIP Agreement (Time-Based), incorporated by reference to Exhibit 10.14 to the Registrant’s Form
10-K, filed with the SEC on March 24, 2014.
Amended and Restated Agreement of Limited Partnership of Empire State Realty OP, L.P., dated October 1,
2013, incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q filed with the SEC on
November 12, 2013.
Amendment No. 1 to the First Amended and Restated Agreement of Limited Partnership of Empire State
Realty OP, L.P., dated August 26, 2014, incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K
filed with the SEC on August 26, 2014.
Registration Rights Agreement among Empire State Realty Trust, Inc. and the persons named therein, dated
October 7, 2013, incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q filed with the SEC
on November 12, 2013.
Tax Protection Agreement among Empire State Realty Trust, Inc., Empire State Realty OP, L.P., and the parties
named therein, dated October 7, 2013, incorporated by reference to Exhibit 10.3 to the Registrant's Form 10-Q
filed with the SEC on November 12, 2013.
Indemnification Agreement among Empire State Realty Trust, Inc. and Peter L. Malkin, dated October 7,
2013, incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-Q filed with the SEC on
November 12, 2013.
Indemnification Agreement among Empire State Realty Trust, Inc. and Anthony E. Malkin, dated October 7,
2013, incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-Q filed with the SEC on
November 12, 2013.
Indemnification Agreement among Empire State Realty Trust, Inc. and David A. Karp, dated October 7, 2013,
incorporated by reference to Exhibit 10.6 to the Registrant's Form 10-Q filed with the SEC on November 12,
2013.
Indemnification Agreement among Empire State Realty Trust, Inc. and Thomas P. Durels, dated October 7,
2013, incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-Q filed with the SEC on
November 12, 2013.
Indemnification Agreement among Empire State Realty Trust, Inc. and Thomas N. Keltner, Jr., dated October
7, 2013, incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-Q filed with the SEC on
November 12, 2013.
Indemnification Agreement among Empire State Realty Trust, Inc. and John B. Kessler, dated February 1,
2015, incorporated by reference to Exhibit 10.24 to the Registrant's Form 10-K filed with the SEC on February
27, 2015.
Form of Empire State Realty Trust, Inc. Independent Director Indemnification Agreement, incorporated by
reference to Exhibit 10.22 to the Registrant's Form 10-K filed with the SEC on February 28, 2018.
Amended and Restated Employment Agreement between Empire State Realty Trust, Inc. and Anthony E.
Malkin, dated April 5, 2016, incorporated by reference to Exhibit 10.32 to the Registrant's Form 10-Q filed
with the SEC on May 5, 2016.
74
10.30+
10.31+
10.32+
10.33+
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45+
21.1*
23.1*
31.1*
31.2*
32.1*
32.2*
Amended and Restated Change in Control Severance Agreement between Empire State Realty Trust, Inc. and
David A. Karp, dated April 5, 2016, incorporated by reference to Exhibit 10.33 to the Registrant's Form 10-Q
filed with the SEC on May 5, 2016.
Amended and Restated Change in Control Severance Agreement between Empire State Realty Trust, Inc. and
Thomas N. Keltner, Jr., dated April 5, 2016, incorporated by reference to Exhibit 10.34 to the Registrant's
Form 10-Q filed with the SEC on May 5, 2016.
Amended and Restated Change in Control Severance Agreement between Empire State Realty Trust, Inc. and
Thomas P. Durels, dated April 5, 2016, incorporated by reference to Exhibit 10.35 to the Registrant's Form 10-
Q filed with the SEC on May 5, 2016.
Change in Control Severance Agreement between Empire State Realty Trust, Inc. and John B. Kessler, dated
February 1, 2015, incorporated by reference to Exhibit 10.36 to the Registrant's Form 10-K filed with the SEC
on February 27, 2015.
Note Purchase Agreement, dated March 27, 2015, among Empire State Realty OP, L.P., Empire State Realty
Trust, Inc. and the purchasers named therein, incorporated by reference to Exhibit 10.1 to the Registrant's
Form 8-K filed with the SEC on March 30, 2015.
Registration Rights Agreement among Empire State Realty Trust, Inc. and the persons named therein, dated
July 15, 2014, incorporated by reference to Exhibit 10.4 to the Registrant's Form 8-K filed with the SEC on
July 21, 2014.
Registration Rights Agreement, dated August 12, 2014, by and among Empire State Realty OP, L.P., Empire
State Realty Trust, Inc. and Goldman, Sachs & Co., incorporated by reference to Exhibit 10.1 to the
Registrant’s Form 8-K filed with the SEC on August 12, 2014.
Form of Asset and Property Management Agreement, incorporated by reference to Exhibit 10.18 to
Amendment No. 6 to the Registrant's Form S-11 (Registration No. 333-179485), filed with the SEC on
September 6, 2013.
Form of Services Agreement, incorporated by reference to Exhibit 10.19 to Amendment No. 6 to the
Registrant's Form S-11 (Registration No. 333-179485), filed with the SEC on September 6, 2013.
Stockholders Agreement dated as of August 23, 2016, by and between Empire State Realty Trust, Inc. and Q
REIT Holding LLC, incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K filed with the SEC
on August 23, 2016.
Registration Rights Agreement dated as of August 23, 2016, by and between Empire State Realty Trust, Inc.
and Q REIT Holding LLC, incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K filed with
the SEC on August 23, 2016.
Amended and Restated Credit Agreement dated August 29, 2017 among Empire State Realty OP, L.P., as
borrower, Empire State Realty Trust, Inc., Bank of America, N.A., as administrative agent, and the lenders and
L/C issuers party hereto, Wells Fargo Bank, National Association and Capital One, National Association, as
co-syndication agents, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC,
as joint bookrunners and the other lenders party thereto, incorporated by reference to Exhibit 10.1 to the
Registrant's Form 8-K filed with SEC on September 05, 2017.
Note Purchase Agreement, dated December 13, 2017, among Empire State Realty OP, L.P., Empire State
Realty Trust, Inc. and the purchasers named therein, incorporated by reference to Exhibit 10.1 to the
Registrant's Form 8-K filed with the SEC on December 14, 2017.
First Amendment, dated as of October 5, 2018, to the Amended and Restated Employment Agreement between
Empire State Realty Trust, Inc. and Anthony E. Malkin, dated April 5, 2016, incorporated by reference to
Exhibit 10.45 to the Registrant's Form 10-Q filed with SEC on November 6, 2018.
Subsidiaries of Registrant
Consent of Ernst & Young LLP
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Document
75
101.DEF*
XBRL Taxonomy Extension Definitions Document
101.LAB*
XBRL Taxonomy Extension Labels Document
101.PRE*
Notes:
XBRL Taxonomy Extension Presentation Document
* Filed herewith.
+ Indicates management contract or compensatory plan or arrangement required to be filed or incorporated by reference as an
exhibit to this Form 10-K pursuant to Item 15(b) of Form 10-K.
ITEM 16. FORM 10-K SUMMARY
None.
76
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
EMPIRE STATE REALTY TRUST, INC.
Date: February 28, 2019
Date: February 28, 2019
Date: February 28, 2019
By:/s/ Anthony E. Malkin
Chairman and Chief Executive Officer
By:/s/ David A. Karp
Executive Vice President and Chief Financial
Officer
By:/s/ Andrew J. Prentice
Senior Vice President,
Chief Accounting Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Anthony E. Malkin
Anthony E. Malkin
/s/ David A. Karp
David A. Karp
/s/ Andrew J. Prentice
Andrew J. Prentice
/s/ William H. Berkman
William H. Berkman
/s/ Leslie D. Biddle
Leslie D. Biddle
/s/ Thomas J. DeRosa
Thomas J. DeRosa
/s/ Steven J. Gilbert
Steven J. Gilbert
/s/ S. Michael Giliberto
S. Michael Giliberto
/s/ James D. Robinson IV
James D. Robinson IV
Title
Chairman of the Board of Directors and Chief
Executive Officer
(Principal Executive Officer)
Executive Vice President and Chief Financial
Officer
(Principal Financial Officer)
Senior Vice President, Chief Accounting Officer
and Treasurer
(Principal Accounting Officer)
Director
Director
Director
Date
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
Lead Independent Director
February 28, 2019
Director
Director
February 28, 2019
February 28, 2019
77
EMPIRE STATE REALTY TRUST
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31,
2018, 2017 and 2016
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2018,
2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and
2016
Notes to Consolidated Financial Statements
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Schedule III - Real Estate and Accumulated Depreciation
PAGE
F-1
F-2
F-3
F-4
F-5
F-6
F-8
F-42
F-43
78
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Empire State Realty Trust, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Empire State Realty Trust, Inc. (the Company) as
of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement
schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December
31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework), and our report dated February 2-, 2019, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2010.
New York, New York
February 28, 2019
F-1
Empire State Realty Trust, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share and per share amounts)
ASSETS
December 31,
2018
December 31,
2017
$
$
$
Commercial real estate properties, at cost:
Land
Development costs
Building and improvements
Less: accumulated depreciation
Commercial real estate properties, net
Cash and cash equivalents
Restricted cash
Short-term investments
Tenant and other receivables, net of allowance of $488 and $1,422 in 2018 and 2017, respectively
Deferred rent receivables, net of allowance of $19 and $185 in 2018 and 2017, respectively
Prepaid expenses and other assets
Deferred costs, net
Acquired below market ground leases, net
Goodwill
Total assets
Liabilities:
LIABILITIES AND EQUITY
Mortgage notes payable, net
Senior unsecured notes, net
Unsecured term loan facility, net
Unsecured revolving credit facility
Accounts payable and accrued expenses
Acquired below market leases, net
Deferred revenue and other liabilities
Tenants’ security deposits
Total liabilities
Commitments and contingencies
Equity:
Empire State Realty Trust, Inc. stockholders' equity:
Preferred stock, $0.01 par value per share, 50,000,000 shares authorized, none issued or
outstanding
Class A common stock, $0.01 par value per share, 400,000,000 shares authorized, 173,872,536
and 160,424,575 shares issued and outstanding in 2018 and 2017, respectively
Class B common stock, $0.01 par value per share, 50,000,000 shares authorized, 1,038,090 and
1,052,469 shares issued and outstanding in 2018 and 2017, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total Empire State Realty Trust, Inc.'s stockholders' equity
Non-controlling interests in operating partnership
Private perpetual preferred units, $16.62 per unit liquidation preference, 1,560,360 issued and
outstanding in 2018 and 2017
Total equity
Total liabilities and equity
$
201,196
7,987
2,675,303
2,884,486
(747,304)
2,137,182
204,981
65,832
400,000
29,437
200,903
64,345
241,223
360,398
491,479
201,196
7,986
2,458,473
2,667,655
(656,900)
2,010,755
464,344
65,853
—
28,329
178,629
61,028
262,701
368,229
491,479
4,195,780
$
3,931,347
$
608,567
1,046,219
264,147
—
130,676
52,450
44,810
57,802
2,204,671
—
1,739
10
1,204,075
(8,853)
41,511
1,238,482
744,623
8,004
1,991,109
4,195,780
$
$
717,164
707,895
263,662
—
110,849
66,047
40,907
47,086
1,953,610
—
1,604
11
1,128,460
(8,555)
46,762
1,168,282
801,451
8,004
1,977,737
3,931,347
The accompanying notes are an integral part of these financial statements
F-2
Empire State Realty Trust, Inc.
Consolidated Statements of Income
(amounts in thousands, except per share amounts)
For the Year Ended December 31,
2017
2018
2016
Revenues:
Rental revenue
Tenant expense reimbursement
Observatory revenue
Lease termination fees
Third-party management and other fees
Other revenue and fees
Total revenues
Operating expenses:
Property operating expenses
Ground rent expenses
General and administrative expenses
Observatory expenses
Real estate taxes
Acquisition expenses
Depreciation and amortization
Total operating expenses
Total operating income
Other income (expense):
Interest income
Interest expense
Loss on early extinguishment of debt
Loss from derivative financial instruments
Income before income taxes
Income tax expense
Net income
Private perpetual preferred unit distributions
Net income attributable to non-controlling interests
Net income attributable to common stockholders
Total weighted average shares:
Basic
Diluted
Earnings per share attributable to common stockholders:
Basic
Diluted
$
$
$
$
493,231
72,372
131,227
20,847
1,440
12,394
731,511
167,379
9,326
52,674
32,767
110,000
—
168,508
540,654
190,857
10,661
(79,623)
—
—
121,895
(4,642)
117,253
(936)
(50,714)
65,603
$
$
483,944
73,679
127,118
13,551
1,400
9,834
709,526
163,531
9,326
50,315
30,275
102,466
—
160,710
516,623
192,903
2,942
(68,473)
(2,157)
(289)
124,926
(6,673)
118,253
(936)
(54,670)
62,647
$
$
460,653
73,459
124,814
7,676
1,766
8,985
677,353
153,850
9,326
49,078
29,833
96,061
98
155,211
493,457
183,896
647
(70,595)
(552)
—
113,396
(6,146)
107,250
(936)
(54,858)
51,456
167,571
297,259
158,380
298,049
133,881
277,568
0.39
0.39
$
$
0.40
0.39
$
$
0.38
0.38
The accompanying notes are an integral part of these financial statements
F-3
Empire State Realty Trust, Inc.
Consolidated Statements of Comprehensive Income
(amounts in thousands)
Net income
Other comprehensive loss:
Unrealized loss on valuation of interest rate swap
agreements
Amount reclassified into interest expense
Other comprehensive loss
Comprehensive income
Net income attributable to non-controlling interests and
private perpetual preferred unitholders
Other comprehensive loss attributable to non-controlling
interests
For the Year Ended December 31,
2017
2018
2016
$
117,253
$
118,253
$
107,250
(2,721)
1,845
(876)
116,377
(11,658)
1,142
(10,516)
107,737
(3,054)
—
(3,054)
104,196
(51,650)
(55,606)
(55,794)
382
4,901
1,576
Comprehensive income attributable to common stockholders
$
65,109
$
57,032
$
49,978
The accompanying notes are an integral part of these financial statements
F-4
Balance at December
31, 2015
Issuance of Class A
shares, net of costs
Conversion of
operating partnership
units and Class B
shares to Class A
shares
Equity compensation:
LTIP Units
Restricted stock,
net of forfeitures
Dividends and
distributions
Net income
Unrealized loss on
valuation of interest
rate swap agreements
Balance at December
31, 2016
Conversion of
operating partnership
units and Class B
shares to Class A
shares
Equity compensation:
LTIP Units
Restricted stock,
net of forfeitures
Dividends and
distributions
Net income
Other comprehensive
income (loss)
Balance at December
31, 2017
Issuance of Class A
shares
Conversion of
operating partnership
units and Class B
shares to Class A
shares
Equity compensation:
LTIP Units, net of
forfeitures
Restricted stock,
net of forfeitures
Dividends and
distributions
Net income
Other comprehensive
income (loss)
Balance at December
31, 2018
Empire State Realty Trust, Inc.
