EMPIRE STATE REALTY OP, L.P. 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, 2021 .
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, market, political and social impact of, and uncertainty relating to, the COVID-19 pandemic; (ii) a failure of conditions or performance regarding any event or transaction described herein, (iii) resolution of legal proceedings involving the Company; (iv) reduced demand for office, multifamily or retail space, including as a result of the COVID-19 pandemic and/or hybrid work schedules which allow work from remote locations other than the employer's office premises; (v) changes in our business strategy; (vi) changes in technology and market competition that affect utilization of our office, retail, broadcast or other facilities; (vii) changes in domestic or international tourism, including due to health crises such as the COVID-19 pandemic, geopolitical events, including global hostilities, currency exchange rates, and/or competition from recently opened observatories inNew York City , any or all of which may cause a decline in observatory visitors; (viii) defaults on, early terminations of, or non-renewal of, leases by tenants; (ix) increases or uncertainty in interest rates, including the phasing out of LIBOR, which may negatively affect the Company's borrowing costs and the market valuation of real property assets generally; (x) declining real estate valuations and impairment charges; (xi) termination of our ground leases; (xii) 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; (xiii) decreased rental rates or increased vacancy rates; (xiv) our failure to execute any newly planned capital project successfully or on the anticipated timeline or at the anticipated costs; (xv) difficulties in identifying and completing acquisitions; (xvi) risks related to our development projects (including ourMetro Tower development site); (xvii) impact of changes in governmental regulations, tax laws and rates and similar matters; (xviii) our failure to qualify as a REIT; (xix) environmental uncertainties and risks related to climate change, adverse weather conditions, rising sea levels and natural disasters; and (xx) accuracy of our methodologies and estimates regarding ESG metrics and goals, tenant willingness and ability to collaborate in reporting ESG metrics and meeting ESG goals, and the impact of governmental regulation on our ESG efforts; (xxi) economic cycles involving inflation and/or recession; (xxii) supply chain disruptions which may limit or delay our timely sourcing of supplies for the maintenance of our facilities and equipment. 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 this Quarterly Report on Form 10-Q, and in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , 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. 28 --------------------------------------------------------------------------------
Overview
Empire State Realty OP, L.P. is the entity through which ESRT, a self-administered and self-managed REIT, conducts all of its business and owns (either directly or through subsidiaries) substantially all of its assets. We own and manage office, retail and multifamily assets inManhattan and the greaterNew York metropolitan area. As the owner of theEmpire State Building , theWorld's Most Famous Building , ESRT also owns and operates its iconic, newly reimagined Observatory Experience.
Highlights for the three months ended
•Incurred net income attributable to common unitholders of$47.8 million and achieved Core Funds From Operations attributable to common unitholders ("Core FFO") of$79.2 million . •Total commercial portfolio 87.8% leased,New York City office portfolio 88.3% leased.
•Signed a total of 320,225 rentable square feet of new, renewal, and expansion leases.
•Empire State Building observatory revenue was$27.4 million and observatory net operating income was$19.6 million for the second quarter of 2022. •ESRT repurchased$53.7 million of its common stock at a weighted average price of$7.90 per share in the second quarter of 2022 and throughJuly 21, 2022 . Since the stock repurchase program began onMarch 5, 2020 throughJuly 21, 2022 , approximately$256 million at a weighted average price of$8.48 per share has been repurchased. Results of Operations Overview
The discussion below relates to our financial condition and results of
operations for the three months ended
Three Months Ended
The following table summarizes our historical results of operations for the
three months ended
29
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Three Months Ended June 30,
2022 2021 Change %
Revenues:
Rental revenue $ 149,339 $ 140,797 $ 8,542 6.1 %
Observatory revenue 27,368 8,359 19,009 227.4 %
Lease termination fees 18,859 3,339 15,520 464.8 %
Third-party management and other fees 326 327 (1) (0.3) %
Other revenues and fees 2,130 586 1,544 263.5 %
Total revenues 198,022 153,408 44,614 29.1 %
Operating expenses:
Property operating expenses 37,433 28,793 (8,640) (30.0) %
Ground rent expenses 2,332 2,332 - - %
General and administrative expenses 15,876 14,089 (1,787) (12.7) %
Observatory expenses 7,776 5,268 (2,508) (47.6) %
Real estate taxes 29,802 31,354 1,552 4.9 %
Depreciation and amortization 58,304 45,088 (13,216) (29.3) %
Total operating expenses 151,523 126,924 (24,599) (19.4) %
Operating income 46,499 26,484 20,015 75.6 %
Other income (expense):
Interest income 431 164 267 162.8 %
Interest expense (25,042) (23,422) (1,620) (6.9) %
Gain on disposition of property 27,170 - 27,170 100.0 %
Income before income taxes 49,058 3,226 45,832 (1,420.7) %
Income tax (expense) benefit (363) 1,185 (1,548) 130.6 %
Net income 48,695 4,411 44,284 (1,003.9) %
Private perpetual preferred unit
distributions (1,051) (1,051) - - %
Net loss attributable to non-controlling
interests in other partnerships 159 - 159 100.0 %
Net income attributable to common
unitholders $ 47,803 $ 3,360 $ 44,443 (1,322.7) %
Rental Revenue
The increase in rental revenue reflects the inclusion of revenue from our recently acquired multifamily properties.
