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EX-32.2 - EXHIBIT 32.2 - Empire State Realty Trust, Inc.exhibit322esrt9-30x17.htm
EX-32.1 - EXHIBIT 32.1 - Empire State Realty Trust, Inc.exhibit321esrt9-30x17.htm
EX-31.2 - EXHIBIT 31.2 - Empire State Realty Trust, Inc.exhibit312esrt9-30x17.htm
EX-31.1 - EXHIBIT 31.1 - Empire State Realty Trust, Inc.exhibit311esrt9-30x17.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2017
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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
 
37-1645259
(State or other jurisdiction of incorporation or organization)
 
(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)
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   x    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x     No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer   x
 
Accelerated filer  o
Non-accelerated filer  o  (Do not check if a smaller reporting company)
 
Smaller reporting company  o
 
 
Emerging growth company  o
 
 
 
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.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class A Common Stock, par value $0.01 per share
 
158,616,019
Class B Common Stock, par value $0.01 per share
 
1,076,990
(Class)
 
(Outstanding on October 31, 2017)
 
 

 




 
EMPIRE STATE REALTY TRUST, INC.
 
 
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2017
 
 
TABLE OF CONTENTS
PAGE
PART 1.
FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
FINANCIAL STATEMENTS
 
 
Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016
 
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016 (unaudited)
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2017 and 2016 (unaudited)
 
Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2017 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2017 and 2016 (unaudited)
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
 
 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
 
 
ITEM 4.
CONTROLS AND PROCEDURES
 
 
 
PART II.
OTHER INFORMATION
 
 
 
ITEM 1.
LEGAL PROCEEDINGS
 
 
 
ITEM 1A.
RISK FACTORS
 
 
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
 
 
ITEM 4.
MINE SAFETY DISCLOSURES
 
 
 
ITEM 5.
OTHER INFORMATION
 
 
 
ITEM 6.
EXHIBITS
 
 
 
SIGNATURES










1




ITEM 1. FINANCIAL STATEMENTS
Empire State Realty Trust, Inc.
Condensed Consolidated Balance Sheets
(amounts in thousands, except share and per share amounts)
 
September 30, 2017
 
December 31, 2016
ASSETS
(unaudited)
 
 
Commercial real estate properties, at cost:
 
 
 
Land
$
201,196

 
$
201,196

Development costs
7,978

 
7,951

Building and improvements
2,398,964

 
2,249,482

 
2,608,138

 
2,458,629

Less: accumulated depreciation
(631,916
)
 
(556,546
)
Commercial real estate properties, net
1,976,222

 
1,902,083

Cash and cash equivalents
432,105

 
554,371

Restricted cash
64,020

 
61,514

Tenant and other receivables, net of allowance of $3,504 and $3,333 in 2017 and 2016, respectively
34,661

 
22,542

Deferred rent receivables, net of allowance of $187 and $390 in 2017 and 2016, respectively
172,665

 
152,074

Prepaid expenses and other assets
39,463

 
53,749

Deferred costs, net
268,132

 
277,081

Acquired below-market ground leases, net
370,187

 
376,060

Goodwill
491,479

 
491,479

Total assets
$
3,848,934

 
$
3,890,953

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Mortgage notes payable, net
$
720,830

 
$
759,016

Senior unsecured notes, net
592,914

 
590,388

Unsecured term loan facility, net
263,546

 
262,927

Unsecured revolving credit facility

 

Accounts payable and accrued expenses
142,690

 
134,064

Acquired below-market leases, net
70,013

 
82,300

Deferred revenue and other liabilities
41,320

 
32,212

Tenants’ security deposits
47,395

 
47,183

Total liabilities
1,878,708

 
1,908,090

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, 158,349,708 shares issued and outstanding and 154,744,740 shares issued and outstanding in 2017 and 2016, respectively
1,583

 
1,547

Class B common stock, $0.01 par value per share, 50,000,000 shares authorized, 1,077,740 and 1,095,737 shares issued and outstanding in 2017 and 2016, respectively
11

 
11

Additional paid-in capital
1,116,026

 
1,104,463

Accumulated other comprehensive loss
(10,425
)
 
(2,789
)
Retained earnings
46,436

 
50,904

Total Empire State Realty Trust, Inc.'s stockholders' equity
1,153,631

 
1,154,136

Non-controlling interests in operating partnership
808,591

 
820,723

Private perpetual preferred units, $16.62 per unit liquidation preference, 1,560,360 issued and outstanding in 2017 and 2016
8,004

 
8,004

Total equity
1,970,226

 
1,982,863

Total liabilities and equity
$
3,848,934

 
$
3,890,953


The accompanying notes are an integral part of these financial statements 

2



Empire State Realty Trust, Inc.
Condensed Consolidated Statements of Income
(unaudited)
(amounts in thousands, except per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Rental revenue
$
122,391

 
$
115,634

 
$
360,348

 
$
343,155

Tenant expense reimbursement
20,346

 
19,176

 
53,889

 
56,350

Observatory revenue
39,306

 
38,093

 
94,212

 
91,112

Third-party management and other fees
345

 
404

 
1,088

 
1,372

Other revenue and fees
4,932

 
2,541

 
19,861

 
6,748

Total revenues
187,320

 
175,848

 
529,398

 
498,737

Operating expenses:
 
 
 
 
 
 
 
Property operating expenses
41,270

 
38,585

 
122,009

 
115,075

Ground rent expenses
2,331

 
2,331

 
6,994

 
6,994

General and administrative expenses
12,899

 
11,798

 
36,566

 
35,623

Observatory expenses
8,648

 
7,250

 
23,079

 
21,900

Real estate taxes
26,901

 
24,691

 
76,001

 
71,773

Acquisition expenses

 

 

 
98

Depreciation and amortization
38,490

 
37,607

 
119,868

 
115,382

Total operating expenses
130,539

 
122,262

 
384,517

 
366,845

Total operating income
56,781

 
53,586

 
144,881

 
131,892

Other expenses:
 
 
 
 
 
 
 
Interest expense
(16,890
)
 
(17,939
)
 
(52,109
)
 
(52,758
)
Loss on early extinguishment of debt
(2,157
)
 

 
(2,157
)
 
(552
)
Loss from derivative financial instruments

 

 
(289
)
 

