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esrt:director


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, 2019
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: 001-36106
EMPIRE STATE REALTY OP, L.P.
(Exact name of Registrant as specified in its charter)  
Delaware
 
45-4685158
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

111 West 33rd Street, 12th Floor
New York, New York 10120
(Address of principal executive offices) (Zip Code)
(212) 687-8700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
    
Title of Securities
Trading Symbol
Exchange on which traded
 
 
 
Series ES operating partnership units
ESBA
NYSE Arca, Inc.
Series 60 operating partnership units
OGCP
NYSE Arca, Inc.
Series 250 operating partnership units
FISK
NYSE Arca, Inc.
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 (§232.405 of this chapter) 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 filer
Accelerated 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 24, 2019, there were 27,916,614 units of the Registrant Series ES operating partnership units outstanding, 7,505,315 units of the Series 60 operating partnership units outstanding, and 3,766,134 units of the Series 250 operating partnership units outstanding.




 
EMPIRE STATE REALTY OP, L.P.
 
 
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2019
 
 
TABLE OF CONTENTS
PAGE
PART 1.
FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
FINANCIAL STATEMENTS
 
 
Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018
 
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018 (unaudited)
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2019 and 2018 (unaudited)
 
Condensed Consolidated Statements of Capital for the three and nine months ended September 30, 2019 and 2018 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
 
 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
 
 
ITEM 4.
CONTROLS AND PROCEDURES
 
 
 
PART II.
OTHER INFORMATION
 
 
 
ITEM 1.
LEGAL PROCEEDINGS
 
 
 
ITEM 1A.
RISK FACTORS
 
 
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
 
 
ITEM 4.
MINE SAFETY DISCLOSURES
 
 
 
ITEM 5.
OTHER INFORMATION
 
 
 
ITEM 6.
EXHIBITS
 
 
 
SIGNATURES









1




ITEM 1. FINANCIAL STATEMENTS
Empire State Realty OP, L.P.
Condensed Consolidated Balance Sheets
(amounts in thousands, except unit and per unit amounts)
 
September 30, 2019
 
December 31, 2018
ASSETS
(unaudited)
 
 
Commercial real estate properties, at cost:
 
 
 
Land
$
201,196

 
$
201,196

Development costs
7,989

 
7,987

Building and improvements
2,830,353

 
2,675,303

 
3,039,538

 
2,884,486

Less: accumulated depreciation
(829,495
)
 
(747,304
)
Commercial real estate properties, net
2,210,043

 
2,137,182

Cash and cash equivalents
293,710

 
204,981

Restricted cash
36,609

 
65,832

Short-term investments

 
400,000

Tenant and other receivables, net of allowance of $488 as of December 31, 2018
29,287

 
29,437

Deferred rent receivables, net of allowance of $19 as of December 31, 2018
214,685

 
200,903

Prepaid expenses and other assets
41,927

 
64,345

Deferred costs, net
223,698

 
241,223

Acquired below-market ground leases, net
354,524

 
360,398

Right of use assets
29,355

 

Goodwill
491,479

 
491,479

Total assets
$
3,925,317

 
$
4,195,780

LIABILITIES AND CAPITAL
 
 
 
Liabilities:
 
 
 
Mortgage notes payable, net
$
606,313

 
$
608,567

Senior unsecured notes, net
798,347

 
1,046,219

Unsecured term loan facility, net
264,517

 
264,147

Unsecured revolving credit facility

 

Accounts payable and accrued expenses
143,201

 
130,676

Acquired below-market leases, net
42,655

 
52,450

Ground lease liabilities
29,355

 

Deferred revenue and other liabilities
68,742

 
44,810

Tenants’ security deposits
31,841

 
57,802

Total liabilities
1,984,971

 
2,204,671

Commitments and contingencies


 


Capital:
 
 
 
Private perpetual preferred units, $16.62 per unit liquidation preference, 1,560,360 issued and outstanding in 2019 and 2018
8,004

 
8,004

Series PR operating partnership units:
 
 
 
ESRT partner's capital (3,042,566 and 3,033,261 general partner operating partnership units and 177,106,987 and 171,877,365 limited partner operating partnership units outstanding in 2019 and 2018, respectively)
1,222,019

 
1,238,482

Limited partners' interests (84,561,214 and 86,202,638 limited partner operating partnership units outstanding in 2019 and 2018, respectively)
700,479

 
725,108

Series ES operating partnership units (28,159,590 and 30,129,556 limited partner operating partnership units outstanding in 2019 and 2018, respectively)
7,454

 
14,399

Series 60 operating partnership units (7,544,485 and 8,019,509 limited partner operating partnership units outstanding in 2019 and 2018, respectively)
1,579

 
3,385

Series 250 operating partnership units (3,841,730 and 4,063,737 limited partner operating partnership units outstanding in 2019 and 2018, respectively)
811

 
1,731

Total capital
1,940,346

 
1,991,109

  Total liabilities and capital
$
3,925,317

 
$
4,195,780

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

2



Empire State Realty OP, L.P.
Condensed Consolidated Statements of Income
(unaudited)
(amounts in thousands, except per unit amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Rental revenue
$
150,225

 
$
123,621

 
$
434,713

 
$
369,970

Tenant expense reimbursement

 
18,627

 

 
52,626

Observatory revenue
37,575

 
40,241

 
91,039

 
96,691

Lease termination fees
2,361

 
1,185

 
3,112

 
2,164

Third-party management and other fees
304

 
312

 
955

 
1,151

Other revenue and fees
2,408

 
2,416

 
6,591

 
9,600

Total revenues
192,873

 
186,402

 
536,410

 
532,202

Operating expenses:
 
 
 
 
 
 
 
Property operating expenses
47,894

 
42,772

 
131,076

 
126,375

Ground rent expenses
2,331

 
2,331

 
6,994

 
6,994

General and administrative expenses
14,421

 
13,148

 
44,445

 
39,001

Observatory expenses
9,089

 
8,854

 
25,024

 
23,868

Real estate taxes
29,599

 
28,284

 
86,098

 
81,771

Depreciation and amortization
44,260

 
42,475

 
135,179

 
121,826

Total operating expenses
147,594

 
137,864

 
428,816

 
399,835

Total operating income
45,279

 
48,538

 
107,594

 
132,367

Other income (expense):
 
 
 
 
 
 
 
Interest income
2,269

 
3,485

 
9,907

 
7,209

Interest expense
(19,426
)
 
(20,658
)
 
(60,712
)
 
(58,774
)
Income before income taxes
28,122

 
31,365

 
56,789

 
80,802

Income tax expense
(1,338
)
 
(2,135
)
 
(1,219
)
 
(3,330
)
Net income
26,784

 
29,230

 
55,570

 
77,472

Private perpetual preferred unit distributions
(234
)
 
(234
)
 
(702
)
 
(702
)
Net income attributable to common unitholders
$
26,550

 
$
28,996

 
$
54,868

 
$
76,770

 
 
 
 
 
 
 
 
Total weighted average units:
 
 
 
 
 
 
 
Basic
298,151

 
297,478

 
298,117

 
297,180

Diluted
298,151

 
297,478

 
298,117

 
297,181

 
 
 
 
 
 
 
 
Earnings per unit attributable to common unitholders:
 
 
 
 
 
 
 
Basic
$
0.09

 
$
0.10

 
$
0.18

 
$
0.26

Diluted
$
0.09

 
$
0.10

 
$
0.18

 
$
0.26

 
 
 
 
 
 
 
 
Dividends per unit
$
0.105

 
$
0.105

 
$
0.315

 
$
0.315


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


3



Empire State Realty OP, L.P.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
(amounts in thousands)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
26,784

 
$
29,230

 
$
55,570

 
$
77,472

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on valuation of interest rate swap agreements
(6,256
)
 
3,884

 
(25,992
)
 
9,827

Less: amount reclassified into interest expense
319

 
427

 
637

 
1,562

     Other comprehensive income (loss)
(5,937
)
 
4,311

 
(25,355
)
 
11,389

Comprehensive income (loss)
$
20,847

 
$
33,541

 
$
30,215

 
$
88,861


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


4




Empire State Realty OP, L.P.
Condensed Consolidated Statements of Capital
For The Three Months Ended September 30, 2019 and 2018
(unaudited)
(amounts in thousands)
 
 
 
 
 
Series PR Operating Partnership Units
 
Series ES Operating Partnership Units Limited Partners
 
Series 60 Operating Partnership Units Limited Partners
 
Series 250 Operating Partnership Units Limited Partners
 
 
 
 
 
 
 
General Partner
 
Limited Partners
 
 
 
 
 
 
Private Perpetual Preferred Units
 
Private Perpetual Preferred Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Total Capital
Balance at June 30, 2019
1,560

 
$
8,004

 
178,021

 
$
1,215,647

 
86,749

 
$
713,039

 
28,518

 
$
8,508

 
7,686

 
$
1,871

 
3,917

 
$
963

 
$
1,948,032

Issuance of OP units, net of costs

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of operating partnership units to ESRT Partner's Capital


 

 
2,130

 
12,796

 
(1,554
)
 
(12,672
)
 
(358
)
 
(85
)
 
(142
)
 
(25
)
 
(75
)
 
(14
)
 

Equity compensation

 

 
(1
)
 
191

 
(634
)
 
3,456

 

 

 

 

 

 

 
3,647

Distributions

 
(234
)
 

 
(18,907
)
 

 
(8,880
)
 

 
(2,960
)
 

 
(794
)
 

 
(405
)
 
(32,180
)
Net income

 
234

 

 
15,882

 

 
7,114

 

 
2,547

 

 
662

 

 
345

 
26,784

Other comprehensive income (loss)

 

 

 
(3,590
)
 

 
(1,578
)
 

 
(556
)
 

 
(135
)
 

 
(78
)
 
(5,937
)
Balance at September 30, 2019
1,560

 
$
8,004

 
180,150

 
$
1,222,019

 
84,561

 
$
700,479

 
28,160

 
$
7,454

 
7,544

 
$
1,579

 
3,842

 
$
811

 
$
1,940,346




 
 
 
 
 
Series PR Operating Partnership Units
 
Series ES Operating Partnership Units Limited Partners
 
Series 60 Operating Partnership Units Limited Partners
 
Series 250 Operating Partnership Units Limited Partners
 
 
 
 
 
 
 
General Partner
 
Limited Partners
 
 
 
 
 
 
Private Perpetual Preferred Units
 
Private Perpetual Preferred Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Total Capital
Balance at June 30, 2018
1,560

 
$
8,004

 
167,704

 
$
1,194,533

 
91,447

 
$
759,895

 
31,407

 
$
15,238

 
8,545

 
$
3,580

 
4,230

 
$
1,891

 
$
1,983,141

Issuance of OP units, net of costs

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of operating partnership units to ESRT Partner's Capital


 

 
1,517

 
5,815

 
(647
)
 
(5,396
)
 
(497
)
 
(253
)
 
(301
)
 
(133
)
 
(72
)
 
(33
)
 

Equity compensation

 

 

 
153

 

 
4,700

 

 

 

 

 

 

 
4,853

Distributions

 
(234
)
 

 
(17,727
)
 

 
(9,558
)
 

 
(3,252
)
 

 
(872
)
 

 
(441
)
 
(32,084
)
Net income

 
234

 

 
16,342

 

 
8,294

 

 
3,084

 

 
841

 

 
435

 
29,230

Other comprehensive income (loss)

 

 

 
2,430

 

 
1,233

 

 
458

 

 
125

 

 
65

 
4,311

Balance at September 30, 2018
1,560

 
$
8,004

 
169,221

 
$
1,201,546

 
90,800

 
$
759,168

 
30,910

 
$
15,275

 
8,244

 
$
3,541

 
4,158

 
$
1,917

 
$
1,989,451




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

5



Empire State Realty OP, L.P.
Condensed Consolidated Statements of Capital
For The Nine Months Ended September 30, 2019 and 2018
(unaudited)
(amounts in thousands)