Observatory Revenue
Observatory revenues were higher driven by increased visitation
Other Revenues and Fees
The increase in other revenues and fees was due to higher food and beverage sales, insurance claim income, parking income and bad debt recovery income.
Property Operating Expenses
The increase in property operating expenses reflects higher payroll, utilities, cleaning and other operating expenses, and the inclusion of operating expenses from our recently acquired multifamily properties.
General and Administrative Expenses
The increase in general and administrative expenses reflects higher equity compensation and payroll costs, information technology costs and professional fees.
30
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The increase in observatory expenses was driven by increased operating hours, which increased variable costs such as labor, union, security, cleaning and maintenance costs.
Real Estate Taxes
Lower real estate taxes were attributable to the overall reduction in property tax assessment values.
Depreciation and Amortization
The increase in depreciation and amortization reflects accelerated depreciation at one property due to an impairment charge taken in the fourth quarter of 2021 and additional depreciation from our recently acquired multifamily properties.
Interest Expense
The increase reflects additional interest expense from our recently acquired multifamily properties, partially offset by the cancellation of debt from383 Main Avenue ,Norwalk CT .
Income Taxes The decrease in income tax benefit was attributable to higher net operating income for the observatory segment.
Gain on disposition of property
Represents a gain on the transfer of
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Six Months Ended
The following table summarizes our historical results of operations for the six
months ended
Six Months Ended June 30,
2022 2021 Change %
Revenues:
Rental revenue $ 296,853 $ 281,028 $ 15,825 5.6 %
Observatory revenue 40,609 10,962 29,647 270.5 %
Lease termination fees 20,032 4,628 15,404 332.8 %
Third-party management and other fees 636 603 33 5.5 %
Other revenues and fees 3,926 1,491 2,435 163.3 %
Total revenues 362,056 298,712 63,344 21.2 %
Operating expenses:
Property operating expenses 76,077 59,072 (17,005) (28.8) %
Ground rent expenses 4,663 4,663 - - %
General and administrative expenses 29,562 27,942 (1,620) (5.8) %
Observatory expenses 13,991 9,856 (4,135) (42.0) %
Real estate taxes 59,806 62,801 2,995 4.8 %
Depreciation and amortization 125,410 89,545 (35,865) (40.1) %
Total operating expenses 309,509 253,879 (55,630) (21.9) %
Operating income 52,547 44,833 7,714 17.2 %
Other income (expense):
Interest income 580 286 294 102.8 %
Interest expense (50,056) (46,976) (3,080) (6.6) %
Loss on early extinguishment of debt - (214) 214 100.0 %
Gain on disposition of property 27,170 - 27,170 100.0 %
Income (loss) before income taxes 30,241 (2,071) 32,312 1,560.2 %
Income tax benefit 1,233 3,291 (2,058) (62.5) %
Net income 31,474 1,220 30,254 (2,479.8) %
Private perpetual preferred unit
distributions (2,101) (2,101) - - %
Net loss attributable to non-controlling
interests in other partnerships 222 - 222 100.0 %
Net income (loss) attributable to common
unitholders $ 29,595 $ (881) $ 30,476 3,459.3 %
Rental Revenue
The increase in rental revenue reflects the inclusion of revenue from our recently acquired multifamily properties.
