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Empire State Realty Trust, Inc. - Quarter Report: 2022 September (Form 10-Q)









UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2022
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) 850-2600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of SecuritiesTrading SymbolExchange on which traded
Class A Common Stock, par value $0.01 per shareESRTThe New York Stock Exchange
Class B Common Stock, par value $0.01 per shareN/AN/A
    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  
Indicate by check mark 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 filerAccelerated filer 
Non-accelerated filer 
Smaller reporting company 
Emerging growth company 
    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of October 28, 2022, there were 160,428,938 shares of Class A Common Stock, $0.01 par value per share, outstanding and 992,051 shares of Class B Common Stock, $0.01 par value per share, outstanding.










EMPIRE STATE REALTY TRUST, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2022
TABLE OF CONTENTSPAGE
PART 1.FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021 (unaudited)
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021 (unaudited)
Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2022 and 2021 (unaudited)
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (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

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ITEM 1. FINANCIAL STATEMENTS
Empire State Realty Trust, Inc.
Condensed Consolidated Balance Sheets
(amounts in thousands, except per share amounts)
September 30, 2022December 31, 2021
ASSETS(unaudited)
Commercial real estate properties, at cost:
Land $334,598 $336,278 
Development costs8,162 8,131 
Building and improvements3,194,787 3,156,508 
3,537,547 3,500,917 
Less: accumulated depreciation(1,159,364)(1,072,938)
Commercial real estate properties, net2,378,183 2,427,979 
Cash and cash equivalents387,248 423,695 
Restricted cash52,567 50,943 
Tenant and other receivables30,547 18,647 
Deferred rent receivables239,750 224,922 
Prepaid expenses and other assets72,905 76,549 
Deferred costs, net188,706 202,437 
Acquired below-market ground leases, net331,030 336,904 
Right of use assets28,725 28,892 
Goodwill491,479 491,479 
Total assets$4,201,140 $4,282,447 
LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable, net$915,202 $948,769 
Senior unsecured notes, net973,607 973,373 
Unsecured term loan facilities, net388,645 388,223 
Unsecured revolving credit facility— — 
Accounts payable and accrued expenses94,436 120,810 
Acquired below-market leases, net18,897 24,941 
Ground lease liabilities28,725 28,892 
Deferred revenue and other liabilities80,249 84,358 
Tenants’ security deposits27,550 28,749 
Total liabilities2,527,311 2,598,115 
Commitments and contingencies
Equity:
Empire State Realty Trust, Inc. stockholders' equity:
Preferred stock, $0.01 par value, 50,000 shares authorized, none issued or outstanding
— — 
Class A common stock, $0.01 par value, 400,000 shares authorized, 160,576 and 169,221 shares issued and outstanding in 2022 and 2021, respectively
1,606 1,692 
Class B common stock, $0.01 par value, 50,000 shares authorized, 994 and 996 shares issued and outstanding in 2022 and 2021, respectively
10 10 
Additional paid-in capital1,060,321 1,150,884 
Accumulated other comprehensive income (loss)6,674 (20,848)
Retained deficit(116,232)(133,610)
Total Empire State Realty Trust, Inc. stockholders' equity952,379 998,128 
Non-controlling interests in the Operating Partnership676,008 643,012 
Non-controlling interests in other partnerships15,502 13,252 
Private perpetual preferred units:
Private perpetual preferred units, $13.52 liquidation preference, 4,664 issued and outstanding in 2022 and 2021, respectively
21,936 21,936 
Private perpetual preferred units, $16.62 liquidation preference, 1,560 issued and outstanding in 2022 and 2021
8,004 8,004 
Total equity1,673,829 1,684,332 
Total liabilities and equity$4,201,140 $4,282,447 
The accompanying notes are an integral part of these consolidated financial statements 
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Empire State Realty Trust, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
(amounts in thousands, except per share amounts)
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Revenues:
Rental revenue$148,290 $139,558 $445,143 $420,586 
Observatory revenue33,051 12,796 73,660 23,758 
Lease termination fees— 11,321 20,032 15,949 
Third-party management and other fees389 314 1,025 917 
Other revenue and fees1,982 1,059 5,908 2,550 
Total revenues183,712 165,048 545,768 463,760 
Operating expenses:
Property operating expenses42,798 33,357 118,875 92,429 
Ground rent expenses2,331 2,331 6,994 6,994 
General and administrative expenses15,725 14,427 45,287 42,369 
Observatory expenses8,516 6,370 22,507 16,226 
Real estate taxes31,831 29,566 91,637 92,367 
Depreciation and amortization46,984 65,794 172,394 155,339 
Total operating expenses148,185 151,845 457,694 405,724 
Total operating income
35,527 13,203 88,074 58,036 
Other income (expense):
Interest income1,564 211 2,144 497 
Interest expense(25,516)(23,577)(75,572)(70,553)
Loss on early extinguishment of debt— — — (214)
Gain on disposition of property— — 27,170 — 
Income (loss) before income taxes11,575 (10,163)41,816 (12,234)
Income tax (expense) benefit(1,457)(20)(224)3,271 
Net income (loss)10,118 (10,183)41,592 (8,963)
Net (income) loss attributable to non-controlling interests:
Non-controlling interests in the Operating Partnership(3,560)4,256 (14,865)4,591 
Non-controlling interests in other partnerships49 — 271 — 
Private perpetual preferred unit distributions(1,050)(1,050)(3,151)(3,151)
Net income (loss) attributable to common stockholders$5,557 $(6,977)$23,847 $(7,523)
Total weighted average shares:
Basic162,165 172,494 166,354 172,487 
Diluted267,121 277,716 270,966 277,829 
Earnings per share attributable to common stockholders:
Basic$0.03 $(0.04)$0.14 $(0.04)
Diluted$0.03 $(0.04)$0.14 $(0.04)
Dividends per share$0.035 $0.035 $0.105 $0.070 

The accompanying notes are an integral part of these consolidated financial statements
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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,
2022202120222021
Net income (loss)$10,118 $(10,183)$41,592 $(8,963)
Other comprehensive income:
Unrealized gain (loss) on valuation of interest rate swap agreements19,588 (103)39,407 (139)
Less: amount reclassified into interest expense1,392 2,920 7,428 8,687 
     Other comprehensive income20,980 2,817 46,835 8,548 
Comprehensive income (loss)31,098 (7,366)88,427 (415)
Net (income) loss attributable to non-controlling interests and private perpetual preferred unitholders(4,561)3,206 (17,746)1,440 
Other comprehensive income attributable to non-controlling interests(8,518)(1,061)(19,400)(3,239)
Comprehensive income (loss) attributable to common stockholders$18,019 $(5,221)$51,281 $(2,214)

The accompanying notes are an integral part of these consolidated financial statements




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Empire State Realty Trust, Inc.
Condensed Consolidated Statements of Stockholders' Equity
For The Three Months Ended September 30, 2022 and 2021
(unaudited) (amounts in thousands)
Number of Class A Common SharesClass A Common StockNumber of Class B Common SharesClass B Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossRetained Earnings (Deficit)Total Stockholders' EquityNon-controlling InterestsPrivate Perpetual Preferred UnitsTotal Equity
Balance at June 30, 2022162,690 $1,626 994 $10 $1,076,854 $(5,827)$(114,860)$957,803 $678,350 $29,940 $1,666,093 
Issuance of Class A shares— — — — — — — — — — — 
Conversion of operating partnership units and Class B shares to Class A shares461 — — (5)39 — 39 (39)— — 
Repurchases of common shares(2,567)(25)— — (16,845)— (1,235)(18,105)— — (18,105)
Equity compensation:— — 
LTIP units— — — — — — — — 5,057 — 5,057 
Restricted stock, net of forfeitures(8)— — — 317 — — 317 — — 317 
Dividends and distributions— — — — — — (5,694)(5,694)(3,887)(1,050)(10,631)
Net income— — — — — — 5,557 5,557 3,511 1,050 10,118 
Other comprehensive income — — — — — 12,462 — 12,462 8,518 — 20,980 
Balance at September 30, 2022160,576 $1,606 994 $10 $1,060,321 $6,674 $(116,232)$952,379 $691,510 $29,940 $1,673,829 

Number of Class A Common SharesClass A Common StockNumber of Class B Common SharesClass B Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossRetained Earnings (Deficit)Total Stockholders' EquityNon-controlling InterestsPrivate Perpetual Preferred UnitsTotal Equity
Balance at June 30, 2021172,399 $1,724 1,001 $10 $1,151,979 $(24,794)$(73,260)$1,055,659 $647,609 $29,940 $1,733,208 
Issuance of Class A shares— — — — — — — — — — — 
Conversion of operating partnership units and Class B shares to Class A shares544 (2)— 914 11 — 931 (931)— — 
Repurchases of common shares(626)(6)— — (4,148)— (2,356)(6,510)(6,510)
Equity compensation:— — — — 
LTIP units— — — — — — — — 5,198 — 5,198 
Restricted stock, net of forfeitures(24)(1)— — 181 — — 180 — — 180 
Dividends and distributions— — — — — — (6,061)(6,061)(3,918)(1,050)(11,029)
Net income (loss)— — — — — — (6,977)(6,977)(4,256)1,050 (10,183)
Other comprehensive income— — — — — 1,756 — 1,756 1,061 — 2,817 
Balance at September 30, 2021172,293 $1,723 999 $10 $1,148,926 $(23,027)$(88,654)$1,038,978 $644,763 $29,940 $1,713,681 
The accompanying notes are an integral part of these consolidated financial statements