Consolidated Statements of Stockholders' Equity
(amounts in thousands)
Number
of Class A
Common
Shares
Class A
Common
Stock
Number
of Class B
Common
Shares
Class B
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
Stockholders'
Equity
Non-
controlling
Interests
Private
Perpetual
Preferred
Units
Total
Equity
118,903
$
1,189
1,120
$
11
$
469,152
$
(883)
$ 55,260
$
524,729
$
839,953
$
8,004
$ 1,372,686
29,611
296
—
—
610,910
—
—
611,206
—
—
611,206
6,191
—
40
—
—
—
62
—
—
—
—
—
(24)
—
—
—
—
—
154,745
1,547
1,096
5,659
—
21
—
—
—
57
—
—
—
—
—
(44)
—
—
—
—
—
160,425
1,604
1,052
284
3
—
—
—
—
—
—
—
11
—
—
—
—
—
—
11
—
—
357
—
—
—
—
468
—
—
—
24,044
(428)
—
—
—
23,678
(23,678)
—
—
357
9,372
—
—
—
—
—
—
9,372
357
(55,812)
(55,812)
(58,206)
(936)
(114,954)
51,456
51,456
54,858
936
107,250
(1,478)
—
(1,478)
(1,576)
—
(3,054)
1,104,463
(2,789)
50,904
1,154,136
820,723
8,004
1,982,863
23,529
(151)
—
—
—
23,435
(23,435)
—
468
13,632
—
—
—
—
—
13,632
468
(66,789)
(66,789)
(59,238)
(936)
(126,963)
62,647
62,647
54,670
936
118,253
(5,615)
—
(5,615)
(4,901)
—
(10,516)
1,128,460
(8,555)
46,762
1,168,282
801,451
8,004
1,977,737
4,746
—
—
4,749
—
—
4,749
13,141
132
(14)
(1)
70,452
196
—
24
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
417
—
—
—
—
—
—
70,779
(70,779)
—
417
18,368
—
—
—
—
—
18,368
417
(70,854)
65,603
(70,854)
(54,749)
65,603
50,714
(936)
936
(126,539)
117,253
(494)
—
(494)
(382)
—
(876)
—
—
—
—
—
—
—
—
—
—
—
—
173,874
$
1,739
1,038
$
10
$ 1,204,075
$
(8,853)
$ 41,511
$
1,238,482
$
744,623
$
8,004
$ 1,991,109
The accompanying notes are an integral part of these financial statements
F-5
Empire State Realty Trust, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)
For the Year Ended December 31,
2017
2016
2018
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Amortization of non-cash items within interest expense
Amortization of acquired above and below-market leases, net
Amortization of acquired below-market ground leases
Straight-lining of rental revenue
Equity based compensation
Settlement of derivative contracts
Loss on early extinguishment of debt
Increase (decrease) in cash flows due to changes in operating assets and
liabilities:
Security deposits
Tenant and other receivables
Deferred leasing costs
Prepaid expenses and other assets
Accounts payable and accrued expenses
Deferred revenue and other liabilities
Net cash provided by operating activities
Cash Flows From Investing Activities
Short-term investments
Additions to building and improvements
Development costs
Net cash used in investing activities
$
117,253
$
118,253
$
107,250
168,508
7,215
(6,120)
7,831
(22,107)
18,785
—
—
10,717
(1,275)
(26,899)
(781)
1,993
3,902
279,022
(400,000)
(243,022)
(1)
160,710
1,039
(5,721)
7,831
(26,544)
14,100
(15,695)
2,157
(97)
(5,787)
(31,743)
(7,893)
(25,103)
8,695
194,202
—
(222,979)
(34)
(643,023)
(223,013)
155,211
739
(8,795)
7,831
(30,147)
9,729
—
552
(1,707)
(3,760)
(22,622)
(3,289)
2,939
824
214,755
—
(181,923)
(453)
(182,376)
The accompanying notes are an integral part of these financial statements
F-6
Empire State Realty Trust, Inc.
Consolidated Statements of Cash Flows (continued)
(amounts in thousands)
For the Year Ended December 31,
2017
2018
2016
Cash Flows From Financing Activities
Proceeds from unsecured revolving credit facility
Repayments of unsecured revolving credit facility
Proceeds from mortgage notes payable
Repayment of mortgage notes payable
Proceeds from senior unsecured notes
Repayment of unsecured term loan
Proceeds from unsecured revolving credit and term loan facility
Deferred financing costs
Net proceeds from the sale of common stock
Private perpetual preferred unit distributions
Dividends paid to common stockholders
Distributions paid to noncontrolling interests in the operating partnership
Net cash provided by (used in) financing activities
Net (decrease) in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash—beginning of period
Cash and cash equivalents and restricted cash—end of period
Reconciliation of Cash and Cash Equivalents and Restricted Cash:
Cash and cash equivalents at beginning of period
Restricted cash at beginning of period
Cash and cash equivalents and restricted cash at beginning of period
Cash and cash equivalents at end of period
Restricted cash at end of period
Cash and cash equivalents and restricted cash at end of period
Supplemental disclosures of cash flow information:
Cash paid for interest
Interest capitalized
Cash paid for income taxes
Non-cash investing and financing activities:
Building and improvements included in accounts payable and accrued
expenses
—
—
160,000
(266,613)
335,000
—
—
(1,980)
4,749
(936)
(70,854)
(54,749)
104,617
(259,384)
530,197
—
—
315,000
(346,615)
115,000
(265,000)
265,000
(13,299)
—
(936)
(66,789)
(59,238)
(56,877)
(85,688)
615,885
$
$
$
$
$
$
$
$
$
270,813
$
530,197
$
464,344
65,853
530,197
204,981
65,832
270,813
74,160
1,596
4,847
$
$
$
$
$
$
$
554,371
61,514
615,885
464,344
65,853
530,197
66,911
459
5,783
$
$
$
$
$
$
$
85,242
$
71,769
$
Write-off of fully depreciated assets
Derivative instruments at fair values included in prepaid expenses and other
assets
Derivative instruments at fair values included in accounts payable and accrued
expenses
Conversion of operating partnership units and Class B shares to Class A shares
39,665
2,536
5,243
70,779
19,136
—
436
23,435
The accompanying notes are an integral part of these financial statements
50,000
(90,000)
50,000
(32,305)
—
—
—
(3,006)
611,206
(936)
(55,812)
(58,206)
470,941
503,320
112,565
615,885
46,685
65,880
112,565
554,371
61,514
615,885
69,062
—
6,238
66,620
15,381
614
5,591
23,678
F-7
Empire State Realty Trust, Inc.
Notes to Consolidated Financial Statements
1. Description of Business and Organization
As used in these consolidated financial statements, unless the context otherwise requires, “we,” “us,” "our," the
"company,” and "ESRT" mean Empire State Realty Trust, Inc. and its consolidated subsidiaries.
We are a self-administered and self-managed real estate investment trust, or REIT, that owns, manages, operates,
acquires and repositions office and retail properties in Manhattan and the greater New York metropolitan area. We were
organized as a Maryland corporation on July 29, 2011.
As of December 31, 2018, 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 interest) encompassing approximately 9.4 million
rentable square feet of office space. Nine of these properties are located in the midtown Manhattan market and encompass in
the 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 513,606 rentable square feet of premier retail space on their ground
floor and/or lower 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 380,000 rentable square foot office building
and garage, which we refer to herein as Metro Tower. As of December 31, 2018, our portfolio also included four standalone
retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut,
encompassing 205,748 rentable square feet in the aggregate.
Empire State Realty OP, L.P. (the "operating partnership") holds substantially all of our assets and conducts
substantially all of our business. As of December 31, 2018, we owned approximately 57.7% of the aggregate operating
partnership units in our operating partnership. We, as the sole general partner in our operating partnership, have responsibility
and discretion in the management and control of our operating partnership, and the limited partners in our operating
partnership, in such capacity, have no authority to transact business for, or participate in the management activities of our
operating partnership. Accordingly, our operating partnership has been consolidated by us.
We elected to be taxed as a REIT and operate in a manner that we believe allows us to qualify as a REIT for federal
income tax purposes commencing with our taxable year ended December 31, 2013. We have two entities that elected to be
treated as taxable REIT subsidiaries, or TRSs, and are owned by our operating partnership. The TRSs, through several wholly
owned limited liability companies, conduct third-party services businesses, which include the Empire State Building
Observatory, cleaning services, cafeteria, restaurant and health clubs, and asset and property management services.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) and with the rules and regulations of the Securities and
Exchange Commission (the "SEC") represent our assets and liabilities and operating results. The consolidated financial
statements include our accounts and our wholly owned subsidiaries as well as our operating partnership and its subsidiaries.
All significant intercompany balances and transactions have been eliminated in consolidation.
We consolidate entities in which we have a controlling financial interest. In determining whether we have a controlling
financial interest in a partially owned entity and the requirement to consolidate the accounts of that entity, we consider factors
such as ownership interest, board representation, management representation, authority to make decisions, and contractual and
substantive participating rights of the partners/members as well as whether the entity is a variable interest entity (“VIE”) and
we are the primary beneficiary. The primary beneficiary of a VIE is the entity that has (i) the power to direct the activities that
most significantly impact the entity's economic performance and (ii) the obligation to absorb losses of the VIE or the right to
receive benefits from the VIE that could be significant to the VIE. The primary beneficiary is required to consolidate the VIE.
Our operating partnership, Empire State Realty OP, L.P., is a variable interest entity of our company, Empire State Realty Trust,
F-8
Inc. As the operating partnership is already consolidated in the financial statements of Empire State Realty Trust, Inc., the
identification of this entity as a variable interest entity had no impact on our consolidated financial statements.
We will assess the accounting treatment for each investment we may have in the future. This assessment will include a
review of each entity’s organizational agreement to determine which party has what rights and whether those rights are
protective or participating. For all VIEs, we will review such agreements in order to determine which party has the power to
direct the activities that most significantly impact the entity’s economic performance and benefit. In situations where we or our
partner could approve, among other things, the annual budget, or leases that cover more than a nominal amount of space
relative to the total rentable space at each property, we would not consolidate the investment as we consider these to be
substantive participation rights that result in shared power of the activities that would most significantly impact the
performance and benefit of such joint venture investment.
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a
subsidiary not attributable, directly or indirectly, to a parent. Non-controlling interests are required to be presented as a separate
component of equity in the consolidated balance sheets and in the consolidated statements of income by requiring earnings and
other comprehensive income to be attributed to controlling and non-controlling interests.
Accounting Estimates
The preparation of the consolidated financial statements in accordance with GAAP requires management to use
estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported revenues and expenses. Significant items subject to such estimates and
assumptions include allocation of the purchase price of acquired real estate properties among tangible and intangible assets,
determination of the useful life of real estate properties and other long-lived assets, valuation and impairment analysis of
commercial real estate properties and other long-lived assets, estimate of tenant expense reimbursements, estimate of
percentage of completion on construction contracts, valuation of the allowance for doubtful accounts, and valuation of
derivative instruments, senior unsecured notes, mortgage notes payable, unsecured notes, unsecured revolving credit and term
loan facilities, and equity based compensation. These estimates are prepared using management’s best judgment, after
considering past, current, and expected events and economic conditions. Actual results could differ from those estimates.
Revenue Recognition
Rental Revenue
Rental revenue includes base rents that each tenant pays in accordance with the terms of its respective lease and is
reported on a straight-line basis over the non-cancellable term of the lease which includes the effects of rent steps and rent
abatements under the leases. In general, we commence rental revenue recognition when the tenant takes possession of the
leased space or controls the physical use of the leased space and the leased space is substantially ready for its intended use. We
account for all of our leases as operating leases. Deferred rent receivables, including free rental periods and leasing
arrangements allowing for increased base rent payments, are accounted for in a manner that provides an even amount of fixed
lease revenues over the respective non-cancellable lease terms. Differences between rental income recognized and amounts
due under the respective lease agreements are recognized as an increase or decrease to deferred rent receivables.
In addition to base rent, our tenants also generally will pay their pro rata share of increases in real estate taxes and
operating expenses for the building over a base year. In some leases, in lieu of paying additional rent based upon increases in
building operating expenses, the tenant will pay additional rent based upon increases in an index such as the Consumer Price
Index over the index value in effect during a base year, or contain fixed percentage increases over the base rent to cover
escalations.
We will recognize rental revenue of acquired in-place above- and below-market leases at their fair values over the
terms of the respective leases, including, for below-market leases, fixed option renewal periods, if any.
Lease termination fees are recognized when the fees are determinable, tenant vacancy has occurred, collectability is
reasonably assured, we have no continuing obligation to provide services to such former tenants and the payment is not subject
to any conditions that must be met or waived.
F-9
Observatory Revenue
Revenues from the sale of Observatory tickets are recognized upon admission or ticket expirations. Deferred revenue
related to unused and unexpired tickets as of December 31, 2018 and 2017 was $4.1 million and $4.1 million, respectively, and
is included in deferred revenue and other liabilities on the consolidated balance sheets.
Gains on Sale of Real Estate
We record a gain on sale of real estate when title is conveyed to the buyer and we have no substantial economic
involvement with the property. If the sales criteria for the full accrual method are not met, we defer some or all of the gain
recognition and account for the continued operations of the property by applying the finance, leasing, profit sharing, deposit,
installment or cost recovery methods, as appropriate, until the sales criteria are met.
Third-Party Management and Other Fees
We earn revenue arising from contractual agreements with related party entities for asset and property management
services. This revenue is recognized as the related services are performed under the respective agreements in place.
Other Revenues and Fees
Other revenues and fees includes parking income, percentage rent, legal, tax and insurance settlements, demand
response energy use earnings and sales from our restaurant at the Empire State Building.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred. The expense for the years ended December 31, 2018, 2017,
and 2016 was $8.9 million, $7.6 million and $9.4 million, respectively, and is included within operating expenses in our
consolidated statements of income.
Real Estate Properties and Related Intangible Assets
Land and buildings and improvements are recorded at cost less accumulated depreciation and amortization. The
recorded cost includes cost of acquisitions, development and construction and tenant allowances and improvements.
Expenditures for ordinary repairs and maintenance are charged to property operating expense as incurred. Significant
replacements and betterments which improve or extend the life of the asset are capitalized. Tenant improvements which
improve or extend the life of the asset are capitalized. If a tenant vacates its space prior to the contractual termination of its
lease, the unamortized balance of any tenant improvements are written off if they are replaced or have no future value. For
developed properties, direct and indirect costs that clearly relate to projects under development are capitalized. Costs include
construction costs, professional services such as architectural and legal costs, capitalized interest and direct payroll costs. We
begin capitalization when the project is probable. The assets relating to the project are stated at cost and are not depreciated.
Once construction is completed and the assets are placed in service, the assets are reclassified to the appropriate asset class and
depreciated in accordance with the useful lives as indicated below. Capitalization of interest ceases when the asset is ready for
its intended use, which is generally near the date that a certificate of occupancy is obtained. Total capitalized interest for the
years ended December 31, 2018 and 2017 was $1.6 million and $0.5 million, respectively. There was no capitalized interest for
the year ended December 31, 2016.
Depreciation and amortization are computed using the straight-line method for financial reporting purposes. Buildings
and improvements are depreciated over the shorter of 39 years, the useful life, or the remaining term of any leasehold interest.
Tenant improvement costs, which are included in building and improvements in the consolidated balance sheets, are
depreciated over the shorter of (i) the related remaining lease term or (ii) the life of the improvement. Corporate equipment,
which is included in “Other assets,” is depreciated over three to seven years.
Acquisitions of properties are accounted for utilizing the acquisition method and accordingly the purchase cost is
allocated to tangible and intangible assets and liabilities based on their fair values. The fair value of tangible assets acquired is
determined by valuing the property as if it were vacant, applying methods similar to those used by independent appraisers of
income-producing property. The resulting value is then allocated to land, buildings and improvements, and tenant
improvements based on our determination of the fair value of these assets. The assumptions used in the allocation of fair values
to assets acquired are based on our best estimates at the time of evaluation.
F-10
Fair value is assigned to above-market and below-market leases based on the difference between (a) the contractual
amounts to be paid by the tenant based on the existing lease and (b) our estimate of current market lease rates for the
corresponding in-place leases, over the remaining terms of the in-place leases. Capitalized above-market lease amounts are
amortized as a decrease to rental revenue over the remaining terms of the respective leases. Capitalized below-market lease
amounts are amortized as an increase to rental revenue over the remaining terms of the respective leases. If a tenant vacates its
space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized
balance of the related intangible will be written off.
The aggregate value of other acquired intangible assets consists of acquired ground leases and acquired in-place leases
and tenant relationships. The fair value allocated to acquired in-place leases consists of a variety of components including, but
not necessarily limited to: (a) the value associated with avoiding the cost of originating the acquired in-place leases (i.e. the
market cost to execute a lease, including leasing commissions and legal fees, if any); (b) the value associated with lost revenue
related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period (i.e. real estate taxes,
insurance and other operating expenses); (c) the value associated with lost rental revenue from existing leases during the
assumed lease-up period; and (d) the value associated with any other inducements to secure a tenant lease.
We assess the potential for impairment of our long-lived assets, including real estate properties, annually or whenever
events occur or a change in circumstances indicate that the recorded value might not be fully recoverable. We determine
whether impairment in value has occurred by comparing the estimated future undiscounted cash flows expected from the use
and eventual disposition of the asset to its carrying value. If the undiscounted cash flows do not exceed the carrying value, the
real estate is adjusted to fair value and an impairment loss is recognized. Assets held for sale are recorded at the lower of cost
or fair value less costs to sell. We do not believe that the value of any of our properties and intangible assets were impaired
during the years ended December 31, 2018, 2017 and 2016.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, government money markets, demand deposits with financial
institutions and short-term liquid investments with original maturities of three months or less when purchased. Cash and cash
equivalents held at major commercial banks may at times exceed the Federal Deposit Insurance Corporation limit. To date, we
have not experienced any losses on our invested cash.