Observatory Revenue
Observatory revenues were higher driven by increased visitation.
Other Revenues and Fees
The increase in other revenues and fees was due to higher food and beverage sales, insurance claim income, parking income and bad debt recovery income.
Property Operating Expenses
32
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The increase in property operating expenses reflects higher payroll, utilities,
repairs and maintenance costs, cleaning and other operating expenses, and the
inclusion of operating expenses from our recently acquired multifamily
properties.
General and Administrative Expenses
The increase in general and administrative expenses reflects higher equity compensation and payroll costs, information technology costs and professional fees.
Observatory Expenses
The increase in observatory expenses was driven by increased operating hours, which increased variable costs such as labor, union, security, cleaning and maintenance costs.
Real Estate Taxes
Lower real estate taxes were attributable to the overall reduction in property tax assessment values.
Depreciation and Amortization
The increase in depreciation and amortization reflects accelerated depreciation at one property due to an impairment charge in the fourth quarter of 2021 and additional depreciation from our recently acquired multifamily properties.
Interest Expense
The increase in interest expense reflects additional interest expense from our recently acquired multifamily properties, partially offset by the cancellation of debt from383 Main Avenue ,Norwalk CT .
Income Taxes The decrease in income tax benefit was attributable to higher net operating income for the observatory segment.
Gain on disposition of property
Represents a gain on the transfer of
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements,
including ongoing commitments to repay borrowings, fund and maintain our assets
and operations, including lease-up costs, fund our redevelopment and
repositioning programs, acquire properties, make distributions to our
securityholders and fulfill other general business needs. Based on the
historical experience of our management and our business strategy, in the
foreseeable future we anticipate we will generate positive cash flows from
operations. In order for ESRT to qualify as a REIT, ESRT is required under the
Internal Revenue Code of 1986 to distribute to its stockholders, on an annual
basis, at least 90% of its REIT taxable income, determined without regard to the
deduction for dividends paid and excluding net capital gains. We expect to make
quarterly distributions, 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
33
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investments of capital for individual lease related tenant improvements
allowances, general capital improvements and costs associated with capital
expenditures. Our overall leverage will depend on our mix of investments and the
cost of leverage. ESRT's charter does not restrict the amount of leverage that
we may use.
At
As ofJune 30, 2022 , we had approximately$2.3 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 3.9% and a weighted average maturity of 6.9 years. As ofJune 30, 2022 , excluding principal amortization, we have no outstanding debt maturing untilNovember 2024 . Our consolidated net debt to total market capitalization was 49.0% as ofJune 30, 2022 .
Unsecured Revolving Credit and Term Loan Facilities
See "Financial Statements - Note 5. Debt" for a summary of our unsecured revolving credit and term loan facilities.
Mortgage Debt
As of
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, 2022 , we were in compliance with the covenants under the outstanding senior unsecured notes.
Financial Covenants
As ofJune 30, 2022 , we were in compliance with the following financial covenants: Financial covenant Required June 30, 2022 In Compliance Maximum total leverage < 60% 31.6 % Yes Maximum secured leverage < 40% 12.7 % Yes Minimum fixed charge coverage > 1.50x 3.4x
Yes
Minimum unencumbered interest coverage > 1.75x 6.6x Yes
Maximum unsecured leverage < 60% 23.2 % Yes
Leverage Policies
We expect to employ leverage in our capital structure in amounts determined from
time to time by ESRT's board of directors. Although ESRT's board of directors
has not adopted a policy that limits the total amount of indebtedness that we
may incur, we anticipate that ESRT's board of directors will consider a number
of factors in evaluating our level of indebtedness from time to time, as well as
the amount of such indebtedness that will be either fixed or floating rate.