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Empire State Realty Trust, Inc.
Condensed Consolidated Statements of Stockholders' Equity
For The Nine Months Ended September 30, 2022 and 2021
(unaudited) (amounts in thousands)
Number of Class A Common SharesClass A Common StockNumber of Class B Common SharesClass B Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Retained Earnings (Deficit)Total Stockholders' EquityNon-controlling InterestsPrivate Perpetual Preferred UnitsTotal Equity
Balance at December 31, 2021169,221 $1,692 996 $10 $1,150,884 $(20,848)$(133,610)$998,128 $656,264 $29,940 $1,684,332 
Conversion of operating partnership units and Class B shares to Class A shares1,601 16 (2)— 2,281 87 — 2,384 (2,384)— — 
Repurchases of common shares(10,433)(104)— — (93,416)— 10,975 (82,545)— — (82,545)
Contributions from consolidated joint ventures— — — — — — — — 224 — 224 
Equity compensation:
LTIP units— — — — — — — — 15,025 — 15,025 
Restricted stock, net of forfeitures187 — — 572 — — 574 — — 574 
Dividends and distributions— — — — — — (17,444)(17,444)(11,613)(3,151)(32,208)
Net income— — — — — — 23,847 23,847 14,594 3,151 41,592 
Other comprehensive income — — — — — 27,435 — 27,435 19,400 — 46,835 
Balance at September 30, 2022160,576 $1,606 994 $10 $1,060,321 $6,674 $(116,232)$952,379 $691,510 $29,940 $1,673,829 


Number of Class A Common SharesClass A Common StockNumber of Class B Common SharesClass B Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Retained Earnings (Deficit)Total Stockholders' EquityNon-controlling InterestsPrivate Perpetual Preferred UnitsTotal Equity
Balance at December 31, 2020170,555 $1,705 1,010 $10 $1,147,527 $(28,320)$(65,673)$1,055,249 $646,118 $29,940 $1,731,307 
Conversion of operating partnership units and Class B shares to Class A shares2,693 27 (11)— 7,755 (16)— 7,766 (7,766)— — 
Repurchases of common shares(1,009)(10)— — (6,699)— (3,334)(10,043)— — (10,043)
Equity compensation:
LTIP units— — — — — — — — 15,072 — 15,072 
Restricted stock, net of forfeitures54 — — 343 — — 344 — — 344 
Dividends and distributions— — — — — — (12,124)(12,124)(7,309)(3,151)(22,584)
Net income (loss)— — — — — — (7,523)(7,523)(4,591)3,151 (8,963)
Other comprehensive income— — — — — 5,309 — 5,309 3,239 — 8,548 
Balance at September 30, 2021172,293 $1,723 999 $10 $1,148,926 $(23,027)$(88,654)$1,038,978 $644,763 $29,940 $1,713,681 

The accompanying notes are an integral part of these consolidated financial statements
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Empire State Realty Trust, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(amounts in thousands)
Nine Months Ended September 30,
20222021
Cash Flows From Operating Activities
Net income (loss)$41,592 $(8,963)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization172,394 155,339 
Gain on disposition of property(27,170)— 
Amortization of non-cash items within interest expense7,514 7,978 
Amortization of acquired above- and below-market leases, net(4,136)(5,615)
Amortization of acquired below-market ground leases5,873 5,873 
Straight-lining of rental revenue(18,533)(13,197)
Equity based compensation15,599 15,416 
Loss on early extinguishment of debt— 214 
Increase (decrease) in cash flows due to changes in operating assets and liabilities:
Security deposits(1,198)(4,366)
Tenant and other receivables(11,707)(123)
Deferred leasing costs(31,983)(12,324)
Prepaid expenses and other assets23,630 18,660 
Accounts payable and accrued expenses2,511 (1,285)
Deferred revenue and other liabilities(401)9,420 
Net cash provided by operating activities173,985 167,027 
Cash Flows From Investing Activities
Development costs(31)(41)
Additions to building and improvements(89,085)(70,719)
Net cash used in investing activities(89,116)(70,760)

The accompanying notes are an integral part of these consolidated financial statements


















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

Nine Months Ended September 30,
20222021
Cash Flows From Financing Activities
Repayment of mortgage notes payable(5,163)(3,053)
Deferred financing costs— (7,559)
Contributions from consolidated joint ventures224 — 
Repurchases of common shares(82,545)(10,043)
Private perpetual preferred unit distributions(3,151)(3,151)
Dividends paid to common stockholders(17,444)(12,124)
Distributions paid to non-controlling interests in the operating partnership(11,613)(7,309)
Net cash used in financing activities (119,692)(43,239)
Net increase (decrease) in cash and cash equivalents and restricted cash(34,823)53,028 
Cash and cash equivalents and restricted cash—beginning of period474,638 567,939 
Cash and cash equivalents and restricted cash—end of period$439,815 $620,967 
Reconciliation of Cash and Cash Equivalents and Restricted Cash:
Cash and cash equivalents at beginning of period$423,695 $526,714 

Restricted cash at beginning of period
50,943 41,225 
Cash and cash equivalents and restricted cash at beginning of period$474,638 $567,939 
Cash and cash equivalents at end of period$387,248 $582,188 
Restricted cash at end of period52,567 38,779 
Cash and cash equivalents and restricted cash at end of period$439,815 $620,967 
Supplemental disclosures of cash flow information:
Cash paid for interest$67,673 $58,208 
Cash paid for income taxes$188 $472 
Non-cash investing and financing activities:
Building and improvements included in accounts payable and accrued expenses$55,320 $53,956 
Write-off of fully depreciated assets55,585 10,798 
Derivative instruments at fair values included in prepaid expenses and other assets18,457 — 
Derivative instruments at fair values included in accounts payable and accrued expenses— 4,887 
Conversion of operating partnership units and Class B shares to Class A shares2,384 7,766 
Disposal of land in connection with foreclosure1,680 — 
Extinguishment of debt in connection with property disposition30,000 — 

The accompanying notes are an integral part of these consolidated financial statements
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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 New York City focused real estate investment trust ("REIT") that owns and manages a well-positioned property portfolio of office, retail and multifamily assets in Manhattan and the greater New York metropolitan area. As the owner of the Empire State Building, the World’s Most Famous Building, we also own and operate our iconic, newly reimagined Observatory Experience.

    As of September 30, 2022, our total portfolio contained 9.9 million rentable square feet of office and retail space. We owned 13 office properties (including three long-term ground leasehold interests) encompassing approximately 9.2 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 approximately 0.5 million rentable square feet of retail space on their ground floor and/or contiguous levels. Our remaining four office properties are located in Fairfield County, Connecticut and Westchester County, New York, encompassing in the aggregate approximately 1.6 million rentable square feet. The majority of square footage for these four 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 0.4 million rentable square foot office building and garage. As of September 30, 2022, our portfolio included four standalone retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut, encompassing approximately 0.2 million rentable square feet in the aggregate. Additionally, at September 30, 2022, our portfolio included two multifamily properties totaling 625 units.
     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, 2022, we owned approximately 59.3% 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, 2021 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, 2021 contained in our Annual Report
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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. Prior to the outbreak of COVID-19, approximately 16.0% to 18.0% of our annual observatory revenue was realized in the first quarter, 26.0% to 28.0% was realized in the second quarter, 31.0% to 33.0% was realized in the third quarter and 23.0% to 25.0% was realized in the fourth quarter.
    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 VIE 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 VIE 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 operations 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, right of use assets and other long-lived and indefinite lived assets, estimate of tenant expense reimbursements, valuation of the allowance for doubtful accounts, and valuation of derivative instruments, ground lease liabilities, 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.    
3. Property Disposition

During April 2022, we transferred 383 Main Avenue, Norwalk CT, which was encumbered by a $30.0 million mortgage, back to the lender in a consensual foreclosure and recognized a non-cash gain of $27.2 million, which is included in Gain on disposition of property in our condensed consolidated statements of operations. In December 2021, we recorded a $7.7 million impairment charge on the property as we had concluded the cost basis of the asset exceeded its fair value given our reduced holding period and new intent to transfer property ownership to the lender.

Subsequent to September 30, 2022, we entered into agreements to sell 500 Mamaroneck Avenue in Harrison, NY and 10 Bank Street in White Plains, NY at a gross asset valuation of $95.0 million. These transactions are expected to close in the first quarter of 2023, subject to customary closing conditions.


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4. Deferred Costs, Acquired Lease Intangibles and Goodwill
    Deferred costs, net, consisted of the following as of September 30, 2022 and December 31, 2021 (amounts in thousands):  
September 30, 2022December 31, 2021
Leasing costs$218,552 $211,189 
Acquired in-place lease value and deferred leasing costs158,286 166,491 
Acquired above-market leases28,123 33,289 
404,961 410,969 
Less: accumulated amortization(221,751)(215,764)
Total deferred costs, net, excluding net deferred financing costs$183,210 $195,205 
    At September 30, 2022 and December 31, 2021, $5.5 million and $7.2 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 sheets.
    Amortization expense related to deferred leasing costs and acquired deferred leasing costs was $5.6 million and $10.4 million for the three months ended September 30, 2022 and 2021, respectively, and $19.8 million and $22.1 million for the nine months ended September 30, 2022 and 2021, respectively. Amortization expense related to acquired lease intangibles was $2.2 million and $5.0 million for the three months ended September 30, 2022 and 2021, respectively, and $10.6 million and $8.3 million for the nine months ended September 30, 2022 and 2021, respectively.
    Amortizing acquired intangible assets and liabilities consisted of the following as of September 30, 2022 and December 31, 2021 (amounts in thousands):
September 30, 2022December 31, 2021
Acquired below-market ground leases$396,916 $396,916 
Less: accumulated amortization(65,886)(60,012)
Acquired below-market ground leases, net$331,030 $336,904 
September 30, 2022December 31, 2021
Acquired below-market leases$(64,529)$(65,403)
Less: accumulated amortization45,632 40,462 
Acquired below-market leases, net$(18,897)$(24,941)
    Rental revenue related to the amortization of below-market leases, net of above-market leases, was $0.7 million and $4.2 million for the three months ended September 30, 2022 and 2021, respectively, and $4.1 million and $5.6 million for the nine months ended September 30, 2022 and 2021, respectively.
    