Restricted Cash
Restricted cash consists of amounts held for tenants in accordance with lease agreements such as security deposits and
amounts held by lenders and/or escrow agents to provide for future real estate tax expenditures and insurance expenditures,
tenant vacancy related costs and debt service obligations.
Short-term Investments
Short-term investments include time deposits with original maturities of greater than three months and remaining
maturities of less than one year.
Tenant and Other Receivables
Tenant and other receivables, other than deferred rent receivable, are generally expected to be collected within one
year.
Allowance for Doubtful Accounts
We maintain an allowance against tenant and other receivables and deferred rents receivables for future potential
tenant credit losses. The credit assessment is based on the estimated accrued rental revenue that is recoverable over the term of
the respective lease. The computation of this allowance is based on the tenants’ payment history and current credit status. If
our estimate of collectability differs from the cash received, then the timing and amount of our reported revenue could be
impacted. Bad debt expense is included in operating expenses on our consolidated statements of income and includes the
impact of changes in the allowance for doubtful accounts on our consolidated balance sheets.
F-11
Deferred Leasing Costs
Deferred leasing costs consist of fees and direct costs incurred to initiate and renew leases, are amortized on a straight-
line basis over the related lease term and the expense is included in depreciation and amortization in our consolidated
statements of income. Upon the early termination of a lease, unamortized deferred leasing costs are charged to expense.
Deferred Financing Costs
Fees and costs incurred to obtain long-term financing have been deferred and are amortized as a component of interest
expense in our consolidated statements of income over the life of the respective long-term financing on the straight-line method
which approximates the effective interest method. Unamortized deferred financing costs are expensed when the associated
debt is refinanced or repaid before maturity. Costs incurred in seeking debt, which do not close, are expensed in the period in
which it is determined that the financing will not close.
Equity Method Investments
We account for investments under the equity method of accounting where we do not have control but have the ability
to exercise significant influence. Under this method, investments are recorded at cost, and the investment accounts are adjusted
for our share of the entities’ income or loss and for distributions and contributions. Equity income (loss) is allocated based on
the portion of the ownership interest that is controlled by us. The agreements may designate different percentage allocations
among investors for profits and losses; however, our recognition of the entity’s income or loss generally follows the entity’s
distribution priorities, which may change upon the achievement of certain investment return thresholds.
To the extent that we contributed assets to an entity, our investment in the entity is recorded at cost basis in the assets
that were contributed to the entity. Upon contributing assets to an entity, we make a judgment as to whether the economic
substance of the transaction is a sale. If so, gain or loss is recognized on the portion of the asset to which the other partners in
the entity obtain an interest.
To the extent that the carrying amount of these investments on our combined balance sheets is different than the basis
reflected at the entity level, the basis difference would be amortized over the life of the related asset and included in our share
of equity in net income of the entity.
On a periodic basis, we assess whether there are any indicators that the carrying value of our investments in entities
may be impaired on an other than temporary basis. An investment is impaired only if management’s estimate of the fair value
of the investment is less than the carrying value of the investment on an other than temporary basis. To the extent impairment
has occurred, the loss shall be measured as the excess of the carrying value of the investment over the fair value of the
investment.
As of December 31, 2018 and 2017, we had no equity method investments.
Goodwill
Goodwill is tested annually for impairment and is tested for impairment more frequently if events and circumstances
indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount, including
goodwill, exceeds the reporting unit’s fair value and the implied fair value of goodwill is less than the carrying amount of that
goodwill. Non-amortizing intangible assets, such as trade names and trademarks, are subject to an annual impairment test
based on fair value and amortizing intangible assets are tested whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.
Fair Value
Fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the
assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant
assumptions in fair value measurements, the Financial Accounting Standards Board ("FASB") guidance establishes a fair value
hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent
of the reporting entity (observable inputs that are classified within levels one and two of the hierarchy) and the reporting
entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
The methodologies used for valuing financial instruments have been categorized into three broad levels as follows:
F-12
Level 1 - Quoted prices in active markets for identical instruments.
Level 2 - Valuations based principally on other observable market parameters, including:
• Quoted prices in active markets for similar instruments;
• Quoted prices in less active or inactive markets for identical or similar instruments;
• Other observable inputs (such as risk free interest rates, yield curves, volatilities, prepayment speeds, loss severities,
credit risks and default rates); and
• Market corroborated inputs (derived principally from or corroborated by observable market data).
Level 3 - Valuations based significantly on unobservable inputs, including:
• Valuations based on third-party indications (broker quotes or counterparty quotes) which were, in turn, based
significantly on unobservable inputs or were otherwise not supportable; and
• Valuations based on internal models with significant unobservable inputs.
These levels form a hierarchy. We follow this hierarchy for our financial instruments measured or disclosed at fair
value on a recurring and nonrecurring basis and other required fair value disclosures. The classifications are based on the
lowest level of input that is significant to the fair value measurement.
We use the following methods and assumptions in estimating fair value disclosures for financial instruments.
Cash and cash equivalents, restricted cash, short term investments, tenant and other receivables, prepaid expenses and
other assets, deferred revenue, tenant security deposits, accounts payable and accrued expenses carrying values approximate
their fair values due to the short term maturity of these instruments.
The fair value of our senior unsecured notes - exchangeable was derived from quoted prices in active markets and is
classified as Level 2 since trading volumes are low.
The fair value of derivative instruments is determined using widely accepted valuation techniques, including
discounted cash flow analysis on the expected cash flows of each derivative. Although the majority of the inputs used to value
our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives
utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our
counterparties. The impact of such credit valuation adjustments, determined based on the fair value of each individual contract,
was not significant to the overall valuation. As a result, all of our derivatives were classified as Level 2 of the fair value
hierarchy.
The fair value of our mortgage notes payable, unsecured revolving credit and term loan facility, and senior unsecured
notes - Series A, B, C, D, E and F which are determined using Level 3 inputs, are estimated by discounting the future cash
flows using current interest rates at which similar borrowings could be made to us.
Derivative Instruments
We are exposed to the effect of interest rate changes and manage these risks by following policies and procedures
including the use of derivatives. To manage exposure to interest rates, derivatives are used primarily to fix the rate on debt
based on floating-rate indices. We also hedge exposure to the variability in future cash flows for forecast transactions over a
maximum period of 11 months (excluding forecast transactions related to the payment of variable interest on existing financial
instruments). We record all derivatives on the balance sheet at fair value. We incorporate credit valuation adjustments to
appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value
measurements. We measure the credit risk of our derivative instruments that are subject to master netting agreements on a net
basis by counterparty portfolio. For derivatives that qualify as cash flow hedges, we report the gain or loss on the derivative
designated as a hedge as part of other comprehensive income (loss) and subsequently reclassify the gain or loss into income in
the period that the hedged transaction affects income.
Income Taxes
We elected to be taxed as a REIT under sections 856 through 860 of the Internal Revenue Code of 1986, as amended,
(the "Code"), commencing with the taxable year ended December 31, 2013 and believe we qualify as a REIT at December 31,
F-13
2018. REITs are subject to a number of organizational and operational requirements, including a requirement that 90% of ordinary
“REIT taxable income” (as determined without regard to the dividends paid deduction or net capital gains) be distributed. As a
REIT, we will generally not be subject to U.S. federal income tax to the extent that we meet the organizational and operational
requirements and our distributions equal or exceed REIT taxable income. For all periods subsequent to the effective date of our
REIT election, we have met the organizational and operational requirements and distributions have exceeded net taxable income.
Accordingly, no provision has been made for federal and state income taxes.
We have elected to treat ESRT Observatory TRS, L.L.C., our subsidiary which holds our observatory operations, and
ESRT Holdings TRS, L.L.C., our subsidiary that holds our third party management, restaurant, cafeteria, health clubs and
certain cleaning operations, as taxable REIT subsidiaries. Taxable REIT subsidiaries may participate in non-real estate activities
and/or perform non-customary services for tenants and their operations are generally subject to regular corporate income taxes.
Our taxable REIT subsidiaries accounts for its income taxes in accordance with GAAP, which includes an estimate of the
amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences
of events that have been recognized in our financial statements or tax returns. The calculation of the taxable REIT subsidiaries'
tax provisions may require interpreting tax laws and regulations and could result in the use of judgments or estimates which
could cause its recorded tax liability to differ from the actual amount due. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The taxable REIT subsidiaries periodically assess the realizability of deferred tax assets and the
adequacy of deferred tax liabilities, including the results of local, state, or federal statutory tax audits or estimates and
judgments used.
We apply provisions for measuring and recognizing tax benefits associated with uncertain income tax positions.
Penalties and interest, if incurred, would be recorded as a component of income tax expense. As of December 31, 2018 and
2017, we do not have a liability for uncertain tax positions. As of December 31, 2018, the tax years ended December 31, 2015
through December 31, 2018 remain open for an audit by the Internal Revenue Service, state or local authorities.
Share-Based Compensation
Share-based compensation is measured at the fair value of the award on the date of grant and recognized as an expense
on a straight-line basis over the vesting period. The determination of fair value of these awards is subjective and involves
significant estimates and assumptions including expected volatility of our stock, expected dividend yield, expected term, and
assumptions of whether these awards will achieve parity with other operating partnership units or achieve performance
thresholds. We believe that the assumptions and estimates utilized are appropriate based on the information available to
management at the time of grant.
Per Share Data
Basic and diluted earnings per share are computed based upon the weighted average number of shares outstanding during
the respective period.
Segment Reporting
We have identified two reportable segments: (1) Real Estate and (2) Observatory. Our real estate segment includes all
activities related to the ownership, management, operation, acquisition, repositioning and disposition of our real estate assets.
Our observatory segment operates the 86th and 102nd floor observatories at the Empire State Building. These two lines of
businesses are managed separately because each business requires different support infrastructures, provides different services
and has dissimilar economic characteristics such as investments needed, stream of revenues and different marketing strategies.
We account for intersegment sales and rent as if the sales or rent were to third parties, that is, at current market prices.
Reclassification
Certain prior year balances have been reclassified to conform to our current year presentation. The 2017 and 2016
balance of other revenues and fees has been reclassified to separately present lease termination fees and interest income and
conform to our current year presentation.
Recently Issued or Adopted Accounting Standards
During August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update
("ASU") No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB
F-14
Emerging Issues Task Force), which contain amendments that align the requirements for capitalizing implementation costs
incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred
to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).
Accordingly, for entities in a hosting arrangement that is a service contract, costs for implementation activities in the
application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary
project and post-implementation stages are expensed as the activities are performed. The amendments in ASU No. 2018-15 also
require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract
over the term of the hosting arrangement. The amendments are effective for public business entities for fiscal years beginning
after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments is permitted,
including adoption in any interim period. The amendments in ASU No. 2018-15 should be applied either retrospectively or
prospectively to all implementation costs incurred after the date of adoption. We are evaluating the impact of adopting this new
accounting standard on our consolidated financial statements.
During January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment, which contain amendments that modify the concept of impairment from the condition that
exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying
amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the
implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting
unit had been acquired in a business combination. Because these amendments eliminate Step 2 from the goodwill impairment
test, they should reduce the cost and complexity of evaluating goodwill for impairment. ASU No. 2017-04 should be applied on
a prospective basis and the amendments adopted for the annual or any interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on
testing dates after January 1, 2017. We are evaluating the impact of adopting this new accounting standard on our consolidated
financial statements.
During January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the
Definition of a Business, which contain amendments to clarify the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets
or businesses. The amendments in ASU No. 2017-01 provide a screen to determine when an integrated set of assets and
activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of
the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets,
the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not
met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive
process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market
participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both
an input and a substantive process are present. Additionally, these amendments narrow the definition of the term output so that
the term is consistent with how outputs are described in Topic 606, Revenue from Contracts with Customers. ASU No.
2017-01 will be effective for annual periods beginning after December 15, 2017, including interim periods within those
periods. The amendments should be applied prospectively on or after the effective date. No disclosures are required at
transition. We believe that future acquisitions of real estate properties will be considered asset acquisitions.
During November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash,
which contain amendments that require that a statement of cash flows explain the change during the period in the total of cash,
cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts
generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU No. 2016-18
will be effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early
adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective
transition method to each period presented. We adopted this standard on January 1, 2018 using a retrospective transition
method. The adoption did not have a material impact on our consolidated financial statements.
During August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the
existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of
cash flows. ASU No. 2016-15 will be effective for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. Earlier adoption is permitted including adoption in an interim period. We adopted this standard on
January 1, 2018 using a retrospective transition method. The adoption did not have a material impact on our consolidated
financial statements.
F-15
During June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, which contains amendments that replace the incurred loss impairment
methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader
range of reasonable and supportable information to inform credit loss estimates. During November 2018, the FASB issued
ASU No. 2018-19 Codification Improvements to Topic 326, Financial Instruments—Credit Losses which contain amendments
relating to the transition and effective date requirements for nonpublic business entities and also clarified that receivables
arising from operating leases are not within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at
Amortized Cost. ASU No. 2016-13 and ASU No. 2018-19 will be effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. Earlier adoption as of the fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years, is permitted. The amendments must be adopted through a cumulative-effect
adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a
modified retrospective approach). We are evaluating the impact of adopting this new accounting standard on our consolidated
financial statements.
During February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires that a lessee recognize
in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing
its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make
an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. ASU No. 2016-02
leaves the accounting for leases by lessors largely unchanged from previous GAAP. ASU No. 2016-02 will be effective for
fiscal years beginning after December 15, 2018 and subsequent interim periods. The new standard must be adopted using a
modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new
guidance at the beginning of the earliest comparative period presented. This ASU is expected to result in the recognition of a
right-to-use asset and related liability to account for our future obligations under our ground lease agreements for which we are
the lessee. As of December 31, 2018, the remaining contractual payments under our ground lease agreements aggregated $75.9
million. In addition, under ASU 2016-02, lessors may only capitalize incremental direct leasing costs. As a result, we expect
that we will no longer capitalize our non-contingent leasing costs and instead will expense these costs as incurred. These costs
totaled $4.6 million for the year ended December 31, 2018. During July 2018, the FASB issued ASU No. 2018-10,
Codification Improvements to Topic 842, Leases, which contains amendments which are intended to clarify or to correct
unintended application of ASU No. 2016-02. Also during July 2018, the FASB issued ASU No. 2018-11, Targeted
Improvements to Topic 842, Leases, which provides another transition method in addition to the existing modified retrospective
transition method by allowing a cumulative effect adjustment to the opening balance of retained earnings in the period of
adoption. The amendments in ASU No. 2018-11 also provide lessors with a practical expedient, by class of underlying asset, to
not separate nonlease components from the associated lease component provided that (1) the timing and pattern of transfer are
the same for the nonlease components and associated lease component and (2) the lease component, if accounted separately,
would be classified as an operating lease. During December 2018, the FASB issued ASU No. 2018-20, Narrow-Scope
Improvements for Lessors that contain amendments to further help lessors apply ASU No. 2016-02, including amendments that
require lessors to (1) exclude lessor costs paid directly by lessees to third parties on the lessor's behalf from variable payments
and therefore variable lease revenue and (2) include lessor costs that are paid by the lessor and reimbursed by the lessee in the
measurement of variable lease revenue and the associated expense. For entities that have not yet adopted ASU No. 2016-02,
the effective dates and transition requirements for ASU No. 2018-10, ASU No. 2018-11 and ASU No. 2018-20 will be the
same as the effective date and transition requirements in ASU No. 2016-02. We adopted this standard on January 1, 2019 and
elected the available practical expedients. ASU 2016-02 and its related amendments resulted in the recognition of right-of-use
assets and lease liabilities for our operating leases on our balance sheet of approximately $30.0 million, but did not have an
impact on our consolidated statements of income.
During May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which
replaces all current GAAP guidance related to revenue recognition and eliminates all industry-specific guidance. The new
revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is
that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted this
standard on January 1, 2018 and it did not have a material impact on our consolidated financial statements.