 
 
 
 
 
Series PR Operating Partnership Units
 
Series ES Operating Partnership Units Limited Partners
 
Series 60 Operating Partnership Units Limited Partners
 
Series 250 Operating Partnership Units Limited Partners
 
 
 
 
 
 
 
General Partner
 
Limited Partners
 
 
 
 
 
 
Private Perpetual Preferred Units
 
Private Perpetual Preferred Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Total Capital
Balance at December 31, 2018
1,560

 
$
8,004

 
174,912

 
$
1,238,482

 
86,202

 
$
725,108

 
30,129

 
$
14,399

 
8,020

 
$
3,385

 
4,064

 
$
1,731

 
1,991,109

Issuance of OP units, net of costs

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of operating partnership units to ESRT Partner's Capital


 

 
5,185

 
21,654

 
(2,517
)
 
(20,655
)
 
(1,969
)
 
(788
)
 
(476
)
 
(143
)
 
(222
)
 
(68
)
 

Equity compensation

 

 
53

 
421

 
876

 
14,971

 

 

 

 

 

 

 
15,392

Distributions

 
(702
)
 

 
(56,098
)
 

 
(26,884
)
 

 
(9,020
)
 

 
(2,431
)
 

 
(1,235
)
 
(96,370
)
Net income

 
702

 

 
32,646

 

 
14,760

 

 
5,322

 

 
1,427

 

 
713

 
55,570

Other comprehensive income (loss)

 

 

 
(15,086
)
 

 
(6,821
)
 

 
(2,459
)
 

 
(659
)
 

 
(330
)
 
(25,355
)
Balance at September 30, 2019
1,560

 
$
8,004

 
180,150

 
$
1,222,019

 
84,561

 
$
700,479

 
28,160

 
$
7,454

 
7,544

 
$
1,579

 
3,842

 
$
811

 
$
1,940,346




 
 
 
 
 
Series PR Operating Partnership Units
 
Series ES Operating Partnership Units Limited Partners
 
Series 60 Operating Partnership Units Limited Partners
 
Series 250 Operating Partnership Units Limited Partners
 
 
 
 
 
 
 
General Partner
 
Limited Partners
 
 
 
 
 
 
Private Perpetual Preferred Units
 
Private Perpetual Preferred Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Operating Partnership Units
 
Operating Partnership Unitholders
 
Total Capital
Balance at December 31, 2017
1,560

 
$
8,004

 
161,477

 
$
1,168,282

 
91,760

 
$
778,279

 
33,774

 
$
17,132

 
8,988

 
$
3,992

 
4,410

 
$
2,048

 
1,977,737

Issuance of OP units, net of costs

 

 
284

 
4,749

 

 

 

 

 

 

 

 

 
4,749

Conversion of operating partnership units to ESRT Partner's Capital


 

 
7,436

 
31,660

 
(3,576
)
 
(29,835
)
 
(2,864
)
 
(1,394
)
 
(744
)
 
(318
)
 
(252
)
 
(113
)
 

Equity compensation

 

 
24

 
269

 
2,616

 
13,795

 

 

 

 

 

 

 
14,064

Distributions

 
(702
)
 

 
(52,519
)
 

 
(28,725
)
 

 
(9,984
)
 

 
(2,689
)
 

 
(1,341
)
 
(95,960
)
Net income

 
702

 

 
42,761

 

 
22,340

 

 
8,291

 

 
2,226

 

 
1,152

 
77,472

Other comprehensive income (loss)

 

 

 
6,344

 

 
3,314

 

 
1,230

 

 
330

 

 
171

 
11,389

Balance at September 30, 2018
1,560

 
$
8,004

 
169,221

 
$
1,201,546

 
90,800

 
$
759,168

 
30,910

 
$
15,275

 
8,244

 
$
3,541

 
4,158

 
$
1,917

 
$
1,989,451




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



6




Empire State Realty OP, L.P.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(amounts in thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash Flows From Operating Activities
 
 
 
Net income
$
55,570

 
$
77,472

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
135,179

 
121,826

Amortization of non-cash items within interest expense
5,400

 
5,142

Amortization of acquired above- and below-market leases, net
(5,780
)
 
(4,387
)
Amortization of acquired below-market ground leases
5,873

 
5,873

Straight-lining of rental revenue
(13,781
)
 
(16,662
)
Equity based compensation
15,392

 
14,064

Increase (decrease) in cash flows due to changes in operating assets and liabilities:
 
 
 
Security deposits
(25,961
)
 
(4,566
)
Tenant and other receivables
149

 
(3,176
)
Deferred leasing costs
(14,513
)
 
(18,578
)
Prepaid expenses and other assets
19,883

 
20,308

Accounts payable and accrued expenses
(2,970
)
 
(1,181
)
Deferred revenue and other liabilities
23,932

 
(8,732
)
Net cash provided by operating activities
198,373

 
187,403

Cash Flows From Investing Activities
 
 
 
Short-term investments
400,000

 
(400,000
)
Development costs
(2
)
 
(1
)
Additions to building and improvements
(189,666
)
 
(169,622
)
Net cash provided by (used in) investing activities
210,332

 
(569,623
)

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





















7




Empire State Realty OP, L.P.
Condensed Consolidated Statements of Cash Flows (continued)
(unaudited)
(amounts in thousands)

 
Nine Months Ended September 30,
 
2019
 
2018
Cash Flows From Financing Activities
 
 
 
Proceeds from mortgage notes payable

 
160,000

Repayment of mortgage notes payable
(2,829
)
 
(265,688
)
Proceeds from unsecured senior notes

 
335,000

Repayment of unsecured senior notes
(250,000
)
 

Proceeds from the sale of common stock


 
4,749

Deferred financing costs

 
(1,977
)
Distributions
(96,370
)
 
(95,960
)
Net cash (used in) provided by financing activities
(349,199
)
 
136,124

Net increase (decrease) in cash and cash equivalents and restricted cash
59,506

 
(246,096
)
Cash and cash equivalents and restricted cash—beginning of period
270,813

 
530,197

Cash and cash equivalents and restricted cash—end of period
$
330,319

 
$
284,101

 
 
 
 
Reconciliation of Cash and Cash Equivalents and Restricted Cash:
 
 
 
Cash and cash equivalents at beginning of period
$
204,981

 
$
464,344

Restricted cash at beginning of period
65,832

 
65,853

Cash and cash equivalents and restricted cash at beginning of period
$
270,813

 
$
530,197

 
 
 
 
Cash and cash equivalents at end of period
$
293,710

 
$
229,745

Restricted cash at end of period
36,609

 
54,356

Cash and cash equivalents and restricted cash at end of period
$
330,319

 
$
284,101

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
59,173

 
$
56,597

Cash paid for income taxes
$
1,589

 
$
3,690

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Building and improvements included in accounts payable and accrued expenses
$
77,142

 
$
92,506

Write-off of fully depreciated assets
26,516

 
32,059

Derivative instruments at fair values included in prepaid expenses and other assets

 
9,944

Derivative instruments at fair values included in accounts payable and accrued expenses
28,850

 

Conversion of limited partners' operating partnership units to ESRT partner's capital

21,654

 
31,660

Right of use assets
29,452

 

Ground lease liabilities
29,452

 


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

8





Empire State Realty OP, L.P.
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," and the "company,” mean Empire State Realty OP, L.P. and its consolidated subsidiaries.
Empire State Realty OP, L.P. (the "Operating Partnership") is the entity through which Empire State Realty Trust, Inc. (“ESRT”), a self-administered and self-managed real estate investment trust ("REIT"), conducts all of its business and owns (either directly or through subsidiaries) substantially all of its assets. We own, manage, operate, acquire and reposition office and retail properties in Manhattan and the greater New York metropolitan area. As of September 30, 2019, our total portfolio contained 10.1 million rentable square feet of office and retail space. We owned 14 office properties (including three long-term ground leasehold interests) encompassing approximately 9.4 million rentable square feet of office space. Nine of these properties are located in the midtown Manhattan market and aggregate approximately 7.6 million rentable square feet of office space, including the Empire State Building. Our Manhattan office properties also contain an aggregate of 511,755 rentable square feet of retail space on their ground floor and/or contiguous levels. Our remaining five office properties are located in Fairfield County, Connecticut and Westchester County, New York, encompassing in the aggregate approximately 1.8 million rentable square feet. The majority of square footage for these five properties is located in densely populated metropolitan communities with immediate access to mass transportation. Additionally, we have entitled land at the Stamford Transportation Center in Stamford, Connecticut, adjacent to one of our office properties, that will support the development of an approximately 380,000 rentable square foot office building and garage. As of September 30, 2019, our portfolio included four standalone retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut, encompassing 205,595 rentable square feet in the aggregate.
We were organized as a Delaware limited partnership on November 28, 2011 and operations commenced upon completion of the initial public offering of ESRT’s Class A common stock and related formation transactions on October 7, 2013. ESRT, as the sole general partner in our company, has responsibility and discretion in the management and control of our company, and our limited partners, in such capacity, have no authority to transact business for, or participate in the management activities, of our company. As of September 30, 2019, ESRT owned approximately 59.2% of our operating partnership units.
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, 2018 Annual Report on Form 10-K, with the exception of the adoption of Financial Accounting Standards Board ("FASB") Topic 842, Lease Accounting on January 1, 2019.

We adopted FASB Topic 842, Lease Accounting, using the modified retrospective approach on January 1, 2019 and elected to apply the transition provisions of the standard at adoption. As such, the prior period amounts presented under Topic 840 were not restated to conform with the 2019 presentation. We adopted the practical expedient in Topic 842, which allows us to avoid separating lease and non-lease rental income. Consequently, all rental income earned pursuant to tenant leases in 2019 is reflected as one category, “Rental Revenue,” in the 2019 consolidated statement of income.
Topic 842 also requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The adoption of this standard resulted in the recognition of right-of-use assets and lease liabilities for our operating leases on our balance sheet of approximately $29.5 million.
In addition, under Topic 842, lessors may only capitalize incremental direct leasing costs. As a result, we no longer capitalize our non-contingent leasing costs and instead expense these costs as incurred. These costs totaled $3.7 million for the nine months ended September 30, 2019.
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

9



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, 2018 contained in our Annual Report on Form 10-K. We do not consider our business to be subject to material seasonal fluctuations, except that our observatory business is subject to tourism seasonality. During the past ten years, approximately 16.0% to 18.0% of our annual observatory 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. We had no VIEs as of September 30, 2019 and December 31, 2018.
We will assess the accounting treatment for each investment we may have in the future. This assessment will include a review of each entity’s organizational agreement to determine which party has what rights and whether those rights are protective or participating. For all VIEs, we will review such agreements in order to determine which party has the power to direct the activities that most significantly impact the entity’s economic performance and benefit. In situations where we or our partner could approve, among other things, the annual budget, or leases that cover more than a nominal amount of space relative to the total rentable space at each property, we would not consolidate the investment as we consider these to be substantive participation rights that result in shared power of the activities that would most significantly impact the performance and benefit of such joint venture investment.
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Non-controlling interests are required to be presented as a separate component of equity in the condensed consolidated balance sheets and in the condensed consolidated statements of income by requiring earnings and other comprehensive income to be attributed to controlling and non-controlling interests.
Accounting Estimates
The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to use estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Significant items subject to such estimates and assumptions include allocation of the purchase price of acquired real estate properties among tangible and intangible assets, determination of the useful life of real estate properties and other long-lived assets, valuation and impairment analysis of commercial real estate properties, right of use assets and other long-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.
Recently Issued or Adopted Accounting Standards
During August 2018, the FASB issued Accounting Standards Update ("ASU") No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force), which contain amendments that align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software

10



(and hosting arrangements that include an internal use software license). Accordingly, for entities in a hosting arrangement that is a service contract, costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. The amendments in ASU No. 2018-15 also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments is permitted, including adoption in any interim period. The amendments in ASU No. 2018-15 should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are evaluating the impact of adopting this new accounting standard on our consolidated financial statements.
During January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which contain amendments that modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. ASU No. 2017-04 should be applied on a prospective basis and the amendments adopted for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are evaluating the impact of adopting this new accounting standard on our consolidated financial statements.
During June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which contains amendments that replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU No. 2016-13 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Earlier adoption as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, is permitted. The amendments must be adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified retrospective approach). We do not anticipate the adoption of this new accounting standard to have a material impact on our consolidated financial statements.
During February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In addition, lessors may only capitalize incremental direct leasing costs. Subsequent amendments to ASU No. 2016-02 also provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component provided that (1) the timing and pattern of transfer are the same for the nonlease components and associated lease component and (2) the lease component, if accounted separately, would be classified as an operating lease.  We adopted this standard and related amendments on January 1, 2019 and elected the available practical expedients. Such adoption resulted in the recognition of right-of-use assets and lease liabilities for our operating leases on our balance sheet of approximately $29.5 million.







