EMPIRE STATE REALTY TRUST, INC. Unless the context otherwise requires or indicates, references in this section to "we," "our," and "us" refer to our company and its consolidated subsidiaries. The following discussion related to our consolidated financial statements should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor provisions. You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," "contemplates," "aims," "continues," "would" or "anticipates" or the negative of these words and phrases or similar words or phrases. In particular, statements pertaining to our capital resources, portfolio performance, dividend policy and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our portfolio from operations, acquisitions and anticipated market conditions, demographics and results of operations are forward-looking statements. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: (i) economic, political and social impact of, and uncertainty relating to, the COVID-19 pandemic; (ii) resolution of legal proceedings involving the Company; (iii) reduced demand for office or retail space, including as a result of the COVID-19 pandemic; (iv) changes in our business strategy; (v) changes in technology and market competition that affect utilization of our office, retail, broadcast or other facilities; (vi) changes in domestic or international tourism, including due to health crises such as the COVID-19 pandemic, geopolitical events and/or currency exchange rates, which may cause a decline in Observatory visitors; (vii) defaults on, early terminations of, or non-renewal of, leases by tenants; (viii) increases in the Company's borrowing costs as a result of changes in interest rates and other factors, including the potential phasing out of LIBOR after 2021; (ix) declining real estate valuations and impairment charges; (x) termination or expiration of our ground leases; (xi) changes in our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due and potential limitations on our ability to borrow additional funds in compliance with drawdown conditions and financial covenants; (xii) decreased rental rates or increased vacancy rates; (xiii) our failure to redevelop and reposition properties, or to execute any newly planned capital project successfully or on the anticipated timeline or at the anticipated costs; (xiv) difficulties in identifying properties to acquire and completing acquisitions; (xv) risks related to our development projects (including ourMetro Tower development site) and capital projects, including the cost of construction delays and cost overruns; (xvi) impact of changes in governmental regulations, tax laws and rates and similar matters; (xvii) our failure to qualify as a real estate investment trust ("REIT"); (xviii) environmental uncertainties and risks related to adverse weather conditions, rising sea levels and natural disasters, and (xix) the accuracy of our methodologies and estimates regarding ESG metrics, goals and targets, tenant willingness and ability to collaborate towards reporting ESG metrics and meeting ESG goals and targets, and the impact of governmental regulation on our ESG efforts. 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 Quarterly Report on Form 10-Q for the quarterly period endedMarch 31, 2021 , and in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 , and other risks described in documents subsequently filed by the Company from time to time with theSecurities and Exchange Commission . While forward-looking statements reflect the Company's good faith beliefs, they are not guarantees of future performance. The Company disclaims any obligation to update or revise publicly any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events, or other changes after the date of this Quarterly Report on Form 10-Q, except as required by applicable law. Prospective investors should not place undue reliance on any forward-looking statements, which are based only on information currently available to the Company. 29 --------------------------------------------------------------------------------
Overview
We are a self-administered and self-managed REIT that owns, manages, operates, acquires and repositions office and retail properties inManhattan and the greaterNew York metropolitan area. Highlights for the three months endedJune 30, 2021 included: •Incurred net income attributable to the Company of$2.1 million and achieved Core Funds From Operations of$48.8 million . •Same-Store Property Cash NOI, excluding lease termination fees, was down 6.0% from the second quarter of 2020 primarily driven by a reduction in revenues due to write-offs taken over the one-year period. •Empire StateBuilding Observatory revenue for the second quarter 2021 increased to$8.4 million , from$2.6 million in the first quarter 2021 as visitation continued to ramp up. Observatory net operating income was$3.1 million for the second quarter 2021. •Realized lease termination fees were$3.3 million . In keeping with historical practice, we include lease termination fees when calculating FFO and Core FFO. •Signed 35 new, renewal, and expansion leases, representing a total of 190,838 rentable square feet. •Collected 95% of second quarter 2021 total billings with 95% for office tenants and 91% for retail tenants. •Reinstated quarterly dividend at$0.035 per share for the second quarter of 2021, which is one quarter earlier than previously announced, driven by confidence in theNew York City recovery and improvement in our results and liquidity. •FromJanuary 1, 2021 and throughJuly 27, 2021 , we repurchased$3.5 million of our common stock at a weighted average price of$9.22 per share. This brings the cumulative total, since the stock repurchase program began onMarch 5, 2020 throughAugust 5, 2021 , to$147.2 million at a weighted average price of$8.34 per share. As ofJune 30, 2021 , 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 midtownManhattan market and aggregate approximately 7.6 million rentable square feet of office space, including theEmpire State Building . OurManhattan office properties also contain an aggregate of approximately 0.5 million rentable square feet of premier retail space on their ground floor and/or contiguous levels. Our remaining five office properties are located inFairfield County, Connecticut andWestchester 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 