Income before income taxes
37,734

 
35,647

 
90,326

 
78,582

Income tax expense
(2,245
)
 
(2,750
)
 
(4,333
)
 
(4,340
)
Net income
35,489

 
32,897

 
85,993

 
74,242

Private perpetual preferred unit distributions
(234
)
 
(234
)
 
(702
)
 
(702
)
Net income attributable to non-controlling interests
(16,449
)
 
(16,690
)
 
(39,916
)
 
(39,050
)
Net income attributable to common stockholders
$
18,806

 
$
15,973

 
$
45,375

 
$
34,490

 
 
 
 
 
 
 
 
Total weighted average shares:
 
 
 
 
 
 
 
Basic
158,102

 
136,831

 
157,796

 
126,740

Diluted
297,871

 
280,614

 
298,089

 
271,028

 
 
 
 
 
 
 
 
Earnings per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.12

 
$
0.12

 
$
0.29

 
$
0.27

Diluted
$
0.12

 
$
0.12

 
$
0.29

 
$
0.27

 
 
 
 
 

 

Dividends per share
$
0.105

 
$
0.105

 
$
0.315

 
$
0.295


The accompanying notes are an integral part of these financial statements

3



Empire State Realty Trust, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
(amounts in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
35,489

 
$
32,897

 
$
85,993

 
$
74,242

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in unrealized gain (loss) on valuation of interest rate swap agreements
(1,279
)
 
930

 
(14,252
)
 
(29,305
)
     Other comprehensive income (loss)
(1,279
)
 
930

 
(14,252
)
 
(29,305
)
Comprehensive income (loss)
34,210

 
33,827

 
71,741

 
44,937

Net income attributable to non-controlling interests and private perpetual preferred unitholders
(16,683
)
 
(16,924
)
 
(40,618
)
 
(39,752
)
Other comprehensive (income) loss attributable to non-controlling interests
586

 
(979
)
 
6,670

 
15,561

Comprehensive income (loss) attributable to common stockholders
$
18,113

 
$
15,924

 
$
37,793

 
$
20,746


The accompanying notes are an integral part of these financial statements


4



Empire State Realty Trust, Inc.
Condensed Consolidated Statements of Stockholders' Equity
For The Nine Months Ended September 30, 2017
(unaudited)
(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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
154,745

 
$
1,547

 
1,096

 
$
11

 
$
1,104,463

 
$
(2,789
)
 
$
50,904

 
$
1,154,136

 
$
820,723

 
$
8,004

 
$
1,982,863

Conversion of operating partnership units and Class B shares to Class A shares
3,577

 
36

 
(18
)
 

 
11,087

 
(54
)
 

 
11,069

 
(11,069
)
 

 

Equity compensation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 


LTIP units

 

 

 

 

 

 

 

 
10,332

 

 
10,332

Restricted stock, net of forfeitures
28

 

 

 

 
476

 

 

 
476

 

 

 
476

Dividends and distributions

 

 

 

 

 

 
(49,843
)
 
(49,843
)
 
(44,641
)
 
(702
)
 
(95,186
)
Net income

 

 

 

 

 

 
45,375

 
45,375

 
39,916

 
702

 
85,993

Unrealized gain (loss) on valuation of interest rate swap agreements

 

 

 

 

 
(7,582
)
 

 
(7,582
)
 
(6,670
)
 

 
(14,252
)
Balance at September 30, 2017
158,350

 
$
1,583

 
1,078

 
$
11

 
$
1,116,026

 
$
(10,425
)
 
$
46,436

 
$
1,153,631

 
$
808,591

 
$
8,004

 
$
1,970,226


The accompanying notes are an integral part of these financial statements


5



 
Empire State Realty Trust, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(amounts in thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash Flows From Operating Activities
 
 
 
Net income
$
85,993

 
$
74,242

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
119,868

 
115,382

Amortization of non-cash items within interest expense
919

 
516

Amortization of acquired above- and below-market leases, net
(4,154
)
 
(6,285
)
Amortization of acquired below-market ground leases
5,873

 
5,873

Straight-lining of rental revenue
(20,590
)
 
(21,495
)
Equity based compensation
10,808

 
7,254

Settlement of derivative contracts
(6,335
)
 

Loss on early extinguishment of debt
2,157

 
552

Increase (decrease) in cash flows due to changes in operating assets and liabilities:
 
 
 
Restricted cash
(703
)
 
3,120

Tenant and other receivables
(12,119
)
 
(788
)
Deferred leasing costs
(21,660
)
 
(18,642
)
Prepaid expenses and other assets
13,672

 
16,775

Accounts payable and accrued expenses
(8,917
)
 
(7,223
)
Deferred revenue and other liabilities
9,108

 
(7,213
)
Net cash provided by operating activities
173,920

 
162,068

Cash Flows From Investing Activities
 
 
 
(Increase) decrease in restricted cash for investing activities
(1,590
)
 
558

Development costs
(27
)
 
(450
)
Additions to building and improvements
(157,579
)
 
(120,401
)
Net cash used in investing activities
(159,196
)
 
(120,293
)

The accompanying notes are an integral part of these financial statements





















6



Empire State Realty Trust, Inc.
Condensed Consolidated Statements of Cash Flows (continued)
(unaudited)
(amounts in thousands)

 
Nine Months Ended September 30,
 
2017
 
2016
Cash Flows From Financing Activities
 
 
 
Proceeds from mortgage notes payable
315,000

 
50,000

Repayment of mortgage notes payable
(344,618
)
 
(29,220
)
Proceeds from unsecured revolving credit facility and term loan
265,000

 
50,000

Repayments of unsecured revolving credit facility and term loan
(265,000
)
 
(90,000
)
Net proceeds from the sale of common stock


 
611,278

Deferred financing costs
(12,186
)
 
(2,905
)
Private perpetual preferred unit distributions
(702
)
 
(702
)
Dividends paid to common stockholders
(49,843
)
 
(39,491
)
Distributions paid to non-controlling interests in the operating partnership
(44,641
)
 
(43,123
)
Net cash (used in) provided by financing activities
(136,990
)
 
505,837

Net (decrease) increase in cash and cash equivalents
(122,266
)
 