As of September 30, 2022, 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 reportable segment.
    
From the quarter ended June 30, 2020 through the quarter ended June 30, 2022, we bypassed the optional qualitative goodwill impairment assessment and proceeded directly to a quantitative assessment of the observatory reportable segment and engaged a third-party valuation consulting firm to perform the valuation process. This was done in response to the closure of the observatory on March 16, 2020, due to the COVID-19 pandemic, which was subsequently fully reopened on August 24, 2020. The quantitative analysis used a combination of the discounted cash flow method (a form of the income approach) utilizing Level 3 unobservable inputs and the guideline company method (a form of the market approach). Significant assumptions under the former included revenue and cost projections, weighted average cost of capital, long-term growth rate and income tax considerations while the latter included guideline company enterprise values, revenue multiples and control premium rates. Our methodology to review goodwill impairment, which included a significant amount of judgment and estimates, provided a reasonable basis to determine whether impairment had occurred. Each quantitative analysis performed concluded the fair value of the reporting unit exceeds its carrying value. For the quarter ended September 30, 2022, we
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performed an optional qualitative assessment and did not identify any events which occurred between our last quantitative assessment and the current reporting date which would indicate, on a more likely than not basis, that the goodwill allocated to the reporting unit was impaired. Many of the factors employed in determining whether or not goodwill is impaired are outside of our control, and it is reasonably likely that assumptions and estimates will change in future periods. We will continue to assess the impairment of the observatory reporting unit goodwill going forward.

5. Debt
    Debt consisted of the following as of September 30, 2022 and December 31, 2021 (amounts in thousands):
Principal BalanceAs of September 30, 2022
September 30, 2022December 31, 2021Stated
Rate
Effective
Rate
(1)
Maturity
Date
(2)
Mortgage debt collateralized by:
Fixed rate mortgage debt
Metro Center$83,213 $85,032 3.59 %3.67 %11/5/2024
10 Union Square50,000 50,000 3.70 %3.97 %4/1/2026
1542 Third Avenue30,000 30,000 4.29 %4.53 %5/1/2027
First Stamford Place(3)
179,549 180,000 4.28 %4.73 %7/1/2027
1010 Third Avenue and 77 West 55th Street36,044 36,670 4.01 %4.21 %1/5/2028
250 West 57th Street180,000 180,000 2.83 %3.21 %12/1/2030
10 Bank Street30,364 31,091 4.23 %4.37 %6/1/2032
383 Main Avenue(4)
— 30,000 — %— %— 
1333 Broadway160,000 160,000 4.21 %4.29 %2/5/2033
345 East 94th Street - Series A43,600 43,600 
70.0% of LIBOR plus 0.95%
3.56 %11/1/2030
345 East 94th Street - Series B8,021 8,650 
LIBOR plus 2.24%
3.56 %11/1/2030
561 10th Avenue - Series A114,500 114,500 
70.0% of LIBOR plus 1.07%
3.85 %11/1/2033
561 10th Avenue - Series B17,797 19,250 
LIBOR plus 2.45%
3.85 %11/1/2033
Total mortgage debt933,088 968,793 
Senior unsecured notes:(5)
   Series A100,000 100,000 3.93 %3.96 %3/27/2025
   Series B125,000 125,000 4.09 %4.12 %3/27/2027
   Series C125,000 125,000 4.18 %4.21 %3/27/2030
   Series D115,000 115,000 4.08 %4.11 %1/22/2028
   Series E160,000 160,000 4.26 %4.27 %3/22/2030
   Series F175,000 175,000 4.44 %4.45 %3/22/2033
   Series G100,000 100,000 3.61 %4.89 %3/17/2032
   Series H75,000 75,000 3.73 %5.00 %3/17/2035
Unsecured term loan facility (5) (6)
215,000 215,000 
SOFR plus 1.20%
4.22 %3/19/2025
Unsecured revolving credit facility (5) (6)
— — 
SOFR plus 1.30%
— 3/31/2025
Unsecured term loan facility (5) (6)
175,000 175,000 
SOFR plus 1.50%
4.51 %12/31/2026
Total principal2,298,088 2,333,793 
Deferred financing costs, net(12,694)(14,881)
Unamortized debt discount(7,940)(8,547)
Total$2,277,454 $2,310,365 
______________

(1)The effective rate is the yield as of September 30, 2022 and includes the stated interest rate, deferred financing cost amortization and interest associated with variable to fixed interest rate swap agreements.
(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 at 4.09% and a $15.5 million loan bearing interest at 6.25%.
(4)Ownership of 383 Main Avenue, Norwalk CT was transferred to the lender during April 2022.
(5)At September 30, 2022, we were in compliance with all debt covenants.
(6)As of August 29, 2022, the benchmark index interest rate was converted from LIBOR to SOFR, plus a benchmark adjustment of 10.0 basis points.


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Principal Payments
    Aggregate required principal payments at September 30, 2022 are as follows (amounts in thousands):

YearAmortizationMaturitiesTotal
2022$2,160 $— $2,160 
20239,632 — 9,632 
20249,903 77,675 87,578 
20257,979 315,000 322,979 
20268,491 225,000 233,491 
Thereafter35,966 1,606,282 1,642,248 
Total $74,131 $2,223,957 $2,298,088 

Deferred Financing Costs
    Deferred financing costs, net, consisted of the following at September 30, 2022 and December 31, 2021 (amounts in thousands):
 September 30, 2022December 31, 2021
Financing costs$44,065 $44,637 
Less: accumulated amortization(25,875)(22,525)
Total deferred financing costs, net$18,190 $22,112 
    Amortization expense related to deferred financing costs was $1.2 million and $1.1 million for the three months ended September 30, 2022 and 2021, respectively, and $3.8 million and $3.4 million for the nine months ended September 30, 2022 and 2021, respectively.

Unsecured Revolving Credit and Term Loan Facilities

    On August 29, 2022, through our Operating Partnership, we entered into a third amendment to our amended and restated credit agreement dated August 29, 2017 with Bank of America, N.A., as administrative agent and the other lenders party thereto, which governs our senior unsecured revolving credit facility and term loan facility (collectively, the “BofA Credit Facility”). The BofA Credit Facility is in the initial maximum principal amount of up to $1.065 billion, which consists of an $850.0 million revolving credit facility that matures on March 31, 2025, and a $215.0 million term loan facility that matures on March 19, 2025. As of September 30, 2022, we had no borrowings under the revolving credit facility and $215.0 million under the term loan facility.

     On August 29, 2022, through our Operating Partnership, we entered into a second amendment to our credit agreement dated March 19, 2020 with Wells Fargo Bank, National Association, as administrative agent, and the other lenders party thereto, which governs a senior unsecured term loan facility (the “Wells Term Loan Facility”). The Wells Term Loan Facility is in the original principal amount of $175.0 million and matures on December 31, 2026. We may request the Wells Term Loan Facility be increased through one or more increases or the addition of new pari passu term loan tranches, for a maximum aggregate principal amount not to exceed $225 million. As of September 30, 2022, our borrowings amounted to $175.0 million under the Wells Term Loan Facility.

    The terms of both the BofA Credit Facility and the Wells Term Loan Facility include customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. Both facilities also require compliance with financial ratios including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a minimum unencumbered interest coverage ratio, and a maximum unsecured leverage ratio. The agreements governing both facilities also contain customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, invalidity of loan documents, loss of real estate investment trust qualification, and occurrence of a change of control. As of September 30, 2022, we were in compliance with these covenants.


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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 of September 30, 2022, we were in compliance with these covenants.
6. Accounts Payable and Accrued Expenses
    Accounts payable and accrued expenses consisted of the following as of September 30, 2022 and December 31, 2021 (amounts in thousands):
September 30, 2022December 31, 2021
Accrued capital expenditures$55,320 $49,247 
Accounts payable and accrued expenses36,353 41,664 
Interest rate swaps liability— 25,308 
Accrued interest payable3,294 3,460 
Due (from) to affiliated companies(531)1,131 
     Total accounts payable and accrued expenses$94,436 $120,810 

7. 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 its obligations.
In May 2022, we entered into forward interest rate swaps with an aggregate notional value of $390.0 million that became effective in August 2022 and fixed the interest rate on 100% of our term loans. This replaced the $265.0 million swap which had fixed the interest rate on a portion of our outstanding term loans balance.
    
    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, 2022, we did not have any derivatives in a net liability position.

    As of September 30, 2022 and December 31, 2021, we had interest rate swaps and caps with an aggregate notional value of $576.3 million and $451.3 million, respectively. The notional value does not represent exposure to credit, interest rate or market risks. As of September 30, 2022, the fair value of our interest rate swaps amounted to $18.5 million, which is included in prepaid assets and other expenses on the condensed consolidated balance sheet. As of December 31, 2021, the fair value of our interest rate swaps amounted to $(25.3) million, which is 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 variability in future cash flows associated with our existing variable-rate term loan facilities. Interest rate caps not designated as hedges are not speculative and are used to manage our exposure to interest rate movements, but do not meet the strict hedge accounting requirements.