ESRT's charter and bylaws do not limit the amount or percentage of indebtedness
that we may incur nor do they restrict the form in which our indebtedness will
be taken (including, but not limited to, recourse or non-recourse debt and
cross-collateralized debt). Our overall leverage will depend on our mix of
investments and the cost of leverage, however, we initially intend to maintain a
level of indebtedness consistent with our plan to seek an investment grade
credit rating. ESRT's board of directors may from time to time modify our
leverage policies in light of the then-current economic conditions, relative
costs of debt and equity capital, market values of our properties, general
market conditions for debt and equity securities, fluctuations in the market
price of ESRT's common stock and our traded OP units, growth and acquisition
opportunities and other factors.
34
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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).
Six Months Ended June 30,
Total New Leases, Expansions, and Renewals 2022 2021
Number of leases signed(2) 76 57
Total square feet 634,582 350,196
Leasing commission costs per square foot(3) $ 22.14 $ 18.27
Tenant improvement costs per square foot(3) 62.15 58.62
Total leasing commissions and tenant improvement costs per
square foot(3) $ 84.29 $ 76.89
Retail Properties(4)
Six Months Ended June 30,
Total New Leases, Expansions, and Renewals 2022 2021
Number of leases signed(2) 5 4
Total square feet 4,289 12,459
Leasing commission costs per square foot(3) $ 16.64 $ 46.03
Tenant improvement costs per square foot(3) - 32.49
Total leasing commissions and tenant improvement costs per
square foot(3) $ 16.64 $ 78.52
_______________
(1)Excludes an aggregate of 496,311 and 504,284 rentable square feet of retail
space in our Manhattan office properties in 2022 and 2021, respectively.
Includes the Empire State Building broadcasting licenses and observatory
operations.
(2)Presents a renewed and expansion lease as one lease signed.
(3)Presents all tenant improvement and leasing commission costs as if they were
incurred in the period in which the lease was signed, which may be different
than the period in which they were actually paid.
(4)Includes an aggregate of 496,311 and 504,284 rentable square feet of retail
space in our Manhattan office properties in 2022 and 2021, respectively.
Excludes the Empire State Building broadcasting licenses and observatory
operations.
Six Months Ended June 30,
2022 2021
Total Portfolio
Capital expenditures (1) $ 19,697 $ 9,331
_______________
(1)Excludes tenant improvements and leasing commission costs.
As ofJune 30, 2022 , we expect to incur additional costs relating to obligations under existing lease agreements of approximately$105.3 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.
Off-Balance Sheet Arrangements
As of
Distribution Policy
We intend to distribute our net taxable income to our security holders in a
manner intended to satisfy REIT distribution requirements and to avoid
35
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Before we pay any distribution, whether for U.S. federal income tax purposes or
otherwise, we must first meet both our operating requirements and obligations to
make payments of principal and interest, if any. However, under some
circumstances, we may be required to use cash reserves, incur debt or liquidate
assets at rates or times that we regard as unfavorable or make a taxable
distribution of our shares in order to satisfy REIT distribution requirements.
Distribution to Equity Holders
Distributions and dividends amounting to$21.6 million and$11.6 million have been made to equity holders for the six months endedJune 30, 2022 and 2021, respectively.
Stock and Publicly Traded Operating Partnership Unit Repurchase Program
ESRT's Board of Directors authorized the repurchase of up to$500 million of ESRT Class A common stock and theOperating Partnership's Series ES, Series 250 and Series 60 operating partnership units throughDecember 31, 2023 . Under the program, ESRT may purchase ESRT Class A common stock and we may purchase our Series ES, Series 250 and Series 60 operating partnership units in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by ESRT and us at our discretion and will be subject to stock price, availability, trading volume and general market conditions. The authorization does not obligate ESRT or us to acquire any particular amount of securities, and the program may be suspended or discontinued at ESRT and our discretion without prior notice. re any particular amount of securities, and the program may be suspended or discontinued at our discretion without prior notice. See "Financial Statements - Note 10. Capital" for a summary of ESRT's purchases of equity securities in each of the three months endedJune 30, 2022 .
Cash Flows
Comparison of Six Months Ended
Net cash. Cash and cash equivalents and restricted cash were$412.8 million and$578.6 million , respectively, as ofJune 30, 2022 and 2021. The decrease was primarily due to the acquisition of real estate property at the end of 2021 and higher spending for capital expenditures, higher repurchases of common shares and higher dividends paid in 2022.