11



3. Deferred Costs, Acquired Lease Intangibles and Goodwill
Deferred costs, net, consisted of the following as of September 30, 2019 and December 31, 2018 (amounts in thousands):  

 
September 30, 2019
 
December 31, 2018
Leasing costs
$
185,698

 
$
178,120

Acquired in-place lease value and deferred leasing costs
206,026

 
214,550

Acquired above-market leases
49,906

 
52,136

 
441,630

 
444,806

Less: accumulated amortization
(222,651
)
 
(209,839
)
Total deferred costs, net, excluding net deferred financing costs
$
218,979

 
$
234,967


At September 30, 2019 and December 31, 2018, $4.7 million and $6.3 million, respectively, of net deferred financing costs associated with the unsecured revolving credit facility was included in deferred costs, net on the condensed consolidated balance sheet.
Amortization expense related to deferred leasing costs and acquired deferred leasing costs was $6.2 million and $6.3 million for the three months ended September 30, 2019 and 2018, respectively, and $18.3 million and $18.4 million for the nine months ended September 30, 2019 and 2018, respectively. Amortization expense related to acquired lease intangibles was $2.4 million and $2.9 million for the three months ended September 30, 2019 and 2018, respectively, and $8.2 million and $9.3 million for the nine months ended September 30, 2019 and 2018, respectively.
Amortizing acquired intangible assets and liabilities consisted of the following as of September 30, 2019 and December 31, 2018 (amounts in thousands):
 
September 30, 2019
 
December 31, 2018
Acquired below-market ground leases
$
396,916

 
$
396,916

Less: accumulated amortization
(42,392
)
 
(36,518
)
Acquired below-market ground leases, net
$
354,524

 
$
360,398

 
September 30, 2019
 
December 31, 2018
Acquired below-market leases
$
(113,625
)
 
$
(118,462
)
Less: accumulated amortization
70,970

 
66,012

Acquired below-market leases, net
$
(42,655
)
 
$
(52,450
)

    
Rental revenue related to the amortization of below-market leases, net of above-market leases, was $1.7 million and $1.7 million for the three months ended September 30, 2019 and 2018, respectively, and $5.8 million and $4.4 million for the nine months ended September 30, 2019 and 2018, respectively.
As of September 30, 2019, we had goodwill of $491.5 million. Goodwill was allocated $227.5 million to the observatory reportable segment and $264.0 million to the real estate segment.

4. Debt
Debt consisted of the following as of September 30, 2019 and December 31, 2018 (amounts in thousands):

12



 
Principal Balance
 
As of September 30, 2019
 
September 30, 2019
 
December 31, 2018
 
Stated
Rate
 
Effective
Rate
(1)
 
Maturity
Date
(2)
Mortgage debt collateralized by:
 
 
 
 
 
 
 
 
 
Fixed rate mortgage debt
 
 
 
 
 
 
 
 
 
Metro Center
$
90,205

 
$
91,838

 
3.59
%
 
3.67
%
 
11/5/2024

10 Union Square
50,000

 
50,000

 
3.70
%
 
3.97
%
 
4/1/2026

1542 Third Avenue
30,000

 
30,000

 
4.29
%
 
4.53
%
 
5/1/2027

First Stamford Place(3)
180,000

 
180,000

 
4.28
%
 
4.44
%
 
7/1/2027

1010 Third Avenue and 77 West 55th Street
38,440

 
38,995

 
4.01
%
 
4.21
%
 
1/5/2028

10 Bank Street
33,138

 
33,779

 
4.23
%
 
4.36
%
 
6/1/2032

383 Main Avenue
30,000

 
30,000

 
4.44
%
 
4.55
%
 
6/30/2032

1333 Broadway
160,000

 
160,000

 
4.21
%
 
4.29
%
 
2/5/2033

Total mortgage debt
611,783

 
614,612

 
 
 
 
 
 
Senior unsecured notes - exchangeable

 
250,000

 

 

 

Senior unsecured notes:(6)


 


 
 
 
 
 
 
   Series A
100,000

 
100,000

 
3.93
%
 
3.96
%
 
3/27/2025

   Series B
125,000

 
125,000

 
4.09
%
 
4.12
%
 
3/27/2027

   Series C
125,000

 
125,000

 
4.18
%
 
4.21
%
 
3/27/2030

   Series D
115,000

 
115,000

 
4.08
%
 
4.11
%
 
1/22/2028

   Series E
160,000

 
160,000

 
4.26
%
 
4.27
%
 
3/22/2030

   Series F
175,000

 
175,000

 
4.44
%
 
4.45
%
 
3/22/2033

Unsecured revolving credit facility(6)

 

 
(4) 
 
(4) 
 
8/29/2021

Unsecured term loan facility(6)
265,000

 
265,000

 
(5) 
 
(5) 
 
8/29/2022

Total principal
1,676,783

 
1,929,612

 
 
 
 
 
 
Unamortized discount, net of unamortized premium


 
(1,647
)
 
 
 
 
 
 
Deferred financing costs, net

(7,606
)
 
(9,032
)
 
 
 
 
 
 
Total
$
1,669,177

 
$
1,918,933

 
 
 
 
 
 
______________

(1)
The effective rate is the yield as of September 30, 2019, including the effects of debt issuance costs and the amortization of the fair value of debt adjustment.
(2)
Pre-payment is generally allowed for each loan upon payment of a customary pre-payment penalty.
(3)
Represents a $164 million mortgage loan bearing interest at 4.09% and a $16 million loan bearing interest at 6.25%.
(4)
At September 30, 2019, the unsecured revolving credit facility bears a floating rate at 30 day LIBOR plus 1.10%. The rate at September 30, 2019 was 3.12%.
(5)
The unsecured term loan facility bears a floating rate at 30 day LIBOR plus 1.20%. Pursuant to an interest rate swap agreement, the LIBOR rate is fixed at 2.1485% through maturity. The rate at September 30, 2019 was 3.35%.
(6)
At September 30, 2019, we were in compliance with all debt covenants.

Principal Payments
Aggregate required principal payments at September 30, 2019 are as follows (amounts in thousands):
 
Year
Amortization
 
Maturities
 
Total
2019
$
961

 
$

 
$
961

2020
3,938

 

 
3,938

2021
4,090

 

 
4,090

2022
5,628

 
265,000

 
270,628

2023
7,876

 

 
7,876

Thereafter
33,868

 
1,355,422

 
1,389,290

Total
$
56,361

 
$
1,620,422

 
$
1,676,783


 



13



Deferred Financing Costs
Deferred financing costs, net, consisted of the following at September 30, 2019 and December 31, 2018 (amounts in thousands):
 
 
September 30, 2019
 
December 31, 2018
Financing costs
 
$
25,315

 
$
25,315

Less: accumulated amortization
 
(12,991
)
 
(10,027
)
Total deferred financing costs, net
 
$
12,324

 
$
15,288


At September 30, 2019 and December 31, 2018, $4.7 million and $6.3 million, respectively, of net deferred financing costs associated with the unsecured revolving credit facility was included in deferred costs, net on the condensed consolidated balance sheet.
Amortization expense related to deferred financing costs was $0.9 million and $1.1 million for the three months ended September 30, 2019 and 2018, respectively, and $2.9 million and $3.1 million for the nine months ended September 30, 2019 and 2018, respectively.

Unsecured Revolving Credit and Term Loan Facility

During August 2017, we entered into an amended and restated senior unsecured revolving credit and term loan facility (the “Facility”) with Bank of America, N.A., as administrative agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC as Joint Lead Arrangers and Joint Bookrunners, Wells Fargo, National Association and Capital One, National Association, as co-syndication agents, and the lenders party thereto.
    
The Facility is in the original principal amount of up to $1.365 billion, which consists of a $1.1 billion revolving credit facility and a $265 million term loan facility. We may request the Facility be increased through one or more increases in the revolving credit facility or one or more increases in the term loan facility or the addition of new pari passu term loan tranches, for a maximum aggregate principal amount not to exceed $1.75 billion.

The initial maturity of the unsecured revolving credit facility is August 2021. We have the option to extend the initial term for up to two additional 6-month periods, subject to certain conditions, including the payment of an extension fee equal to 0.0625% and 0.075% of the then outstanding commitments under the unsecured revolving credit facility on the first and the second extensions, respectively. The term loan facility matures in August 2022. We may prepay the loans under the Facility at any time, subject to reimbursement of the lenders’ breakage and redeployment costs in the case of prepayment of Eurodollar Rate borrowings.

Exchangeable Senior Notes

During August 2014, we issued $250.0 million 2.625% Exchangeable Senior Notes (“2.625% Exchangeable Senior Notes”) that were due on August 15, 2019. The 2.625% Exchangeable Senior Notes were exchangeable into cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at our election. On August 15, 2019, we settled the principal amount of the 2.625% Exchangeable Senior Notes in cash.

For the three and nine months ended September 30, 2019, total interest expense related to the 2.625% Exchangeable Senior Notes was $1.2 million and $6.1 million, respectively, consisting of (i) the contractual interest expense of $0.8 million and $4.1 million, respectively, (ii) the additional non-cash interest expense of $0.3 million and $1.6 million, respectively, relating to the accretion of the debt discount and (iii) the amortization of deferred financing costs of $0.1 million and $0.4 million, respectively. For the three and nine months ended September 30, 2018, total interest expense related to the 2.625% Exchangeable Senior Notes was $2.4 million and $7.3 million, respectively, consisting of (i) the contractual interest expense of $1.6 million and $4.9 million, respectively, (ii) the additional non-cash interest expense of $0.7 million and $2.0 million, respectively, relating to the accretion of the debt discount, and (iii) the amortization of deferred financing costs of $0.1 million and $0.4 million, respectively.



14



5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following as of September 30, 2019 and December 31, 2018 (amounts in thousands):
 
September 30, 2019
 
December 31, 2018
Accrued capital expenditures
$
77,142

 
$
85,242

Accounts payable and accrued expenses
34,328

 
34,585

Interest rate swap agreements liability
28,850

 
5,243

Accrued interest payable
2,851

 
4,990

Due to affiliated companies
30

 
616

     Total accounts payable and accrued expenses
$
143,201

 
$
130,676



6. Financial Instruments and Fair Values
Derivative Financial Instruments
We use derivative financial instruments primarily to manage interest rate risk and such derivatives are not considered speculative. These derivative instruments are typically in the form of interest rate swap and forward agreements and the primary objective is to minimize interest rate risks associated with investing and financing activities. The counterparties of these arrangements are major financial institutions with which we may also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties; however, we currently do not anticipate that any of the counterparties will fail to meet their obligations.
    
