EMPIRE STATE REALTY TRUST, INC. Item 2.02. Results of Operations and Financial Condition.
OnJuly 29, 2020 ,Empire State Realty Trust, Inc. (the "Company" or "we") issued a press release announcing its financial results for the second quarter 2020. The press release referred to certain supplemental information that is available on the Company's website. The press release and supplemental report are attached hereto as Exhibits 99.1 and 99.2, respectively, and are incorporated by reference herein. The information in Item 2.02 of this Current Report, including Exhibits 99.1 and 99.2, is being furnished and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that Section. Such information shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act, unless it is specifically incorporated by reference therein.
Item 5.02. Departure of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain
Officers.
In view of the ongoing impact of the
COVID-19
pandemic on the Company and Empire State Realty OP, L.P., the limited
partnership through which the Company conducts its operations, each of Anthony
E. Malkin , Chairman, President and Chief Executive Officer, and Thomas P.
Durels , Executive Vice President, Real Estate, has volunteered to reduce his
annual base salary for the remainder of 2020, effective August 1, 2020 through
December 31, 2020 . Mr. Malkin's salary will be reduced by
one-third
(1/3
rd
), so that his new base salary rate is $540,000 (instead of $810,000 ) per annum,
and Mr. Durels' salary will be reduced by
one-fourth
(1/4
th
), so that his new base salary rate is $525,000 (instead of $700,000 ) per annum.
Mr. Malkin's base salary reduction is in addition to the salary reduction to
$1.00 that he voluntarily took for the second quarter of 2020, as announced in
the Company's Current Report on
Form 8-K
dated May 11, 2020.
Additionally, each of Mr. Malkin and Mr. Durels has voluntarily agreed to reduce
his long-term equity incentive compensation target for 2021, so that the value
of equity awards to be granted to him in 2021 in the discretion of the
Compensation Committee under the Company's 2019 Equity Incentive Plan will be
not greater than 66% of the value of comparable equity awards issued to him
under such Plan in 2020; and as a result, the 2021 grants to these two
executives would be reduced from 2020 levels by at least $3,9
1
2,082, as follows:
New Cap on Reduction in
New Cap on 2020 2021 LTI equity
2020 Time- 2021 Time Performance- Performance- from 2020 to
based LTI based LTI based LTI equity based LTI equity 2021 will be at
Grantee equity equity max max least
Anthony E. Malkin $ 2,731,714 $ 1,823,178 $ 5,467,500 $ 3,646,357 $ 2,731,713
Thomas P, Durels $ 1,181,250 $ 787,793 $ 2,632,500 $ 1,575,586 $ 1,180,369
3,9
TOTAL 12
REDUCTION $ ,082
These compensation reductions will not modify other rights under Mr. Malkin's
Amended and Restated Employment Agreement with the Company, dated as of
October 7, 2013 , as amended by the First Amendment thereto, or Mr. Durels'
Amended and Restated Change In Control Severance Agreement with the Company,
dated April 5, 2016 , in each case including those rights that are determined by
reference to base salary.
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--------------------------------------------------------------------------------Item 7.01. Regulation FD Disclosure
As discussed in Item 2.02 above, the Company issued a press release regarding its financial results for the second quarter 2020 and made available on its website certain supplemental information relating thereto. The information in Item 7.01 of this Current Report is being furnished and shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that Section. Such information shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act or the Exchange Act, unless it is specifically incorporated by reference therein.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
Exhibit
No. Description
99.1 Press Release announcing financial results for the second quarter
2020
99.2 Supplemental report
104 Cover Page Interactive File (the cover page tags are embedded within
the Inline XBRL document).
Non-GAAP
Supplemental Financial Measures
Funds From Operations ("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
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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 our overall results. We present Modified FFO because we consider
it an important supplemental measure of our operating performance in that it
adds back the
non-cash
amortization of below-market ground leases. There can be no assurance that
Modified FFO presented by us is comparable to similarly titled measures of other
REITs. Modified FFO does not represent cash generated from operating activities
and should not be considered as an alternative to net income (loss) determined
in accordance with GAAP or to cash flow from operating activities determined in
accordance with GAAP. Modified FFO is not indicative of cash available to fund
ongoing cash needs, including the ability to make cash distributions.
Core Funds From Operations ("Core FFO")
Core FFO adds back to Modified FFO the following items: acquisition expenses,
loss on early extinguishment of debt and severance expenses. The Company
presents Core FFO because it considers it an important supplemental measure of
its operating performance in that it excludes
non-recurring
items. There can be no assurance that Core FFO presented by the Company is
comparable to similarly titled measures of other REITs. Core FFO does not
represent cash generated from operating activities and should not be considered
as an alternative to net income (loss) determined in accordance with GAAP or to
cash flow from operating activities determined in accordance with GAAP. Core FFO
is not indicative of cash available to fund ongoing cash needs, including the
ability to make cash distributions. In future periods, we may also exclude other
items from Core FFO that we believe may help investors compare our results.
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Core Funds Available for Distribution ("Core FAD")
In addition to Core FFO, we present Core FAD by (i) adding to Core FFO
non-real
estate depreciation and amortization, the amortization of deferred financing
costs, amortization of debt discounts and
non-cash
compensation expense and (ii) deducting straight line rent, recurring second
generation leasing commissions, tenant improvements, prebuilts, capital
expenditures, furniture, fixtures & equipment purchases, amortization of debt
premiums and above/below market rent revenue. Core FAD is presented solely as a
supplemental disclosure that management believes provides useful information
regarding our ability to fund our dividends. Core FAD 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 FAD is
not indicative of cash available to fund ongoing cash needs, including the
ability to make cash distributions. There can be no assurance that Core FAD
presented by us is comparable to similarly titled measures of other REITs.
Net Operating Income ("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 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, impairment
charges 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
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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. 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.
EBITDA
We compute EBITDA as net income plus interest expense, income taxes and
depreciation and amortization. We present EBITDA because we believe that EBITDA,
along with cash flow from operating activities, investing activities and
financing activities, provides investors with an additional indicator of its
ability to incur and service debt. EBITDA should not be considered as an
alternative to net income (determined in accordance with GAAP), as an indication
of our financial performance, as an alternative to net cash flows from operating
activities (determined in accordance with GAAP), or as a measure of its
liquidity.
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