F-16
3. Deferred Costs, Acquired Lease Intangibles and Goodwill
Deferred costs, net, consisted of the following at December 31, 2018 and 2017 (amounts in thousands):
Leasing costs
$
Acquired in-place lease value and deferred leasing costs
Acquired above-market leases
Less: accumulated amortization
Total deferred costs, net, excluding net deferred financing costs
$
2018
2017
178,120
214,550
52,136
444,806
(209,839)
234,967
$
$
164,751
237,364
67,415
469,530
(215,102)
254,428
At December 31, 2018 and 2017, $6.3 million and $8.3 million, respectively, of net deferred financing costs associated
with the unsecured revolving credit facility was included in deferred costs, net on the consolidated balance sheets.
Amortization expense related to deferred leasing and acquired deferred leasing costs was $26.3 million, $24.1 million,
and $24.2 million, for the years ended December 31, 2018, 2017, and 2016, respectively. Amortization expense related to
acquired lease intangibles was $12.1 million, $17.1 million and $24.6 million for the years ended December 31, 2018, 2017 and
2016, respectively.
Amortizing acquired intangible assets and liabilities consisted of the following at December 31, 2018 and 2017
(amounts in thousands):
Acquired below-market ground leases
Less: accumulated amortization
Acquired below-market ground leases, net
Acquired below-market leases
Less: accumulated amortization
Acquired below-market leases, net
2018
2017
396,916
(36,518)
360,398
2018
(118,462)
66,012
(52,450)
$
$
$
$
396,916
(28,687)
368,229
2017
(132,026)
65,979
(66,047)
$
$
$
$
Rental revenue related to the amortization of below market leases, net of above market leases was $6.1 million, $5.7
million and $8.8 million for the years ended December 31, 2018, 2017 and 2016, respectively. The remaining weighted-average
amortization period as of December 31, 2018 is 24.5 years, 4.5 years, 3.8 years and 4.0 years for below-market ground leases,
in-place leases and deferred leasing costs, above-market leases and below-market leases, respectively. We expect to recognize
amortization expense and rental revenue from the acquired intangible assets and liabilities as follows (amounts in thousands):
For the year ending:
2019
2020
2021
2022
2023
Thereafter
Future
Ground Rent
Amortization
Future
Amortization
Expense
Future Rental
Revenue
$
$
7,831
7,831
7,831
7,831
7,831
321,243
$
360,398
$
15,829
12,967
11,250
10,433
9,756
31,690
91,925
$
6,875
3,651
2,868
3,185
3,181
9,532
$
29,292
As of December 31, 2018, we had goodwill of $491.5 million. In 2013, we acquired the interests in Empire State
Building Company, L.L.C. and 501 Seventh Avenue Associates, L.L.C. for an amount in excess of their net tangible and
identified intangible assets and liabilities and as a result we recorded goodwill related to the transaction. Goodwill was
F-17
allocated $227.5 million to the observatory operations of the Empire State Building, $250.8 million to Empire State Building,
and $13.2 million to 501 Seventh Avenue.
We performed an annual review of goodwill for impairment and concluded there was no impairment of goodwill. Our
methodology to review goodwill impairment, which includes a significant amount of judgment and estimates, provides a
reasonable basis to determine whether impairment has occurred. However, many of the factors employed in determining
whether or not goodwill is impaired are outside of our control and it is reasonably likely that assumptions and estimates will
change in future periods.
4. Debt
Debt consisted of the following as of December 31, 2018 and 2017 (amounts in thousands):
Principal Balance as
of December 31,
2018
Principal Balance as
of December 31,
2017
Stated
Rate
Effective
Rate(1)
Maturity
Date(2)
As of December 31, 2018
Fixed rate mortgage debt
Metro Center
10 Union Square
$
1542 Third Avenue
First Stamford Place(3)
1010 Third Avenue and 77 West 55th
Street
10 Bank Street
383 Main Avenue
1333 Broadway
1400 Broadway
(first lien mortgage loan)
(second lien mortgage loan)
111 West 33rd Street
(first lien mortgage loan)
(second lien mortgage loan)
1350 Broadway
Total mortgage debt
Senior unsecured notes - exchangeable
Senior unsecured notes: (4)
Series A
Series B
Series C
Series D
Series E
Series F
Unsecured revolving credit facility (4)
Unsecured term loan facility (4)
Total principal
Unamortized (discount) premiums, net
of unamortized premiums (discount)
Deferred financing costs, net
Total
______________
$
91,838
50,000
30,000
180,000
38,995
33,779
30,000
160,000
—
—
—
—
—
614,612
250,000
100,000
125,000
125,000
115,000
160,000
175,000
—
265,000
1,929,612
(1,647)
(9,032)
93,948
50,000
30,000
180,000
39,710
34,602
30,000
66,602
66,632
9,172
74,045
9,369
37,144
721,224
250,000
100,000
125,000
125,000
115,000
—
—
—
265,000
1,701,224
(3,370)
(9,133)
3.59%
3.70%
4.29%
4.28%
4.01%
4.23%
4.44%
4.21%
—
—
—
—
—
3.68% 11/5/2024
3.97%
4.53%
4.45%
4.22%
4.35%
4/1/2026
5/1/2027
7/1/2027
1/5/2028
6/1/2032
4.55% 6/30/2032
4.29%
2/5/2033
—
—
—
—
—
—
—
—
—
—
2.63%
3.93% 8/15/2019
3.93%
4.09%
4.18%
4.08%
4.26%
4.44%
(5)
(6)
3.96% 3/27/2025
4.12% 3/27/2027
4.21% 3/27/2030
4.11% 1/22/2028
4.27% 3/22/2030
4.45% 3/22/2033
(5)
(6)
8/29/2021
8/29/2022
$
1,918,933
$
1,688,721
(1)
(2)
(3)
(4)
The effective rate is the yield as of December 31, 2018, including the effects of debt issuance costs and the amortization of the fair value of debt adjustment.
Pre-payment is generally allowed for each loan upon payment of a customary pre-payment penalty.
Represents a $164 million mortgage loan bearing interest of 4.09% and a $16 million loan bearing interest at 6.25%.
At December 31, 2018, we were in compliance with all debt covenants.
F-18
(5)
(6)
At December 31, 2018, the unsecured revolving credit facility bears a floating rate at 30 day LIBOR plus 1.10%. The rate at December 31, 2018 was 3.60%.
The unsecured term loan facility bears a floating rate at 30 day LIBOR plus 1.20%. Pursuant to an interest rate swap agreement, the LIBOR rate is fixed at
2.1485% through maturity. The rate at December 31, 2018 was 3.35%.
Mortgage Debt
During January 2018, we refinanced and increased our mortgage debt on 1333 Broadway from $66.6 million to $160.0
million. A portion of this increase was applied to release the $75.8 million mortgage lien on 1400 Broadway.
During March 2018, we repaid our mortgage indebtedness on 111 West 33rd Street and 1350 Broadway.
Principal Payments
Aggregate required principal payments at December 31, 2018 are as follows (amounts in thousands):
Year
2019
2020
2021
2022
2023
Thereafter
Total principal maturities
Deferred Financing Costs
Amortization
3,790
$
Maturities
$
250,000
$
3,938
4,090
5,628
7,876
—
—
265,000
—
Total
253,790
3,938
4,090
270,628
7,876
33,868
1,355,422
1,389,290
$
59,190
$ 1,870,422
$ 1,929,612
Deferred financing costs, net, consisted of the following at December 31, 2018 and 2017 (amounts in thousands):
Financing costs
Less: accumulated amortization
Total deferred financing costs, net
2018
2017
$
$
25,315
(10,027)
15,288
$
$
24,446
(7,039)
17,407
At December 31, 2018 and 2017, $6.3 million and $8.3 million, respectively, of net deferred financing costs associated
with the unsecured revolving credit facility were included in deferred costs, net on the consolidated balance sheet.
Amortization expense related to deferred financing costs was $4.1 million, $4.7 million, and $5.0 million, for the years
ended December 31, 2018, 2017 and 2016, respectively, and was included in interest expense.
Unsecured Revolving Credit and Term Loan Facility
During August 2017, through the Operating Partnership, we entered into an amended and restated senior unsecured
revolving credit and term loan facility (the “Facility”) 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. The
Facility amended and restated the credit facility dated as of January 23, 2015, with Bank of America, N.A., Merrill Lynch,
Goldman Sachs and the other lenders party thereto. In connection with the modification of the credit facility and term loan, we
incurred a loss on early extinguishment of debt of $2.2 million which is reflected in our consolidated statement of income for
the year ended December 31, 2017. This transaction extended the unsecured revolving credit and term loan facility maturity,
lowered borrowing costs and added flexibility to the financial covenants.
The Facility is in the original principal amount of up to $1.365 billion which consists of a $1.1 billion revolving credit
facility and a $265.0 million term loan facility. The new revolving credit facility replaced a credit facility which was due to
mature in January 2019 and was undrawn when amended. The term loan facility was borrowed in full at closing and used to
repay a $265.0 million term loan that had been due in 2022. We may request the Facility be increased through one or more
increases in the revolving credit facility or one or more increases in the term loan facility or the addition of new pari passu term
loan tranches, for a maximum aggregate principal amount not to exceed $1.75 billion.
F-19
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 6-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 August 2022. We may prepay the loans under the Facility at
any time, subject to reimbursement of the lenders’ breakage and redeployment costs in the case of prepayment of Eurodollar
Rate borrowings.
The 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 $1.2 billion 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 us up to the amount paid by us 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 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, and (vi) the ratio of total
unsecured indebtedness to unencumbered asset value will not exceed 60%.
The Facility contains customary covenants, including limitations on liens, investment, distributions, debt, fundamental
changes, and transactions with affiliates, and requires certain customary financial reports. The Facility contains customary
events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of
covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events,
invalidity of loan documents, loss of real estate investment trust qualification, and occurrence of a change of control (defined in
the agreement for the Facility).
As of December 31, 2018, we were in compliance with the covenants under the Facility.
Senior Unsecured Notes Exchangeable
During August 2014, we issued $250.0 million principal amount of 2.625% Exchangeable Senior Notes (“2.625%
Exchangeable Senior Notes”) due August 15, 2019. Interest on the 2.625% Exchangeable Senior Notes is payable semi-
annually in arrears on February 15 and August 15 of each year. The 2.625% Exchangeable Senior Notes are senior unsecured
obligations and rank equally in right of payment with all of our other senior unsecured indebtedness and effectively
subordinated in right of payment to all of our secured indebtedness (to the extent of the value of the collateral securing such
indebtedness) and structurally subordinated to all liabilities and preferred equity of our subsidiaries.
The 2.625% Exchangeable Senior Notes will mature on August 15, 2019, unless earlier exchanged, redeemed or
repurchased. Holders may exchange their 2.625% Exchangeable Senior Notes at their option at any time prior to the close of
business on the business day immediately preceding May 15, 2019 only under the following circumstances: (i) during any
calendar quarter beginning after September 30, 2014 (and only during such quarter) if the closing sale price of our Class A
common stock is more than 130% of the then current exchange price for at least 20 trading days (whether or not consecutive) in
the period of the 30 consecutive trading days ending on the last trading day of the previous calendar quarter; (ii) during the five
consecutive business-day period following any five consecutive trading-day period in which the trading price per 1,000
principal amount of the 2.625% Exchangeable Senior Notes for each trading day during such five consecutive trading-day
period in which the trading price per 1,000 principal amount of the 2.625% Exchangeable Senior Notes for each trading day
during such five trading-day period was less than 98% of the closing sale price of our Class A common stock, for each trading
day during such five trading-day period multiplied by the then current exchange rate; (iii) if we call any or all of the 2.625%
Exchangeable Senior Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately
preceding the redemption date; or (iv) upon the occurrence of specified corporate transactions (significant consolidation, sale,
merger, share exchange, fundamental change, etc.).
On or after May 15, 2019, and on or prior to the second scheduled trading day immediately preceding the maturity
date, holders may exchange their notes without regard to the foregoing conditions.
The 2.625% Exchangeable Senior Notes will be exchangeable into cash, shares of Class A common stock or a
combination of cash and shares of Class A common stock, at our election. We have asserted it is our intent and ability to settle
the principal amount of the 2.625% Exchangeable Senior Notes in cash. The initial exchange rate of 2.625% Exchangeable
Senior Notes is 51.4059 shares per $1,000 principal amount of notes (equivalent to an initial exchange price of approximately
F-20
$19.45 per share of Class A common stock), subject to adjustment, as described in the related indenture governing the 2.625%
Exchangeable Senior Notes. As of December 31, 2018, the exchange rate of the 2.625% Exchangeable Senior Notes was
52.0116 shares per $1,000 principal amount of notes (equivalent to an initial exchange price of approximately $19.23 per share
of Class A common stock), subject to adjustment, as described in the related indenture governing the 2.625% Exchangeable
Senior Notes.
Following certain corporate transactions which constitute a make-whole fundamental change (defined in the
indenture), we will increase the exchange rate for holders who elect to exchange their 2.625% Exchangeable Senior Notes in
connection with such make whole fundamental change in certain circumstances. Following certain corporate transactions which
constitute a fundamental change, holders may require us to repurchase the 2.625% Exchangeable Senior Notes for cash at a
price equal to 100% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to, but excluding,
the repurchase date.
We have separately accounted for the liability and equity components of the 2.625% Exchangeable Senior Notes by
bifurcating gross proceeds between the indebtedness, or liability component, and the embedded conversion option, or the equity
component. The bifurcation was done by estimating an effective interest rate as of the date of the issuance for similar notes
which do not contain an embedded conversion option. This effective interest rate was estimated to be 3.8% and was used to
compute the fair value at the time of issuance for the indebtedness of $236.6 million. The gross proceeds from the issuance of
the 2.625% Exchangeable Senior Notes less the initial amount allocated to the indebtedness resulted in a $13.4 million
allocation to the embedded conversion option which is included in Equity, net of financing costs, in the consolidated balance
sheets as of December 31, 2018 and 2017. The resulting debt discount is being amortized over the five year period in which
the 2.625% Exchangeable Senior Notes are expected to be outstanding (that is, through maturity date) as additional non-cash
interest expense. As of December 31, 2018 and 2017, the unamortized discount was $1.6 million and $4.3 million,
respectively.
Underwriting discounts and commissions and issuance costs totaled $3.1 million and were allocated to the
indebtedness and the embedded conversion option on a pro-rata basis and accounted for as debt issuance costs and equity
issuance costs, respectively. In this connection, $2.9 million attributable to the indebtedness was recorded as part of deferred
costs, to be subsequently amortized using the effective interest method as interest expense over the expected term of the
2.625% Exchangeable Senior Notes, and $0.2 million attributable to the embedded conversion option was recorded as a
reduction to Equity in the consolidated balance sheets as of December 31, 2018 and 2017.
For the years ended December 31, 2018, 2017 and 2016, total interest expense related to the 2.625% Exchangeable
Senior Notes was $9.9 million, $9.9 million and $9.9 million, respectively, consisting of (i) contractual interest expense of $6.6
million, $6.6 million and $6.6 million, respectively, (ii) additional non-cash interest expense of $2.7 million, $2.7 million and
$2.7 million, respectively, related to the accretion of the debt discount, and (iii) amortization of deferred financing costs of $0.6
million, $0.6 million and $0.6 million, respectively.
Senior Unsecured Notes
During December 2017, we entered into an agreement to issue and sell an aggregate principal amount of $450.0
million of senior unsecured notes consisting of $115.0 million of 4.08% Series D Senior Notes due 2028, $160.0 million of
4.26% Series E Senior Notes due 2030, and $175.0 million of 4.44% Series F Senior Notes due 2033. We issued and sold the
Series D Senior Notes in December 2017 and the Series E and F Senior Notes in March 2018. In connection with the March
2018 issuance of the notes, we repaid our mortgage indebtedness on 111 West 33rd Street and 1350 Broadway.
The terms of the Series A, B, C, D, E, and F senior notes agreements 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 amount of tangible net worth, a minimum fixed charge coverage ratio, a minimum
unencumbered interest coverage ratio, and a maximum unsecured leverage ratio. As of December 31, 2018, we were in
compliance with the covenants under the outstanding Senior Unsecured Notes.