inStamford, Connecticut , adjacent to one of our office properties, that will support the development of an approximately 0.4 million rentable square foot office building and garage. Our portfolio includes four standalone retail properties located inManhattan and two standalone retail properties located in the city center ofWestport, Connecticut , encompassing approximately 0.2 million 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 inManhattan and currently impacted by the COVID-19 pandemic. Historically, prior to the outbreak of the COVID-19 pandemic, approximately 16.0% to 18.0% of our annual observatory revenue was realized in the first quarter, 26.0% to 28.0% was realized in the second quarter, 31.0% to 33.0% was realized in the third quarter, and 23.0% to 25.0% was realized in the fourth quarter. OnMarch 16, 2020 , we complied with governmental mandates regarding the closing of non-essential businesses in response to the COVID-19 pandemic and closed theEmpire State Building Observatory . The Observatory reopened onJuly 20, 2020 . 30 -------------------------------------------------------------------------------- The components of theEmpire State Building revenue are as follows (dollars in thousands): Six Months Ended June 30, 2021 2020 Office leases$ 70,827 68.8 %$ 74,907 62.4 % Retail leases 3,526 3.4 % 3,058 2.6 % Tenant reimbursements & other income 7,681 7.5 %
12,900 10.7 %
Observatory operations 10,962 10.6 %
19,630 16.3 %
Broadcasting licenses and leases 9,972 9.7 % 9,596 8.0 % Total$ 102,968 100.0 %$ 120,091 100.0 % We have undertaken a comprehensive redevelopment and repositioning strategy of ourManhattan office properties. This strategy is designed to improve the overall value and attractiveness of our properties and has contributed significantly to our tenant repositioning efforts, which seek to increase our occupancy, raise our rental rates, increase our rentable square feet, increase our aggregate rental revenue, lengthen our average lease term, increase our average lease size, and improve our tenant credit quality. These improvements include restored, renovated and upgraded or new lobbies, elevator modernization, renovated public areas and bathrooms, refurbished or new windows, upgrade and standardization of retail storefront and signage, façade restorations, modernization of building-wide systems, and enhanced tenant amenities. We have also aggregated smaller spaces in order to offer larger blocks of office space, including multiple floors, that are attractive to larger, higher credit-quality tenants as well as to offer new, pre-built suites with improved layouts. This strategy has shown what we believe to be attractive results to date, and we believe has the potential to improve our operating margins and cash flows in the future. From 2002 throughJune 30, 2021 , we have invested a total of approximately$956.4 million (excluding tenant improvement costs and leasing commissions) in ourManhattan office properties pursuant to this program. We intend to fund capital improvements through a combination of operating cash flow, cash on hand, and borrowings. TheGreater New York Metropolitan Area office market is soft, and we compete with properties that have been redeveloped recently or have planned redevelopment. We have spent approximately$37.3 million over 2018 through 2021 on these well-maintained and our well-located properties' common areas and amenities to ensure competitiveness and protect our market position. As ofJune 30, 2021 , we had total debt outstanding of approximately$2.1 billion , with a weighted average interest rate of 3.9%, and a weighted average maturity of 7.7 years. 94.2% of our total debt outstanding is fixed-rate indebtedness. Excluding principal amortization, we had no outstanding debt maturing untilNovember 2024 . As ofJune 30, 2021 , we had cash and cash equivalents of$540.6 million . Our consolidated net debt to total market capitalization was 31.4% as ofJune 30, 2021 . Impact of COVID-19 InMarch 2020 , the outbreak of the novel COVID-19 was recognized as a pandemic by theWorld Health Organization . The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented economic, social and political uncertainty, volatility and disruption inthe United States and globally. We have taken the following actions in response to the impact of the COVID-19 pandemic on our business.
Liquidity
We currently hold$540.6 million in cash and cash equivalents on our balance sheet and have$850 million undrawn capacity under our unsecured revolving credit facility. Our$850 million unsecured revolving credit facility matures inMarch 2025 and has two six-month extension options, subject to certain conditions.
Property Operations
All of our office buildings have remained open during the COVID-19 pandemic. We
have scaled back certain building operations in cleaning, security, lobby
concierge and recurring maintenance, which reduced costs until buildings are
repopulated. A portion of the reduction in operating expenses was offset by a
reduction in tenant expense recoveries.
31
--------------------------------------------------------------------------------
Our operations team worked diligently to develop and implement plans for
tenants' reoccupation of our buildings to ensure a safe, clean and healthy work
environment. These plans involved staff reassigned to screen tenants and
visitors, changes to cleaning and maintenance standards, and changes to building
operations for access by tenants and their guests.
Despite the challenge of the uncertain near-term environment, we continue to
believe in the long-term demand for office space. We believe many tenants have
acknowledged the challenges, inequities, and worries about divided workplaces
between home and office work, the challenges with onboarding new employees and
miss the connectivity and productivity that an office environment provides.
Leasing
The economic uncertainty relating to the COVID-19 pandemic has slowed the pace
of our leasing activity and could result in higher vacancy than we otherwise
would have experienced, a longer amount of time to fill vacancies and
potentially lower rental rates. As of June 30, 2021 , our portfolio was 88.2%
leased, including signed leases not yet commenced, with 4.9% subject to leases
scheduled to expire in 2021 and 5.6% subject to leases scheduled to expire in
2022.