547,612

Cash and cash equivalents—beginning of period
554,371

 
46,685

Cash and cash equivalents—end of period
$
432,105

 
$
594,297

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
53,918

 
$
53,286

Cash paid for income taxes
$
5,004

 
$
3,495

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Building and improvements included in accounts payable and accrued expenses
$
72,130

 
$
71,444

Derivative instruments at fair values included in accounts payable and accrued expenses
13,378

 
31,227

Conversion of operating partnership units and Class B shares to Class A shares
11,087

 
19,941


The accompanying notes are an integral part of these financial statements

7





Empire State Realty Trust, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
 
1. Description of Business and Organization
As used in these condensed 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 ("REIT") that owns, manages, operates, acquires and repositions office and retail properties in Manhattan and the greater New York metropolitan area.
As of September 30, 2017, 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 494,935 rentable square feet of retail space on their ground floor and/or contiguous levels. Our remaining five office properties are located in Fairfield County, Connecticut and Westchester County, New York, encompassing in the aggregate approximately 1.9 million rentable square feet. The majority of square footage for these five properties is located in densely populated metropolitan communities with immediate access to mass transportation. Additionally, we have entitled land at the Stamford Transportation Center in Stamford, Connecticut, adjacent to one of our office properties, that will support the development of an approximately 380,000 rentable square foot office building and garage, which we refer to herein as Metro Tower. As of September 30, 2017, our portfolio included four standalone retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut, encompassing 204,450 rentable square feet in the aggregate.
We were organized as a Maryland corporation on July 29, 2011 and commenced operations upon completion of our initial public offering and related formation transactions on October 7, 2013. Our operating partnership, Empire State Realty OP, L.P. (the "Operating Partnership"), holds substantially all of our assets and conducts substantially all of our business. As of September 30, 2017, we owned approximately 53.1% of the aggregate operating partnership units in the Operating Partnership. We, as the sole general partner in the Operating Partnership, have responsibility and discretion in the management and control of the Operating Partnership, and the limited partners in the Operating Partnership, in such capacity, have no authority to transact business for, or participate in the management activities of, the Operating Partnership. Accordingly, the 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.
2. Summary of Significant Accounting Policies
There have been no material changes to the summary of significant accounting policies included in the section entitled "Summary of Significant Accounting Policies" in our December 31, 2016 Annual Report on Form 10-K.

Basis of Quarterly Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), for interim financial information, and with the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments and eliminations (including intercompany balances and transactions), consisting of normal recurring adjustments, considered necessary for the fair presentation of the financial statements have been included.
    The results of operations for the periods presented are not necessarily indicative of the results that may be expected for the corresponding full years. These financial statements should be read in conjunction with the financial statements and accompanying notes included in the financial statements for the year ended December 31, 2016 contained in our Annual Report on Form 10-K. We do not consider our business to be subject to material seasonal fluctuations, except that our observatory business is subject to tourism seasonality. During the past ten years, approximately 16.0% to 18.0% of our annual observatory

8



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.
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.  For variable interest entities ("VIE"), we consolidate the entity if we are deemed to have a variable interest in the entity and through that interest we are deemed 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. The Operating Partnership is a variable interest entity of our company, Empire State Realty Trust, 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 has 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 condensed consolidated balance sheets and in the condensed 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 condensed 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, valuation of the allowance for doubtful accounts, and valuation of derivative instruments, senior unsecured notes, mortgage notes payable, unsecured term loan and revolving credit 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.
Reclassification
Certain prior year balances have been reclassified to conform to our current year presentation. The prior year balance of interest expense has been reclassified to separately present loss on early extinguishment of debt.
Recently Issued or Adopted Accounting Standards
During August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends its hedge accounting model to enable entities to better portray their risk management activities in the financial statements. The amendments expand an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. ASU No. 2017-12 eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. It also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. ASU No. 2017-12 will be effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted in any interim period. All transition requirements and elections should be applied to hedging relationships existing

9



on the date of adoption. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption (that is, the initial application date). During the quarter, we early adopted ASU No. 2017-02 using a modified retrospective approach for existing and active hedging relationships as of adoption date. The adoption of ASU No. 2017-02 did not have a material impact 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. Real estate acquisitions that do not meet the definition of a business will be accounted for as asset acquisitions and the corresponding acquisition costs will be capitalized rather than expensed. 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 are evaluating the impact of adopting this new accounting standard 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 are evaluating the impact of adopting this new accounting standard on our consolidated financial statements.
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. ASU No. 2016-13 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.

10



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 September 30, 2017, the remaining contractual payments under our ground lease agreements aggregated $61.7 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 internal leasing costs and instead will expense these costs as incurred. These costs totaled $2.3 million for the year ended December 31, 2016. We continue to evaluate the impact of adopting this new accounting standard on our consolidated financial statements.
During May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which will replace all current GAAP guidance related to revenue recognition and eliminate 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. This guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. ASU No. 2014-09 was amended in August 2015 by ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU No. 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. ASU No. 2014-09 was further amended in December 2016 by ASU No. 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers which contain amendments that are intended to clarify or correct unintended application of the guidance. Those items generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements for Topic 606. We plan to adopt this standard on the required effective date of January 1, 2018 using the modified retrospective approach and we do not expect the adoption to have a material impact on our consolidated financial statements. This standard excludes from its scope, accounting for leases which is covered by ASU No. 2016-02, Leases. However, the non-lease service components within a lease such as common area maintenance reimbursed by tenants will be considered individual performance obligations and be subject to the new revenue recognition standard, and such revenue will be recognized over the period in which the related services are performed. We expect to apply the new revenue guidance to non-lease components within tenant leases upon our adoption of the lease standard effective January 1, 2019.
3. Deferred Costs, Acquired Lease Intangibles and Goodwill
Deferred costs, net, consisted of the following as of September 30, 2017 and December 31, 2016 (amounts in thousands):  
 
September 30, 2017
 
December 31, 2016
Leasing costs
$
158,780

 
$
140,325

Acquired in-place lease value and deferred leasing costs
244,829

 
253,113

Acquired above-market leases
70,290

 
74,770

 
473,899

 
468,208

Less: accumulated amortization
(214,466
)
 
(195,617
)
Total deferred costs, net, excluding net deferred financing costs
$
259,433

 
$
272,591

At September 30, 2017 and December 31, 2016, $8.7 million and $4.5 million, respectively, of net deferred financing costs associated with the unsecured revolving credit facility was included in deferred costs, net on the condensed consolidated balance sheet.    