F-21
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following as of December 31, 2018 and 2017 (amounts in
thousands):
Accrued capital expenditures
Accounts payable and accrued expenses
Interest rate swap agreements liability
Accrued interest payable
Due to affiliated companies
Total accounts payable and accrued expenses
6. Financial Instruments and Fair Values
Derivative Financial Instruments
$
2018
2017
$
85,242
34,585
5,243
4,990
616
71,769
32,509
436
5,687
448
$
130,676
$
110,849
We use derivative financial instruments primarily to manage interest rate risk and such derivatives are not considered
speculative. These derivative instruments are typically in the form of interest rate swap and forward agreements and the
primary objective is to minimize interest rate risks associated with investing and financing activities. The counterparties of
these arrangements are major financial institutions with which we may also have other financial relationships. We are exposed
to credit risk in the event of non-performance by these counterparties; however, we currently do not anticipate that any of the
counterparties will fail to meet their obligations.
We have agreements with our derivative counterparties that contain a provision where if we either default or are
capable of being declared in default on any of our indebtedness, then we could also be declared in default on our derivative
obligations. As of December 31, 2018, the fair value of derivatives in a net liability position, which includes accrued interest
but excludes any adjustment for nonperformance risk, related to these agreements was $5.3 million. If we had breached any of
these provisions at December 31, 2018, we could have been required to settle our obligations under the agreements at their
termination value of $5.3 million.
As of December 31, 2018 and 2017, we had interest rate LIBOR swaps with an aggregate notional value of $515.0
million and $265.0 million, respectively, which were designated as cash flow hedges of interest rate risk. We are hedging
variability in future cash flows associated with our existing variable-rate term loan facility and with a forecasted refinancing of
our exchangeable senior notes. The notional value does not represent exposure to credit, interest rate or market risks. As of
December 31, 2018, the fair value of these derivative instruments amounted to $2.5 million which is included in prepaid
expenses and other assets and ($5.2 million) which is included in accounts payable and accrued expenses on the consolidated
balance sheet. As of December 31, 2017, the fair value of the derivative instrument amounted to ($0.4 million) which is
included in accounts payable and accrued expenses on the consolidated balance sheet.
As of December 31, 2018 and 2017, a net unrealized loss of $0.9 million and $10.5 million, respectively, is reflected
in the consolidated statements of comprehensive income (loss) relating to both active and terminated cash flow hedges of
interest rate risk. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be
reclassified to interest expense as interest payments are made on the debt. We estimate that $0.9 million net loss of the current
balance held in accumulated other comprehensive loss will be reclassified into interest expense within the next 12 months.
For the year ended December 31, 2017, we recognized a loss of $0.3 million from derivative financial instruments,
incurred in connection with the partial termination and re-designation of related cash flow hedges.
F-22
The table below summarizes the terms of agreements and the fair values of our derivative financial instruments as of
December 31, 2018 and 2017 (dollar amounts in thousands):
Derivative
Notional
Amount
Receive
Rate
Pay Rate Effective Date
Expiration
Date
Asset
Liability
Asset
Liability
December 31, 2018
December 31, 2017
Interest rate swap
$ 265,000
Interest rate swap
125,000
Interest rate swap
125,000
1 Month
LIBOR
3 Month
LIBOR
3 Month
LIBOR
2.1485% August 31, 2017 August 24, 2022
$
2,536 $
— $
— $
(436)
2.9580%
July 1, 2019
July 1, 2026
2.9580%
July 1, 2019
July 1, 2026
—
—
(2,623)
(2,620)
—
—
—
—
$
2,536 $
(5,243)
$
— $
(436)
The table below shows the effect of our derivative financial instruments designated as cash flow hedges on
accumulated other comprehensive income (loss) for the years ended December 31, 2018, 2017 and 2016 (amounts in
thousands):
Effects of Cash Flow Hedges
December 31, 2018
December 31, 2017
December 31, 2016
Amount of gain (loss) recognized in other comprehensive
income (loss)
Amount of gain (loss) reclassified from accumulated other
comprehensive income (loss) into interest expense
$
(2,721)
$
(11,658)
$
(1,845)
(1,142)
(3,054)
—
The table below shows the effect of our derivative financial instruments designated as cash flow hedges on the
consolidated statements of income for the years ended December 31, 2018, 2017 and 2016 (amounts in thousands):
Effects of Cash Flow Hedges
Total interest (expense) presented on the consolidated
statements of income in which the effects of cash flow
hedges are recorded
Amount of gain (loss) reclassified from accumulated other
comprehensive income (loss) into interest expense
December 31, 2018
December 31, 2017
December 31, 2016
$
(79,623)
$
(68,473)
$
(70,595)
(1,845)
(1,142)
—
Fair Valuation
The estimated fair values at December 31, 2018 and 2017 were determined by management, using available market
information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop
estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize
on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
The following tables summarize the carrying and estimated fair values of our financial instruments as of December 31,
2018 and 2017 (amounts in thousands):
Interest rate swaps included in prepaid
expenses and other assets
Interest rate swaps included in accounts
payable and accrued expenses
Mortgage notes payable
Senior unsecured notes - Exchangeable
Senior unsecured notes - Series A, B, C, D,
E and F
Unsecured term loan facility
Carrying
Value
December 31, 2018
Estimated Fair Value
Total
Level 1
Level 2
Level 3
$
2,536
$
2,536
$
— $
2,536
$
5,243
608,567
247,930
798,289
264,147
5,243
597,424
250,625
795,662
265,000
F-23
—
—
—
—
—
5,243
—
250,625
—
—
—
—
597,424
—
795,662
265,000
Carrying
Value
December 31, 2017
Estimated Fair Value
Total
Level 1
Level 2
Level 3
Interest rate swaps included in prepaid
expenses and other assets
Interest rate swaps included in accounts
payable and accrued expenses
Mortgage notes payable
Senior unsecured notes - Exchangeable
Senior unsecured notes - Series A, B, C, D,
E and F
Unsecured term loan facility
$
— $
— $
— $
— $
436
717,164
244,739
463,156
263,662
436
707,300
275,723
460,352
265,000
—
—
—
—
—
436
—
275,723
—
—
—
—
707,300
—
460,352
265,000
Disclosure about the fair value of financial instruments is based on pertinent information available to us as of
December 31, 2018 and 2017. Although we are not aware of any factors that would significantly affect the reasonable fair
value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date
and current estimates of fair value may differ significantly from the amounts presented herein.
7. Rental Income
We lease various spaces to tenants over various terms. Certain leases have renewal options for additional terms. The
leases provide for base monthly rentals and reimbursements for real estate taxes, escalations linked to the consumer price index
or common area maintenance known as operating expense escalation. Operating expense reimbursements are reflected in our
consolidated statements of income as tenant expense reimbursement.
As of December 31, 2018, we were entitled to the following future contractual minimum lease payments on non-
cancellable operating leases to be received which expire on various dates through 2038 (amounts in thousands):
2019
2020
2021
2022
2023
Thereafter
$
$
485,441
460,127
423,365
391,395
362,738
1,536,461
3,659,527
The above future minimum lease payments exclude tenant recoveries, amortization of deferred rent receivables and the
net accretion of above-below-market lease intangibles. Some leases are subject to termination options generally upon
payment of a termination fee. The preceding table is prepared assuming such options are not exercised.
8. Commitments and Contingencies
Legal Proceedings
Litigation
Except as described below, as of December 31, 2018, we were not involved in any material litigation, nor, to our
knowledge, was any material litigation threatened against us or our properties, other than routine litigation arising in the
ordinary course of business such as disputes with tenants. We believe that the costs and related liabilities, if any, which may
result from such actions will not materially affect our condensed consolidated financial position, operating results or liquidity.
As previously disclosed, in October 2014, 12 former investors in Empire State Building Associates L.L.C. (“ESBA”),
which prior to the initial public offering of our company (the "Offering"), owned the fee title to the Empire State Building, filed
an arbitration with the American Arbitration Association against Peter L. Malkin, Anthony E. Malkin, Thomas N. Keltner, Jr.,
and our subsidiary ESRT MH Holdings LLC, the former supervisor of ESBA, as respondents. The statement of claim (also
filed later in federal court in New York for the expressed purpose of tolling the statute of limitations) alleges breach of fiduciary
duty and related claims in connection with the Offering and formation transactions and seeks monetary damages and
declaratory relief. These investors had opted out of a prior class action bringing similar claims that was settled with court
F-24
approval. The respondents filed an answer and counterclaims. In March 2015, the federal court action was stayed on consent
of all parties pending the arbitration. Arbitration hearings for a select number of sessions started in May 2016 and concluded in
August 2018. Post-hearing briefing is currently scheduled to be completed by June 25, 2019.
The respondents believe the allegations in the arbitration are entirely without merit, and they intend to continue to
defend them vigorously.
Pursuant to indemnification agreements which were made with our directors, executive officers and chairman
emeritus as part of our formation transactions, Anthony E. Malkin, Peter L. Malkin and Thomas N. Keltner, Jr. have defense
and indemnity rights from us with respect to this arbitration.
Ground Lease Commitments
We make payments under ground leases related to three of our properties. Minimum rent is expensed on a straight-line
basis over the non-cancellable term of the leases. The ground leases are due to expire between the years 2050 and 2077. Future
minimum lease payments to be paid over the terms of the leases are as follows (amounts in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$
$
1,518
1,518
1,518
1,518
1,518
68,298
75,888
Unfunded Capital Expenditures
At December 31, 2018, we estimate that we will incur approximately $88.4 million of capital expenditures
(including tenant improvements and leasing commissions) on our properties pursuant to existing lease agreements. We
expect to fund these capital expenditures with operating cash flow, additional property level mortgage financings, our
unsecured credit facility, cash on hand and other borrowings. Future property acquisitions may require substantial capital
investments for refurbishment and leasing costs. We expect that these financing requirements will be met in a similar fashion.
Concentration of Credit Risk
Financial instruments that subject us to credit risk consist primarily of cash and cash equivalents, restricted cash,
short-term investments, tenant and other receivables and deferred rent receivables. At December 31, 2018, we held on deposit
at various major financial institutions cash and cash equivalents, restricted cash balances and short-term investments in excess
of amounts insured by the Federal Deposit Insurance Corporation.
Real Estate Investments
Our properties are located in Manhattan, New York; Fairfield County, Connecticut; and Westchester County, New
York. The latter locations are suburbs of the city of New York. The ability of the tenants to honor the terms of their respective
leases is dependent upon the economic, regulatory and social factors affecting the markets in which the tenants operate. We
perform ongoing credit evaluations of our tenants for potential credit losses.
Tenant Credit Evaluations
Our investments in real estate properties are subject to risks incidental to the ownership and operation of commercial
real estate. These risks include, among others, the risks normally associated with changes in general economic conditions,
trends in the real estate industry, creditworthiness of tenants, competition of tenants and customers, changes in tax laws, interest
rate levels, the availability and cost of financing, and potential liability under environmental and other laws.
We may require tenants to provide some form of credit support such as corporate guarantees and/or other financial
guarantees and we perform ongoing credit evaluations of tenants. Although the tenants operate in a variety of industries, to
the extent we have a significant concentration of rental revenue from any single tenant, the inability of that tenant to make its
lease payments could have an adverse effect on our company.
F-25
Major Customers and Other Concentrations
For the year ended December 31, 2018, other than five tenants who accounted for 6.0%, 3.1%, 2.9%, 2.0% and 2.0%
of rental revenues, no other tenant in our portfolio accounted for more than 2.0% of rental revenues. For the year ended
December 31, 2017, other than five tenants who accounted for 6.3%, 3.2%, 2.9%, 2.1% and 2.0% of rental revenues, no other
tenant in our portfolio accounted for more than 2.0% of rental revenues. For the year ended December 31, 2016, other than
five tenants who accounted for 6.4%, 3.3%, 2.9%, 2.3% and 2.0% of rental revenues, no other tenant in our portfolio accounted
for more than 2.0% of rental revenues.
For the years ended December 31, 2018, 2017 and 2016, the six properties listed below accounted for the indicated
percentage of total rental revenues. No other property accounted for more than 5.0% of total rental revenues.
Empire State Building
One Grand Central Place
111 West 33rd Street
1400 Broadway
First Stamford Place
250 West 57th Street
Asset Retirement Obligations
Year Ended December 31,
2018
2017
2016
31.9%
12.8%
9.3%
7.1%
5.9%
5.2%
32.0%
13.1%
8.6%
7.4%
5.4%
5.2%
32.6%
12.5%
6.8%
7.8%
6.4%
5.3%
We are required to accrue costs that we are legally obligated to incur on retirement of our properties which result from
acquisition, construction, development and/or normal operation of such properties. Retirement includes sale, abandonment or
disposal of a property. Under that standard, a conditional asset retirement obligation represents a legal obligation to perform an
asset retirement activity in which the timing and/or method of settlement is conditional on a future event that may or may not
be within a company’s control and a liability for a conditional asset retirement obligation must be recorded if the fair value of
the obligation can be reasonably estimated. Environmental site assessments and investigations have identified asbestos or
asbestos-containing building materials in certain of our properties. As of December 31, 2018, management has no plans to
remove or alter these properties in a manner that would trigger federal and other applicable regulations for asbestos removal,
and accordingly, the obligations to remove the asbestos or asbestos-containing building materials from these properties have
indeterminable settlement dates. As such, we are unable to reasonably estimate the fair value of the associated conditional asset
retirement obligation. However ongoing asbestos abatement, maintenance programs and other required documentation are
carried out as required and related costs are expensed as incurred.
Other Environmental Matters
Certain of our properties have been inspected for soil contamination due to pollutants, which may have occurred prior
to our ownership of these properties or subsequently in connection with its development and/or its use. Required remediation to
such properties has been completed and, as of December 31, 2018, management believes that there are no obligations related to
environmental remediation other than maintaining the affected sites in conformity with the relevant authority’s mandates and
filing the required documents. All such maintenance costs are expensed as incurred. We expect that resolution of the
environmental matters relating to the above will not have a material impact on our business, assets, consolidated and combined
financial condition, results of operations or liquidity. However, we cannot be certain that we have identified all environmental
liabilities at our properties, that all necessary remediation actions have been or will be undertaken at our properties or that we
will be indemnified, in full or at all, in the event that such environmental liabilities arise.
Insurance Coverage
We carry insurance coverage on our properties of types and in amounts with deductibles that we believe are in line
with coverage customarily obtained by owners of similar properties.
Multiemployer Pension and Defined Contribution Plans
We contribute to a number of multiemployer defined benefit pension plans under the terms of collective bargaining
agreements that cover our union-represented employees. The risks of participating in these multiemployer plans are different
from single-employer plans in the following respects:
F-26
• Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees
of other participating employers.
•
•
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne
by the remaining participating employers.
If we choose to stop participating in some of our multiemployer plans, we may be required to pay those plans
an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
We participate in various unions. The union in which we have significant employees and costs is 32BJ.
32BJ
We participate in the Building Service 32BJ, ("Union"), Pension Plan and Health Plan. The Pension Plan is a multi-
employer, non-contributory defined benefit pension plan that was established under the terms of collective bargaining
agreements between the Service Employees International Union, Local 32BJ, the Realty Advisory Board on Labor Relations,
Inc. and certain other employers. This Pension Plan is administered by a joint board of trustees consisting of union trustees
and employer trustees and operates under employer identification number 13-1879376. The Pension Plan year runs from
July 1 to June 30. Employers contribute to the Pension Plan at a fixed rate on behalf of each covered employee. Separate
actuarial information regarding such pension plans is not made available to the contributing employers by the union
administrators or trustees, since the plans do not maintain separate records for each reporting unit. However, on September
28, 2016, September 28, 2017 and September 28, 2018, the actuary certified that for the plan years beginning July 1, 2016,
July 1, 2017 and July 1, 2018, respectively, the Pension Plan was in critical status under the Pension Protection Act of 2006.
The Pension Plan trustees adopted a rehabilitation plan consistent with this requirement. For each of the years ended June
30, 2018, 2017 and 2016, the Pension Plan received contributions from employers totaling $272.3 million, $257.8 million
and $249.5 million, respectively.
The Health Plan was established under the terms of collective bargaining agreements between the Union, the Realty
Advisory Board on Labor Relations, Inc. and certain other employers. The Health Plan provides health and other benefits to
eligible participants employed in the building service industry who are covered under collective bargaining agreements, or
other written agreements, with the Union. The Health Plan is administered by a Board of Trustees with equal representation
by the employers and the Union and operates under employer identification number 13-2928869. The Health Plan receives
contributions in accordance with collective bargaining agreements or participation agreements. Generally, these agreements
provide that the employers contribute to the Health Plan at a fixed rate on behalf of each covered employee. For the years
ended June 30, 2018, 2017 and 2016, the Health Plan received contributions from employers totaling $1.4 billion, $1.3
billion and $1.2 billion, respectively.