New leasing activity was impacted during 2020 by the COVID-19 pandemic and
shelter-in-place rules that were in effect for much of the period. On June 15,
2021 , New York State ended pandemic-linked restrictions given the broad-based
distribution of the COVID-19 vaccine. During the second quarter 2021, we have
seen a sustained increase in leasing tour volume in our Manhattan office
portfolio to about 84% of pre-Covid-19 pandemic levels. While the recent
increase is a positive sign that some tenants are beginning to re-engage, any
potential lease transactions that stem from these tours will likely appear in
the second half of the year.
Our smaller food and service type retailers have been hit particularly hard.
They provide critical amenities and services to our office tenants. In many
instances, we have converted some of their fixed rent to a percentage rent
structure, with a payback of the difference between current and percentage rent
over a defined period. We intend to support our food and service retailers so
that they can service our office tenants when they re-occupy.
Retailers, in general, have been hardest hit by the pandemic. Our
retail-orientated tenants are no exception. As with all landlords, we are
working with some of our retail tenants that are financially challenged. Some of
these tenants may end up in bankruptcy or default in their leases in the near
term.
On July 29, 2021 , GBG USA Inc. , an indirect wholly-owned subsidiary of Global
Brands Group Holding Limited, announced that its North America wholesale
business and certain subsidiaries and affiliates (collectively, "GBG USA ") filed
for bankruptcy under Chapter 11. At the time of the filing, GBG USA leased
353,325 square feet of office space at 1333 Broadway and the Empire State
Building , or 3.5%, of our total portfolio rentable square feet, representing
approximately 3.6% of total portfolio annualized rent. Of that total, all but
191,000 square feet, or 1.9% of our total portfolio rentable square feet, has
been sublet to tenants, where both GBG USA and the subtenant are liable for the
rent, and we have the right to require the subtenant to pay directly to us.
The sublets are for GBG USA's entire premises at 1333 Broadway and have been in
effect for several years. We have current discussions to convert the subtenants
to direct tenants.
We collected rent from GBG USA through June 2021 and have converted the full
balance of its $17.0 million letter of credit to cash, which we will apply
against amounts due to us. In the short-term, we expect the current
circumstances will cause us to record a non-cash write-off in the third quarter
of $1.6 million in straight line rent receivables.
We actively monitor these developments to review our alternatives.
Observatory Operations OnMarch 16, 2020 , we complied with governmental mandates regarding the closing of non-essential businesses in response to the COVID-19 pandemic and closed theEmpire State Building Observatory . The observatory reopened underNew York State's Phase 4 guidelines,Low-Risk Outdoor Arts and Entertainment , onJuly 20, 2020 . The 102nd observation deck was reopened onAugust 24, 2020 . Due to the lifting ofNew York State COVID-19 restrictions, onJune 16, 2021 , the observatory fully reopened with interactive exhibits. We continue to operate with reduced hours, staffing, services, operating costs, credit card fees and marketing expenses. We have seen a higher local visitor mix, followed by a ramp up of nationally sourced travel. We 32 -------------------------------------------------------------------------------- anticipate this pattern will then be followed by a restoration of our typical visitor mix that is approximately two-thirds international which we do not expect to be achieved until the broad resumption of international air travel some time in 2022. Second quarter 2021 attendance was at nearly 17% of 2019 comparable attendance; a gradual improvement from 2020 levels and above our hypothetical admissions forecast. We anticipate expenses to be approximately$6-7 million per quarter for the balance of 2021 dependent upon the pace of visitor ramp-up. The closure of our observatory caused us during each quarter of 2020 and during the first and second quarters of 2021 to choose to perform an impairment test related to goodwill. We engaged a third-party valuation consulting firm to perform the valuation process. Based upon the results of the goodwill impairment test of the stand-alone observatory reporting unit, which is after the intercompany rent expense paid to the Real Estate reporting unit, we determined that the fair value of the observatory reporting unit exceeded its carrying value by less than 15.0%. 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. We will continue to assess the impairment of the observatory reporting unit goodwill going forward and that continued assessment may again utilize a third-party valuation consulting firm.Goodwill allocated to the observatory reporting unit was$227.5 million atJune 30, 2021 . Results of Operations Overview
The discussion below relates to our financial condition and results of
operations for the three and six months ended
Three Months EndedJune 30, 2021 Compared to the Three Months EndedJune 30, 2020 The following table summarizes our historical results of operations for the three months endedJune 30, 2021 and 2020 (dollars in thousands): 33 --------------------------------------------------------------------------------
Three Months Ended June 30,
2021 2020 Change %
Revenues:
Rental revenue $ 140,797 $ 137,999 $ 2,798 2.0 %
Observatory revenue 8,359 86 8,273 9,619.8 %
Lease termination fees 3,339 1,033 2,306 223.2 %
Third-party management and other fees 327 301 26 8.6 %
Other revenues and fees 586 1,611 (1,025) (63.6) %
Total revenues 153,408 141,030 12,378 8.8 %
Operating expenses:
Property operating expenses 28,793 29,750 957 3.2 %
Ground rent expenses 2,332 2,332 - - %
General and administrative expenses 14,089 18,149 4,060 22.4 %
Observatory expenses 5,268 4,002 (1,266) (31.6) %
Real estate taxes 31,354 29,579 (1,775) (6.0) %
Impairment charges - 4,101 4,101 100.0 %
Depreciation and amortization 45,088 52,783 7,695 14.6 %
Total operating expenses 126,924 140,696 13,772 9.8 %
Operating income 26,484 334 26,150 7,829.3 %
Other income (expense):
Interest income 164 1,526 (1,362) (89.3) %
Interest expense (23,422) (23,928) 506 2.1 %
Income (loss) before income taxes 3,226 (22,068) 25,294 114.6 %
Income tax benefit (expense) 1,185 2,450 (1,265) (51.6) %
Net income (loss) 4,411 (19,618) 24,029 122.5 %
Private perpetual preferred unit
distributions (1,051) (1,047) (4) (0.4) %
Net (income) loss attributable to
non-controlling interests (1,285) 7,872 9,157 116.3 %
Net income (loss) attributable to common
stockholders $ 2,075 $ (12,793) $ 14,868 116.2 %
Rental Revenue
The increase in rental revenue as compared to the prior year was attributable
to the prior year write-off of straight-line receivables in the three months
ended June 30, 2020 .