11



Amortization expense related to deferred leasing costs and acquired deferred leasing costs was $5.8 million and $6.1 million for the three months ended September 30, 2017 and 2016, respectively, and $17.9 million and $17.6 million for the nine months ended September 30, 2017 and 2016, respectively. Amortization expense related to acquired lease intangibles was $4.0 million and $5.0 million for the three months ended September 30, 2017 and 2016, respectively, and $13.0 million and $19.7 million for the nine months ended September 30, 2017 and 2016, respectively.
Amortizing acquired intangible assets and liabilities consisted of the following as of September 30, 2017 and December 31, 2016 (amounts in thousands):
 
September 30, 2017
 
December 31, 2016
Acquired below-market ground leases
$
396,916

 
$
396,916

Less: accumulated amortization
(26,729
)
 
(20,856
)
Acquired below-market ground leases, net
$
370,187

 
$
376,060

 
September 30, 2017
 
December 31, 2016
Acquired below-market leases
$
(132,723
)
 
$
(135,026
)
Less: accumulated amortization
62,710

 
52,726

Acquired below-market leases, net
$
(70,013
)
 
$
(82,300
)
Rental revenue related to the amortization of below-market leases, net of above-market leases, was $1.6 million and $1.2 million for the three months ended September 30, 2017 and 2016, respectively, and $4.1 million and $6.3 million for the nine months ended September 30, 2017 and 2016, respectively.
As of September 30, 2017, we had goodwill of $491.5 million. Goodwill was allocated $227.5 million to the observatory reportable segment and $264.0 million to the real estate segment.
































12



4. Debt
Debt consisted of the following as of September 30, 2017 and December 31, 2016 (amounts in thousands):
 
Principal Balance
 
As of September 30, 2017
 
September 30, 2017
 
December 31, 2016
 
Stated
Rate
 
Effective
Rate
(1)
 
Maturity
Date
(2)
Mortgage debt collateralized by:
 
 
 
 
 
 
 
 
 
Fixed rate mortgage debt
 
 
 
 
 
 
 
 
 
1333 Broadway
$
66,872

 
$
67,656

 
6.32
%
 
3.73
%
 
1/5/2018
1400 Broadway
 
 
 
 
 
 
 
 
 
(first lien mortgage loan)
66,909

 
67,714

 
6.12
%
 
3.37
%
 
2/5/2018
(second lien mortgage loan)
9,226

 
9,389

 
3.35
%
 
3.36
%
 
2/5/2018
111 West 33rd Street
 
 
 
 
 
 
 
 
 
(first lien mortgage loan)
74,356

 
75,261

 
6.01
%
 
3.32
%
 
4/5/2018
(second lien mortgage loan)
9,405

 
9,509

 
6.56
%
 
3.62
%
 
4/5/2018
1350 Broadway
37,302

 
37,764

 
5.87
%
 
3.71
%
 
4/5/2018
Metro Center
94,464

 
95,985

 
3.59
%
 
3.66
%
 
11/5/2024
10 Union Square
50,000

 
50,000

 
3.70
%
 
3.97
%
 
4/1/2026
1542 Third Avenue
30,000

 
17,795

 
4.29
%
 
4.68
%
 
5/1/2027
First Stamford Place(3)
180,000

 
235,067

 
4.28
%
 
4.67
%
 
7/1/2027
1010 Third Avenue and 77 West 55th Street
39,885

 
26,502

 
4.01
%
 
4.45
%
 
1/5/2028
10 Bank Street
34,802

 
31,544

 
4.23
%
 
4.54
%
 
6/1/2032
383 Main Avenue
30,000

 
28,654

 
4.44
%
 
4.77
%
 
6/30/2032
Total mortgage debt
723,221

 
752,840

 
 
 
 
 
 
Senior unsecured notes - exchangeable
250,000

 
250,000

 
2.63
%
 
3.93
%
 
8/15/2019
Senior unsecured notes:(6)
 
 
 
 
 
 
 
 
 
   Series A
100,000

 
100,000

 
3.93
%
 
4.00
%
 
3/27/2025
   Series B
125,000

 
125,000

 
4.09
%
 
4.17
%
 
3/27/2027
   Series C
125,000

 
125,000

 
4.18
%
 
4.26
%
 
3/27/2030
Unsecured revolving credit facility(6)

 

 
(4) 
 
(4) 
 
8/29/2021
Unsecured term loan facility(6)
265,000

 
265,000

 
(5) 
 
(5) 
 
8/29/2022
Total principal
1,588,221

 
1,617,840

 
 
 
 
 
 
Unamortized premiums, net of unamortized discount
(2,301
)
 
905

 
 
 
 
 
 
Deferred financing costs, net

(8,630
)
 
(6,414
)
 
 
 
 
 
 
Total
$
1,577,290

 
$
1,612,331

 
 
 
 
 
 
______________

(1)
The effective rate is the yield as of September 30, 2017, including the effects of debt issuance costs and the amortization of the fair value of debt adjustment.
(2)
Pre-payment is generally allowed for each loan upon payment of a customary pre-payment penalty.
(3)
Represents a $164 million mortgage loan bearing interest of 4.09% and a $16 million loan bearing interest at 6.25%.
(4)
At September 30, 2017, the unsecured revolving credit facility bears a floating rate at 30 day LIBOR plus 1.10%. The rate at September 30, 2017 was 2.33%.
(5)
The unsecured term loan facility bears a floating rate at 30 day LIBOR plus 1.20%. Pursuant to a forward interest rate swap agreement, the LIBOR rate is fixed at 2.1485% for the period beginning on August 31, 2017 through maturity. The rate at September 30, 2017 was 3.35%.
(6)
At September 30, 2017, we were in compliance with all debt covenants.
    
Mortgage Debt
During April 2017, we refinanced a mortgage loan collateralized by 1542 Third Avenue. The new $30.0 million loan bears interest at a fixed rate of 4.29% and matures in May 2027.
During May 2017, we refinanced a mortgage loan collateralized by 10 Bank Street. The new $35.0 million loan bears interest at a fixed rate of 4.23% and matures in June 2032.
During June 2017, we refinanced a mortgage loan collateralized by First Stamford Place. The new $180.0 million loans bear a blended interest rate of 4.28% and mature in July 2027. One mortgage loan is for $164.0 million and bears an interest rate of 4.09%. The second loan is for $16.0 million and bears an interest rate of 6.25%.