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, 2019, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $29.3 million. If we had breached any of these provisions at September 30, 2019, we could have been required to settle our obligations under the agreements at their termination value of $29.3 million.

As of September 30, 2019 and December 31, 2018, we had interest rate LIBOR swaps with an aggregate notional value of $515.0 million and $515.0 million, respectively. The notional value does not represent exposure to credit, interest rate or market risks. As of September 30, 2019, the fair value of our derivative instruments amounted to $(28.8) million which is included in accounts payable and accrued expenses on the condensed consolidated balance sheet. As of December 31, 2018, the fair value of our derivative instruments amounted to $2.5 million which is included in prepaid expenses and other assets and $(5.2) 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 facility and with a forecast refinancing of our exchangeable senior notes.

As of September 30, 2019 and 2018, our cash flow hedges are deemed highly effective and a net unrealized gain (loss) of $(5.9) million and $4.3 million for the three months ended September 30, 2019 and 2018, respectively, and a net unrealized gain (loss) of $(25.4) million and $11.4 million for the nine months ended September 30, 2019 and 2018, respectively, relating to both active and terminated hedges of interest rate risk, are reflected in the condensed consolidated statements of comprehensive income. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the debt. We estimate that $(5.6) 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.

15



The table below summarizes the terms of agreements and the fair values of our derivative financial instruments as of September 30, 2019 and December 31, 2018 (dollar amounts in thousands):     
 
 
 
 
September 30, 2019
 
December 31, 2018
Derivative
 
Notional Amount
Receive Rate
Pay Rate
Effective Date
Expiration Date
 
Asset
Liability
 
Asset
Liability
Interest rate swap
 
$
265,000

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

$
(5,594
)
 
$
2,536

$

Interest rate swap
 
125,000

3 Month LIBOR
2.9580%
July 1, 2019
July 1, 2026
 

(11,628
)
 

(2,623
)
Interest rate swap
 
125,000

3 Month LIBOR
2.9580%
July 1, 2019
July 1, 2026
 

(11,628
)
 

(2,620
)
 
 
 
 
 
 
 
 
$

$
(28,850
)
 
$
2,536

$
(5,243
)
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, 2019 and 2018 (amounts in thousands):    
 
 
Three Months Ended
 
Nine Months Ended
Effects of Cash Flow Hedges
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Amount of gain (loss) recognized in other comprehensive income (loss)
 
$
(6,256
)
 
$
3,884

 
$
(25,992
)
 
$
9,827

Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense
 
(319
)
 
(427
)
 
(637
)
 
(1,562
)
The table below shows the effect of our derivative financial instruments designated as cash flow hedges on the condensed consolidated statements of income for the three and nine months ended September 30, 2019 and 2018 (amounts in thousands):
 
 
Three Months Ended
 
Nine Months Ended
Effects of Cash Flow Hedges
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Total interest (expense) presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded
 
$
(19,426
)
 
$
(20,658
)
 
$
(60,712
)
 
$
(58,774
)
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense
 
(319
)
 
(427
)
 
(637
)
 
(1,562
)


Fair Valuation

The estimated fair values at September 30, 2019 and December 31, 2018 were determined by management, using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The fair value of our senior unsecured notes - exchangeable was derived from quoted prices in active markets and is classified as Level 2 since trading volumes are low.

The fair value of derivative instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Although the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our counterparties. The impact of such credit valuation adjustments, determined based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of our derivatives were classified as Level 2 of the fair value hierarchy.


16



The fair value of our mortgage notes payable, senior unsecured notes - Series A, B, C, D, E and F, unsecured term loan facility and ground lease liabilities which are determined using Level 3 inputs, are estimated by discounting the future cash flows using current interest rates at which similar borrowings could be made to us.

The following tables summarize the carrying and estimated fair values of our financial instruments as of September 30, 2019 and December 31, 2018 (amounts in thousands):
 
September 30, 2019
 
 
 
Estimated Fair Value
 
Carrying
Value
 
Total
 
Level 1
 
Level 2
 
Level 3
Interest rate swaps included in prepaid expenses and other assets

$

 
$

 
$

 
$

 
$

Interest rate swaps included in accounts payable and accrued expenses
28,850

 
28,850

 

 
28,850

 

Mortgage notes payable
606,313

 
643,159

 

 

 
643,159

Senior unsecured notes - Series A, B, C, D, E and F
798,347

 
861,245

 

 

 
861,245

Unsecured term loan facility
264,517

 
265,000

 

 

 
265,000

Ground lease liabilities
29,355

 
29,355

 

 

 
29,355

 
December 31, 2018
 
 
 
Estimated Fair Value
 
Carrying
Value
 
Total
 
Level 1
 
Level 2
 
Level 3
Interest rate swaps included in prepaid expenses and other assets

$
2,536

 
$
2,536

 
$

 
$
2,536

 
$

Interest rate swaps included in accounts payable and accrued expenses
5,243

 
5,243

 

 
5,243

 

Mortgage notes payable
608,567

 
597,424

 

 

 
597,424

Senior unsecured notes - Exchangeable
247,930

 
250,625

 

 
250,625

 

Senior unsecured notes - Series A, B, C, D, E and F
798,289

 
795,662

 

 

 
795,662

Unsecured term loan facility
264,147

 
265,000

 

 

 
265,000


Disclosure about the fair value of financial instruments is based on pertinent information available to us as of September 30, 2019 and December 31, 2018. Although we are not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

7. 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, 2019 condensed consolidated statement of income as rental revenue and in our September 30, 2018 condensed consolidated statement of income as tenant expense reimbursement.

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, 2019 are as follows (amounts in thousands):

17



 
Three months ended September 30, 2019
 
Nine months ended September 30, 2019
Fixed payments
$
129,030

 
$
380,647

Variable payments
21,195

 
54,066

Total rental revenue
$
150,225

 
$
434,713



As of September 30, 2019, 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 2038 (amounts in thousands):
Remainder of 2019
$
124,080

2020
496,805

2021
477,068

2022
446,300

2023
419,857

Thereafter
1,954,810

 
$
3,918,920



As of December 31, 2018, 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 2038 (amounts in thousands):
2019
$
485,441

2020
460,127

2021
423,365

2022
391,395

2023
362,738

Thereafter
1,536,461

 
$
3,659,527



The above future minimum lease payments exclude tenant recoveries, amortization of deferred rent receivables and the net accretion of above-below-market lease intangibles. Some leases are subject to termination options generally upon payment of a termination fee. The preceding tables are prepared assuming such options are not exercised.
Lessee
We make payments under ground leases related to three of our properties. Minimum rent is expensed on a straight-line basis over the non-cancellable term of the leases. 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 of September 30, 2019, our balance sheet included $29.4 million and $29.4 million in right-of-use assets and lease liabilities, respectively, that are associated with these three ground leases.

The rate implicit in the lease was not determinable for any of these ground leases and accordingly, we measured the related lease liabilities using discount rates based on estimated incremental borrowing rates. Our estimates required significant judgment given that the lease terms of our ground leases are significantly longer than the terms of borrowings on a fully-collateralized basis and considered factors such as U.S. Treasury rates and our own credit rating.




18



Information relating to the measurement of our lease liabilities as of September 30, 2019 are as follows:
Weighted average remaining lease term (in years)
50.8

Weighted average discount rate
4.49
%
Cash paid for operating leases nine months ended September 30, 2019 (in thousands)
$
1,139



Future minimum lease payments to be paid over the terms of the leases as of September 30, 2019 are as follows (amounts in thousands):
Remainder of 2019
$
380

2020
1,518

2021
1,518

2022
1,518

2023
1,518

Thereafter
68,298

Total undiscounted cash flows
74,750

Present value discount
(45,395
)
Ground lease liabilities
$
29,355



Future minimum lease payments to be paid over the terms of the leases as of December 31, 2018 are as follows (amounts in thousands):
2019
$
1,518

2020
1,518

2021
1,518

2022
1,518

2023
1,518

Thereafter
68,298

 
$
75,888



8. Commitments and Contingencies
Legal Proceedings
Except as described below, as of September 30, 2019, 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 in Empire State Building Associates L.L.C. (“ESBA”), which prior to the initial public offering of our company (the "Offering"), owned the fee title to the Empire State Building, filed an arbitration with the American Arbitration Association against Peter L. Malkin, Anthony E. Malkin, Thomas N. Keltner, Jr., and our subsidiary ESRT MH Holdings LLC, the former supervisor of ESBA, as respondents. The statement of claim (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. These investors had opted out of a prior class action bringing similar claims that was settled with court approval. The 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 for a select number of sessions started in May 2016 and concluded in August 2018. Post-hearing briefing is currently scheduled to be completed by March 2020.
The respondents believe the allegations in the arbitration are entirely without merit, and they intend to continue to defend them vigorously.

19



     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, 2019, we estimate that we will incur approximately $144.2 million of capital expenditures (including tenant improvements and leasing commissions) on our properties pursuant to existing lease agreements. We expect to fund these capital expenditures with operating cash flow, additional property level mortgage financings, our unsecured credit facility, cash on hand and other borrowings. Future property acquisitions may require substantial capital investments for refurbishment and leasing costs. We expect that these financing requirements will be met in a similar fashion.
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, 2019, 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, 2019, management has no plans to remove or alter these properties in a manner that would trigger federal and other applicable regulations for asbestos removal, and accordingly, the obligations to remove the asbestos or asbestos-containing building materials from these properties have indeterminable settlement dates. As such, we are unable to reasonably estimate the fair value of the associated conditional asset retirement obligation. However, ongoing asbestos abatement, maintenance programs and other required documentation are carried out as required and related costs are expensed as incurred.
Other Environmental Matters
Certain of our properties have been inspected for soil contamination due to pollutants, which may have occurred prior to our ownership of these properties or subsequently in connection with its development and/or its use. Required remediation to such properties has been completed, and as of September 30, 2019, management believes that there are no obligations related to environmental remediation other than maintaining the affected sites in conformity with the relevant authority’s mandates and filing the required documents. All such maintenance costs are expensed as incurred. We expect that resolution of the environmental matters relating to the above will not have a material impact on our business, assets, consolidated financial condition, results of operations or liquidity. However, we cannot be certain that we have identified all environmental liabilities at our properties, that all necessary remediation actions have been or will be undertaken at our properties or that we will be indemnified, in full or at all, in the event that such environmental liabilities arise.
Insurance Coverage
We carry insurance coverage on our properties of types and in amounts with deductibles that we believe are in line with coverage customarily obtained by owners of similar properties.
9. Capital
As of September 30, 2019, there were 304,256,572 operating partnership units outstanding, of which 180,149,553, or 59.2%, were owned by ESRT and 124,107,019, or 40.8%, were owned by other partners, including ESRT directors, members of senior management and other employees.
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 ESRT and the 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 ESRT common

20



stock is 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 ESRT 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 ESRT 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 and 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 ESRT Class A common stock available for issuance under the 2019 Plan. In addition, shares of ESRT Class A common stock repurchased on the open market will not be added back to the shares of ESRT Class A common stock available for issuance under the 2019 Plan.
Long-term incentive plan ("LTIP") units are a special class of partnership interests. Each LTIP unit awarded will be deemed equivalent to an award of one share of ESRT 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, we will revalue for tax purposes its assets upon the occurrence of certain specified events, and any increase in valuation from the time of grant until such event will be allocated first to the holders of LTIP units to equalize the capital accounts of such holders with the capital accounts of unitholders. Subject to any agreed upon exceptions, once vested and having achieved parity with unitholders, LTIP units are convertible into Series PR operating partnership units on a one-for-one basis.     
LTIP units subject to time based vesting, whether vested or not, receive the same per unit distributions as operating partnership units, which equal per share dividends (both regular and special) on our common stock. Performance based LTIP units receive 10% of such distributions currently, unless and until such LTIP units are earned based on performance, at which time they will receive the accrued and unpaid 90% and will commence receiving 100% of such distributions thereafter.