Term of Collective Bargaining Agreement
The most recent collective bargaining agreement for Local 32BJ commenced from January 1, 2016 and runs through
December 31, 2019.
Contributions
Contributions we made to the multi-employer plans for the years ended December 31, 2018, 2017 and 2016 are included
in the table below (amounts in thousands):
Benefit Plan
Pension Plans (pension and annuity)*
Health Plans**
Other***
Total plan contributions
For the Year Ended December 31,
2017
2018
2016
$
$
3,327
9,373
814
13,514
$
$
3,035
8,551
856
12,442
$
$
3,155
8,280
542
11,977
*
Pension plans include $1.0 million, $0.9 million and $0.8 million for the years ended 2018, 2017 and 2016,
respectively, to multiemployer plans not discussed above.
** Health plans include $1.6 million, $1.6 million and $1.6 million for the years ended 2018, 2017 and 2016, respectively,
to multiemployer plans not discussed above.
*** Other consists of union costs which were not itemized between pension and health plans. Other includes $0.2 million,
$0.2 million and $0.2 million for the years ended 2018, 2017 and 2016, respectively, in connection with other
F-27
multiemployer plans not discussed above.
Benefit plan contributions are included in operating expenses in our consolidated statements of income.
9. Equity
During 2016, 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", and together with any
eligible transferee, "QIA"), purchased 29,610,854 newly issued Class A common shares at $21.00 per share, equivalent to a
9.9% economic interest in us on a fully diluted basis (representing a 19.4% ownership of Class A common shares). However,
QIA can only vote shares equivalent to 9.9% of all voting securities, with the balance of their shares to be voted by us in accord
with the votes of all other voting securities. We received approximately $621.8 million in gross proceeds from this 2016 sale to
QREIT. QIA has a top-up right to acquire a pro rata number of additional shares from us in the future should we issue new
shares to third parties.
During the second quarter of 2018, pursuant to an August 2016 stockholders agreement between us and QIA , we sold
284,015 shares of Class A common stock (the “Top Up Shares”) to QIA pursuant to its top-up right to acquire its 9.9% pro rata
share of new equity securities issued during the first quarter of 2018 (in this case, equity compensation). The aggregate
purchase price which QIA paid to us for the Top Up Shares was $4.7 million, or $16.72 per share of Class A common stock, in
accordance with a formula in the stockholders agreement equal to the average closing price per share during the five (5)
consecutive trading days immediately preceding the issuance of the applicable new equity securities.
Shares and Units
An operating partnership unit ("OP Unit") and a share of our common stock have essentially the same economic
characteristics as they receive the same per unit profit distributions of our operating partnership. On the one-year anniversary
of issuance, an OP Unit may be tendered for redemption for cash, however, we have sole and absolute discretion and the
authorized common stock to exchange for shares of common stock on a one-for-one basis instead of cash.
Long-term incentive plan ("LTIP") units are a special class of partnership interests in our operating partnership. Each
LTIP unit awarded will be deemed equivalent to an award of one share of stock under the Empire State Realty Trust Inc.
Empire State Realty OP, L.P. 2013 Equity Incentive Plan ("2013 Plan"), reducing the availability for other equity awards on a
one-for-one basis. The vesting period for LTIP units, if any, will be determined at the time of issuance. Under the terms of the
LTIP units, our operating partnership will revalue for tax purposes its assets upon the occurrence of certain specified events,
and any increase in valuation from the time of grant until such event will be allocated first to the holders of LTIP units to
equalize the capital accounts of such holders with the capital accounts of OP unitholders. Subject to any agreed upon
exceptions, once vested and having achieved parity with OP unitholders, LTIP units are convertible into OP Units in our
operating partnership on a one-for-one basis.
LTIP units subject to time based vesting, whether vested or not, receive the same per unit distributions as OP Units,
which equal per share dividends (both regular and special) on our common stock. Market based LTIP units receive 10% of
such distributions currently, unless and until such LTIP units are earned based on performance, at which time they will receive
the accrued and unpaid 90% and will commence receiving 100% of such distributions thereafter.
The following is net income attributable to common stockholders and the issuance of our class A shares in exchange
for the conversion of OP Units into common stock (amounts in thousands):
Net income attributable to common stockholders
Increase in additional paid-in capital for the conversion of OP Units
into common stock
Change from net income attributable to common stockholders and
transfers from noncontrolling interests
$
$
Year ended December 31,
2018
2017
2016
65,603
$
62,647
$
51,456
70,452
23,529
24,044
136,055
$
86,176
$
75,500
F-28
As of December 31, 2018, there were approximately 303.3 million common stock and OP Units outstanding, of which
approximately 174.9 million, or 57.7%, were owned by us and approximately 128.4 million, or 42.3%, were owned by other
partners, including certain directors, officers and other members of executive management.
Private Perpetual Preferred Units
As of December 31, 2018, there were 1,560,360 Private Perpetual Preferred Units ("Preferred Units") which have a
liquidation preference of $16.62 per unit and which are entitled to receive cumulative preferential annual cash distributions of
$0.60 per unit payable in arrears on a quarterly basis. The Preferred Units are not redeemable at the option of the holders and
are redeemable at our option only in the case of specific defined events.
Dividends and Distributions
The following table summarizes the dividends paid on our Class A common stock and Class B common stock for the
years ended December 31, 2018, 2017 and 2016:
Record Date
December 17, 2018
September 14, 2018
June 15, 2018
March 15, 2018
December 15, 2017
September 15, 2017
June 15, 2017
March 15, 2017
December 15, 2016
September 19, 2016
June 15, 2016
March 16, 2016
Payment Date
December 31, 2018
September 28, 2018
June 29, 2018
March 30, 2018
December 29, 2017
September 29, 2017
June 30, 2017
March 31, 2017
December 29, 2016
September 30, 2016
June 30, 2016
March 31, 2016
Amount per Share
$0.105
$0.105
$0.105
$0.105
$0.105
$0.105
$0.105
$0.105
$0.105
$0.105
$0.105
$0.085
Total dividends paid to common securityholders during 2018, 2017 and 2016 were $70.9 million, $66.8 million and
$55.8 million, respectively. Total distributions paid to OP unitholders, excluding inter-company distributions, during 2018,
2017 and 2016 totaled $54.7 million, $59.2 million and $58.2 million, respectively. Total distributions paid to Preferred
unitholders during 2018, 2017 and 2016 were $0.9 million, $0.9 million, and $0.9 million, respectively.
Earnings and profits, which determine the tax treatment of distributions to securityholders, will differ from income
reported for financial reporting purposes due to the differences for federal income tax purposes, including, but not limited to,
treatment of loss on extinguishment of debt, revenue recognition, compensation expense, and basis of depreciable assets and
estimated useful lives used to compute depreciation. The 2018 dividends of $0.42 per share are classified for income tax
purposes 83.8% as taxable ordinary dividends eligible for the Section 199A deduction and 16.2% as a return of capital. The
2017 and 2016 dividends of $0.42 and $0.40 per share, respectively, are classified for income tax purposes as 100.0% taxable
ordinary dividends.
Incentive and Share-Based Compensation
The 2013 Plan provides for grants to our directors, employees and consultants consisting of stock options, restricted
stock, dividend equivalents, stock payments, performance shares, LTIP units, stock appreciation rights and other incentive
awards. An aggregate of approximately 12.2 million shares of our common stock are authorized for issuance under awards
granted pursuant to the 2013 Plan, and as of December 31, 2018, approximately 4.3 million shares of common stock remain
available for future issuance.
In May 2018, we made grants of LTIP units to our non-employee directors under the 2013 Plan. At such time, we
granted a total of 65,000 LTIP units that are subject to time-based vesting with fair market values of $1.0 million. The awards
vest ratably over three years from the date of the grant, subject generally to the director's continued service on our Board of
Directors.
F-29
In March 2018, we made grants of LTIP units to executive officers under the 2013 Plan. At such time, we granted to
executive officers a total of 386,876 LTIP units that are subject to time-based vesting and 1,737,917 LTIP units that are subject
to market-based vesting, with fair market values of $6.1 million for the time-based vesting awards and $9.6 million for the
market-based vesting awards. In March 2018, we made grants of LTIP units and restricted stock to certain other employees
under the 2013 Plan. At such time, we granted to certain other employees a total of 67,449 LTIP units and 39,608 shares of
restricted stock that are subject to time-based vesting and 223,950 LTIP units that are subject to market-based vesting, with fair
market values of $1.7 million for the time-based vesting awards and $1.1 million for the market-based vesting awards. The
awards subject to time-based vesting vest ratably over four years from January 1, 2018, subject generally to the grantee's
continued employment. The first installment vests on January 1, 2019 and the remainder will vest thereafter in three equal
annual installments. The vesting of the LTIP units subject to performance-based vesting is based on the achievement of
absolute and relative total stockholder return hurdles over a three-year performance period, commencing on January 1, 2018.
Following the completion of the three-year performance period, our compensation committee will determine the number of
LTIP units to which the grantee is entitled based on our performance relative to the performance hurdles set forth in the LTIP
unit award agreements the grantee entered into in connection with the award grant. These units then vest in two installments,
with the first installment vesting on January 1, 2021 and the second installment vesting on January 1, 2022, subject generally to
the grantee's continued employment on those dates.
In 2017, our board of directors determined to reinforce the alignment of our executive officers’ interests with that of
stockholders by designing a new bonus election program, under which named executive officers could elect to receive their
annual incentive bonus in any combination of (i) cash or vested LTIP's at the face amount of such bonus or (ii) time-vesting
LTIP's which would vest over three years, subject to continued employment, at 125% of such face amount. In February 2018,
we made grants of LTIP units to executive officers under the 2013 Plan in connection with the 2017 bonus election program.
We granted to executive officers a total of 238,609 LTIP units that are subject to time based vesting with a fair market value
$4.0 million. Of these LTIP units, 25,158 LTIP units vested immediately on the grant date and 213,451 LTIP units vest ratably
over three years from January 1, 2018, subject generally to the grantee's continued employment. The first installment vests on
January 1, 2019 and the remainder will vest thereafter in two equal annual installments.
In May 2017, we made grants of LTIP units to our non-employee directors under the 2013 Plan. At such time, we
granted a total of 50,408 LTIP units that are subject to time-based vesting with fair market values of $1.0 million. The awards
vest ratably over three years from the date of the grant, subject generally to the director's continued service on our Board of
Directors.
In March 2017, we made grants of LTIP units to executive officers under the 2013 Plan. At such time, we granted to
executive officers a total of 313,275 LTIP units that are subject to time-based vesting and 865,742 LTIP units that are subject to
market-based vesting, with fair market values of $6.1 million for the time-based vesting awards and $9.6 million for the
market-based vesting awards. In March 2017, we made grants of LTIP units and restricted stock to certain other employees
under the 2013 Plan. At such time, we granted to certain other employees a total of 47,993 LTIP units and 34,407 shares of
restricted stock that are subject to time-based vesting and 95,156 LTIP units that are subject to market-based vesting, with fair
market values of $1.6 million for the time-based vesting awards and $1.0 million for the market-based vesting awards. The
awards subject to time-based vesting vest ratably over four years from January 1, 2017, subject generally to the grantee's
continued employment. The first installment vests on January 1, 2018 and the remainder will vest thereafter in three equal
annual installments. The vesting of the LTIP units subject to performance-based vesting is based on the achievement of
absolute and relative total stockholder return hurdles over a three-year performance period, commencing on January 1, 2017.
Following the completion of the three-year performance period, our compensation committee will determine the number of
LTIP units to which the grantee is entitled based on our performance relative to the performance hurdles set forth in the LTIP
unit award agreements the grantee entered into in connection with the award grant. These units then vest in two installments,
with the first installment vesting on January 1, 2020 and the second installment vesting on January 1, 2021, subject generally to
the grantee's continued employment on those dates.
Share-based compensation is measured at the fair value of the award on the date of grant and recognized as an expense
on a straight-line basis over the vesting period. For the market-based LTIP units and restricted stock awards, the fair value of
the awards was estimated using a Monte Carlo Simulation model. Our stock price, along with the prices of the comparative
indexes, is assumed to follow the Geometric Brownian Motion Process. Geometric Brownian motion is a common assumption
when modeling in financial markets, as it allows the modeled quantity (in this case, the stock price) to vary randomly from its
current value and take any value greater than zero. The volatilities of the returns on our stock price and the comparative
indexes were estimated based on implied volatilities and historical volatilities using a six-year look-back period. The expected
growth rate of the stock prices over the performance period is determined with consideration of the risk free rate as of the grant
date. For LTIP unit awards that are time-based, the fair value of the awards was estimated based on the fair value of our stock
F-30
at the grant date discounted for the restriction period during which the LTIP units cannot be redeemed or transferred and the
uncertainty regarding if, and when, the book capital account of the LTIP units will equal that of the common units. For
restricted stock awards that are time-based, we estimate the stock compensation expense based on the fair value of the stock at
the grant date.
LTIP units and restricted stock issued during the year ended December 31, 2018, 2017 and 2016 were valued at $23.6
million, $19.4 million and $18.4 million, respectively. The weighted-average per unit or share fair value was $8.54, $13.77 and
$9.60 for grants issued in 2018, 2017 and 2016, respectively. The per unit or share granted in 2018 was estimated on the
respective dates of grant using the following assumptions: an expected life of 2.8 years, a dividend rate of 2.30%, a risk-free
interest rate of 2.50% and an expected price volatility of 20.0%. The per unit or share granted in 2017 was estimated on the
respective dates of grant using the following assumptions: an expected life of 2.8 years, a dividend rate of 2.05%, a risk-free
interest rate of 1.55% and an expected price volatility of 20.0%. The per unit or share granted in 2016 was estimated on the
respective dates of grant using the following assumptions: an expected life of 2.8 years, a dividend rate of 2.10%, a risk-free
interest rate of 0.84% and an expected price volatility of 24.0%.
No other stock options, dividend equivalents, or stock appreciation rights were issued or outstanding in 2018, 2017
and 2016.
The following is a summary of restricted stock and LTIP unit activity for the year ended December 31, 2018:
Unvested balance at December 31, 2017
Vested
Granted
Forfeited or unearned
Unvested balance at December 31, 2018
Restricted
Stock
LTIP Units
Weighted Average
Grant Fair Value
90,791
(30,693)
39,608
(8,548)
91,158
3,588,609
(495,303)
2,719,801
(110,286)
5,702,821
$
$
11.20
14.59
8.54
8.50
9.68
The total fair value of LTIP units and restricted stock that vested during 2018, 2017 and 2016 was $7.7 million, $7.6
million and $5.1 million, respectively.
The LTIP unit and restricted stock award agreements will immediately vest when a grantee attains the (i) age of 60 and
(ii) the date on which grantee has first completed ten years of continuous service with us or our affiliates. For award
agreements that qualify, we recognize noncash compensation expense on the grant date for the time-based awards and ratably
over the vesting period for the market-based awards, and accordingly, we recognized $1.8 million, $1.0 million and $0.7
million for the years ended December 31, 2018, 2017 and 2016, respectively. Unrecognized compensation expense was $1.0
million at December 31, 2018, which will be recognized over a weighted average period of 2.1 years.
For the remainder of the LTIP unit and restricted stock awards, we recognize noncash compensation expense ratably
over the vesting period, and accordingly, we recognized $17.0 million, $13.1 million and $9.0 million in noncash compensation
expense for the years ended December 31, 2018, 2017 and 2016, respectively. Unrecognized compensation expense was $27.4
million at December 31, 2018, which will be recognized over a weighted average period of 2.2 years.
F-31
Earnings Per Share
Earnings per share for the years ended December 31, 2018, 2017 and 2016 is computed as follows (amounts in
thousands, except per share amounts):
Numerator - Basic:
Net income
Private perpetual preferred unit distributions
Net income attributable to non-controlling interests
Earnings allocated to unvested shares
Net income attributable to common stockholders - basic
Numerator - Diluted:
Net income
Private perpetual preferred unit distributions
Earnings allocated to unvested shares
Net income attributable to common stockholders - diluted
Denominator:
Weighted average shares outstanding - basic
Operating partnership units
Effect of dilutive securities:
Stock-based compensation plans
Exchangeable senior notes
Weighted average shares outstanding - diluted
Earnings per share - basic
Earnings per share - diluted
For the Year Ended December 31,
2018
2017
2016
$
$
$
$
117,253
(936)
(50,714)
(38)
65,565
117,253
(936)
(38)
116,279
167,571
129,687
1
—
$
$
$
$
118,253
(936)
(54,670)
(36)
62,611
118,253
(936)
(36)
117,281
158,380
138,075
775
819
107,250
(936)
(54,858)
(36)
51,420
107,250
(936)
(36)
106,278
133,881
142,967
454
266
297,259
298,049
277,568
0.39
0.39
$
$
0.40
0.39
$
$
0.38
0.38
$
$
$
$
$
$
There were 485,865, 834,267, and 800,746 antidilutive shares for the years ended December 31, 2018, 2017 and 2016,
respectively.