    As of September 30, 2022 and 2021, our cash flow hedges are deemed highly effective and a net unrealized gain of $21.0 million and $2.8 million for the three months ended September 30, 2022 and 2021, respectively, and a net unrealized gain of $46.8 million and $8.5 million for the nine months ended September 30, 2022 and 2021, respectively, relating to both active and terminated hedges of interest rate risk, are reflected in the condensed consolidated statements of comprehensive income (loss). Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense
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as interest payments are made on the debt. We estimate that $3.3 million net loss of the current balance held in accumulated other comprehensive income (loss) will be reclassified into interest expense within the next 12 months.
    The table below summarizes the terms of agreements and the fair values of our derivative financial instruments as of September 30, 2022 and December 31, 2021 (amounts in thousands):     
September 30, 2022December 31, 2021
DerivativeNotional AmountReceive RatePay RateEffective DateExpiration DateAssetLiabilityAssetLiability
Interest rate swap$265,000 1 Month LIBOR2.1485%August 31, 2017August 24, 2022$— $— $— $(3,184)
Interest rate swap36,820 
70% of 1 Month LIBOR
2.5000%December 1, 2021November 1, 2030324 — — (4,527)
Interest rate swap103,790 
70% of 1 Month LIBOR
2.5000%December 1, 2021November 1, 2033324 — — (15,945)
Interest rate swap10,710 
70% of 1 Month LIBOR
1.7570%December 1, 2021November 1, 2033657  — (754)
Interest rate swap19,008 1 Month LIBOR2.2540%December 1, 2021November 1, 20301,143 — — (898)
Interest rate cap6,780 
70% of 1 Month LIBOR
4.5000%December 1, 2021October 1, 202416 — — 
Interest rate cap9,188 1 Month LIBOR5.5000%December 1, 2021October 1, 202443 — — 
Interest rate swap175,000 SOFR Compound2.5620%August 31, 2022December 31, 20268,713 — — — 
Interest rate swap107,500 SOFR Compound2.6260%August 19, 2022March 19, 20253,649 — — — 
Interest rate swap107,500 SOFR OIS Compound2.6280%August 19, 2022March 19, 20253,646 — — — 
$18,515 $— $13 $(25,308)
    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, 2022 and 2021 (amounts in thousands):    
Three Months EndedNine Months Ended
Effects of Cash Flow HedgesSeptember 30, 2022September 30, 2021September 30, 2022September 30, 2021
Amount of gain (loss) recognized in other comprehensive income (loss)$19,588 $(103)$39,407 $(139)
Amount of loss reclassified from accumulated other comprehensive income (loss) into interest expense(1,392)(2,920)(7,428)(8,687)
    The table below shows the effect of our derivative financial instruments designated as cash flow hedges on the condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021 (amounts in thousands):
Three Months EndedNine Months Ended
Effects of Cash Flow HedgesSeptember 30, 2022September 30, 2021September 30, 2022September 30, 2021
Total interest expense presented in the condensed consolidated statements of operations in which the effects of cash flow hedges are recorded$(25,516)$(23,577)$(75,572)$(70,553)
Amount of loss reclassified from accumulated other comprehensive income (loss) into interest expense(1,392)(2,920)(7,428)(8,687)

Fair Valuation

    The estimated fair values at September 30, 2022 and December 31, 2021 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.

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    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 our derivatives were classified as Level 2 of the fair value hierarchy.

    The fair values of our mortgage notes payable, senior unsecured notes - Series A, B, C, D, E, F, G and H - unsecured term loan facilities and unsecured revolving credit 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 by us.

    The following tables summarize the carrying and estimated fair values of our financial instruments as of September 30, 2022 and December 31, 2021 (amounts in thousands):
September 30, 2022
Estimated Fair Value
Carrying
Value
TotalLevel 1Level 2Level 3
Interest rate swaps included in prepaid expenses and other assets$18,457 $18,457 $— $18,457 $— 
Mortgage notes payable915,202 809,720 — — 809,720 
Senior unsecured notes - Series A, B, C, D, E, F, G and H973,607 862,768 — — 862,768 
Unsecured term loan facilities388,645 390,000 — — 390,000 
    
December 31, 2021
Estimated Fair Value
Carrying
Value
TotalLevel 1Level 2Level 3
Interest rate swap included in accounts payable and accrued expenses$25,308 $25,308 $— $25,308 $— 
Mortgage notes payable948,769 960,933 — — 960,933 
Senior unsecured notes - Series A, B, C, D, E, F, G and H973,373 994,389 — — 994,389 
Unsecured term loan facilities388,223 390,000 — — 390,000 
    Disclosure about the fair value of financial instruments is based on pertinent information available to us as of September 30, 2022 and December 31, 2021. 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.

8. Leases
Lessor    
    We lease various spaces to tenants over terms ranging from one to 21 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 September 30, 2022 and 2021 condensed consolidated statements of operations as rental revenue.

Rental revenue includes fixed and variable payments. Fixed payments primarily relate to base rent and variable payments primarily relate to tenant expense reimbursements for certain property operating costs. The components of rental revenue for the three and nine months ended September 30, 2022 and 2021 are as follows (amounts in thousands):

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Three Months EndedNine Months Ended
Rental revenueSeptember 30, 2022September 30, 2021September 30, 2022September 30, 2021
Fixed payments$131,800 $124,764 $399,995 $374,968 
Variable payments16,490 14,794 45,148 45,618 
Total rental revenue$148,290 $139,558 $445,143 $420,586 

As of September 30, 2022, we were entitled to the following future contractual minimum lease payments (excluding operating expense reimbursements) on non-cancellable operating leases to be received which expire on various dates through 2039 (amounts in thousands):
Remainder of 2022$120,126 
2023487,764 
2024480,189 
2025448,981 
2026407,826 
Thereafter1,934,341 
$3,879,227 
The above future minimum lease payments exclude tenant recoveries and the net accretion of above and below-market lease intangibles. Some leases are subject to termination options generally upon payment of a termination fee. The preceding table is prepared assuming such options are not exercised.
Lessee
    We determine if an arrangement is a lease at inception. Our operating lease agreements relate to three ground lease assets and are reflected in right-of-use assets of $28.7 million and lease liabilities of $28.7 million in our consolidated balance sheets as of September 30, 2022. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Variable lease payments are excluded from the right-of-use assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred.
    The ground leases are due to expire between the years 2050 and 2077, inclusive of extension options, and have no variable payments or residual value guarantees. As our leases do not provide an implicit rate, we determined our incremental borrowing rate based on information available at the date of adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842), in determining the present value of lease payments. The weighted average incremental borrowing rate used to calculate the right-of-use assets and lease liabilities as of September 30, 2022 was 4.5%. Rent expense for lease payments related to our operating leases is recognized on a straight-line basis over the non-cancellable term of the leases. The weighted average remaining lease term as of September 30, 2022 was 47.7 years.

    As of September 30, 2022, the following table summarizes our future minimum lease payments discounted by our incremental borrowing rates to calculate the lease liabilities of our leases (amounts in thousands):
Remainder of 2022$380 
20231,518 
20241,518 
20251,518 
20261,518 
Thereafter63,744 
Total undiscounted cash flows70,196 
Present value discount(41,471)
Ground lease liabilities$28,725 
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9. Commitments and Contingencies
Legal Proceedings
    Except as described below, as of September 30, 2022, we were not involved in any material litigation, nor, to our knowledge, was any material litigation threatened against us or our properties, other than routine litigation arising in the ordinary course of business such as disputes with tenants. We believe that the costs and related liabilities, if any, which may result from such actions will not materially affect our condensed consolidated financial position, operating results or liquidity.
    As previously disclosed, in October 2014, 12 former investors (the "Claimants") 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 (the "Respondents"). The statement of claim (also filed later in federal court in New York for the expressed purpose of tolling the statute of limitations) alleges breach of fiduciary duty and related claims in connection with the Offering and formation transactions and seeks monetary damages and declaratory relief. Claimants had opted out of a prior class action bringing similar claims that was settled with court approval. Respondents filed an answer and counterclaims. In March 2015, the federal court action was stayed on consent of all parties pending the arbitration. Arbitration hearings started in May 2016 and concluded in August 2018. On August 26, 2020, the arbitration panel issued an award that denied all Claimants’ claims with one exception, on which it awarded Claimants approximately $1.2 million, inclusive of seven years of interest through October 2, 2020. This amount was recorded as an IPO litigation expense in the consolidated statement of operations for the year ended December 31, 2020.
Respondents believe that such award in favor of the Claimants is entirely without merit and sought to vacate that portion of the award. On September 27, 2021, the court denied Respondents' motion to vacate and entered judgement in the aforementioned amount, inclusive of accumulated interest. Respondents have appealed that ruling. On May 10, 2022, Respondents moved to dismiss the appeal and judgment on the grounds that a recent decision of the United States Supreme Court held that the federal courts have no subject matter jurisdiction over the case. Claimants opposed the motion, which is pending. In addition, certain of the Claimants in the federal court action sought to pursue claims in that case against Respondents. Respondents believe that any such claims are meritless. The magistrate judge assigned to the action has issued a Report and Recommendation rejecting Claimants’ claims; the district judge will decide whether to adopt the Report and Recommendation.