Operating activities. Net cash provided by operating activities was
Investing activities. Net cash used in investing activities increased by
Financing activities. Net cash used in financing activities increased by$64.2 million to$88.9 million primarily due to higher repurchases of common shares and higher dividends and distributions.
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 to investors because the resulting
36
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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):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(unaudited) (unaudited)
Net income $ 48,695 $ 4,411 $ 31,474 $ 1,220
Add:
General and administrative expenses 15,876 14,089 29,562 27,942
Depreciation and amortization 58,304 45,088 125,410 89,545
Interest expense 25,042 23,422 50,056 46,976
Loss on early extinguishment of debt - - - 214
Income tax expense (benefit) 363 (1,185) (1,233) (3,291)
Less:
Gain on disposition of property (27,170) - (27,170) - Third-party management and other fees (326) (327) (636) (603) Interest income (431) (164) (580) (286) Net operating income$ 120,353 $ 85,334 $ 206,883 $ 161,717 Other Net Operating Income Data Straight-line rental revenue $ 8,597$ 3,763 $ 11,192 $ 10,110 Net increase in rental revenue from the amortization of above-and below-market lease assets and liabilities $ 1,675$ 717 $ 3,459 $ 1,371 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 theNational 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, we believe 37 -------------------------------------------------------------------------------- FFO is useful to investors as it captures features particular to real estate performance by recognizing that real estate has generally appreciated over time or maintains residual value to a much greater extent than do other depreciable assets. Investors should review FFO, along with GAAP net income, when trying to understand an equity REIT's operating performance. We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results of operations, the utility of FFO as a measure of performance is limited. There can be no assurance that FFO presented by us is comparable to similarly titled measures of other REITs. FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. Although FFO is a measure used for comparability in assessing the performance of REITs, as the NAREIT White Paper only provides guidelines for computing FFO, the computation of FFO may vary from one company to another.
Modified Funds From Operations ("Modified FFO")
Modified FFO adds back an adjustment for any above or below-market ground lease amortization to traditionally defined FFO. We believe 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 believe it is 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 adds back to Modified FFO the following items: IPO litigation expense, severance expenses and loss on early extinguishment of debt. The company believes Core FFO is an important supplemental measure of its operating performance because 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):
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Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(unaudited) (unaudited)
Net income $ 48,695 $ 4,411 $ 31,474 $ 1,220
Noncontrolling interests in other partnerships 159 - 222 -
Private perpetual preferred unit distributions (1,051) (1,051)
(2,101) (2,101)
Real estate depreciation and amortization 56,571 43,480 121,985 86,584
Gain on disposition of property (27,170) - (27,170) -
FFO attributable to common unitholders 77,204 46,840 124,410 85,703
Amortization of below-market ground leases 1,958 1,958 3,916 3,916
Modified FFO attributable to common
unitholders 79,162 48,798 128,326 89,619
Loss on early extinguishment of debt - - - 214
Core FFO attributable to common unitholders
Weighted averageOperating Partnership units Basic 270,078 277,893 271,834 277,887 Diluted 270,085 278,436 271,837 277,887
Factors That May Influence Future Results of Operations
Leasing
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, 2022 , 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 12.2% of the net rentable square footage of the properties in our portfolio. In addition, leases representing 3.4% and 6.2% of net rentable square footage of the properties in our portfolio will expire in 2022 and in 2023, respectively. These leases are expected to represent approximately 4.0% and 7.2%, 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 rental revenues. 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 obtain better quality tenants, whom have higher likelihood for growth within the portfolio, following the redevelopment and repositioning of our properties.
Observatory Operations
For the three months endedJune 30, 2022 , the observatory hosted 573,000 visitors, compared to 162,000 visitors for the same period in 2021. 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. 39 -------------------------------------------------------------------------------- Observatory revenue for the three months endedJune 30, 2022 was$27.4 million , compared to$8.4 million for the three months endedJune 30, 2021 . 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.
Critical Accounting Estimates
Refer to our Annual Report on Form 10-K for the year endedDecember 31, 2021 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, 2021 . 40
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