Observatory Revenue
The Observatory was closed for the entire second quarter 2020 due to COVID-19
pandemic restrictions. The increase in revenues reflects increased visitors due
to the lifting of COVID-19 pandemic restrictions in the second quarter 2021.
Lease Termination Fees
Higher termination fees were earned in the three months ended June 30, 2021
compared to the three months ended June 30, 2020 .
Third-Party Management and Other Fees
Management fee income was consistent with prior year.
Other Revenues and Fees
The decrease in other revenues and fees was due to higher bad debt recovery
income received in the three months ended
34
--------------------------------------------------------------------------------
Property Operating Expenses
Property operating expenses were consistent with 2020.
Ground Rent Expenses
Ground rent expense was consistent with 2020.
General and Administrative Expenses
The decrease in general and administrative expenses was primarily due to lower
equity compensation expense and lower legal leasing costs. Also contributing to
the decrease were higher severance costs recorded in the three months ended June
30, 2020 .
Observatory Expenses
Due to the observatory closure in the second quarter 2020, we reduced variable
costs such as labor, union, security, and cleaning costs. During the second
quarter 2021, the observatory was open to visitors, which resulted in increased
expenses compared to the second quarter 2020.
Real Estate Taxes
The increase in real estate taxes was primarily due to higher assessed values
for multiple properties.
Impairment charge
The variance reflects a $4.1 million of prior expenditures on a Combined Heat
Power / Redundancy onsite power generation project in our real estate segment
that is rendered economically unviable due to New York City's Local Law 97 and
from its measurement of carbon from natural gas combustion generates fines,
recorded in the second quarter 2020.
Depreciation and Amortization
The decrease in depreciation and amortization reflects tenant improvement write-offs due to the early termination of a tenant in the second quarter 2020. Interest Income
The decrease in interest income reflects higher cash investments in 2020 compared to 2021 and lower interest rates in 2021. Interest Expense
Interest expense was consistent with 2020. Income Taxes The decrease in income tax benefit was attributable to lower net loss for the Observatory segment. Six Months EndedJune 30, 2021 Compared to the Six Months EndedJune 30, 2020 The following table summarizes our historical results of operations for the six months endedJune 30, 2021 and 2020 (dollars in thousands): 35 --------------------------------------------------------------------------------
Six Months Ended June 30,
2021 2020 Change %
Revenues:
Rental revenue $ 281,028 $ 286,112 $ (5,084) (1.8) %
Observatory revenue 10,962 19,630 (8,668) (44.2) %
Lease termination fees 4,628 1,244 3,384 272.0 %
Third-party management and other fees 603 647 (44) (6.8) %
Other revenues and fees 1,491 3,621 (2,130) (58.8) %
Total revenues 298,712 311,254 (12,542) (4.0) %
Operating expenses:
Property operating expenses 59,072 71,218 12,146 17.1 %
Ground rent expenses 4,663 4,663 - - %
General and administrative expenses 27,942 34,100 6,158 18.1 %
Observatory expenses 9,856 12,156 2,300 18.9 %
Real estate taxes 62,801 58,833 (3,968) (6.7) %
Impairment charges - 4,101 4,101 100.0 %
Depreciation and amortization 89,545 98,876 9,331 9.4 %
Total operating expenses 253,879 283,947 30,068 10.6 %
Operating income 44,833 27,307 17,526 64.2 %
Other income (expense):
Interest income 286 2,163 (1,877) (86.8) %
Interest expense (46,976) (43,546) (3,430) (7.9) %
Loss on early extinguishment of debt (214) (86) (128) (148.8) %
Income (loss) before income taxes (2,071) (14,162) 12,091 85.4 %
Income tax benefit 3,291 2,832 459 16.2 %
Net income (loss) 1,220 (11,330) 12,550 110.8 %
Private perpetual preferred unit
distributions (2,101) (2,097) (4) (0.2) %
Net (income) loss attributable to
non-controlling interests 335 5,129 4,794 93.5 %
Net income (loss) attributable to common
stockholders $ (546) $ (8,298) $ 7,752 93.4 %
Rental Revenue
The decrease in rental revenue was attributable to lower tenant expense reimbursements, consistent with lower operating expenses. Observatory Revenue
Observatory revenues were lower due to the COVID-19 pandemic as our results continue to be impacted the strong first quarter 2020, pre-COVID-19 performance and the rebuild of tourist travel and by international travel restrictions. Lease Termination Fees Higher termination fees were earned in the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . Third-Party Management and Other Fees
Management fee income was consistent with prior year.