F-32
10. Related Party Transactions
QIA
In connection with any new issuance by us of common equity securities, for so long as QIA maintains at least a 5.0%
fully diluted economic interest in us and remains in material compliance with the terms of the stockholders agreement, QIA
will have the right (but not the obligation) to purchase its pro rata share of such new equity securities in the form of newly
issued shares of Class A common stock. These “top up” rights are generally exercisable on a quarterly basis, or sooner if we or
the operating partnership issues new equity securities in an issuance in excess of $1.0 million.
Through August 2021, to the extent QIA remains in material compliance with the terms of the Stockholders
Agreement, 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 a joint venture partner. The right of first offer
period will be extended for a 30-month term if at least one joint venture transaction is consummated among us and QIA during
the initial five year term, and will be extended for a further 30-month term if at least one joint venture transaction is
consummated during such initial 30-month extension term.
Subject to certain minimum thresholds and conditions, we will indemnify QIA for certain applicable U.S. federal and
state taxes payable by QIA in connection with dividends paid by us on the QIA shares that are attributable to capital gains from
the sale or exchange of any U.S. real property interests. Our obligation to indemnify QIA will terminate one year following the
date on which the sum of the QIA shares then owned by QIA falls below 10% of our outstanding common shares.
Tax Protection Agreement
In 2013, we entered into a tax protection agreement with Anthony E. Malkin and Peter L. Malkin that is intended to
protect to a limited extent the Malkin Group and an additional third party investor in Metro Center (who was one of the original
landowners and was involved in the development of the property) against certain tax consequences arising from a transaction
involving one of four properties, which we refer to in this section as the protected assets.
First, this agreement provides that our operating partnership will not sell, exchange, transfer or otherwise dispose of
such protected assets, or any interest in a protected asset, until (i) October 7, 2025, with respect to one protected asset, First
Stamford Place, and (ii) the later of (x) October 7, 2021 and (y) the death of both Peter L. Malkin and Isabel W. Malkin, who
are 85 and 82 years old, respectively, for the three other protected assets, Metro Center, 10 Bank Street and 1542 Third Avenue,
unless:
(1)
Anthony E. Malkin consents to the sale, exchange, transfer or other disposition; or
our operating partnership delivers to each protected party thereunder a cash payment intended to approximate the tax
(2)
liability arising from the recognition of the pre-contribution built-in gain resulting from the sale, exchange, transfer or other
disposition of such protected asset (with the pre-contribution “built-in gain” being not more than the taxable gain that would
have been recognized by such protected party if the protected asset been sold for fair market value in a taxable transaction at
the time of the consolidation) plus an additional amount so that, after the payment of all taxes on amounts received pursuant to
the agreement (including any tax liability incurred as a result of receiving such payment), the protected party retains an amount
equal to such protected party’s total tax liability incurred as a result of the recognition of the pre-contribution built-in gain
pursuant to such sale, exchange, transfer or other disposition; or
(3)
the disposition does not result in a recognition of any built-in gain by the protected party.
Second, with respect to the Malkin Group, including Anthony E. Malkin and Peter L. Malkin, and one additional third
party investor in Metro Center (who was one of the original landowners and was involved in the development of the property),
to protect against gain recognition resulting from a reduction in such continuing investor’s share of the operating partnership
liabilities, the agreement provides that during the period from October 7, 2013 until such continuing investor owns less than the
aggregate number of operating partnership units and shares of common stock equal to 50% of the aggregate number of such
units and shares such investor received in the formation transactions, which we refer to in this section as the tax protection
period, our operating partnership will (i) refrain from prepaying any amounts outstanding under any indebtedness secured by
the protected assets and (ii) use its commercially reasonable efforts to refinance such indebtedness at or prior to maturity at its
current principal amount, or, if our operating partnership is unable to refinance such indebtedness at its current principal
F-33
amount, at the highest principal amount possible. The agreement also provides that, during the tax protection period, our
operating partnership will make available to such continuing investors the opportunity (i) to enter into a “bottom dollar”
guarantee of their allocable share of $160.0 million of aggregate indebtedness of our operating partnership meeting certain
requirements or (ii) in the event our operating partnership has recourse debt outstanding and such a continuing investor agrees,
in lieu of guaranteeing debt pursuant to clause (i) above, to enter into a deficit restoration obligation, in each case, in a manner
intended to provide an allocation of operating partnership liabilities to the continuing investor. In the event that a continuing
investor guarantees debt of our operating partnership, such continuing investor will be responsible, under certain
circumstances, for the repayment of the guaranteed amount to the lender in the event that the lender would otherwise recognize
a loss on the loan, such as, for example, if property securing the loan was foreclosed and the value was not sufficient to repay a
certain amount of the debt. A deficit restoration obligation is a continuing investor’s obligation, under certain circumstances, to
contribute a designated amount of capital to our operating partnership upon our operating partnership’s liquidation in the event
that the assets of our operating partnership are insufficient to repay our operating partnership liabilities.
Because we expect that our operating partnership will at all times have sufficient liabilities to allow it to meet its
obligations to allocate liabilities to its partners that are protected parties under the tax protection agreement, our operating
partnership’s indemnification obligation with respect to “certain tax liabilities” would generally arise only in the event that the
operating partnership disposes in a taxable transaction of a protected asset within the period specified above in a taxable
transaction. In the event of such a disposition, the amount of our operating partnership’s indemnification obligation would
depend on several factors, including the amount of “built-in gain,” if any, recognized and allocated to the indemnified partners
with respect to such disposition and the effective tax rate to be applied to such gain at the time of such disposition.
The operating partnership agreement requires that allocations with respect to such acquired property be made in a
manner consistent with Section 704(c) of the Code. Treasury Regulations issued under Section 704(c) of the Code provide
partnerships with a choice of several methods of allocating book-tax differences. Under the tax protection agreement, our
operating partnership has agreed to use the “traditional method” for accounting for book-tax differences for the properties
acquired by our operating partnership in the consolidation. Under the traditional method, which is the least favorable method
from our perspective, the carryover basis of the acquired properties in the hands of our operating partnership (i) may cause us
to be allocated lower amounts of depreciation and other deductions for tax purposes than would be allocated to us if all of the
acquired properties were to have a tax basis equal to their fair market value at the time of acquisition and (ii) in the event of a
sale of such properties, could cause us to be allocated gain in excess of its corresponding economic or book gain (or taxable
loss that is less than its economic or book loss), with a corresponding benefit to the partners transferring such properties to our
operating partnership for interests in our operating partnership.
Registration Rights
We entered into a registration rights agreement with certain persons receiving shares of our common stock or
operating partnership units in the formation transactions, including certain members of our senior management team and our
other continuing investors. In connection therewith, we have filed, and are obligated to maintain the effectiveness of, an
automatically effective shelf registration statement, along with a prospectus supplement, with respect to, among other things,
shares of our Class A common stock that may be issued upon redemption of operating partnership units or issued upon
conversion of shares of Class B common stock to continuing investors in the public existing entities. Pursuant to the
registration rights agreement, under certain circumstances, we will also be required to undertake an underwritten offering upon
the written request of the Malkin Group, which we refer to as the holder, provided (i) the registrable shares to be registered in
such offering will have a market value of at least $150.0 million, (ii) we will not be obligated to effect more than two
underwritten offerings during any 12-month period; and (iii) the holder will not have the ability to effect more than four
underwritten offerings. In addition, if we file a registration statement with respect to an underwritten offering for our own
account or on behalf of the holder, the holder will have the right, subject to certain limitations, to register such number of
registrable shares held by him, her or it as each such holder requests. With respect to underwritten offerings on behalf of the
holder, we will have the right to register such number of primary shares as we request; provided, however, that if cut backs are
required by the managing underwriters of such an offering, our primary shares shall be cutback first (but in no event will our
shares be cut back to less than $25.0 million).
We have also agreed to indemnify the persons receiving rights against specified liabilities, including certain potential
liabilities arising under the Securities Act, or to contribute to the payments such persons may be required to make in respect
thereof. We have agreed to pay all of the expenses relating to the registration and any underwritten offerings of such securities,
including, without limitation, all registration, listing, filing and stock exchange or FINRA fees, all fees and expenses of
complying with securities or “blue sky” laws, all printing expenses and all fees and disbursements of counsel and independent
public accountants retained by us, but excluding underwriting discounts and commissions, any out-of-pocket expenses (except
F-34
we will pay any holder’s out-of-pocket fees (including disbursements of such holder’s counsel, accountants and other advisors)
up to $25,000 in the aggregate for each underwritten offering and each filing of a resale shelf registration statement or demand
registration statement), and any transfer taxes.
Employment Agreement and Change in Control Severance Agreements
We entered into an employment agreement with Anthony E. Malkin, which provides for salary, bonuses and other
benefits, including among other things, severance benefits upon a termination of employment under certain circumstances and
the issuance of equity awards. In addition, we entered into change in control severance agreements with Thomas P. Durels,
David A. Karp, Thomas N. Keltner, Jr. and John B. Kessler.
Indemnification of Our Directors and Officers
We entered into indemnification agreements with each of our directors, executive officers, chairman emeritus and
certain other parties, providing for the indemnification by us for certain liabilities and expenses incurred as a result of actions
brought, or threatened to be brought, against (i) our directors, executive officers and chairman emeritus and (ii) our executive
officers, chairman emeritus and certain other parties who are former members, managers, securityholders, directors, limited
partners, general partners, officers or controlling persons of our predecessor in such capacities.
Excluded Properties and Businesses
The Malkin Group, including Anthony E. Malkin, our Chairman and Chief Executive Officer, owns non-controlling
interests in, and Anthony E. Malkin and Peter L. Malkin control the general partners or managers of, the entities that own
interests in eight multi-family properties, five net leased retail properties, (including one single tenant retail property in
Greenwich, Connecticut), and a parcel that is being developed for residential use. The Malkin Group also owns non-controlling
interests in one Manhattan office property, two Manhattan retail properties and several retail properties outside of Manhattan,
none of which were contributed to us in the formation transactions. We refer to the non-controlling interests described above
collectively as the excluded properties. In addition, the Malkin Group owns interests in two mezzanine and senior equity funds,
an industrial fund, and five residential properties, and which we refer to collectively as the excluded businesses. Other than the
Greenwich retail property, we do not believe that the excluded properties or the excluded businesses are consistent with our
portfolio geographic or property type composition, management or strategic direction.
Pursuant to management and/or service agreements with the owners of interests in those excluded properties and
services agreements with five residential property managers and the managers of certain other excluded businesses which
historically were managed by affiliates of our predecessor, we are designated as the asset manager (supervisor) and/or property
manager of the excluded properties and will provide services to the owners of certain of the excluded properties and the five
residential property managers and provide services and access to office space to the existing managers of the other excluded
businesses. As the manager or service provider, we are paid a management or other fee with respect to those excluded
properties and excluded businesses where our predecessor had previously received a management fee on the same terms as the
fee paid to our predecessor, and reimbursed for our costs in providing the management and other services to those excluded
properties and businesses where our predecessor had not previously received a management fee. Our management of the
excluded properties and provision of services to the five residential property managers and the existing managers of the other
excluded businesses represent a minimal portion of our overall business. There is no established time period in which we will
manage such properties or provide services to the owners of certain of the excluded properties and the five residential property
managers and provide services and access to office space to the existing managers of the other excluded businesses; and Peter
L. Malkin and Anthony E. Malkin expect to sell certain properties or unwind these businesses over time. We are not precluded
from acquiring all or certain interests in the excluded properties or businesses. If we were to attempt any such acquisition, we
anticipate that Anthony E. Malkin, our Chairman and Chief Executive Officer, will not participate in the negotiation process on
our behalf with respect to our potential acquisition of any of these excluded properties or businesses, and the approval of a
majority of our independent directors will be required to approve any such acquisition.
Services are and were provided by us to excluded properties and businesses. These transactions are reflected in our
consolidated statements of income as third-party management and other fees.
We earned asset management (supervisory) and service fees from excluded properties and businesses of $1.1 million,
$1.1 million and $1.4 million during the years ended December 31, 2018, 2017 and 2016, respectively.
F-35
We earned property management fees from excluded properties of $0.3 million, $0.3 million and $0.4 million during
the years ended December 31, 2018, 2017 and 2016, respectively.
Other
We were reimbursed at allocable cost for 647 square feet of shared office space, equipment, and administrative support
shared with us in our corporate offices, as was done prior to our formation, and we received rent generally at market rental rate
for 3,074 square feet of leased space, from entities affiliated with Anthony E. Malkin at one of our properties. Total revenue
aggregated $0.2 million for the year ended December 31, 2016.
During August 2016, such entities moved from the previously shared office and leased spaces to relocate to a new
5,351 square foot leased space at one of our properties, paying rent generally at a market rental rate. Under such new lease, the
tenant has the right to cancel such lease without special payment on 90 days’ notice. We now have a shared use agreement with
such tenant, to occupy a portion of the leased premises as the office location for Peter L. Malkin, our chairman emeritus and
employee, utilizing approximately 15% of the space, for which we pay an allocable pro rata share of the cost to such tenant. We
also have agreements with these entities and excluded properties and businesses to provide them with general computer-related
support. Total revenue aggregated $0.3 million, $0.4 million and $0.1 million for the years ended December 31, 2018, 2017 and
2016, respectively.
During 2016 and in connection with our office move, Peter L. Malkin purchased miscellaneous furniture and artwork
from us at their appraised value of $23,300. Remaining office furniture was disposed.
One of our directors, James D. Robinson IV, is a general partner in an investment fund, which owns more than a 10%
economic and voting interest in one of our tenants, OnDeck Capital, with an annualized rent of $4.5 million and $5.8 million as
of December 31, 2018 and 2017, respectively.
11. Income Taxes
TRS Holdings and Observatory TRS are taxable entities and their consolidated provision for income taxes consisted of
the following for the years ended December 31, 2018, 2017 and 2016 (amounts in thousands):
Current:
Federal
State and local
Total current
Deferred:
Federal
State and local
Total deferred
Income tax expense
For the Year Ended December 31,
2018
2017
2016
$
$
$
(2,389)
(2,253)
(4,642)
—
—
—
(4,642)
$
(3,923)
(2,304)
(6,227)
(446)
—
(446)
(6,673)
$
$
(3,632)
(2,055)
(5,687)
(291)
(168)
(459)
(6,146)
In December 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted. The TCJA includes a number of changes to
existing U.S. tax laws, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent, effective
January 1, 2018. We measure deferred tax assets using enacted tax rates that will apply in the years in which the temporary
differences are expected to be recovered or paid. Accordingly, our deferred tax assets were remeasured to reflect the reduction in
the U.S. corporate income tax rate, resulting in a $0.4 million increase in income tax expense for the year ended December 31,
2017 and a corresponding decrease of the same amount in our deferred assets as of December 31, 2017.
The effective income tax rate is 34.0%, 48.5% and 44.8% for the years ended December 31, 2018, 2017 and 2016,
respectively. The actual tax provision differed from that computed at the federal statutory corporate rate as follows (amounts in
thousands):
F-36
Federal tax expense at statutory rate
State income taxes, net of federal benefit
Corporate income tax rate adjustment
Income tax expense
For the Year Ended December 31,
2018
2017
2016
$
$
(2,844) $
(1,798)
—
(4,642) $
(4,684) $
(1,543)
(446)
(6,673) $
(4,629)
(1,517)
—
(6,146)
The income tax effects of temporary differences that give rise to deferred tax assets are presented below as of
December 31, 2018, 2017 and 2016 (amounts in thousands):
Deferred tax assets:
Deferred revenue on unredeemed observatory admission ticket sales $
1,396
$
1,395
$
198
2018
2017
2016
Deferred tax assets at December 31, 2018, 2017 and 2016, respectively, are attributable to the inclusion of deferred
revenue on Observatory admission ticket sales not redeemed at year-end in determining income for tax reporting purposes and
are included in prepaid expenses and other assets on the consolidated balance sheets. No valuation allowance has been
recorded against the deferred tax asset because the Company believes that the deferred tax asset will, more likely than not, be
realized. This determination is based on the Observatory TRS’s anticipated future taxable income and the reversal of the
deferred tax asset.