     Pursuant to indemnification agreements which were made with our directors, executive officers and chairman emeritus as part of our formation transactions, Anthony E. Malkin, Peter L. Malkin and Thomas N. Keltner, Jr. have defense and indemnity rights from us with respect to this arbitration.
Unfunded Capital Expenditures

    At September 30, 2022, we estimate that we will incur approximately $117.9 million of capital expenditures (including tenant improvements and leasing commissions) on our properties pursuant to existing lease agreements. We expect to fund these capital expenditures with operating cash flow, additional property level mortgage financings, our unsecured credit facility, cash on hand and other borrowings. Future property acquisitions may require substantial capital investments for refurbishment and leasing costs. We expect that these financing requirements will be met in a similar fashion.
Concentration of Credit Risk
    Financial instruments that subject us to credit risk consist primarily of cash and cash equivalents, restricted cash, short-term investments, tenant and other receivables and deferred rent receivables. At September 30, 2022, 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, 2022, 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
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accordingly, the obligations to remove the asbestos or asbestos-containing building materials from these properties have indeterminable settlement dates. As such, we are unable to reasonably estimate the fair value of the associated conditional asset retirement obligation. However, ongoing asbestos abatement, maintenance programs and other required documentation are carried out as required and related costs are expensed as incurred.
Other Environmental Matters
    Certain of our properties have been inspected for soil contamination due to pollutants, which may have occurred prior to our ownership of these properties or subsequently in connection with its development and/or its use. Required remediation to such properties has been completed, and as of September 30, 2022, 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.
10. Equity
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.
    On May 16, 2019, the Empire State Realty Trust, Inc. Empire State Realty OP, L.P. 2019 Equity Incentive Plan (“2019 Plan”) was approved by our shareholders.  The 2019 Plan provides for grants to directors, employees and consultants of our company and operating partnership, including options, restricted stock, restricted stock units, stock appreciation rights, performance awards, dividend equivalents and other equity-based awards.  An aggregate of approximately 11.0 million shares of our common stock are authorized for issuance under awards granted pursuant to the 2019 Plan. We will not issue any new equity awards under the First Amended and Restated Empire State Realty Trust, Inc. and Empire State Realty OP, L.P. 2013 Equity Incentive Plan ("2013 Plan", and collectively with the 2019 Plan, "the Plans"). The shares of Class A common stock underlying any awards under the 2019 Plan and the 2013 Plan that are forfeited, canceled or otherwise terminated, other than by exercise, will be added back to the shares of Class A common stock available for issuance under the 2019 Plan. Shares tendered or held back upon exercise of a stock option or settlement of an award under the 2019 Plan or the 2013 Plan to cover the exercise price or tax withholding and shares subject to a stock appreciation right that are not issued in connection with the stock settlement of the stock appreciation right upon exercise thereof, will not be added back to the shares of Class A common stock available for issuance under the 2019 Plan. In addition, shares of Class A common stock repurchased on the open market will not be added back to the shares of Class A common stock available for issuance under the 2019 Plan.
    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 Plans, 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 capital events, and any increase in valuation from the time of one such event to the next 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.
     LTIP units subject to time-based vesting, whether vested or not, receive per unit distributions as OP units, which equal per share dividends (both regular and special) on our common stock. Market and performance-based LTIPs receive 10%
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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.

    As of September 30, 2022, there were 160,576,042 shares of Class A common stock, 993,332 shares of Class B common stock and 110,959,627 OP Units outstanding, of which 161,569,374, or 59.3%, were owned by us and 110,959,627, or 40.7%, were owned by other partners, including certain directors, officers and other members of executive management.
Stock and Publicly Traded Operating Partnership Unit Repurchase Program
    Our Board of Directors authorized the repurchase of up to $500 million of our Class A common stock and the Operating Partnership’s Series ES, Series 250 and Series 60 operating partnership units from January 1, 2022 through December 31, 2023. Under the program, we may purchase our Class A common stock and the Operating Partnership’s Series ES, Series 250 and Series 60 operating partnership units in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by us and will be subject to stock price, availability, trading volume, general market conditions, and applicable securities laws. The authorization does not obligate us to acquire any particular amount of securities, and the program may be suspended or discontinued at our discretion without prior notice.

The following table summarizes our purchases of equity securities in each of the three months ended September 30, 2022:
PeriodTotal Number of Shares PurchasedWeighted Average Price Paid per ShareMaximum Approximate Dollar Value Available for Future Purchase (in thousands)
July 2022184,045 $6.92 $434,286 
August 2022621,314 $7.32 $429,736 
September 20221,761,561 $6.97 $417,455 
Private Perpetual Preferred Units
    As of September 30, 2022, there were 4,664,038 Series 2019 Preferred Units ("Series 2019 Preferred Units") and 1,560,360 Series 2014 Private Perpetual Preferred Units ("Series 2014 Preferred Units") outstanding. The Series 2019 Preferred Units have a liquidation preference of $13.52 per unit and are entitled to receive cumulative preferential annual cash distributions of $0.70 per unit payable in arrears on a quarterly basis. The Series 2014 Preferred Units which have a liquidation preference of $16.62 per unit and are entitled to receive cumulative preferential annual cash distributions of $0.60 per unit payable in arrears on a quarterly basis. Both series are not redeemable at the option of the holders and are redeemable at our option only in the case of specific defined events.

Dividends and Distributions
    Total dividends paid to common stockholders were $5.7 million and $17.4 million for the three and nine months ended September 30, 2022, respectively, and $6.1 million and $12.1 million for the three and nine months ended September 30, 2021, respectively. Total distributions paid to OP unitholders were $3.9 million and $11.6 million for the three and nine months ended September 30, 2022, respectively, and $3.9 million and $7.3 million for the three and nine months ended September 30, 2021, respectively. Total distributions paid to preferred unitholders were $1.1 million and $3.2 million for the three months and nine ended September 30, 2022, respectively, and $1.1 million and $3.2 million for the three and nine months ended September 30, 2021, respectively.

Incentive and Share-Based Compensation
    The Plans provide 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 11.0 million shares of our common stock is authorized for issuance under awards granted pursuant to the 2019 Plan, and as of September 30, 2022, 5.9 million shares of common stock remain available for future issuance.

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Share-based compensation for time-based equity awards 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 shorter of (i) the stated vesting period, which is generally three, four or five years, or (ii) the period from the date of grant to the date the employee becomes retirement eligible, which may occur upon grant. An employee is retirement eligible when the employee attains the (i) age of 65 for awards granted in 2020 and after and age of 60 for awards granted before 2020 and (ii) the date on which the employee has first completed ten years of continuous service with us or our affiliates. Share-based compensation for market-based equity awards and performance-based equity awards 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 three or four years. Additionally, for the performance-based equity awards, we assess, at each reporting period, whether it is probable that the performance conditions will be satisfied. We recognize expense respective to the number of awards we expect to vest at the conclusion of the measurement period. Changes in estimate are accounted for in the period of change through a cumulative catch-up adjustment.

For the market-based LTIP units, the fair value of the awards was estimated using a Monte Carlo Simulation model and 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.  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 an appropriate 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 or performance 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, the fair value of the awards are based on the market price of our stock at the grant date.

LTIP units and restricted stock issued during the nine months ended September 30, 2022 were valued at $22.4 million. The weighted average per unit or share fair value was $7.21 for grants issued in 2022. The fair value per unit or share granted in 2022 was estimated on the respective dates of grant using the following assumptions: an expected life from 2.0 to 5.3 years, a dividend rate of 2.0%, a risk-free interest rate from 1.4% to 2.0%, and an expected price volatility from 37.0% to 53.0%. No other stock options, dividend equivalents, or stock appreciation rights were issued or outstanding in 2022.

    The following is a summary of restricted stock and LTIP unit activity for the nine months ended September 30, 2022:
Restricted StockTime-based LTIPsMarket-based LTIPsPerformance-based LTIPsWeighted Average Grant Fair Value
Unvested balance at December 31, 2021214,408 2,499,592 5,039,134 — $7.02 
Vested(68,867)(1,052,119)— 9.95 
Granted232,448 1,514,434 780,155 578,943 7.21 
Forfeited or unearned(17,830)— (1,311,839)— 7.21 
Unvested balance at September 30, 2022360,159 2,961,907 4,507,450 578,943 6.67 
    The time-based LTIPs and restricted stock awards are treated for accounting purposes as immediately vested upon the later of (i) the date the grantee attains the age of 60 or 65, as applicable, 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 market-based and performance-based awards, and accordingly, we recognized $0.4 million and $2.0 million for the three and nine months ended September 30, 2022, respectively, and $0.7 million and $2.1 million for the three and nine months ended September 30, 2021, respectively. Unrecognized compensation expense was $1.2 million at September 30, 2022, which will be recognized over a weighted average period of 3.3 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 $4.8 million and $13.7 million for the three and nine months ended September 30, 2022, respectively, and $4.7 million and $13.3 million for the three and nine months ended September 30, 2021, respectively. Unrecognized compensation expense was $30.7 million at September 30, 2022, which will be recognized over a weighted average period of 2.6 years.