36
--------------------------------------------------------------------------------
Other Revenues and Fees
The decrease in other revenues and fees was due to higher bad debt recovery
income received in the six months ended June 30, 2020 and lower food and
beverage sales and lower parking income due to the COVID-19 pandemic in the six
months ended June 30, 2021 .
Property Operating Expenses
The decrease in property operating expenses was primarily due to lower payroll
costs, lower cleaning costs, lower repair and maintenance costs, and other lower
operating expenses. The lower costs are primarily driven by lower tenant
utilization in our buildings.
Ground Rent Expenses
Ground rent expense was consistent with 2020.
General and Administrative Expenses
The decrease in general and administrative expenses was primarily due to lower
equity compensation expense and lower legal leasing costs. Also contributing to
the decrease were higher severance costs recorded in the six months ended June
30, 2020 .
Observatory Expenses
The decrease in observatory expenses was driven by cost controls and reduced
hours of operation instituted in response to reduced tourist demand during the
six months ended June 30, 2021 due to COVID-19 reduced travel and international
travel restrictions.
Real Estate Taxes
The increase in real estate taxes was primarily due to higher assessed values
for multiple properties.
Impairment charge
The variance reflects a $4.1 million of prior expenditures on a Combined Heat
Power / Redundancy onsite power generation project in our real estate segment
that is rendered economically unviable due to New York City's Local Law 97 and
from its measurement of carbon from natural gas combustion generates fines,
recorded in the second quarter 2020.
Depreciation and Amortization
The decrease in depreciation and amortization reflects tenant improvement write-offs due to the early termination of a tenant in 2020. Interest Income
The decrease in interest income reflects higher cash investments in 2020 compared to 2021 and lower interest rates in 2021. Interest Expense
Interest expense increased due to higher deferred financing cost amortization and higher interest associated with variable to fixed interest rate swap agreements. Income Taxes The increase in income tax benefit was attributable to higher net loss for the Observatory segment.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements,
including ongoing commitments to repay borrowings, fund and maintain our assets
and operations, including lease-up costs, fund our redevelopment and
repositioning programs, acquire properties, make distributions to our
securityholders and fulfill other general business needs. Based on the
historical experience of our management and our business strategy, in the
foreseeable future we anticipate we will generate
37
--------------------------------------------------------------------------------
positive cash flows from operations. In order to qualify as a REIT, we are
required under the Internal Revenue Code of 1986 to distribute to our
stockholders, 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, as required, to our
securityholders.
While we may be able to anticipate and plan for certain liquidity needs, there
may be unexpected increases in uses of cash that are beyond our control and
which would affect our financial condition and results of operations. For
example, we may be required to comply with new laws or regulations that cause us
to incur unanticipated capital expenditures for our properties, thereby
increasing our liquidity needs. Even if there are no material changes to our
anticipated liquidity requirements, our sources of liquidity may be fewer than,
and the funds available from such sources may be less than, anticipated or
needed. Our primary sources of liquidity will generally consist of cash on hand
and cash generated from our operating activities, debt issuances and unused
borrowing capacity under our unsecured revolving credit facility. We expect to
meet our short-term liquidity requirements, including distributions, operating
expenses, working capital, debt service, and capital expenditures from cash
flows from operations, cash on hand, debt issuances, and available borrowing
capacity under our unsecured revolving credit facility. The availability of
these borrowings is subject to the conditions set forth in the applicable loan
agreements. We expect to meet our long-term capital requirements, including
acquisitions, redevelopments and capital expenditures through our cash flows
from operations, cash on hand, our unsecured revolving credit facility, mortgage
financings, debt issuances, common and/or preferred equity issuances and asset
sales. Our properties require periodic investments of capital for individual
lease related tenant improvements allowances, general capital improvements and
costs associated with capital expenditures. Our overall leverage will depend on
our mix of investments and the cost of leverage. Our charter does not restrict
the amount of leverage that we may use.