Private Perpetual Preferred Units
During September 2019, we commenced an offer to exchange 15,000,000 newly issued Series 2019 Private Perpetual Preferred Units ("Series 2019 Preferred Units") for outstanding Series ES operating partnership units, Series 60 operating partnership units, Series 250 operating partnership units and Series PR operating partnership units on a one-for-one basis, in reliance upon an exemption from registration under Section 3(a)(9) of the Securities Act of 1933, as amended. 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 2019 Preferred Units are not redeemable at the option of the holders and are redeemable at our option only upon the occurrence of certain events involving a change in control and the payment of an amount equal to 200% of such liquidation preference. The offering is set to expire on November 22, 2019.
Distributions
Total distributions paid to OP unitholders were $31.9 million and $95.7 million for the three and nine months ended September 30, 2019, respectively, and $31.9 million and $95.3 million for the three and nine months ended September 30, 2018, respectively. Total distributions paid to preferred unitholders were $0.2 million and $0.7 million for the three and nine months ended September 30, 2019, respectively, and $0.2 million and $0.7 million for the three and nine months ended September 30, 2018, 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 ESRT common stock is authorized for issuance under awards granted pursuant to the 2019 Plan, and as of September 30, 2019, 11.5 million shares of ESRT common stock remain available for future issuance.
In March 2019, we made grants of LTIP units to executive officers under the 2013 Plan. At such time, we granted to executive officers a total of 461,693 LTIP units that are subject to time-based vesting and 1,806,520 LTIP units that are subject to performance-based vesting, with fair market values of $6.4 million for the time-based vesting awards and $12.8 million for the performance-based vesting awards. In March 2019, we made grants of LTIP units and restricted stock to certain other employees under the 2013 Plan. At such time, we granted to certain other employees a total of 61,432 LTIP units and 69,358 shares of restricted stock that are subject to time-based vesting and 113,383 LTIP units that are subject to performance-based

21



vesting, with fair market values of $2.0 million for the time-based vesting awards and $0.9 million for the performance-based vesting awards. The awards subject to time-based vesting vest ratably over four years from January 1, 2019, subject generally to the grantee's continued employment. The first installment vests on January 1, 2020 and the remainder will vest thereafter in three equal annual installments. The vesting of the LTIP units subject to performance-based vesting is based on the achievement of relative total stockholder return hurdles over a three-year performance period, commencing on January 1, 2019. Following the completion of the three-year performance period, our compensation committee will determine the number of LTIP units to which the grantee is entitled based on our performance relative to the performance hurdles set forth in the LTIP unit award agreements the grantee entered into in connection with the award grant. These units then vest in two installments, with the first installment vesting on January 1, 2022 and the second installment vesting on January 1, 2023, subject generally to the grantee's continued employment on those dates.
Our named executive officers can elect to receive their annual incentive bonus in any combination of (i) cash or vested LTIP's at the face amount of such bonus or (ii) time-vesting LTIP's which would vest over three years, subject to continued employment, at 125% of such face amount. In March 2019, we made grants of LTIP units to executive officers under the 2013 Plan in connection with the 2018 bonus election program. We granted to executive officers a total of 334,952 LTIP units that are subject to time based vesting with a fair market value of $4.6 million. Of these LTIP units, 26,056 LTIP units vested immediately on the grant date and 308,896 LTIP units vest ratably over three years from January 1, 2019, subject generally to the grantee's continued employment. The first installment vests on January 1, 2020 and the remainder will vest thereafter in two equal annual installments.
In May 2019, we made grants of LTIP units to our non-employee directors under the 2019 Plan. At such time, we granted a total of 70,746 LTIP units that are subject to time-based vesting with fair market values of $1.0 million. The awards vest ratably over three years from the date of the grant, subject generally to the director's continued service on our Board of Directors.
Share-based compensation is measured at the fair value of the award on the date of grant and recognized as an expense on a straight-line basis over the vesting period. For the performance-based LTIP units, 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 a six-year look-back period.  The expected growth rate of the stock prices over the performance period is determined with consideration of the risk free rate as of the grant date.  For LTIP unit awards that are time-based, the fair value of the awards was estimated based on the fair value of our stock at the grant date discounted for the restriction period during which the LTIP units cannot be redeemed or transferred and the uncertainty regarding if, and when, the book capital account of the LTIP units will equal that of the common units.  For restricted stock awards that are time-based, we estimate the stock compensation expense based on the fair value of the stock at the grant date.
LTIP units and ESRT restricted stock issued during the nine months ended September 30, 2019 were valued at $27.9 million. The weighted-average per unit or share fair value was $9.55 for grants issued in 2019. The per unit or share granted in 2019 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 2.40%, a risk-free interest rate from 2.48% to 2.63%, and an expected price volatility from 17.0% to 22.0%.
No other stock options, dividend equivalents, or stock appreciation rights were issued or outstanding in 2019.
The following is a summary of ESRT restricted stock and LTIP unit activity for the nine months ended September 30, 2019:
 
Restricted Stock
 
LTIP Units
 
Weighted Average Grant Fair Value
Unvested balance at December 31, 2018
91,158

 
5,702,821

 
$
9.68

Vested
(35,724
)
 
(598,402
)
 
15.98

Granted
69,358

 
2,848,726

 
9.55

Forfeited or unearned
(5,762
)
 
(1,972,548
)
 
7.34

Unvested balance at September 30, 2019
119,030

 
5,980,597

 
$
9.72



22



The LTIP unit and ESRT restricted stock awards will immediately vest upon the later of (i) the date the grantee attains the age of 60 and (ii) the date on which grantee has first completed ten years of continuous service with our company or its affiliates. For award agreements that qualify, we recognize noncash compensation expense on the grant date for the time-based awards and ratably over the vesting period for the performance-based awards, and accordingly, we recognized $0.3 million and $1.8 million for the three and nine months ended September 30, 2019, respectively, and $0.4 million and $1.7 million for the three and nine months ended September 30, 2018, respectively. Unrecognized compensation expense was $1.4 million at September 30, 2019, which will be recognized over a weighted average period of 2.3 years.
For the remainder of the LTIP unit and ESRT restricted stock awards, we recognize noncash compensation expense ratably over the vesting period, and accordingly, we recognized noncash compensation expense of $3.4 million and $13.6 million for the three and nine months ended September 30, 2019, respectively, and $4.5 million and $12.4 million for the three and nine months ended September 30, 2018, respectively. Unrecognized compensation expense was $33.8 million at September 30, 2019, which will be recognized over a weighted average period of 2.3 years.

Earnings Per Unit
Earnings per unit for the three and nine months ended September 30, 2019 and 2018 is computed as follows (amounts in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Numerator:
 
 
 
 
 
 
 
Net income
$
26,784

 
$
29,230

 
$
55,570

 
$
77,472

Private perpetual preferred unit distributions
(234
)
 
(234
)
 
(702
)
 
(702
)
Earnings allocated to unvested units
(243
)
 
(212
)
 
(646
)
 
(586
)
Net income attributable to common unitholders - basic and diluted
$
26,307

 
$
28,784

 
$
54,222

 
$
76,184

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average units outstanding - basic
298,151

 
297,478

 
298,117

 
297,180

Effect of dilutive securities:
 
 
 
 
 
 
 
  Stock-based compensation plans


 

 

 
1

Weighted average units outstanding - diluted
298,151

 
297,478

 
298,117

 
297,181

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.09

 
$
0.10

 
$
0.18

 
$
0.26

Diluted
$
0.09

 
$
0.10

 
$
0.18

 
$
0.26


There were 452,457 and 288,053 antidilutive shares and LTIP units for the three and nine months ended September 30, 2019, respectively, and 541,947 and 458,698 antidilutive shares and LTIP units for the three and nine months ended September 30, 2018, respectively.

10. Related Party Transactions
Supervisory Fee Revenue

We earned supervisory fees from entities affiliated with Anthony E. Malkin, our Chairman and Chief Executive Officer, of $0.2 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively, and $0.7 million and $0.9 million for the nine months ended September 30, 2019 and 2018, respectively. These fees are included within third-party management and other fees.


23




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, 2019 and 2018, respectively, and $0.2 million and $0.3 million for the nine months ended September 30, 2019 and 2018, respectively. These fees are included within third-party management and other fees.
Other
We receive rent generally at market rental rate for 5,351 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, 2019 and 2018, respectively, and $0.2 million and $0.3 million for the nine months ended September 30, 2019 and 2018, respectively.
One of ESRT's directors, James D. Robinson IV, is a general partner in an investment fund, which owns more than a 10% economic and voting interest in one of our tenants, OnDeck Capital, with an annualized rent of $4.6 million as of September 30, 2019.
11. Segment Reporting
We have identified two reportable segments: (1) real estate and (2) observatory. Our real estate segment includes all activities related to the ownership, management, operation, acquisition, redevelopment, repositioning and disposition of our 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 rent as if the sales or rent were to third parties, that is, at current market prices.

24



The following tables provide components of segment profit for each segment for the three and nine months ended September 30, 2019 and 2018 (amounts in thousands):

 
 
Three Months Ended September 30, 2019
 
 
Real Estate
 
Observatory
 
Intersegment Elimination
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
150,225

 
$

 
$

 
$
150,225

Intercompany rental revenue
 
23,242

 

 
(23,242
)
 

Observatory revenue
 

 
37,575

 

 
37,575

Lease termination fees
 
2,361

 

 

 
2,361

Third-party management and other fees
 
304

 

 

 
304

Other revenue and fees
 
2,408

 

 

 
2,408

Total revenues
 
178,540

 
37,575

 
(23,242
)
 
192,873

Operating expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
47,894

 

 

 
47,894

Intercompany rent expense
 

 
23,242

 
(23,242
)
 

Ground rent expense
 
2,331

 

 

 
2,331

General and administrative expenses
 
14,421

 

 

 
14,421

Observatory expenses
 

 
9,089

 

 
9,089

Real estate taxes
 
29,599

 

 

 
29,599

Depreciation and amortization
 
44,253

 
7

 

 
44,260

Total operating expenses
 
138,498

 
32,338

 
(23,242
)
 
147,594

Total operating income
 
40,042

 
5,237

 

 
45,279

Other income (expense):

 
 
 
 
 
 
 
 
Interest income
 
2,269

 

 

 
2,269

Interest expense
 
(19,426
)
 

 

 
(19,426
)
Income before income taxes
 
22,885

 
5,237

 

 
28,122

Income tax expense
 
(267
)
 
(1,071
)
 

 
(1,338
)
Net income
 
$
22,618

 
$
4,166

 
$

 
$
26,784

Segment assets
 
$
3,659,592

 
$
265,725

 
$

 
$
3,925,317

Expenditures for segment assets
 
$
42,901

 
$
18,375

 
$

 
$
61,276





25



 
 
Three Months Ended September 30, 2018
 
 
Real Estate
 
Observatory
 
Intersegment Elimination
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
123,621

 
$

 
$

 
$
123,621

Intercompany rental revenue
 
23,805

 

 
(23,805
)
 

Tenant expense reimbursement
 
18,627

 

 

 
18,627

Observatory revenue
 

 
40,241

 

 
40,241

Lease termination fees
 
1,185

 

 

 
1,185

Third-party management and other fees
 
312

 

 

 
312

Other revenue and fees
 
2,416

 

 

 
2,416

Total revenues
 
169,966

 
40,241

 
(23,805
)
 
186,402

Operating expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
42,772

 

 

 
42,772

Intercompany rent expense
 

 
23,805

 
(23,805
)
 