At December 31, 2018, 2017 and 2016, the TRS entities have no amount of unrecognized tax benefits. For tax years
2018, 2017, 2016 and 2015, the United States federal and state tax returns are open for examination.
12. Segment Reporting
We have identified two reportable segments: (1) Real Estate and (2) Observatory. Our real estate segment includes all
activities related to the ownership, management, operation, acquisition, repositioning and disposition of our real estate assets.
Our observatory segment operates the 86th and 102nd floor observatories at the Empire State Building. These two lines of
businesses are managed separately because each business requires different support infrastructures, provides different services
and has dissimilar economic characteristics such as investments needed, stream of revenues and different marketing strategies.
We account for intersegment sales and rents as if the sales or rents were to third parties, that is, at current market prices.
F-37
The following tables provide components of segment profit for each segment for the years ended December 31, 2018,
2017 and 2016, as reviewed by management (amounts in thousands):
Revenues:
Rental revenue
Intercompany rental revenue
Tenant expense reimbursement
Observatory revenue
Lease termination fees
Third-party management and other fees
Other revenue and fees
Total revenues
Operating expenses:
Property operating expenses
Intercompany rent expense
Ground rent expense
General and administrative expenses
Observatory expenses
Real estate taxes
Depreciation and amortization
Total operating expenses
Total operating income
Other income (expense):
Interest income
Interest expense
Income before income taxes
Income tax expense
Net income
Segment assets
Expenditures for segment assets
2018
Real Estate
Observatory
Intersegment
Elimination
Total
$
493,231
$
— $
— $
493,231
79,954
72,372
—
20,847
1,440
12,394
—
—
131,227
—
—
—
(79,954)
—
—
—
—
—
—
72,372
131,227
20,847
1,440
12,394
680,238
131,227
(79,954)
731,511
167,379
—
9,326
52,674
—
110,000
168,430
507,809
172,429
10,661
(79,623)
103,467
(1,114)
102,353
3,930,330
201,685
$
$
$
$
$
$
—
79,954
—
—
32,767
—
78
112,799
18,428
—
—
18,428
(3,528)
14,900
265,450
54,811
$
$
$
—
167,379
(79,954)
—
—
—
—
—
(79,954)
—
—
—
—
—
—
9,326
52,674
32,767
110,000
168,508
540,654
190,857
10,661
(79,623)
121,895
(4,642)
— $
117,253
— $
4,195,780
— $
256,496
F-38
Revenues:
Rental revenue
Intercompany rental revenue
Tenant expense reimbursement
Observatory revenue
Lease termination fees
Third-party management and other fees
Other revenue and fees
Total revenues
Operating expenses:
Property operating expenses
Intercompany rent expense
Ground rent expense
General and administrative expenses
Observatory expenses
Real estate taxes
Depreciation and amortization
Total operating expenses
Total operating income (loss)
Other income (expense):
Interest income
Interest expense
Loss on early extinguishment of debt
Loss from derivative financial instrument
Income before income taxes
Income tax expense
Net income
Segment assets
Expenditures for segment assets
2017
Real Estate
Observatory
Intersegment
Elimination
Total
$
483,944
$
— $
— $
483,944
77,646
73,679
—
13,551
1,400
9,834
—
—
127,118
—
—
—
(77,646)
—
—
—
—
—
—
73,679
127,118
13,551
1,400
9,834
660,054
127,118
(77,646)
709,526
163,531
—
9,326
50,315
—
102,466
160,630
486,268
173,786
2,942
(68,473)
(2,157)
(289)
105,809
(1,306)
104,503
3,670,907
191,541
$
$
$
$
$
$
—
77,646
—
—
30,275
—
80
108,001
19,117
—
—
—
—
19,117
(5,367)
13,750
260,440
36,621
$
$
$
—
163,531
(77,646)
—
—
—
—
—
(77,646)
—
—
—
—
—
—
—
—
9,326
50,315
30,275
102,466
160,710
516,623
192,903
2,942
(68,473)
(2,157)
(289)
124,926
(6,673)
— $
118,253
— $
3,931,347
— $
228,162
F-39
Revenues:
Rental revenue
Intercompany rental revenue
Tenant expense reimbursement
Observatory revenue
Lease termination fees
Third-party management and other fees
Other revenue and fees
Total revenues
Operating expenses:
Property operating expenses
Intercompany rent expense
Ground rent expense
General and administrative expenses
Observatory expenses
Real estate taxes
Acquisition expenses
Depreciation and amortization
Total operating expenses
Total operating income (loss)
Other income (expense):
Interest income
Interest expense
Loss on early extinguishment of debt
Income (loss) before income taxes
Income tax expense
Net income
Segment assets
Expenditures for segment assets
2016
Real Estate
Observatory
Intersegment
Elimination
Total
$
460,653
$
— $
— $
460,653
75,658
73,459
—
7,676
1,766
8,970
—
—
124,814
—
—
15
(75,658)
—
—
—
—
—
—
73,459
124,814
7,676
1,766
8,985
628,182
124,829
(75,658)
677,353
153,850
—
9,326
49,078
—
96,061
98
154,817
463,230
164,952
647
(70,595)
(552)
94,452
(1,361)
93,091
3,641,844
197,680
$
$
$
$
$
$
—
75,658
—
—
29,833
—
—
394
105,885
18,944
—
—
—
18,944
(4,785)
14,159
249,109
$
$
—
153,850
(75,658)
—
—
—
—
—
—
(75,658)
—
—
—
—
—
—
—
9,326
49,078
29,833
96,061
98
155,211
493,457
183,896
647
(70,595)
(552)
113,396
(6,146)
— $
107,250
— $
3,890,953
— $
— $
197,680
F-40
13. Summary of Quarterly Financial Information (unaudited)
The quarterly results of operations of our company for the years ended December 31, 2018, 2017 and 2016 are as
follows (amounts in thousands):
Revenues
Operating income
Net income
Net income attributable to common stockholders
Net income per share attributable to common stockholders:
Basic and diluted
Revenues
Operating income
Net income
Net income attributable to common stockholders
Net income per share attributable to common stockholders:
Basic and diluted
Revenues
Operating income
Net income
Net income attributable to common stockholders
Net income per share attributable to common stockholders:
Basic and diluted
14. Subsequent Events
None.
March 31,
2018
167,271
34,164
18,058
9,768
0.06
March 31,
2017
164,333
36,045
19,145
9,985
0.06
March 31,
2016
157,057
34,097
16,705
7,428
0.06
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
June 30,
2018
178,529
September 30,
2018
186,402
$
December 31,
2018
199,309
$
49,665
30,184
16,651
0.10
$
$
$
$
48,538
29,230
16,342
0.10
$
$
$
$
58,490
39,781
22,842
0.13
June 30,
2017
176,349
September 30,
2017
186,547
$
December 31,
2017
182,297
$
50,659
31,359
16,584
0.10
$
$
$
$
56,008
35,489
18,806
0.12
$
$
$
$
50,191
32,260
17,272
0.11
June 30,
2016
165,785
September 30,
2016
175,704
$
December 31,
2016
178,807
$
44,162
24,640
11,089
0.09
$
$
$
$
53,442
32,897
15,973
0.12
$
$
$
$
52,195
33,008
16,966
0.11
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
F-41
Empire State Realty Trust, Inc.
Schedule II—Valuation and Qualifying Accounts
(amounts in thousands)
Description
Year ended December 31, 2018
Allowance for doubtful accounts
Year ended December 31, 2017
Allowance for doubtful accounts
Year ended December 31, 2016
Allowance for doubtful accounts
Balance At
Beginning
of Year
Additions
Charged
Against
Operations
Uncollectible
Accounts
Written-Off
Balance
at End of
Year
$
$
$
1,607
3,723
3,037
$
$
$
(811) $
(289) $
507
(1,650) $
(466) $
1,607
908
$
(222) $
3,723
F-42
Empire State Realty Trust, Inc.
Schedule III—Real Estate and Accumulated Depreciation
(amounts in thousands)
Initial Cost to
the Company
Cost Capitalized
Subsequent to
Acquisition
Gross Amount at
which Carried
at 12/31/18
Encumbr
ances
Land
Building
&
Improvem
ents
Improveme
nts
Carry
ing
Costs
Land
Buildings
&
Improvem
ents
Total
Accumulated
Depreciation
Date of
Construc
tion
Date
Acquired
Life on
which
depreciation
in latest
income
statement is
computed
$
— $ 13,630
$ 244,461
$
106,780
n/a
$ 13,630
$
351,241
$
364,871
$
(41,629)
1954
2014
various
—
—
96,338
40,261
—
—
136,599
136,599
(31,601)
1930
2014
various
158,484
91,435
120,190
7,491
n/a
91,435
127,681
219,116
(22,331)
1915
2013
various
—
—
—
—
—
—
—
102,518
27,161
—
—
129,679
129,679
(25,312)
1929
2013
various
2,117
5,041
141,581
n/a
2,117
146,622
148,739
(36,058)
1921
1953
various
1,100
2,600
94,778
n/a
1,100
97,378
98,478
(43,164)
1923
1950
various
1,233
1,809
57,938
n/a
1,233
59,747
60,980
(26,549)
1924
1953
various
21,551
38,934
895,989
n/a
21,551
934,923
956,474
(211,068)
1930
2013
various
7,240
17,490
241,218
n/a
7,222
258,726
265,948
(109,502)
1930
1954
various
Type
office
/
retail
office
/
retail
office
/
retail
office
/
retail
office/
retail
office/
retail
office/
retail
office/
retail
office/
retail
office
178,616
22,952
122,739
63,292
n/a
24,862
184,121
208,983
(78,570)
1986
2001
various
office
91,592
5,313
28,602
15,301
n/a
5,313
43,903
49,216
(30,763)
1987
1984
various
office
29,614
2,262
12,820
22,253
n/a
2,262
35,073
37,335
(12,876)
1985
1994
various
office
—
4,571
25,915
22,198
n/a
4,571
48,113
52,684
(23,147)
1987
1999
various
office
33,316
5,612
31,803
18,412
n/a
5,612
50,215
55,827
(21,134)
1989
1999
various
retail
49,116
5,003
12,866
1,966
n/a
5,003
14,832
19,835
(7,801)
1987
1996
various
retail
29,459
2,239
15,266
425
n/a
2,239
15,691
17,930
(7,774)
1991
1999
various
retail
38,370
4,462
15,817
783
n/a
4,462
16,600
21,062
(8,590)
1962
1998
various
retail
retail
—
—
2,782
15,766
1,046
n/a
2,782
16,812
19,594
(7,113)
1922
2003
various
1,243
7,043
321
n/a
1,260
7,347
8,607
(2,322)
1900
2006
various
land
—
4,542
—
7,987
—
12,529
—
12,529
—
n/a
n/a
n/a
$ 608,567
$ 199,287
$ 918,018
$ 1,767,181
$ — $ 209,183
$ 2,675,303
$ 2,884,486
$
(747,304)
Development
111 West 33rd
Street, New
York, NY
1400
Broadway,
New York, NY
1333
Broadway,
New York, NY
1350
Broadway,
New York, NY
250 West 57th
Street, New
York, NY
501 Seventh
Avenue, New
York, NY
1359
Broadway,
New York, NY
350 Fifth
Avenue
(Empire State
Building),
New York, NY
One Grand
Central Place,
New York, NY
First Stamford
Place,
Stamford, CT
One Station
Place,
Stamford, CT
(Metro Center)
383 Main
Avenue,
Norwalk, CT
500
Mamaroneck
Avenue,
Harrison, NY
10 Bank
Street, White
Plains, NY
10 Union
Square, New
York, NY
1542 Third
Avenue, New
York, NY
1010 Third
Avenue, New
York, NY and
77 West 55th
Street, New
York, NY
69-97 Main
Street,
Westport, CT
103-107 Main
Street,
Westport, CT
Property for
development at
the
Transportation
Hub in
Stamford, CT
Totals
F-43
Empire State Realty Trust, Inc.
Notes to Schedule III—Real Estate and Accumulated Depreciation
(amounts in thousands)
1. Reconciliation of Investment Properties
The changes in our investment properties for the years ended December 31, 2018, 2017 and 2016 are as follows:
Balance, beginning of year
Acquisition of new properties
Improvements
Disposals
Balance, end of year
2018
2,667,655
—
256,496
(39,665)
2,884,486
$
$
2017
2,458,629
—
228,162
(19,136)
2,667,655
$
$
2016
2,276,330
—
197,680
(15,381)
2,458,629
$
$
The unaudited aggregate cost of investment properties for federal income tax purposes as of December 31, 2018 was
$2.5 billion.
2. Reconciliation of Accumulated Depreciation
The changes in our accumulated depreciation for the years ended December 31, 2018, 2017 and 2016 are as follows:
Balance, beginning of year
Depreciation expense
Disposals
Balance, end of year
2018
656,900
130,069
(39,665)
747,304
$
$
2017
556,546
119,490
(19,136)
656,900
$
$
2016
465,584
106,343
(15,381)
556,546
$
$
Depreciation of investment properties reflected in the combined statements of income is calculated over the estimated
original lives of the assets as follows:
Buildings
Building improvements
Tenant improvements
39 years
39 years or useful life
Term of related lease
F-44
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Corporate Information
CORPORATE OFFICES
111 West 33rd Street, 12th Floor, New York, NY 10120
BOARD OF DIRECTORS
Anthony E. Malkin
Chairman
William H. Berkman 3, 4
Director
Chair, Finance Committee
Leslie D. Biddle 1, 4
Director
Thomas J. DeRosa 1
Director
Steven J. Gilbert 2, 3, 4
Lead Director
S. Michael Giliberto 1, 3, 4
Director
Chair, Audit Committee
James D. Robinson IV 2, 4
Director
Chair, Compensation Committee
Chair, Nominating and Corporate
Governance Committee
EXECUTIVE MANAGEMENT
Anthony E. Malkin
Chairman and Chief Executive Officer
John B. Kessler
President and Chief Operating Officer
Thomas P. Durels
Executive Vice President,
Real Estate
David A. Karp
Executive Vice President and
Chief Financial Officer
Thomas N. Keltner, Jr.
Executive Vice President, General
Counsel and Secretary
COMMITTEE MEMBERSHIPS:
1 Audit Committee
2 Compensation Committee
3 Finance Committee
4 Nominating and Corporate Governance Committee
STOCKHOLDER ACCOUNT
ASSISTANCE
Registered stockholder records are
maintained by our Transfer Agent:
American Stock Transfer &
Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Shareholder Service Number:
(800) 937-5449
www.amstock.com
FORM 10-K
Our Form 10-K is incorporated
herein and has been filed with
the Securities and Exchange
Commission. To request a copy
of our Form 10-K, free of charge,
from the Company, please contact
Investor Relations.
INVESTOR RELATIONS
Company information is available upon
request without charge. Please contact
the Investor Relations Department at
(212) 850-2678 or by email at
ir@empirestaterealtytrust.com
ANNUAL STOCKHOLDERS
MEETING
State Grill
21 West 33rd Street
New York, New York 10118
May 16, 2019 at 11:00 a.m. EST
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
5 Times Square
New York, New York 10036
STOCK EXCHANGE
The New York Stock Exchange – NYSE
Ticker Symbol – ESRT
Front Cover - Empire State Building's New Observatory Entrance - 2-story building model 1 Shutterstock's lounge area at the Empire State Building 2 Empire State Building's New Observatory Lobby
3 Empire State Building's New Observatory Red Carpet area 4 JCDecaux’s pantry at the Empire State Building - Photo by Chris Cooper 5 PartnerRe’s lounge area at First Stamford Place
6 Shutterstock's pantry at the Empire State Building 7 Empire State Realty Trust’s open office space at 111 West 33rd Street 8 Gerson Lehrman Group's (GLG) pantry at One Grand Central Place
9 Mast-Jägermeister’s pantry at 10 Bank Street Back Cover - Empire State Building's Observatory Welcome Wall
PHOTO CREDITS:
e m p i r e s t a t e r e a l t y t r u s t . c o m