At
For a five year right of first offer period expiringAugust 23, 2021 ,Q REIT Holding LLC , aQatar Financial Centre limited liability company and a wholly owned subsidiary of theQatar Investment Authority , a governmental authority of theState of Qatar ("QREIT", together with any eligible transferee, "QIA") will have a right of first offer to co-invest with us as a joint venture partner in real estate investment opportunities initiated by us where we have elected, at our discretion, to seek out a joint venture partner in real estate investment opportunities. The right of first offer period will be extended for 30 months beyond its original expiration date so long as at least one joint venture transaction is consummated by us and QIA during the initial five year 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 ofJune 30, 2021 , we had approximately$2.1 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 3.9% and a weighted average maturity of 7.7 years. As ofJune 30, 2021 , excluding principal amortization, we have no outstanding debt maturing untilNovember 2024 . Our consolidated net debt to total market capitalization was 31.4% as ofJune 30, 2021 . Unsecured Revolving Credit and Term Loan Facilities As described more fully in our Form 10-Q for the quarterly period ended March 31, 2021 (the "Q1 2021 10-Q"), in Q1 2021, we entered into an amended senior unsecured credit facility (the "Credit Facility") withBank of America, N.A ., as administrative agent and the other lenders party thereto. The Credit Facility is in the initial maximum principal amount of up to$1.065 billion , which consists of$850.0 million revolving credit facility that matures onMarch 31, 2025 , and a$215.0 million term loan facility that matures onMarch 19, 2025 . As ofJune 30, 2021 , we had no borrowings under the revolving credit facility and$215.0 million under the term loan facility. Additionally, as described more fully in the Q1 2021 10-Q, we have outstanding a senior unsecured term loan facility (the "Term Loan Facility") that we entered into onMarch 19, 2020 withWells Fargo Bank, National Association , as administrative agent, and the other lenders party thereto. The Term loan Facility is in the original principal amount of$175.0 million and matures onDecember 31, 2026 . As ofJune 30, 2021 , our borrowings amounted to$175.0 million under the Term Loan Facility. The terms of both the Credit Facility and the Term Loan Facility include customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. Both facilities also require compliance with financial ratios including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a minimum unencumbered interest coverage ratio, and a maximum unsecured leverage ratio. The agreements governing both facilities also contain customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, 38 -------------------------------------------------------------------------------- representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, invalidity of loan documents, loss of real estate investment trust qualification, and occurrence of a change of control.As ofJune 30, 2021 , we were in compliance with the covenants. Senior Unsecured Notes The terms of the senior unsecured notes include customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. It also requires compliance with financial ratios including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a minimum unencumbered interest coverage ratio, and a maximum unsecured leverage ratio. The agreements also contain customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, the occurrence of certain change of control transactions and loss of real estate investment trust qualification. As ofJune 30, 2021 , we were in compliance with the covenants under the outstanding senior unsecured notes. Financial Covenants As ofJune 30, 2021 , we were in compliance with the following financial covenants: Financial covenant Required June 30, 2021 In Compliance Maximum total leverage < 60% 37.6 % Yes Maximum secured debt < 40% 13.7 % Yes Minimum fixed charge coverage > 1.50x 2.6x
Yes
Minimum unencumbered interest coverage > 1.75x 5.3x Yes Maximum unsecured leverage < 60% 29.4 % Yes 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 be taken (including, but not limited to, recourse or non-recourse debt and cross-collateralized debt). Our overall leverage will depend on our mix of investments and the cost of leverage, however, we initially intend to maintain a level of indebtedness consistent with our plan to seek an investment grade credit rating. 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 leasing commission costs, tenant improvement costs and our capital expenditures for each of the periods presented (dollars in thousands, except per square foot amounts).Office Properties (1) Six Months Ended June 30, Total New Leases, Expansions, and Renewals 2021 2020 Number of leases signed(2) 57 48 Total square feet 350,196 216,710 Leasing commission costs(3)$ 6,397 $ 2,548 Tenant improvement costs(3) 20,529 10,147 Total leasing commissions and tenant improvement costs(3)$ 26,926 $ 12,695 Leasing commission costs per square foot(3)$ 18.27 $ 11.76 Tenant improvement costs per square foot(3) 58.62 46.83 Total leasing commissions and tenant improvement costs per square foot(3)$ 76.89 $ 58.59 39
--------------------------------------------------------------------------------
Retail Properties (4) Six Months Ended June 30, Total New Leases, Expansions, and Renewals 2021 2020 Number of leases signed(2) 4 6 Total square feet 12,459 45,864 Leasing commission costs(3)$ 573 $ 1,997 Tenant improvement costs(3) 405 7,345 Total leasing commissions and tenant improvement costs(3)$ 978 $ 9,342 Leasing commission costs per square foot(3)$ 46.03 $ 43.54 Tenant improvement costs per square foot(3) 32.49 160.14 Total leasing commissions and tenant improvement costs per square foot(3)$ 78.52 $ 203.68 _______________ (1)Excludes an aggregate of 504,284 and 506,452 rentable square feet of retail space in ourManhattan office properties in 2021 and 2020, respectively. Includes theEmpire State Building broadcasting licenses and observatory operations. (2)Presents a renewed and expansion lease as one lease signed. (3)Presents all tenant improvement and leasing commission costs as if they were incurred in the period in which the lease was signed, which may be different than the period in which they were actually paid. (4)Includes an aggregate of 504,284 and 506,452 rentable square feet of retail space in ourManhattan office properties in 2021 and 2020, respectively. Excludes theEmpire State Building broadcasting licenses and observatory operations. Six Months Ended June 30, 2021 2020 Total Portfolio Capital expenditures (1)$ 9,331 $ 23,884