13



During June 2017, we refinanced a mortgage loan collateralized by 1010 Third Avenue and 77 West 55th Street. The new $40.0 million loan bears interest at a fixed rate of 4.01% and matures in January 2028.
During June 2017, we refinanced a mortgage loan collateralized by 383 Main Avenue. The new $30.0 million loan bears interest at a fixed rate of 4.44% and matures in June 2032.
Principal Payments
Aggregate required principal payments at September 30, 2017 are as follows (amounts in thousands):

Year
Amortization
 
Maturities
 
Total
2017
$
1,983

 
$

 
$
1,983

2018
4,417

 
262,210

 
266,627

2019
3,790

 
250,000

 
253,790

2020
3,938

 

 
3,938

2021
4,090

 

 
4,090

Thereafter
43,407

 
1,014,386

 
1,057,793

Total
$
61,625

 
$
1,526,596

 
$
1,588,221

Deferred Financing Costs
Deferred financing costs, net, consisted of the following at September 30, 2017 and December 31, 2016 (amounts in thousands):
 
 
September 30, 2017
 
December 31, 2016
Financing costs
 
$
23,333

 
$
23,145

Less: accumulated amortization
 
(6,004
)
 
(12,241
)
Total deferred financing costs, net
 
$
17,329

 
$
10,904

At September 30, 2017 and December 31, 2016, $8.7 million and $4.5 million, respectively, of net deferred financing costs associated with the unsecured revolving credit facility was included in deferred costs, net on the condensed consolidated balance sheet.
Amortization expense related to deferred financing costs was $1.0 million and $1.3 million for the three months ended September 30, 2017 and 2016, respectively, and $3.6 million and $3.7 million for the nine months ended September 30, 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 condensed consolidated statement of income for the nine months ended September 30, 2017. This transaction extended the unsecured revolving credit 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 million term loan facility. The new revolving credit facility replaced a credit facility which was due to mature in January 2019 and was undrawn as of September 30, 2017. The term loan facility was borrowed in full at closing and used to repay a $265 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.


14



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.

Exchangeable Senior Notes

Issued in August 2014, the $250.0 million 2.625% Exchangeable Senior Notes (“2.625% Exchangeable Senior Notes”) are due August 15, 2019. 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 that it is our intent and ability to settle the principal amount of the 2.625% Exchangeable Senior Notes in cash. As of September 30, 2017, the exchange rate of the 2.625% Exchangeable Senior Notes was 51.7101 shares per $1,000 principal amount of notes (equivalent to an initial exchange price of approximately $19.34 per share of Class A common stock), subject to adjustment, as described in the related indenture governing the 2.625% Exchangeable Senior Notes.

For the three and nine months ended September 30, 2017, total interest expense related to the 2.625% Exchangeable Senior Notes was $2.4 million and $7.3 million, respectively, consisting of (i) the contractual interest expense of $1.6 million and $4.9 million, respectively, (ii) the additional non-cash interest expense of $0.7 million and $2.0 million, respectively, relating to the accretion of the debt discount, and (iii) the amortization of deferred financing costs of $0.1 million and $0.4 million, respectively. For the three and nine months ended September 30, 2016, total interest expense related to the 2.625% Exchangeable Senior Notes was $2.4 million and $7.3 million, respectively, consisting of (i) the contractual interest expense of $1.6 million and $4.9 million, respectively, (ii) the additional non-cash interest expense of $0.7 million and $2.0 million, respectively, relating to the accretion of the debt discount, and (iii) the amortization of deferred financing costs of $0.1 million and $0.4 million, respectively.

5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following as of September 30, 2017 and December 31, 2016 (amounts in thousands):
 
September 30, 2017
 
December 31, 2016
Accounts payable and accrued expenses
$
106,420

 
$
102,866

Payable to the estate of Leona M. Helmsley (1)
18,367

 
18,367

Interest rate swap agreements liability
13,378

 
5,591

Accrued interest payable
3,903

 
6,230

Due to affiliated companies
622

 
1,010

Accounts payable and accrued expenses
$
142,690

 
$
134,064

___________
(1)
Reflects a payable to the estate of Leona M. Helmsley, as required under our formation agreements, for New York City transfer taxes which would have been payable in absence of the estate's exemption from such tax. The taxing authority's final approval of such exemption was issued during the three months ended September 30, 2017, and upon receipt of the confirming documents we made this payment to the estate of Leona M. Helmsley on October 2, 2017.
6. Financial Instruments and Fair Values
Derivative Financial Instruments
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.
    

15



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 September 30, 2017, 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 $13.4 million. If we had breached any of these provisions at September 30, 2017, we could have been required to settle our obligations under the agreements at their termination value of $13.4 million.

As of September 30, 2017, we had interest rate LIBOR swaps with an aggregate notional value of $790.0 million. The notional value does not represent exposure to credit, interest rate or market risks. As of September 30, 2017, the fair value of these derivative instruments amounted to ($13.4 million) which is included in accounts payable and accrued expenses on the condensed consolidated balance sheet. As of December 31, 2016, the fair value of these derivative instruments amounted to $0.6 million which was included in prepaid expenses and other assets and ($5.6 million) which was included in accounts payable and accrued expenses on the condensed consolidated balance sheet. These interest rate swaps have been designated as cash flow hedges and hedge the future cash outflows on our mortgage debt and also on our term loan facility that is subject to a floating interest rate. As of September 30, 2017 and 2016, these cash flow hedges are deemed highly effective and a net unrealized gain (loss) of $(1.6) million and $0.9 million for the three months ended September 30, 2017 and 2016, respectively, and a net unrealized gain (loss) of $(14.7) million and $(29.3) million for the nine months ended September 30, 2017 and 2016, respectively, are reflected in the condensed consolidated statements of comprehensive income (loss). 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 $2.9 million of the current balance held in accumulated other comprehensive income (loss) will be reclassified into interest expense within the next 12 months relating to the interest rate swap contracts in effect as of September 30, 2017.
The table below summarizes the terms of agreements and the fair values of our derivative financial instruments as of September 30, 2017 and December 31, 2016 (dollar amounts in thousands):     
 