Ground rent expense
 
2,331

 

 

 
2,331

General and administrative expenses
 
13,148

 

 

 
13,148

Observatory expenses
 

 
8,854

 

 
8,854

Real estate taxes
 
28,284

 

 

 
28,284

Depreciation and amortization
 
42,458

 
17

 

 
42,475

Total operating expenses
 
128,993

 
32,676

 
(23,805
)
 
137,864

Total operating income
 
40,973

 
7,565

 

 
48,538

Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
3,485

 

 

 
3,485

Interest expense
 
(20,658
)
 

 

 
(20,658
)
Income before income taxes
 
23,800

 
7,565

 

 
31,365

Income tax expense
 
(277
)
 
(1,858
)
 

 
(2,135
)
Net income
 
$
23,523

 
$
5,707

 
$

 
$
29,230

Segment assets
 
$
3,904,454

 
$
262,378

 
$

 
$
4,166,832

Expenditures for segment assets
 
$
52,613

 
$
14,507

 
$

 
$
67,120


26



 
 
Nine Months Ended September 30, 2019
 
 
Real Estate
 
Observatory
 
Intersegment Elimination
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
434,713

 
$

 
$

 
$
434,713

Intercompany rental revenue
 
58,754

 

 
(58,754
)
 

Observatory revenue
 

 
91,039

 

 
91,039

Lease termination fees
 
3,112

 

 

 
3,112

Third-party management and other fees
 
955

 

 

 
955

Other revenue and fees
 
6,591

 

 

 
6,591

Total revenues
 
504,125

 
91,039

 
(58,754
)
 
536,410

Operating expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
131,076

 

 

 
131,076

Intercompany rent expense
 

 
58,754

 
(58,754
)
 

Ground rent expense
 
6,994

 

 

 
6,994

General and administrative expenses
 
44,445

 

 

 
44,445

Observatory expenses
 

 
25,024

 

 
25,024

Real estate taxes
 
86,098

 

 

 
86,098

Depreciation and amortization
 
135,157

 
22

 

 
135,179

Total operating expenses
 
403,770

 
83,800

 
(58,754
)
 
428,816

Total operating income
 
100,355

 
7,239

 

 
107,594

Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
9,907

 

 

 
9,907

Interest expense
 
(60,712
)
 

 

 
(60,712
)
Income before income taxes
 
49,550

 
7,239

 

 
56,789

Income tax expense
 
(762
)
 
(457
)
 

 
(1,219
)
Net income
 
$
48,788

 
$
6,782

 
$

 
$
55,570

Expenditures for segment assets
 
$
134,865

 
$
46,703

 
$

 
$
181,568


27



 
 
Nine Months Ended September 30, 2018
 
 
Real Estate
 
Observatory
 
Intersegment Elimination
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
369,970

 
$

 
$

 
$
369,970

Intercompany rental revenue
 
59,356

 

 
(59,356
)
 

Tenant expense reimbursement
 
52,626

 

 

 
52,626

Observatory revenue
 

 
96,691

 

 
96,691

Lease termination fees
 
2,164

 

 

 
2,164

Third-party management and other fees
 
1,151

 

 

 
1,151

Other revenue and fees
 
9,600

 

 

 
9,600

Total revenues
 
494,867

 
96,691

 
(59,356
)
 
532,202

Operating expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
126,375

 

 

 
126,375

Intercompany rent expense
 

 
59,356

 
(59,356
)
 

Ground rent expense
 
6,994

 

 

 
6,994

General and administrative expenses
 
39,001

 

 

 
39,001

Observatory expenses
 

 
23,868

 

 
23,868

Real estate taxes
 
81,771

 

 

 
81,771

Depreciation and amortization
 
121,775

 
51

 

 
121,826

Total operating expenses
 
375,916

 
83,275

 
(59,356
)
 
399,835

Total operating income
 
118,951

 
13,416

 

 
132,367

Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
7,209

 

 

 
7,209

Interest expense
 
(58,774
)
 

 

 
(58,774
)
Income before income taxes
 
67,386

 
13,416

 

 
80,802

Income tax expense
 
(852
)
 
(2,478
)
 

 
(3,330
)
Net income
 
$
66,534

 
$
10,938

 
$

 
$
77,472

Expenditures for segment assets
 
$
148,429

 
$
41,930

 
$

 
$
190,359


12. Subsequent Events
None.
    


28



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, 2018.
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:

changes in our industry, the real estate markets, either nationally or in Manhattan or the greater New York metropolitan area;
reduced demand for office or retail space;
decreased rental rates or increased vacancy rates;
defaults on, early terminations of, or non-renewal of leases by tenants;
insolvency of a major tenant or a significant number of smaller tenants;
our failure to redevelop and reposition properties, or to execute any planned capital project, successfully or on the anticipated timeline or at the anticipated costs;
difficulties in identifying properties to acquire and completing acquisitions;
risks of real estate development and capital projects, including construction delays and cost overruns;
inability to manage our properties and our growth effectively;
departure of any of our key personnel and challenges in succession transition;
declining real estate valuations and impairment charges;
termination or expiration of our ground leases;
changes in real estate and zoning laws and increases in real property tax rates;
increased operating costs;
misunderstanding of our competition;
new office or observatory development in our market;
fluctuations in attendance at the observatory;
changes in domestic or international tourism, including geopolitical events and currency exchange rates;
changes in technology and market competition, which affect utilization of our broadcast or other facilities;
changes in our business strategy;
resolution of legal proceedings involving the company;
general volatility of the capital and credit markets and the market price of our Class A common stock and our publicly-traded OP Units;
availability and terms of debt and equity capital;
failure to deploy capital effectively;
our leverage;
fluctuations in interest rates;

29



the discontinuance of LIBOR as an index for interest rates and the possible resulting disruption in debt agreements and/or markets;
inability to continue to raise additional debt or equity financing on attractive terms, or at all;
our failure to generate sufficient cash flows to service our outstanding indebtedness;
inability to make distributions to our securityholders in the future;
impact of changes in governmental regulations, tax law and rates and similar matters;
failure to continue to qualify as a real estate investment trust, or REIT;
lack, or insufficient amounts, of insurance;
a future terrorist event in New York City or the U.S.;
environmental uncertainties and risks related to climate change, rising sea levels, adverse weather conditions and natural disasters;
inability to comply with applicable laws, rules and regulations;
damages resulting from security breaches through cyberattacks, cyber intrusions or otherwise, as well as other significant disruptions of our technology (IT) networks related systems; and
other factors discussed under “Item 1A, Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018 and additional factors that may be contained in any filing we make with the SEC, including Part II, Item 1A of our Quarterly Reports on Form 10-Q.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of 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. The risks set forth above are not exhaustive. For a further discussion of these and other factors that could impact our future results, performance or transactions, see the sections entitled “Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018 which we filed with the SEC. You should not place undue reliance on any forward-looking statements, which are based only on information currently available to us.    
Overview

Empire State Realty OP, L.P. is the entity through which Empire State Realty Trust, Inc. (“ESRT”), a self-administered and self-managed real estate investment trust ("REIT"), conducts all of its business and owns (either directly or through subsidiaries) substantially all of its assets. We own, manage, operate, acquire and reposition office and retail properties in Manhattan and the greater New York metropolitan area.
Highlights for the three months ended September 30, 2019 included:
Achieved net income of $26.6 million and Core Funds From Operations of $71.8 million.
Occupancy and leased percentages at September 30, 2019:
Total portfolio was 89.4% occupied; including signed leases not commenced (“SLNC”), the total portfolio was 91.7% leased.
Manhattan office portfolio (excluding the retail component of these properties) was 89.6% occupied; including SLNC, the Manhattan office portfolio was 92.1% leased.
Retail portfolio was 90.7% occupied; including SLNC, the retail portfolio was 94.3% leased.
Empire State Building was 93.4% occupied; including SLNC, was 95.3% leased.
Signed 25 leases, representing 388,686 rentable square feet across the total portfolio, and achieved a 23.9% increase in mark-to-market cash rent over previous fully escalated cash rents portfolio-wide on new, renewal, and expansion leases.
Signed 13 new leases representing 266,769 rentable square feet for the Manhattan office portfolio (excluding the retail component of these properties), and achieved an increase of 32.6% in mark-to-market cash rent over previous fully escalated cash rents.
Empire State Building Observatory revenue for the third quarter 2019 decreased by 6.6% to $37.6 million from $40.2 million in the third quarter 2018. Net operating income for the third quarter 2019 decreased by 9.2% to $28.5 million

30



from $31.4 million in the third quarter 2018. As a reminder, the 102nd floor observation deck was closed through the third quarter 2019 and opened on October 12, 2019.
Declared a dividend of $0.105 per share.
As of September 30, 2019, our total portfolio contained 10.1 million rentable square feet of office and retail space. We owned 14 office properties (including three long-term ground leasehold interests) encompassing approximately 9.4 million rentable square feet of office space. Nine of these properties are located in the midtown Manhattan market and aggregate approximately 7.6 million rentable square feet of office space, including the Empire State Building. Our Manhattan office properties also contain an aggregate of 511,755 rentable square feet of premier retail space on their ground floor and/or contiguous levels. Our remaining five office properties are located in Fairfield County, Connecticut and Westchester County, New York, encompassing in the aggregate approximately 1.8 million rentable square feet. The majority of square footage for these five properties is located in densely populated metropolitan communities with immediate access to mass transportation. Additionally, we have entitled land at the Stamford Transportation Center in Stamford, Connecticut, adjacent to one of our office properties, that will support the development of an approximately 380,000 rentable square foot office building and garage. As of September 30, 2019, our portfolio included four standalone retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut, encompassing 205,595 rentable square feet in the aggregate.
The Empire State Building is our flagship property. The Empire State Building provides us with a diverse source of revenue through its office and retail leases, observatory operations and broadcasting licenses and related leased space. Our observatory operations are a separate reporting segment. Our observatory operations are subject to regular patterns of tourist activity in Manhattan. During the past ten years, 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.
The components of the Empire State Building revenue are as follows (dollars in thousands):
 
Nine Months Ended September 30,
 
2019
 
2018
Office leases
$
106,848

 
45.1
%
 
$
98,597

 
40.9
%
Retail leases
5,566

 
2.4
%
 
5,549

 
2.3
%
Tenant reimbursements & other income
21,356

 
9.0
%
 
21,660

 
9.0
%
Observatory operations
91,039

 
38.5
%
 
96,691

 
40.1
%
Broadcasting licenses and leases
11,945

 
5.0
%
 
18,501

 
7.7
%
Total
$
236,754

 
100.0
%
 
$
240,998

 
100.0
%
    
We have been executing on a comprehensive redevelopment and repositioning strategy of our Manhattan office properties. This strategy is designed to improve the overall value and attractiveness of our properties and has contributed significantly to our tenant repositioning efforts, which seek to increase our occupancy; raise our rental rates; increase our rentable square feet; increase our aggregate rental revenue; lengthen our average lease term; increase our average lease size; and improve our tenant credit quality. The related improvements include restored, renovated and upgraded or new lobbies; elevator modernization; renovated public areas and bathrooms; refurbished or new windows; upgrade and standardization of retail storefront and signage; façade restorations; modernization of building-wide systems; and enhanced tenant amenities. We have also aggregated smaller spaces in order to offer larger blocks of office space, including multiple floors, that are attractive to larger, higher credit-quality tenants and have offered new, pre-built suites with improved layouts. This strategy has shown what we believe to be attractive results to date, and we believe has the potential to improve our operating margins and cash flows in the future. We believe we will continue to enhance our tenant base and improve rents as our pre-redevelopment leases continue to expire and be re-leased. From 2002 through September 30, 2019, we have invested a total of approximately $903.2 million (excluding tenant improvement costs and leasing commissions) in our Manhattan office properties pursuant to this program. We intend to continue to fund these capital improvements through a combination of operating cash flow, cash on hand, and borrowings.
During the second quarter 2017, we commenced a multi-year capital project at the Empire State Building which we believe will improve convenience for office tenants and their visitors, increase the value of our 34th Street facing retail space, enhance the Observatory visitor experience, and increase Observatory revenue per capita.