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Earnings Per Share
    Earnings per share for the three and nine months ended September 30, 2022 and 2021 is computed as follows (amounts in thousands, except per share amounts):
Three Months EndedNine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
Numerator - Basic:
Net income (loss)$10,118 $(10,183)$41,592 $(8,963)
Private perpetual preferred unit distributions(1,050)(1,050)(3,151)(3,151)
Net (income) loss attributable to non-controlling interests(3,511)4,256 (14,594)4,591 
Earnings allocated to unvested shares— (9)— (18)
Net income (loss) attributable to common stockholders – basic$5,557 $(6,986)$23,847 $(7,541)
Numerator - Diluted:
Net income (loss)$10,118 $(10,183)$41,592 $(8,963)
Private perpetual preferred unit distributions(1,050)(1,050)(3,151)(3,151)
Net loss attributable to non-controlling interests in other partnerships49 — 271 — 
Earnings allocated to unvested shares— (9)— (18)
Net income (loss) attributable to common stockholders – diluted$9,117 $(11,242)$38,712 $(12,132)
Denominator:
Weighted average shares outstanding – basic162,165 172,494 166,354 172,487 
OP units103,870 105,222 103,526 105,342 
Effect of dilutive securities:
   Stock-based compensation plans1,086 — 1,086 — 
Weighted average shares outstanding – diluted267,121 277,716 270,966 277,829 
Earnings per share:
Basic$0.03 $(0.04)$0.14 $(0.04)
Diluted$0.03 $(0.04)$0.14 $(0.04)
    There were zero and zero antidilutive shares and LTIP units for the three and nine months ended September 30, 2022, respectively, and 1,084 and 998 antidilutive shares and LTIP units for the three and nine months ended September 30, 2021, respectively.


11. Related Party Transactions

Supervisory Fee Revenue
    We earned supervisory fees from entities affiliated with Anthony E. Malkin, our Chairman, President and Chief Executive Officer, of $0.2 million and $0.3 million for the three months ended September 30, 2022 and 2021, respectively, and $0.8 million and $0.8 million for the nine months ended September 30, 2022 and 2021, respectively. These fees are included within third-party management and other fees.


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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, 2022 and 2021, respectively, and $0.2 million and $0.2 million for the nine months ended September 30, 2022 and 2021, respectively. These fees are included within third-party management and other fees.
Other
    We receive rent generally at the market rental rate for 5,447 square feet of leased space from entities affiliated with Anthony E. Malkin at one of our properties. Under the lease, the tenant has the right to cancel such lease without special payment on 90 days’ notice. We also 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 to such tenant an allocable pro rata share of the cost. We also have agreements with these entities and excluded properties and businesses to provide them with general computer-related support services. Total revenue aggregated $0.1 million and $0.1 million for the three months ended September 30, 2022 and 2021, respectively, and $0.2 million and $0.2 million for the nine months ended September 30, 2022 and 2021, respectively.
12. Segment Reporting
    We have identified two reportable segments: (1) real estate and (2) observatory. Our real estate segment includes all activities related to the ownership, management, operation, acquisition, redevelopment, repositioning and disposition of our traditional 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 rents as if the sales or rents were to third parties, that is, at current market prices.

The following tables provide components of segment net income (loss) for each segment for the three and nine months ended September 30, 2022 and 2021 (amounts in thousands):

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Three Months Ended September 30, 2022
Real EstateObservatoryIntersegment EliminationTotal
Revenues:
Rental revenue$148,290 $— $— $148,290 
Intercompany rental revenue19,072 — (19,072)— 
Observatory revenue— 33,051 — 33,051 
Lease termination fees— — — — 
Third-party management and other fees389 — — 389 
Other revenue and fees1,982 — — 1,982 
Total revenues169,733 33,051 (19,072)183,712 
Operating expenses:
Property operating expenses42,798 — — 42,798 
Intercompany rent expense— 19,072 (19,072)— 
Ground rent expense2,331 — — 2,331 
General and administrative expenses15,725 — — 15,725 
Observatory expenses— 8,516 — 8,516 
Real estate taxes31,831 — — 31,831 
Depreciation and amortization46,933 51 — 46,984 
Total operating expenses139,618 27,639 (19,072)148,185 
Total operating income30,115 5,412 — 35,527 

Other income (expense):
Interest income1,530 34 — 1,564 
Interest expense(25,516)— — (25,516)
Gain on disposition of property— — — — 
 Income before income taxes6,129 5,446 — 11,575 
Income tax expense(359)(1,098)— (1,457)
Net income$5,770 $4,348 $— $10,118 
Segment assets$3,950,883 $250,257 $— $4,201,140 
Expenditures for segment assets$18,686 $24 $— $18,710 
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Three Months Ended September 30, 2021
Real EstateObservatoryIntersegment EliminationTotal
Revenues:
Rental revenue$139,558 $— $— $139,558 
Intercompany rental revenue5,310 — (5,310)— 
Observatory revenue— 12,796 — 12,796 
Lease termination fees11,321 — — 11,321 
Third-party management and other fees314 — — 314 
Other revenue and fees921 138 — 1,059 
Total revenues157,424 12,934 (5,310)165,048 
Operating expenses:
Property operating expenses33,357 — — 33,357 
Intercompany rent expense— 5,310 (5,310)— 
Ground rent expense2,331 — — 2,331 
General and administrative expenses14,427 — — 14,427 
Observatory expenses— 6,370 — 6,370 
Real estate taxes29,566 — — 29,566 
Depreciation and amortization65,759 35 — 65,794 
Total operating expenses145,440 11,715 (5,310)151,845 
Total operating income (loss)11,984 1,219 — 13,203 

Other income (expense):
Interest income211 — — 211 
Interest expense(23,577)— — (23,577)
Income (loss) before income taxes(11,382)1,219 — (10,163)
Income tax (expense) benefit53 (73)— (20)
Net income (loss)$(11,329)$1,146 $— $(10,183)
Segment assets$3,870,142 $242,021 $— $4,112,163 
Expenditures for segment assets$21,349 $— $— $21,349 
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Nine Months Ended September 30, 2022
Real EstateObservatoryIntersegment EliminationTotal
Revenues:
Rental revenue$445,143 $— $— $445,143 
Intercompany rental revenue46,801 — (46,801)— 
Observatory revenue— 73,660 — 73,660 
Lease termination fees20,032 — — 20,032 
Third-party management and other fees1,025 — — 1,025 
Other revenue and fees5,908 — — 5,908 
Total revenues518,909 73,660 (46,801)545,768 
Operating expenses:
Property operating expenses118,875 — — 118,875 
Intercompany rent expense— 46,801 (46,801)— 
Ground rent expense6,994 — — 6,994 
General and administrative expenses45,287 — — 45,287 
Observatory expenses— 22,507 — 22,507 
Real estate taxes91,637 — — 91,637 
Depreciation and amortization172,258 136 — 172,394 
Total operating expenses435,051 69,444 (46,801)457,694 
Total operating income (loss)
83,858 4,216 — 88,074 
Other income (expense):
Interest income2,105 39 — 2,144 
Interest expense(75,572)— — (75,572)
Gain on disposition of property27,170 — — 27,170 
Income (loss) before income taxes37,561 4,255 — 41,816 
Income tax (expense) benefit(541)317 — (224)
Net income$37,020 $4,572 $— $41,592 
Expenditures for segment assets$70,795 $315 $— $71,110 
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Nine Months Ended September 30, 2021
Real EstateObservatoryIntersegment EliminationTotal
Revenues:
Rental revenue$420,586 $— $— $420,586 
Intercompany rental revenue16,271 — (16,271)— 
Observatory revenue— 23,758 — 23,758 
Lease termination fees15,949 — — 15,949 
Third-party management and other fees917 — — 917 
Other revenue and fees2,412 138 — 2,550 
Total revenues456,135 23,896 (16,271)463,760 
Operating expenses:
Property operating expenses92,429 — — 92,429 
Intercompany rent expense— 16,271 (16,271)— 
Ground rent expense6,994 — — 6,994 
General and administrative expenses42,369 — — 42,369 
Observatory expenses— 16,226 — 16,226 
Real estate taxes92,367 — — 92,367 
Depreciation and amortization155,244 95 — 155,339 
Total operating expenses389,403 32,592 (16,271)405,724 
Total operating income (loss)66,732 (8,696)— 58,036 
Other income (expense):
Interest income494 — 497 
Interest expense(70,553)— — (70,553)
Loss on early extinguishment of debt
(214)— — (214)
Income (loss) before income taxes(3,541)(8,693)— (12,234)
Income tax (expense) benefit(365)3,636 — 3,271 
Net loss$(3,906)$(5,057)$— $(8,963)
Expenditures for segment assets$64,655 $$— $64,659 
    
13. Subsequent Events

None.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 ended December 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; (v) changes in our business strategy; (vi) changes in technology and market competition that affect utilization of our office, retail, Observatory, 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 in New 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 in the Company’s borrowing costs as a result of changes in interest rates and other factors, including the current phasing out of LIBOR; (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 budget; (xv) difficulties in identifying and completing acquisitions; (xvi) risks related to any development project (including our Metro Tower potential 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; (xx) incurrence of taxable capital gain on disposition of an asset due to failure of use or compliance with a 1031 exchange program; and (xxi) 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 impact of governmental regulation on our ESG efforts. For a further discussion of these and other factors that could impact the Company's future results, see the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and other risks described in documents subsequently filed by the Company from time to time with the Securities 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.
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Overview
We are a New York City focused real estate investment trust ("REIT") that owns and manages office, retail and multifamily assets in Manhattan and the greater New York metropolitan area. As the owner of the Empire State Building, the World’s Most Famous Building, we also own and operate our iconic, newly reimagined Observatory Experience.
Highlights for the three months ended September 30, 2022

Incurred net income attributable to common stockholders of $5.6 million and achieved Core Funds From Operations ("Core FFO") of $56.5 million attributable to common stockholders and the operating partnership.
Total commercial portfolio 88.5% leased, New York City office portfolio 89.4% leased.

Signed a total of 335,382 rentable square feet of new, renewal, and expansion leases.

Empire State Building Observatory generated $24.5 million of net operating income for the third quarter 2022.

Repurchased $20.1 million of our common stock in the third quarter of 2022 and through October 24, 2022.

Results of Operations
Overview
    The discussion below relates to our financial condition and results of operations for the three months ended September 30, 2022 and 2021, respectively.

Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021
The following table summarizes our historical results of operations for the three months ended September 30, 2022 and 2021 (amounts in thousands):
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Three Months Ended September 30,
20222021Change%
Revenues:
Rental revenue
$148,290 $139,558 $8,732 6.3 %
Observatory revenue33,051 12,796 20,255 158.3 %
Lease termination fees— 11,321 (11,321)(100.0)%
Third-party management and other fees
389 314 75 23.9 %
Other revenues and fees
1,982 1,059 923 87.2 %
Total revenues
183,712 165,048 18,664 11.3 %
Operating expenses:
Property operating expenses
42,798 33,357 (9,441)(28.3)%
Ground rent expenses
2,331 2,331 — — %
General and administrative expenses
15,725 14,427 (1,298)(9.0)%
Observatory expenses
8,516 6,370 (2,146)(33.7)%
Real estate taxes
31,831 29,566 (2,265)(7.7)%
Depreciation and amortization
46,984 65,794 18,810 28.6 %
Total operating expenses
148,185 151,845 3,660 2.4 %
Operating income
35,527 13,203 22,324 169.1 %
Other income (expense):
Interest income
1,564 211 1,353 641.2 %
Interest expense
(25,516)(23,577)(1,939)(8.2)%
Income (loss) before income taxes
11,575 (10,163)21,738 213.9 %
Income tax (expense) benefit
(1,457)(20)(1,437)(7,185.0)%
Net income (loss)
10,118 (10,183)20,301 199.4 %
Net (income) loss attributable to non-controlling interests:
Non-controlling interests in the Operating Partnership(3,560)4,256 (7,816)(183.6)%
Non-controlling interests in other partnerships49 — 49 100.0 %
Private perpetual preferred unit distributions(1,050)(1,050)— — %
Net income (loss) attributable to common stockholders $5,557 $(6,977)$12,534 179.6 %

Rental Revenue

The increase in rental revenue reflects the inclusion of revenue from our multifamily properties which were acquired on December 22, 2021.
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, 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.

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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

Higher real estate taxes primarily attributable to the inclusion of real estate taxes from our recently acquired multifamily properties.
Depreciation and Amortization
    
    The decrease in depreciation and amortization reflects write-offs primarily related to one tenant in the third quarter 2021.
Interest Income
    The increase reflects higher interest rates in the three months ended September 30, 2022 compared to the three months ended September 30, 2021.
Interest Expense
    The increase was primarily attributable to interest expense from our recently acquired multifamily properties, partially offset by the cancellation of debt from 383 Main Avenue, Norwalk CT.
Income Taxes
The increase in income tax expense was attributable to higher net operating income for the observatory segment.






























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Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021
The following table summarizes our historical results of operations for the nine months ended September 30, 2022 and 2021 (dollars in thousands):
Nine Months Ended September 30,
20222021Change%
Revenues:
Rental revenue
$445,143 $420,586 $24,557 5.8 %
Observatory revenue73,660 23,758 49,902 210.0 %
Lease termination fees20,032 15,949 4,083 25.6 %
Third-party management and other fees
1,025 917 108 11.8 %
Other revenues and fees
5,908 2,550 3,358 131.7 %
Total revenues
545,768 463,760 82,008 17.7 %
Operating expenses:
Property operating expenses
118,875 92,429 (26,446)(28.6)%
Ground rent expenses
6,994 6,994 — — %
General and administrative expenses
45,287 42,369 (2,918)(6.9)%
Observatory expenses
22,507 16,226 (6,281)(38.7)%
Real estate taxes
91,637 92,367 730 0.8 %
Depreciation and amortization
172,394 155,339 (17,055)(11.0)%
Total operating expenses
457,694 405,724 (51,970)(12.8)%
Operating income
88,074 58,036 30,038 51.8 %
Other income (expense):
Interest income
2,144 497 1,647 331.4 %
Interest expense
(75,572)(70,553)(5,019)(7.1)%
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
41,816 (12,234)54,050 441.8 %
Income tax (expense) benefit
(224)3,271 (3,495)(106.8)%
Net income (loss)
41,592 (8,963)50,555 564.0 %
Net (income) loss attributable to non-controlling interests:
Non-controlling interests in the Operating Partnership(14,865)4,591 (19,456)(423.8)%
Non-controlling interests in other partnerships271 — 271 100.0 %
Private perpetual preferred unit distributions(3,151)(3,151)— — %
Net income (loss) attributable to common stockholders $23,847 $(7,523)$31,370 417.0 %

Rental Revenue

The increase in rental revenue reflects the inclusion of revenue from our multifamily properties which were acquired on December 22, 2021.
Observatory Revenue
Observatory revenues were higher driven by increased visitation.
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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, 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.
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 Income
    The increase reflects higher interest rates in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
Interest Expense
    The increase was primarily attributable to interest expense from our recently acquired multifamily properties, partially offset by the cancellation of debt from 383 Main Avenue, Norwalk CT.
Income Taxes
The increase in income tax expense was attributable to higher net operating income for the observatory segment.

Gain on disposition of property

Represents a gain on the transfer of 383 Main Avenue, Norwalk CT, which was encumbered by a $30.0 million mortgage, back to the lender in a consensual foreclosure.


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 to qualify as a REIT, we are required under the Internal Revenue Code of 1986 to distribute to our stockholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We expect to make quarterly distributions, as required, to our securityholders.

While we may be able to anticipate and plan for certain liquidity needs, there may be unexpected increases in uses of cash that are beyond our control and which would affect our financial condition and results of operations. For example, we may be required to comply with new laws or regulations that cause us to incur unanticipated capital expenditures for our properties, thereby increasing our liquidity needs. Even if there are no material changes to our anticipated liquidity requirements, our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or needed. Our primary sources of liquidity will generally consist of cash on hand and cash generated from our
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operating activities, debt issuances and unused borrowing capacity under our unsecured revolving credit facility. We expect to meet our short-term liquidity requirements, including distributions, operating expenses, working capital, debt service, and capital expenditures from cash flows from operations, cash on hand, debt issuances, and available borrowing capacity under our unsecured revolving credit facility. The availability of these borrowings is subject to the conditions set forth in the applicable loan agreements. We expect to meet our long-term capital requirements, including acquisitions, redevelopments and capital expenditures through our cash flows from operations, cash on hand, our unsecured revolving credit facility, mortgage financings, debt issuances, common and/or preferred equity issuances and asset sales. Our properties require periodic investments of capital for individual lease related tenant improvements allowances, general capital improvements and costs associated with capital expenditures. Our overall leverage will depend on our mix of investments and the cost of leverage. Our charter does not restrict the amount of leverage that we may use.

At September 30, 2022, we had $387.2 million available in cash and cash equivalents, and $850 million available under our unsecured revolving credit facility.

    As of September 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 6.7 years. As of September 30, 2022, excluding principal amortization, we have no outstanding debt maturing until November 2024.

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 September 30, 2022, our consolidated mortgage notes payable amounted to $933.1 million. The first maturity is in November 2024. See "Financial Statements - Note 5. Debt" for more information on mortgage debt.

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 of September 30, 2022, we were in compliance with the covenants under the outstanding senior unsecured notes.

Financial Covenants
As of September 30, 2022, we were in compliance with the following financial covenants:
Financial covenantRequiredSeptember 30, 2022In Compliance
Maximum total leverage< 60%39.0 %Yes
Maximum secured leverage< 40%15.6 %Yes
Minimum fixed charge coverage> 1.50x2.6xYes
Minimum unencumbered interest coverage> 1.75x4.7xYes
Maximum unsecured leverage< 60%28.5 %Yes

Leverage Policies
We expect to employ leverage in our capital structure in amounts determined from time to time by our board of directors. Although our board of directors has not adopted a policy that limits the total amount of indebtedness that we may incur, we anticipate that our board of directors will consider a number of factors in evaluating our level of indebtedness from time to time, as well as the amount of such indebtedness that will be either fixed or floating rate. Our charter and bylaws do not limit the amount or percentage of indebtedness that we may incur nor do they restrict the form in which our indebtedness will be taken (including, but not limited to, recourse or non-recourse debt and cross-collateralized debt). Our overall leverage will depend on our mix of investments and the cost of leverage. Our board of directors may from time to time modify our
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leverage policies in light of the then-current economic conditions, relative costs of debt and equity capital, market values of our properties, general market conditions for debt and equity securities, fluctuations in the market price of our common stock, growth and acquisition opportunities and other factors.

Capital Expenditures
The following tables summarize our leasing commission costs, tenant improvement costs and our capital expenditures for each of the periods presented (dollars in thousands, except per square foot amounts).
Office Properties(1)
  
Nine Months Ended September 30,
Total New Leases, Expansions, and Renewals20222021
Number of leases signed(2)
10388
Total square feet928,598614,328
Leasing commission costs per square foot(3)
$19.14 $17.10 
Tenant improvement costs per square foot(3)
59.20 59.80 
Total leasing commissions and tenant improvement costs per square foot(3)
$78.34 $76.90 
Retail Properties(4)
  
Nine Months Ended September 30,
Total New Leases, Expansions, and Renewals20222021
Number of leases signed(2)
12 
Total square feet45,655 16,382 
Leasing commission costs per square foot(3)
$59.85 $42.88 
Tenant improvement costs per square foot(3)
53.97 36.18 
Total leasing commissions and tenant improvement costs per square foot(3)
$113.82 $79.06 
_______________
(1)Excludes an aggregate of 497,235 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 497,235 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.
  