 
 
 
September 30, 2017
 
December 31, 2016
Derivative
 
Notional Amount
Receive Rate
Pay Rate
Effective Date
Expiration Date
 
Asset
Liability
 
Asset
Liability
Interest rate swap
 
$
265,000

1 Month LIBOR
2.1485%
August 31, 2017
August 24, 2022
 
$

$
(3,436
)
 
$

$
(1,634
)
Interest rate swap (1)
 
100,000

3 Month LIBOR
2.5050%
July 5, 2017
July 5, 2027
 


 

(684
)
Interest rate swap (1) (2)
 
80,000

3 Month LIBOR
2.5050%
July 5, 2017
July 5, 2027
 


 

(685
)
Interest rate swap
 
100,000

3 Month LIBOR
2.4860%
January 5, 2018
January 5, 2028
 

(1,448
)
 
224


Interest rate swap
 
100,000

3 Month LIBOR
2.4860%
January 5, 2018
January 5, 2028
 

(1,448
)
 
223


Interest rate swap
 
75,000

3 Month LIBOR
2.4860%
January 5, 2018
January 5, 2028
 

(1,086
)
 
167


Interest rate swap
 
75,000

3 Month LIBOR
2.7620%
June 1, 2018
June 1, 2028
 

(2,592
)
 

(1,295
)
Interest rate swap
 
75,000

3 Month LIBOR
2.7620%
June 1, 2018
June 1, 2028
 

(2,591
)
 

(1,293
)
Interest rate swap
 
100,000

3 Month LIBOR
2.4625%
June 1, 2018
June 1, 2028
 

(777
)
 


 
 
 
 
 
 
 
 
$

$
(13,378
)
 
$
614

$
(5,591
)

(1)
During June 2017, these swaps aggregating $180.0 million were terminated in connection with the refinancing of several of our mortgage debt (see Note 4 Debt). As of September 30, 2017, the deferred net losses from these terminated hedges amounted to $5.9 million which is included in accumulated other comprehensive loss relating to net unrealized loss from derivative financial instruments.
(2)
During March 2017, $20.0 million of an original notional amount of $100.0 million was terminated. In connection with the partial termination and re-designation of the related cash flow hedges, $0.3 million is recognized as a loss from derivative financial instruments and included in Other Expenses on the condensed consolidated statement of income for the nine months ended September 30, 2017. There was no loss from derivative financial instruments for the three months ended September 30, 2017 and for the three and nine months ended September 30, 2016.
The table below shows the effect of our derivative financial instruments designated as cash flow hedges on accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016 (amounts in

16



thousands):    
 
 
Three Months Ended
 
Nine Months Ended
Effects of Cash Flow Hedges
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Amount of gain (loss) recognized in other comprehensive income (loss)
 
$
(1,638
)
 
$
930

 
$
(14,654
)
 
$
(29,305
)
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense
 
(359
)
 

 
(402
)
 

The table below shows the effect of our derivative financial instruments designated as cash flow hedges on the condensed consolidated income statements for the three and nine months ended September 30, 2017 and 2016 (amounts in thousands):
 
 
Three Months Ended
 
Nine Months Ended
Effects of Cash Flow Hedges
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Total interest (expense) presented in the condensed consolidated income statements in which the effects of cash flow hedges are recorded
 
$
(16,890
)
 
$
(17,939
)
 
$
(52,109
)
 
$
(52,758
)
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense
 
(359
)
 

 
(402
)
 


Fair Valuation
The estimated fair values at September 30, 2017 and December 31, 2016 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 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, senior unsecured notes - Series A, B and C, and unsecured term loan facility 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.

The following tables summarize the carrying and estimated fair values of our financial instruments as of September 30, 2017 and December 31, 2016 (amounts in thousands):

17



 
September 30, 2017
 
 
 
Estimated Fair Value
 
Carrying
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
13,378

 
13,378

 

 
13,378

 

Mortgage notes payable
720,830

 
712,365

 

 

 
712,365

Senior unsecured notes - Exchangeable
243,923

 
281,068

 

 
281,068

 

Senior unsecured notes - Series A, B, and C
348,991

 
344,267

 

 

 
344,267

Unsecured term loan facility
263,546

 
265,000

 

 

 
265,000

    
 
December 31, 2016
 
 
 
Estimated Fair Value
 
Carrying
Value
 
Total
 
Level 1
 
Level 2
 
Level 3
Interest rate swaps included in prepaid expenses and other assets

$
614

 
$
614

 
$

 
$
614

 
$

Interest rate swaps included in accounts payable and accrued expenses
5,591

 
5,591

 

 
5,591

 

Mortgage notes payable
759,016

 
755,640

 

 

 
755,640

Senior unsecured notes - Exchangeable
241,474

 
282,435

 

 
282,435

 

Senior unsecured notes - Series A, B, and C
348,914

 
339,274

 

 

 
339,274

Unsecured term loan facility
262,927

 
265,000

 

 

 
265,000

Disclosure about the fair value of financial instruments is based on pertinent information available to us as of September 30, 2017 and December 31, 2016. 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 office spaces to tenants over terms ranging from one to 16 years. 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 condensed consolidated statements of income as tenant expense reimbursement.
8. Commitments and Contingencies
Legal Proceedings
Except as described below, as of September 30, 2017, 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, on or about October 14, 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 alleges breach of fiduciary duty and related claims in connection with the Offering and formation transactions. These investors had opted out of a prior class action brought regarding the Offering and formation transactions that was settled with court approval. The statement of claim in the arbitration seeks monetary damages and declaratory relief. The respondents filed an answering statement and counterclaims. On December 18, 2014, these claimants also filed a complaint in the United States District Court for the Southern District of New York alleging the same claims that they asserted

18



in the arbitration. As alleged in the complaint, the claimants filed this lawsuit to toll the statute of limitations on their claims in the event it is determined that the claims are not subject to arbitration, and they planned to move to stay the lawsuit in favor of the pending arbitration. On February 2, 2015, the claimants filed an amended complaint adding an additional claim and making other non-substantive modifications to the original complaint. On March 12, 2015, the court stayed the action on consent of all parties pending the arbitration. The arbitration hearings commenced in May 2016 and have proceeded for a select number of hearing sessions since that time. Additional hearing sessions are scheduled to resume in November and December 2017.
    