31



We anticipate that we will invest approximately $165 million in total over three years to complete all phases of this project. Expenditures, which began during the second quarter 2017, were $137.8 million through September 30, 2019. This investment is an outcome of continually looking at ways to innovate and enhance the office and retail tenant and visitor experience at the Empire State Building.
We continue our work on the 102nd floor component of the Observatory upgrade program and closed the 102nd floor in January 2019. The elevator servicing the 102nd floor Observatory was closed to visitors, during the first quarter of 2018, for the planned replacement of the original machinery and a new, higher speed glass elevator. Revenue for the 102nd floor observatory was $11.4 million in 2017 and $8.6 million in 2018.
The Greater New York Metropolitan Area office market is soft, and we compete with properties that have been redeveloped recently or have planned redevelopment.  We expect to spend approximately $40 million over 2018 through 2020 on these well-maintained and well-located properties’ common areas and amenities to ensure competitiveness and protect our market position. Expenditures, which began during the second quarter 2018, were $25.5 million through September 30, 2019.
As of September 30, 2019, excluding principal amortization, we have no debt maturing until 2022, and we had total debt outstanding of approximately $1.7 billion, with a weighted average interest rate of 4.03% (excluding discount), a weighted average maturity of 8.5 years and 100.0% of which is fixed-rate indebtedness. As of September 30, 2019, we had cash and cash equivalents and short-term investments of $293.7 million. Our consolidated net debt to total market capitalization was approximately 24.1% as of September 30, 2019.


Results of Operations
Overview
The discussion below relates to our financial condition and results of operations for the three and nine months ended September 30, 2019 and 2018, respectively.
Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018
The following table summarizes our historical results of operations for the three months ended September 30, 2019 and 2018 (dollars in thousands):

32



 
Three Months Ended September 30,
 
 
 
 
 
2019
 
2018
 
Change
 
%
Revenues:
 
 
 
 
 
 
 
Rental revenue
$
150,225

 
$
123,621

 
$
26,604

 
21.5
 %
Tenant expense reimbursement

 
18,627

 
(18,627
)
 
(100.0
)%
Observatory revenue
37,575

 
40,241

 
(2,666
)
 
(6.6
)%
Lease termination fees
2,361

 
1,185

 
1,176

 
99.2
 %
Third-party management and other fees
304

 
312

 
(8
)
 
(2.6
)%
Other revenues and fees
2,408

 
2,416

 
(8
)
 
(0.3
)%
Total revenues
192,873

 
186,402

 
6,471

 
3.5
 %
Operating expenses:
 
 
 
 
 
 
 
Property operating expenses
47,894

 
42,772

 
(5,122
)
 
(12.0
)%
Ground rent expenses
2,331

 
2,331

 

 
 %
General and administrative expenses
14,421

 
13,148

 
(1,273
)
 
(9.7
)%
Observatory expenses
9,089

 
8,854

 
(235
)
 
(2.7
)%
Real estate taxes
29,599

 
28,284

 
(1,315
)
 
(4.6
)%
Depreciation and amortization
44,260

 
42,475

 
(1,785
)
 
(4.2
)%
Total operating expenses
147,594

 
137,864

 
(9,730
)
 
(7.1
)%
Operating income
45,279

 
48,538

 
(3,259
)
 
(6.7
)%
Other income (expense):
 
 
 
 
 
 
 
Interest income
2,269

 
3,485

 
(1,216
)
 
(34.9
)%
Interest expense
(19,426
)
 
(20,658
)
 
1,232

 
6.0
 %
Income before income taxes
28,122

 
31,365

 
(3,243
)
 
(10.3
)%
Income tax expense
(1,338
)
 
(2,135
)
 
797

 
37.3
 %
Net income
26,784

 
29,230

 
(2,446
)
 
(8.4
)%
Private perpetual preferred unit distributions
(234
)
 
(234
)
 

 
 %
Net income attributable to common unitholders
$
26,550

 
$
28,996

 
$
(2,446
)
 
(8.4
)%


Rental Revenue and Tenant Expense Reimbursement

We adopted FASB Topic 842 using the modified retrospective approach as of January 1, 2019 and elected to apply the transition provisions of the standard at adoption. As such, the prior period amounts presented under ASC 840 were not restated to conform with the 2019 presentation. We adopted the practical expedient in Topic 842, which allowed us to avoid separating lease and non-lease rental income. Consequently, all rental income earned pursuant to tenant leases in 2019 is reflected as one category, “Rental Revenue,” in the 2019 consolidated statement of income. The following table reflects the components of 2019 rental revenue:
 
Three Months Ended
 
September 30, 2019
Rental revenue
 
Base rent
$
129,098

Billed tenant expense reimbursement
21,127

Total rental revenue
$
150,225


We believe the preceding table of the components of rental revenue is not, and is not intended to be, a presentation in accordance with GAAP. It is provided here based on our understanding that such information is frequently used by management, investors, securities analysts and other interested parties to evaluate our performance.

The increase in base rent revenue was attributable to increased rental rates, partially offset by decreased broadcast revenues and holdover rent.

33




The increase in billed tenant expense reimbursement was primarily due to reimbursements related to higher property operating expenses and real estate tax expense.

 Observatory Revenue
Observatory revenues were lower primarily driven by the closure of the 102nd floor observation deck as part of the Observatory upgrade program and a visitation decline, partially offset by improved pricing.
Lease Termination Fees
Higher lease termination fees were earned in the three months ended September 30, 2019 compared to the three months ended September 30, 2018.
Third-Party Management and Other Fees
Third-party management and other fees were consistent with the three months ended September 30, 2018.
Other Revenues and Fees
Other revenues and fees were consistent with the three months ended September 30, 2018.
Property Operating Expenses
The increase in property operating expenses was primarily due to higher repair and labor costs partially offset by lower utility costs.

Ground Rent Expenses

Ground rent expense was consistent with the three months ended September 30, 2018.
General and Administrative Expenses
The increase in general and administrative expenses was primarily due to higher leasing costs which were previously capitalized prior to our adoption of Topic 842, Lease Accounting, on January 1, 2019, which requires that non-contingent leasing costs be expensed as incurred.
Observatory Expenses
Observatory expenses increased primarily due to higher information technology consulting fees.
Real Estate Taxes
The increase in real estate taxes was primarily due to higher assessed values for multiple properties.

Depreciation and Amortization
    
The increase in depreciation and amortization was attributable to additional depreciation on assets newly placed in service subsequent to the third quarter 2018.

Interest Income
    
The decrease in interest income was due to reduced levels of short-term time deposits during the three months ended September 30, 2019.
Interest Expense
In August 2019, we settled the $250.0 million principal amount of the 2.645% Exchangeable Senior Notes in cash, which resulted in lower interest expense for the three months ended September 30, 2019.


34



Income Taxes
The decrease in income tax expense was attributable to lower revenues and higher operating expenses for the Observatory segment.
Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018
The following table summarizes our historical results of operations for the nine months ended September 30, 2019 and 2018 (dollars in thousands):
 
Nine Months Ended September 30,
 
 
 
 
 
2019
 
2018
 
Change
 
%
Revenues:
 
 
 
 
 
 
 
Rental revenue
$
434,713

 
$
369,970

 
$
64,743

 
17.5
 %
Tenant expense reimbursement

 
52,626

 
(52,626
)
 
(100.0
)%
Observatory revenue
91,039

 
96,691

 
(5,652
)
 
(5.8
)%
Lease termination fees

3,112

 
2,164

 
948

 
43.8
 %
Third-party management and other fees
955

 
1,151

 
(196
)
 
(17.0
)%
Other revenues and fees
6,591

 
9,600

 
(3,009
)
 
(31.3
)%
Total revenues
536,410

 
532,202

 
4,208

 
0.8
 %
Operating expenses:
 
 
 
 
 
 
 
Property operating expenses
131,076

 
126,375

 
(4,701
)
 
(3.7
)%
Ground rent expenses
6,994

 
6,994

 

 
 %
General and administrative expenses
44,445

 
39,001

 
(5,444
)
 
(14.0
)%
Observatory expenses
25,024

 
23,868

 
(1,156
)
 
(4.8
)%
Real estate taxes
86,098

 
81,771

 
(4,327
)
 
(5.3
)%
Depreciation and amortization
135,179

 
121,826

 
(13,353
)
 
(11.0
)%
Total operating expenses
428,816

 
399,835

 
(28,981
)
 
(7.2
)%
Operating income
107,594

 
132,367

 
(24,773
)
 
(18.7
)%
Other income (expense):
 
 
 
 
 
 
 
Interest income
9,907

 
7,209

 
2,698

 
37.4
 %
Interest expense
(60,712
)
 
(58,774
)
 
(1,938
)
 
(3.3
)%
Income before income taxes
56,789

 
80,802

 
(24,013
)
 
(29.7
)%
Income tax expense
(1,219
)
 
(3,330
)
 
2,111

 
63.4
 %
Net income
55,570

 
77,472

 
(21,902
)
 
(28.3
)%
Private perpetual preferred unit distributions
(702
)
 
(702
)
 

 
 %
Net income attributable to common unitholders
$
54,868

 
$
76,770

 
$
(21,902
)
 
(28.5
)%
 
Rental Revenue and Tenant Expense Reimbursement

We adopted FASB Topic 842 using the modified retrospective approach as of January 1, 2019 and elected to apply the transition provisions of the standard at adoption. As such, the prior period amounts presented under ASC 840 were not restated to conform with the 2019 presentation. We adopted the practical expedient in Topic 842, which allowed us to avoid separating lease and non-lease rental income. Consequently, all rental income earned pursuant to tenant leases in 2019 is reflected as one category, “Rental Revenue,” in the 2019 consolidated statement of income. The following table reflects the components of 2019 rental revenue:
 
Nine Months Ended
 
September 30, 2019
Rental revenue
 
Base rent
$
380,902

Billed tenant expense reimbursement
53,811

Total rental revenue
$
434,713


35




We believe the preceding table of the components of rental revenue is not, and is not intended to be, a presentation in accordance with GAAP. It is provided here based on our understanding that such information is frequently used by management, investors, securities analysts and other interested parties to evaluate our performance.

The increase in base rent revenue was attributable to increased rental rates, partially offset by lower broadcast revenues and holdover rent.

The increase in billed tenant expense reimbursement was primarily due to reimbursements related to higher property operating expenses and real estate tax expense.

 Observatory Revenue
Observatory revenues were lower primarily driven by the closure of the 102nd floor observation deck as part of the Observatory upgrade program and visitor decline, partially offset by improved pricing.
Lease Termination Fees
Higher termination fees were earned in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.
Third-Party Management and Other Fees
The decrease reflects lower management fee income due to fewer properties under management.
Other Revenues and Fees
The decrease in other revenues and fees is primarily due to a $2.8 million settlement with a former broadcast tenant which was received in the nine months ended September 30, 2018.
Property Operating Expenses
The increase in property operating expenses was primarily due to higher repair and labor costs partially offset by lower utility costs.

Ground Rent Expenses
Ground rent expense was consistent with 2018.
General and Administrative Expenses
The increase in general and administrative expenses was primarily due to higher equity compensation expenses as well as higher leasing costs which were previously capitalized prior to our adoption of Topic 842, Lease Accounting on January 1, 2019, which requires that non-contingent leasing costs be expensed as incurred.
Observatory Expenses
Observatory expenses increased primarily due to higher information technology consulting fees and higher marketing costs.
Real Estate Taxes
The increase in real estate taxes was primarily due to higher assessed values for multiple properties.