_______________
(1)Excludes tenant improvements and leasing commission costs. As ofJune 30, 2021 , we expect to incur additional costs relating to obligations under existing lease agreements of approximately$89.1 million for tenant improvements and leasing commissions. We intend to fund the tenant improvements and leasing commission costs through a combination of operating cash flow, cash on hand, additional property level mortgage financings and borrowings under the unsecured revolving credit facility. Capital expenditures are considered part of both our short-term and long-term liquidity requirements. We intend to fund capital improvements through a combination of operating cash flow, cash on hand and borrowings under the unsecured revolving credit facility. Contractual Obligations Refer to our Annual Report on Form 10-K for the year endedDecember 31, 2020 for a discussion of our contractual obligations. There have been no material changes, outside the ordinary course of business, to these contractual obligations during the six months endedJune 30, 2021 . Off-Balance Sheet Arrangements As ofJune 30, 2021 , 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 toU.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 underU.S. federal income tax laws. 40 -------------------------------------------------------------------------------- We intend to distribute our net income to our securityholders in a manner intended to satisfy the REIT 90% distribution requirement and to avoidU.S. federal income tax liability on our income and the 4% nondeductible excise tax. Before we pay any distribution, whether forU.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 avoidU.S. federal income tax and the 4% nondeductible excise tax in that year. In 2020, we had a unique situation whereby we had no requirement to pay a dividend beyond the quarterly dividends paid in the first and second quarters of 2020 due to two primary factors: (i) the significant decline in revenue due to lower levels of observatory visitation, and (ii) we had a net operating loss carryforward available to reduce the amount of REIT taxable income otherwise required to be distributed by us to meet REIT requirements. After careful consideration and focus on long-term shareholder value creation and preservation of our balance sheet strength and flexibility, our management and the Board of Directors concluded the best course of action was to temporarily suspend its quarterly dividend and to activate our share repurchase program. DuringAugust 2020 , we announced the suspension of our third and fourth quarter 2020 dividends to holders of our Class A common stock and Class B common stock and to holders ofEmpire State Realty OP, L.P.'s Series ES, Series 250 and Series 60 operating partnership units and Series PR operating partnership units. DuringDecember 2020 , we announced the continued dividend suspension for the first and second quarters of 2021. DuringMay 2021 , we announced our decision to reinstate the quarterly dividend, one quarter earlier than previously announced, driven by confidence in theNew York City recovery and improvement in our results and liquidity. We declared a dividend of$0.035 per share for the second quarter of 2021, which equates to an annualized rate of$0.14 per share. The Board of Directors will continue its regular review of its dividend and capital allocation policies at each Board meeting. As ofJune 30, 2021 ,Empire State Realty Trust, Inc. had net operating loss ("NOL") carryforwards that may be used in the future to reduce the amount otherwise required to be distributed by us to meet REIT requirements. However, for federal income tax purposes, the NOL will not be able to offset more than 80% of our REIT taxable income and, therefore, may not be able to reduce the amount required to be distributed by us to meet REIT requirements to zero, except for the tax year endedDecember 31, 2020 , of which we were able to offset 100% of our REIT taxable income in accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The federal NOL may be carried forward indefinitely. Other limitations may apply to our ability to use our NOL to offset taxable income. Distribution to Securityholders Distributions and dividends amounting to$11.6 million and$64.3 million have been made to securityholders for the six months endedJune 30, 2021 and 2020, respectively.
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 theOperating Partnership's Series ES, Series 250 and Series 60 operating partnership units throughDecember 31, 2021 . Under the program, we may purchase our Class A common stock and theOperating Partnership'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. There were no purchases of equity securities during the three months endedJune 30, 2021 . Cash Flows Comparison of Six Months EndedJune 30, 2021 to the Six Months EndedJune 30, 2020 Net cash. Cash and cash equivalents and restricted cash were$578.6 million and$931.8 million , respectively, as ofJune 30, 2021 and 2020. The decrease was primarily due to a$550.0 million draw on the unsecured revolving credit facility inMarch 2020 which was subsequently repaid inSeptember 2020 . Operating activities. Net cash provided by operating activities increased by$9.3 million to$83.7 million for the six months endedJune 30, 2021 compared to$74.4 million for the six months endedJune 30, 2020 , primarily due to changes in working capital. 41 -------------------------------------------------------------------------------- Investing activities. Net cash used in investing activities decreased by$31.3 million to$48.4 million for the six months endedJune 30, 2021 compared to$79.7 million for the six months endedJune 30, 2020 , due to lower capital expenditures. Financing activities. Net cash provided by financing activities decreased by$690.2 million to$24.7 million used in financing activities for the six months endedJune 30, 2021 compared to$665.5 million provided by financing activities for the six months endedJune 30, 2020 , primarily due to$850.0 million of net proceeds from issuance of debt, partially offset by higher repurchases of common shares of$111.1 million and higher dividends and distributions of$52.8 million which occurred in the six months endedJune 30, 2020 .