The respondents believe the allegations in the arbitration are entirely without merit, and they intend to defend them vigorously.

    In connection with the Offering and formation transactions, we entered into indemnification agreements with our directors, executive officers and chairman emeritus, providing for the indemnification by us for certain liabilities and expenses incurred as a result of actions brought, or threatened to be brought, against them. As a result, Anthony E. Malkin, Peter L. Malkin and Thomas N. Keltner, Jr. have defense and indemnity rights from us with respect to the above-referenced arbitration.
Unfunded Capital Expenditures
At September 30, 2017, we estimate that we will incur approximately $78.2 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.

Ground Leases
Aggregate required payments on ground leases at September 30, 2017 were as follows (amounts in thousands):
2017
$
380

2018
1,518

2019
1,518

2020
1,518

2021
1,518

Thereafter
55,212

 
$
61,664


Concentration of Credit Risk
Financial instruments that subject us to credit risk consist primarily of cash and cash equivalents, restricted cash, tenant and other receivables and deferred rent receivables. At September 30, 2017, we held on deposit at various major financial institutions cash and cash equivalents and restricted cash balances in excess of amounts insured by the Federal Deposit Insurance Corporation.
Asset Retirement Obligations
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 September 30, 2017, 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

19



such properties has been completed, and as of September 30, 2017, 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 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.
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”, 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 the sale. 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.

In connection with the share issuance to QIA, we agreed, subject to certain minimum thresholds and conditions, to indemnify QIA for certain applicable U.S. federal and state taxes paid by QIA in connection with any dividends 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 this agreement, we would be required to pay QIA for the resulting tax consequences, as applicable.

Shares and Units
An operating partnership unit of the Operating Partnership ("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 the 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 sufficient authorized common stock, to exchange OP Units 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 the Operating Partnership. Each LTIP unit awarded will be deemed equivalent to an award of one share of stock under the First Amended and Restated Empire State Realty Trust, Inc. and 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, the 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 the Operating Partnership on a one-for-one basis.
With the exception of performance based LTIP units granted in 2016 and 2017, all LTIP units issued in connection with annual equity awards, 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. Performance based LTIP units granted in 2016 and 2017 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.


20



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):
 
Three Months Ended
 
 Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Net income attributable to common stockholders
$
18,806

 
$
15,973

 
$
45,375

 
$
34,490

Increase in additional paid-in capital for the conversion of OP Units into common stock
1,953

 
5,016

 
11,087

 
20,217

Change from net income attributable to common stockholders and transfers from non-controlling interests
$
20,759

 
$
20,989

 
$
56,462

 
$
54,707

As of September 30, 2017, there were 300,416,821 OP Units outstanding, of which 159,427,448, or 53.1%, were owned by us and 140,989,373, or 46.9%, were owned by other partners, including certain directors, officers and other members of executive management.
Dividends and Distributions
Total dividends paid to common stockholders were $16.7 million and $49.8 million for the three and nine months ended September 30, 2017, respectively, and $16.2 million and $39.5 million for the three and nine months ended September 30, 2016, respectively. Total distributions paid to OP unitholders, excluding inter-company distributions, were $14.8 million and $44.6 million for the three and nine months ended September 30, 2017, respectively, and $15.1 million and $43.1 million for the three and nine months ended September 30, 2016, respectively. Total distributions paid to preferred unitholders were $0.2 million and $0.7 million for the three and nine months ended September 30, 2017, respectively, and $0.2 million and $0.7 million for the three and nine months ended September 30, 2016, respectively.
Incentive and Share-Based Compensation
The 2013 Plan provides for grants to 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 12.2 million shares of our common stock is authorized for issuance under awards granted pursuant to the 2013 Plan, and as of September 30, 2017, 7.0 million shares of common stock remain available for future issuance.
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 performance-based vesting, with fair market values of $6.1 million for the time-based vesting awards and $9.6 million for the performance-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 performance-based vesting, with fair market values of $1.6 million for the time-based vesting awards and $1.0 million for the performance-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.
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 February 2016, we made grants of LTIP units to executive officers under the 2013 Plan. At such time, we granted to executive officers a total of 368,225 LTIP units that are subject to time-based vesting and 1,230,228 LTIP units that are subject to performance-based vesting, with fair market values of $5.6 million for the time-based vesting awards and $8.8 million for

21



the performance-based vesting awards. In February 2016, 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 47,168 LTIP units and 44,198 shares of restricted stock that are subject to time-based vesting and 112,925 LTIP units that are subject to performance-based vesting, with fair market values of $1.4 million for the time-based vesting awards and $0.8 million for the performance-based vesting awards. The awards subject to time-based vesting vest ratably over four years from January 1, 2016, subject generally to the grantee's continued employment. The first installment vested on January 1, 2017 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, 2016. 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, 2019 and the second installment vesting on January 1, 2020, subject generally to the grantee's continued employment on those dates.
In February 2016, we made a grant of LTIP units to an executive officer under the 2013 Plan. We granted a total of 62,814 LTIP units with a fair market value of $1.0 million. The award is subject to time-based vesting of 30% after three years, 30% after four years, and 40% after five years, subject to the grantee's continued employment.
In June 2016, we made grants of LTIP units to our non-employee directors under the 2013 Plan. At such time, we granted a total of 43,257 LTIP units that are subject to time-based vesting with fair market values of $0.8 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.
We made other grants during 2016 under the 2013 Plan with fair market values of $0.1 million in the aggregate.
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 performance-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 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 nine months ended September 30, 2017 and 2016 were valued at $19.4 million and $18.4 million, respectively. The weighted-average per unit or share fair value was $13.77 and $9.60 for grants issued in 2017 and 2016, respectively. 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 2017.
The following is a summary of restricted stock and LTIP unit activity for the nine months ended September 30, 2017:

22



 
Restricted Stock
 
LTIP Units
 
Weighted Average Grant Fair Value
Unvested balance at December 31, 2016
107,793

 
2,881,629

 
$
10.01

Vested
(17,923
)
 
(323,982
)
 
13.74

Granted
34,407

 
1,372,574

 
13.77

Forfeited or unearned
(2,509
)
 
(77,227
)
 
5.36

Unvested balance at September 30, 2017
121,768

 
3,852,994

 
$
11.11

The LTIP unit and restricted stock awards will immediately vest upon the later of (i) the date the grantee attains the age of 60 and (ii) the date on which grantee has first completed ten years of continuous service with our company or its 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 performance-based awards, and accordingly, we recognized $0.2 million and $0.9 million for the three and nine months ended September 30, 2017, respectively, and $0.1 million and $0.6 million for the three and nine months ended September 30, 2016, respectively. Unrecognized compensation expense was $0.9 million at September 30, 2017, which will be recognized over a weighted average period of 2.4 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 noncash compensation expense of $3.7 million and $9.9 million for the three and nine months ended September 30, 2017, respectively, and $2.5 million and $6.7 million for the three and nine months ended September 30, 2016, respectively. Unrecognized compensation expense was $26.5 million at September 30, 2017, which will be recognized over a weighted average period of 2.5 years.



