Nine Months Ended September 30,
20222021
Total Portfolio
Capital expenditures (1)
$28,823 $15,552 
_______________
(1)Excludes tenant improvements and leasing commission costs.
As of September 30, 2022, we expect to incur additional costs relating to obligations under existing lease agreements of approximately $117.9 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 September 30, 2022, we did not have any off-balance sheet arrangements.
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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 U.S. federal income tax liability on our income.
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 $32.2 million and $22.6 million have been made to equity holders for the nine months ended September 30, 2022 and 2021, respectively.

Stock and Publicly Traded Operating Partnership Unit Repurchase Program

    Our Board of Directors authorized the repurchase of up to $500 million of our Class A common stock and the Operating Partnership’s Series ES, Series 250 and Series 60 operating partnership units through December 31, 2023. Under the program, we may purchase our Class A common stock and the Operating Partnership’s Series ES, Series 250 and Series 60 operating partnership units in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will be subject to stock price, availability, trading volume and general market conditions. The authorization does not obligate us to acquire any particular amount of securities, and the program may be suspended or discontinued at our discretion without prior notice. See "Financial Statements - Note 10. Equity" for a summary of our purchases of equity securities in each of the three months ended September 30, 2022.

Cash Flows
Comparison of Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021
Net cash. Cash and cash equivalents and restricted cash were $439.8 million and $621.0 million, respectively, as of September 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 increased by $7.0 million to $174.0 million.
Investing activities. Net cash used in investing activities increased by $18.3 million to $89.1 million due to higher capital expenditures.
Financing activities. Net cash used in financing activities increased by $76.5 million to $119.7 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
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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 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 September 30,Nine Months Ended September 30,
2022202120222021
(unaudited)(unaudited)
Net income (loss)
$10,118 $(10,183)$41,592 $(8,963)
Add:
General and administrative expenses
15,725 14,427 45,287 42,369 
Depreciation and amortization
46,984 65,794 172,394 155,339 
Interest expense
25,516 23,577 75,572 70,553 
Loss on early extinguishment of debt
— — — 214 
Income tax expense (benefit)
1,457 20 224 (3,271)
Less:
Gain on disposition of property— — (27,170)— 
Third-party management and other fees
(389)(314)(1,025)(917)
Interest income
(1,564)(211)(2,144)(497)
Net operating income
$97,847 $93,110 $304,730 $254,827 
Other Net Operating Income Data
Straight-line rental revenue
$7,341 $3,087 $18,533 $13,197 
Net increase in rental revenue from the amortization of above-and below-market lease assets and liabilities
$677 $4,244 $4,136 $5,615 
Amortization of acquired below-market ground leases
$1,957 $1,957 $5,873 $5,873 

Funds from Operations ("FFO")
    We present below a discussion of FFO. We compute FFO in accordance with the “White Paper” on FFO published by the National Association of Real Estate Investment Trusts, or NAREIT, which defines FFO as net income (loss) (determined in accordance with GAAP), excluding impairment write-off of investments in depreciable real estate and investments in in-substance real estate investments, gains or losses from debt restructurings and sales of depreciable operating properties, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs), less distributions to non-controlling interests and gains/losses from discontinued operations and after adjustments for unconsolidated partnerships and joint ventures. FFO is a widely recognized non-GAAP financial measure for REITs that we believe, when considered with financial statements determined in accordance with GAAP, is useful to investors in understanding financial performance and providing a relevant basis for comparison among REITs. In addition, we believe
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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 September 30,Nine Months Ended September 30,
2022202120222021
(unaudited)(unaudited)
Net income (loss)
$10,118 $(10,183)$41,592 $(8,963)
Noncontrolling interests in other partnerships49 — 271 — 
Private perpetual preferred unit distributions
(1,050)(1,050)(3,151)(3,151)
Real estate depreciation and amortization
45,461 64,565 167,446 151,149 
Gain on disposition of property
— — (27,170)— 
FFO attributable to common stockholders and the Operating Partnership
54,578 53,332 178,988 139,035 
Amortization of below-market ground leases
1,957 1,957 5,873 5,873 
Modified FFO attributable to common stockholders and the Operating Partnership
56,535 55,289 184,861 144,908 

Loss on early extinguishment of debt
— — — 214 
Core FFO attributable to common stockholders and the Operating Partnership
$56,535 $55,289 $184,861 $145,122 
Weighted average shares and Operating Partnership Units
Basic
266,035 277,716 269,880 277,829 
Diluted
267,121 277,716 270,966 277,829 
Factors That May Influence Future Results of Operations
Portfolio Transaction Activity
Subsequent to September 30, 2022, we entered into agreements to sell 500 Mamaroneck Avenue in Harrison, NY and 10 Bank Street in White Plains, NY at a gross asset valuation of $95.0 million. These transactions are expected to close in the first quarter of 2023, subject to customary closing conditions.
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 of September 30, 2022, there were approximately 1.1 million rentable square feet of space in our portfolio available to lease (excluding leases signed but not yet commenced) representing 11.5% of the net rentable square footage of the properties in our portfolio. In addition, leases representing 1.4% and 5.5% 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 1.6% and 6.4%, 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
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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 ended September 30, 2022, the observatory hosted 687,000 visitors, compared to 255,000 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.    
    Observatory revenue for the three months ended September 30, 2022 was $33.1 million, compared to $12.8 million for the three months ended September 30, 2021. Observatory revenues and admissions are dependent upon the following: (i) the number of tourists (domestic and international) who come to New York City and visit the observatory, as well as any related tourism trends; (ii) the prices per admission that can be charged; (iii) seasonal trends affecting the number of visitors to the observatory; (iv) competition, in particular from other new and existing observatories; and (v) weather trends.
Critical Accounting Estimates
    Refer to our Annual Report on Form 10-K for the year ended December 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 ended December 31, 2021.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. We are exposed to interest rate changes primarily on our unsecured revolving credit facility and debt refinancings. In order to mitigate our interest rate risk, we may borrow at fixed rates or may enter into derivative financial instruments such as interest rate swaps or caps on floating rate financial instruments. We are not subject to foreign currency risk and we do not enter into derivative or interest rate transactions for speculative purposes.

    As of September 30, 2022, we have interest rate LIBOR swap and cap agreements and SOFR swap agreements with an aggregate notional value of $576.3 million and which mature between October 1, 2024 and November 1, 2033. These "variable to fixed" interest rate swaps have been designated as cash flow hedges and are deemed highly effective with fair values of $18.5 million which is included in prepaid assets and other expenses on the condensed consolidated balance sheet as of September 30, 2022. Given the phasing out of LIBOR, we have entered into SOFR swap agreements to begin the replacement of our LIBOR swap agreements. We will continue to work with our lenders and counterparties to replace or modify, as appropriate, the interest rate provisions in our other LIBOR swap and cap agreements.
As of September 30, 2022, the weighted average interest rate on the $2.3 billion of fixed-rate indebtedness outstanding was 3.9% per annum, with maturities at various dates through March 17, 2035.
As of September 30, 2022, the fair value of our outstanding debt was approximately $2.1 billion, which was approximately $215.0 million less than the book value as of such date. Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
    We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
    As of September 30, 2022, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures at the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded, as of that time, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
    No changes to our internal control over financial reporting were identified in connection with the evaluation referenced above that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
    See Note 9 to the Condensed Consolidated Financial Statements for a description of legal proceedings.

ITEM 1A. RISK FACTORS
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There have been no material changes to the risk factors included in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities

     None.

Recent Purchases of Equity Securities

Stock and Publicly Traded Operating Partnership Unit Repurchase Program

     Our Board of Directors authorized the repurchase of up to $500 million of our Class A common stock and the Operating Partnership’s Series ES, Series 250 and Series 60 operating partnership units during the period from January 1, 2022 through December 31, 2023. This replaces an earlier $500.0 million repurchase authorization that ran from January 1, 2021 through December 31, 2021. Under the program, we may purchase our Class A common stock and the Operating Partnership’s Series ES, Series 250 and Series 60 operating partnership units in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by us and will be subject to stock price, availability, trading volume, general market conditions, and applicable securities laws. The authorization does not obligate us to acquire any particular amount of securities, and the program may be suspended or discontinued at our discretion without prior notice. As of September 30, 2022, we had approximately $417.5 million remaining of the authorized repurchase amount.

The following table summarizes our repurchases of equity securities in each of the months in the three month period ended September 30, 2022 under the repurchase program described above:
PeriodTotal Number of Shares PurchasedWeighted Average Price Paid per ShareTotal Number of Shares Purchased As Part of Publicly Announced Plans or ProgramsMaximum Approximate Dollar Value Available for Future Purchase (in thousands)
July 1-31, 2022184,045 $6.92 184,045 $434,286 
August 1-31, 2022621,314 $7.32 621,314 $429,736 
September 1-30, 20221,761,561 $6.97 1,761,561 $417,455 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

    None.

ITEM 4. MINE SAFETY DISCLOSURES

    Not Applicable.

ITEM 5. OTHER INFORMATION

    None.

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ITEM 6. EXHIBITS

Exhibit No.Description
101.INS*XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*XBRL Taxonomy Extension Schema Document
101.CAL*XBRL Taxonomy Extension Calculation Document
101.DEF*XBRL Taxonomy Extension Definitions Document
101.LAB*XBRL Taxonomy Extension Labels Document
101.PRE*XBRL Taxonomy Extension Presentation Document
104Cover Page Interactive Data File (contained in Exhibit 101)
Notes:
* Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EMPIRE STATE REALTY TRUST, INC.


Date:November 3, 2022
By:/s/ Christina Chiu
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date:November 3, 2022
By: /s/ Stephen V. Horn
Senior Vice President,
Chief Accounting Officer
(Principal Accounting Officer)
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