Net Operating Income ("NOI")
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 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 and 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):
42
--------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(unaudited) (unaudited)
Net income (loss) $ 4,411 $
(19,618)
14,089 18,149 27,942 34,100
Depreciation and amortization 45,088 52,783 89,545 98,876
Interest expense 23,422 23,928 46,976 43,546
Loss on early extinguishment of debt - - 214 86
Income tax (benefit) (1,185) (2,450) (3,291) (2,832)
Impairment charges - 4,101 - 4,101
Less:
Third-party management and other fees (327) (301) (603) (647)
Interest income (164) (1,526) (286) (2,163)
Net operating income $ 85,334 $ 75,066 $ 161,717 $ 163,737
Other Net Operating Income Data
Straight-line rental revenue $ 3,763 $ (2,710) $ 10,110 $ 5,483
Net increase in rental revenue from the
amortization of above-and below-market lease
assets and liabilities $ 717 $ 1,366 $ 1,371 $ 2,274
Amortization of acquired below-market ground
leases $ 1,958 $ 1,958 $ 3,916 $ 3,916
Funds from Operations ("FFO")
We present below a discussion of FFO. We compute FFO in accordance with the
"White Paper" on FFO published by the National Association of Real Estate
Investment Trusts , or NAREIT, which defines FFO as net income (loss) (determined
in accordance with GAAP), excluding impairment write-off 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.
43--------------------------------------------------------------------------------
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: IPO litigation expense, severance expenses and loss on early extinguishment of debt. The company presents Core FFO because it considers it an important supplemental measure of its operating performance in that it excludes items associated with its IPO and formation transactions and other non-recurring items. There can be no assurance that Core FFO presented by the company is comparable to similarly titled measures of other REITs. Core FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Core FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. In future periods, we may also exclude other items from Core FFO that we believe may help investors compare our results.
The following table presents a reconciliation of our net income, the most directly comparable GAAP measure, to FFO, Modified FFO and Core FFO for the periods presented (amounts in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(unaudited) (unaudited)
Net income (loss) $ 4,411 $
(19,618)
(1,051) (1,047) (2,101) (2,097)
Real estate depreciation and amortization 43,480 51,096 86,584 95,526
Impairment charge - 4,101 - 4,101
FFO attributable to common stockholders and
non-controlled interests 46,840 34,532 85,703 86,200
Amortization of below-market ground leases 1,958 1,958 3,916 3,916
Modified FFO attributable to common
stockholders and non-controlled interests 48,798 36,490 89,619 90,116
Loss on early extinguishment of debt - - 214 86
Severance expenses - 3,008 - 3,008
Core FFO attributable to common
stockholders and non-controlled interests
Weighted average shares and Operating
Partnership Units
Basic 277,893 283,384 277,887 288,015
Diluted 278,436 283,384 277,887 288,015
44--------------------------------------------------------------------------------
Factors That May Influence Future Results of Operations Impact of COVID-19
See "Overview" section. Leasing
We signed 0.9 million rentable square feet of new leases, expansions and
lease renewals for the year ended
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 ofJune 30, 2021 , there were approximately 1.2 million rentable square feet of space in our portfolio available to lease (excluding leases signed but not yet commenced) representing 11.8% of the net rentable square footage of the properties in our portfolio. In addition, leases representing 4.9% and 5.6% of net rentable square footage of the properties in our portfolio will expire in 2021 and in 2022, respectively. These leases are expected to represent approximately 5.0% and 6.1%, respectively, of our annualized rent for such periods. Our revenues and results of operations can be impacted by expiring leases that are not renewed or re-leased or that are renewed or re-leased at base rental rates equal to, above or below the current average base rental rates. Further, our revenues and results of operations can also be affected by the costs we incur to re-lease available space, including payment of leasing commissions, redevelopments and build-to-suit remodeling that may not be borne by the tenant. Despite the challenge of the uncertain near-term environment, we continue to believe that as we have largely completed 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, including aggregating smaller spaces to offer large blocks of space, we may experience lower occupancy levels as a result of having to relocate tenants to alternative space and the strategic expiration of existing leases. We believe that despite the short-term lower occupancy levels we may experience, we will continue to experience increased rental revenues as a result of the increased rents which we expect to obtain following the redevelopment and repositioning of our properties. Observatory Operations OnMarch 16, 2020 , we complied with governmental mandates regarding the closing of non-essential businesses in response to the COVID-19 pandemic and closed theEmpire State Building Observatory . The observatory was closed for the entirety of the second quarter 2020 and reopened the 86th floor observation deck onJuly 20, 2020 with new protocols and processes underNew York State's Phase 4'sLow-Risk Outdoor Arts and Entertainment guidelines. The 102nd floor observation deck reopened onAugust 24, 2020 . The Observatory hosted approximately 162,000 visitors in the second quarter of 2021, compared to 51,000 visitors in the first quarter of 2021 and no visitors in the second quarter of 2020. In spite of the ongoing nature of international, national, and local travel restrictions and quarantines, the observatory has seen steady, weekly increases in visitors. Our return of attendance to pre-COVID-19 levels is closely tied to national and international travel trends and these remain adversely impacted by developments around the COVID-19 pandemic.
Observatory revenues for the three months ended
Observatory revenues and admissions are dependent upon the following: (i) the number of tourists (domestic and international)who come toNew 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. 45 --------------------------------------------------------------------------------
Critical Accounting Estimates
Refer to our Annual Report on Form 10-K for the year endedDecember 31, 2020 for a discussion of our critical accounting estimates. There were no material changes to our critical accounting estimates disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 46
--------------------------------------------------------------------------------
© Edgar Online, source