23



Earnings Per Share
Earnings per share for the three and nine months ended September 30, 2017 and 2016 is computed as follows (amounts in thousands, except per share amounts):
 
Three Months Ended,
 
Nine Months Ended,
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Numerator - Basic:
 
 
 
 
 
 
 
Net income
$
35,489

 
$
32,897

 
$
85,993

 
$
74,242

Private perpetual preferred unit distributions
(234
)
 
(234
)
 
(702
)
 
(702
)
Net income attributable to non-controlling interests
(16,449
)
 
(16,690
)
 
(39,916
)
 
(39,050
)
Earnings allocated to unvested shares
(11
)
 
(11
)
 
(28
)
 
(27
)
Net income attributable to common stockholders - basic
$
18,795

 
$
15,962

 
$
45,347

 
$
34,463

 
 
 
 
 
 
 
 
Numerator - Diluted:
 
 
 
 
 
 
 
Net income
$
35,489

 
$
32,897

 
$
85,993

 
$
74,242

Private perpetual preferred unit distributions
(234
)
 
(234
)
 
(702
)
 
(702
)
Earnings allocated to unvested shares
(11
)
 
(11
)
 
(28
)
 
(27
)
Net income attributable to common stockholders - diluted
$
35,244

 
$
32,652

 
$
85,263

 
$
73,513

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
158,102

 
136,831

 
157,796

 
126,740

Operating partnership units
138,287

 
141,908

 
138,593

 
143,648

Effect of dilutive securities:
 
 
 
 
 
 
 
   Stock-based compensation plans
762

 
1,090

 
848

 
378

   Exchangeable senior notes
720

 
785

 
852

 
262

Weighted average shares outstanding - diluted
297,871

 
280,614

 
298,089

 
271,028

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.12

 
$
0.12

 
$
0.29

 
$
0.27

Diluted
$
0.12

 
$
0.12

 
$
0.29

 
$
0.27

There were 954,533 and 840,092 antidilutive shares and LTIP units for the three and nine months ended September 30, 2017, respectively, and 1,033,044 and 757,119 antidilutive shares and LTIP units for the three and nine months ended September 30, 2016, respectively.

10. Related Party Transactions

Supervisory Fee Revenue
We earned supervisory fees from entities affiliated with Anthony E. Malkin, our Chairman and Chief Executive Officer, of $0.3 million and $0.3 million for the three months ended September 30, 2017 and 2016, respectively, and $0.9 million and $1.1 million for the nine months ended September 30, 2017 and 2016, respectively. These fees are included within third-party management and other fees.
Property Management Fee Revenue
We earned property management fees from entities affiliated with Anthony E. Malkin of $0.1 million and $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and $0.2 million and $0.3 million for the nine months ended September 30, 2017 and 2016, respectively. These fees are included within third-party management and other fees.


24



Other
We were reimbursed at allocable cost for 647 square feet of shared office space, equipment, and administrative support, 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 aggregating $0.07 million and $0.2 million for the three and nine months ended September 30, 2016, respectively.
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 to provide them with general computer-related support. Total revenue aggregated $0.1 million and $0.3 million for the three and nine months ended September 30, 2017, respectively.
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 $5.8 million and $5.7 million as of September 30, 2017 and 2016, respectively.
11. 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, redevelopment, repositioning and disposition of our real estate assets. Our observatory segment includes the operation of 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 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.

The following tables provide components of segment profit for each segment for the three and nine months ended September 30, 2017 and 2016 (amounts in thousands):


25



 
 
Three Months Ended September 30, 2017
 
 
Real Estate
 
Observatory
 
Intersegment Elimination
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
122,391

 
$

 
$

 
$
122,391

Intercompany rental revenue
 
23,301

 

 
(23,301
)
 

Tenant expense reimbursement
 
20,346

 

 

 
20,346

Observatory revenue
 

 
39,306

 

 
39,306

Third-party management and other fees
 
345

 

 

 
345

Other revenue and fees
 
4,932

 

 

 
4,932

Total revenues
 
171,315

 
39,306

 
(23,301
)
 
187,320

Operating expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
41,270

 

 

 
41,270

Intercompany rent expense
 

 
23,301

 
(23,301
)
 

Ground rent expense
 
2,331

 

 

 
2,331

General and administrative expenses
 
12,899

 

 

 
12,899

Observatory expenses
 

 
8,648

 

 
8,648

Real estate taxes
 
26,901

 

 

 
26,901

Depreciation and amortization
 
38,473

 
17

 

 
38,490

Total operating expenses
 
121,874

 
31,966

 
(23,301
)
 
130,539

Total operating income
 
49,441

 
7,340

 

 
56,781

Other expenses:

 
 
 
 
 
 
 
 
Interest expense
 
(16,890
)
 

 

 
(16,890
)
Loss on early extinguishment of debt

 
(2,157
)
 

 

 
(2,157
)
Loss from derivative financial instruments

 

 

 

 

Income before income taxes
 
30,394

 
7,340

 

 
37,734

Income tax expense
 
(264
)
 
(1,981
)
 

 
(2,245
)
Net income
 
$
30,130

 
$
5,359

 
$

 
$
35,489

Segment assets
 
$
3,582,935

 
$
265,999

 
$

 
$
3,848,934

Expenditures for segment assets
 
$
40,320

 
$
13,411

 
$

 
$
53,731




26