Depreciation and Amortization
    
The increase in depreciation and amortization was attributable to additional depreciation on assets newly placed in service during the past year as well as the acceleration of depreciation of $2.0 million in connection with a partial termination agreement.





36



Interest Income
    
The increase in interest income was primarily due to higher rates and the timing of short-term time deposits during the nine months ended September 30, 2018.
Interest Expense
Interest expense increased due to higher outstanding principal balances.
Income Taxes
The decrease in income tax expense was attributable to lower revenues and higher operating expenses for the Observatory segment.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, including lease-up costs, fund our redevelopment and repositioning programs, acquire properties, make distributions to our securityholders and fulfill other general business needs. Based on the historical experience of our management and our business strategy, in the foreseeable future we anticipate we will generate positive cash flows from operations. In order for ESRT to qualify as a REIT, ESRT is required under the Internal Revenue Code of 1986 to distribute to its stockholders, on an annual basis, at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We expect to make quarterly distributions to our securityholders.
While we may be able to anticipate and plan for certain liquidity needs, there may be unexpected increases in uses of cash that are beyond our control and which would affect our financial condition and results of operations. For example, we may be required to comply with new laws or regulations that cause us to incur unanticipated capital expenditures for our properties, thereby increasing our liquidity needs. Even if there are no material changes to our anticipated liquidity requirements, our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or needed. Our primary sources of liquidity will generally consist of cash on hand and cash generated from our operating activities, debt issuances and unused borrowing capacity under our unsecured revolving credit facility. We expect to meet our short-term liquidity requirements, including distributions, operating expenses, working capital, debt service, and capital expenditures from cash flows from operations, cash on hand, debt issuances, and available borrowing capacity under our unsecured revolving credit facility. The availability of these borrowings is subject to the conditions set forth in the applicable loan agreements. We expect to meet our long-term capital requirements, including acquisitions, redevelopments and capital expenditures through our cash flows from operations, cash on hand, our unsecured revolving credit facility, mortgage financings, debt issuances, common and/or preferred equity issuances and asset sales. Our properties require periodic investments of capital for individual lease related tenant improvements allowances, general capital improvements and costs associated with capital expenditures. Our overall leverage will depend on our mix of investments and the cost of leverage. ESRT's charter does not restrict the amount of leverage that we may use.
At September 30, 2019, we had approximately $293.7 million available in cash and cash equivalents and short-term investments and there was $1.1 billion available under our unsecured revolving credit facility.
Through August 2021, Q REIT Holding LLC, a Qatar Financial Centre limited liability company and a wholly owned
subsidiary of the Qatar Investment Authority, a governmental authority of the State of Qatar (“QREIT”, together with any eligible transferee, “QIA”) will have a right of first offer to co-invest with us as a joint venture partner in real estate investment opportunities initiated by us where we have elected, at our discretion, to seek out a joint venture partner in real estate investment opportunities. The right of first offer period will be extended for 30 months so long as at least one joint venture transaction is consummated by us and QIA during the initial term, and will be extended for a further 30-month term if at least one more joint venture transaction is consummated during such initial extension period.
As of September 30, 2019, we had approximately $1.7 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 4.03% (excluding discounts) and a weighted average maturity of 8.5 years. As of September 30, 2019, exclusive of principal amortization, we have no debt maturing until 2022. Our consolidated net debt to total market capitalization was approximately 24.1% as of September 30, 2019.


37



Unsecured Revolving Credit and Term Loan Facility
During August 2017, we entered into an amended and restated senior unsecured revolving credit and term loan facility. This unsecured revolving credit and term loan facility is comprised of a $1.1 billion revolving credit facility and a $265 million term loan facility. The unsecured revolving credit and term loan facility contains an accordion feature that would allow us to increase the maximum aggregate principal amount to $1.75 billion under specified circumstances.
The initial maturity of the unsecured revolving credit facility is August 2021. We have the option to extend the initial term for up to two additional six-month periods, subject to certain conditions, including the payment of an extension fee equal to 0.0625% and 0.075% of the then outstanding commitments under the unsecured revolving credit facility on the first and the second extensions, respectively. The term loan facility matures on August 2022.
The unsecured revolving credit facility includes the following financial covenants: (i) maximum leverage ratio of total indebtedness to total asset value (as defined in the agreement) of the loan parties and their consolidated subsidiaries will not exceed 60%, (ii) consolidated secured indebtedness will not exceed 40% of total asset value, (iii) tangible net worth will not be less than $1.2 billion plus 75% of net equity proceeds received by the Operating Partnership (other than proceeds received within ninety days after the redemption, retirement or repurchase of ownership or equity interests in the Operating Partnership up to the amount paid by the Operating Partnership in connection with such redemption, retirement or repurchase, where, the net effect is that the Operating Partnership shall not have increased its net worth as a result of any such proceeds), (iv) adjusted EBITDA (as defined in the unsecured revolving credit facility) to consolidated fixed charges will not be less than 1.50x, (v) the aggregate net operating income with respect to all unencumbered eligible properties to the portion of interest expense attributable to unsecured indebtedness will not be less than 1.75x, and (vi) the ratio of total unsecured indebtedness to unencumbered asset value will not exceed 60%.
As of September 30, 2019, we were in compliance with the above financial covenants (dollars in thousands):
Financial covenant
Required
September 30, 2019
In Compliance
Maximum total leverage
< 60%

26.7
%
Yes
Maximum secured debt
< 40%

9.6
%
Yes
Minimum fixed charge coverage
> 1.50x

4.1x

Yes
Minimum unencumbered interest coverage
> 1.75x

6.3x

Yes
Maximum unsecured leverage
< 60%

20.1
%
Yes
Minimum tangible net worth
$
1,252,954

$
1,833,218

Yes
The unsecured revolving credit facility contains customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates, and requires certain customary financial reports.
The unsecured revolving credit facility contains 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 defined in the agreement for the unsecured credit facility).
Exchangeable Senior Notes
In August 2019, we settled the $250.0 million principal amount of the 2.625% Exchangeable Senior Notes in cash. See Note 4 to our consolidated financial statements.
Leverage Policies
We expect to employ leverage in our capital structure in amounts determined from time to time by ESRT's board of directors. Although ESRT's board of directors has not adopted a policy that limits the total amount of indebtedness that we may incur, we anticipate that ESRT's board of directors will consider a number of factors in evaluating our level of indebtedness from time to time, as well as the amount of such indebtedness that will be either fixed or floating rate. ESRT's charter and bylaws do not limit the amount or percentage of indebtedness that we may incur nor do they restrict the form in which our indebtedness will be taken (including, but not limited to, recourse or non-recourse debt and cross-collateralized debt). Our overall leverage will depend on our mix of investments and the cost of leverage, however, we initially intend to maintain a level of indebtedness consistent with our plan to seek an investment grade credit rating. ESRT's board of directors may from time to time modify our leverage policies in light of the then-current economic conditions, relative costs of debt and equity capital,

38



market values of our properties, general market conditions for debt and equity securities, fluctuations in the market price of ESRT's common stock and our traded OP units, growth and acquisition opportunities and other factors.
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 Renewals
2019
 
2018
Number of leases signed(2)
106

 
117

Total square feet
903,010

 
749,598

Leasing commission costs(3)
$
16,071

 
$
13,223

Tenant improvement costs(3)
52,533

 
48,774

Total leasing commissions and tenant improvement costs(3)
$
68,604

 
$
61,997

Leasing commission costs per square foot(3)
$
17.80

 
$
17.64

Tenant improvement costs per square foot(3)
58.18

 
65.07

Total leasing commissions and tenant improvement costs per square foot(3)
$
75.98

 
$
82.71

Retail Properties(4)
  
Nine Months Ended September 30,
Total New Leases, Expansions, and Renewals
2019
 
2018
Number of leases signed(2)
8

 
4

Total square feet
54,779

 
7,448

Leasing commission costs(3)
$
1,856

 
$
198

Tenant improvement costs(3)
2,214

 
206

Total leasing commissions and tenant improvement costs(3)
$
4,070

 
$
404

Leasing commission costs per square foot(3)
$
33.88

 
$
26.51

Tenant improvement costs per square foot(3)
40.42

 
27.70

Total leasing commissions and tenant improvement costs per square foot(3)
$
74.30

 
$
54.21

_______________
(1)
Excludes an aggregate of 511,755 and 513,437 rentable square feet of retail space in our Manhattan office properties in 2019 and 2018, 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 511,755 and 513,437 rentable square feet of retail space in our Manhattan office properties in 2019 and 2018, respectively. Excludes the Empire State Building broadcasting licenses and observatory operations.
  
Nine Months Ended September 30,
 
2019
 
2018
Total Portfolio
 
 
 
Capital expenditures (1)
$
99,266

 
$
102,920

_______________
(1)
Excludes tenant improvements and leasing commission costs.
As of September 30, 2019, we expect to incur additional costs relating to obligations under existing lease agreements of approximately $144.2 million for tenant improvements and leasing commissions. We intend to fund the tenant improvements

39



and leasing commission costs through a combination of operating cash flow, cash on hand, additional property level mortgage financings and borrowings under the unsecured revolving credit facility.
Capital expenditures are considered part of both our short-term and long-term liquidity requirements. We intend to fund capital improvements through a combination of operating cash flow, cash on hand and borrowings under the unsecured revolving credit facility.
Contractual Obligations
Refer to our Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of our contractual obligations. There have been no material changes, outside the ordinary course of business, to these contractual obligations during the nine months ended September 30, 2019.
Off-Balance Sheet Arrangements
As of September 30, 2019, we did not have any off-balance sheet arrangements.
Distribution Policy
In order for ESRT to qualify as a REIT, it must distribute to its securityholders, on an annual basis, at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, it will be subject to U.S. federal income tax at regular corporate rates to the extent that it distributes less than 100% of its net taxable income (including net capital gains) and will be subject to a 4% nondeductible excise tax on the amount, if any, by which its distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. We intend to distribute our net income to our securityholders in a manner intended to allow ESRT to satisfy its REIT 90% distribution requirement and to allow ESRT to avoid U.S. federal income tax liability on its income and the 4% nondeductible excise tax.
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 units in order to allow ESRT to satisfy its REIT 90% distribution requirement and to avoid U.S. federal income tax and the 4% nondeductible excise tax in that year.
Distributions to Securityholders
Distributions and dividends amounting to $96.4 million and $96.0 million have been made to securityholders for the nine months ended September 30, 2019 and 2018, respectively.

Stock and Publicly Traded Operating Partnership Unit Repurchase Program

ESRT’s Board of Directors authorized the repurchase of up to $500 million of ESRT’s Class A common stock (“Common Stock”) and our Series ES, Series 250 and Series 60 operating partnership units (NYSE Arca: ESBA, FISK and OGCP, respectively; collectively with the Common Stock, the “Securities”) through December 31, 2019.

Under the program, ESRT may purchase such Securities in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by ESRT and us at its discretion and will be subject to stock price, availability, trading volume and general market conditions. The authorization does not obligate ESRT to acquire any particular amount of Securities, and the program may be suspended or discontinued at ESRT’s discretion without prior notice.

Private Perpetual Preferred Units
During September 2019, we commenced an offer to exchange 15,000,000 newly issued Series 2019 Private Preferred Units for outstanding Series ES operating partnership units, Series 60 operating partnership units, Series 250 operating partnership units and Series PR operating partnership units on a one-for-one basis, in reliance upon an exemption from registration under Section 3(a)(9) of the Securities Act of 1933, as amended. 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 2019 Preferred Units are not redeemable at the option of the holders and are

40



redeemable at our option only upon the occurrence of certain events involving a change in control and the payment of an amount equal to 200% of such liquidation preference. The offering is set to expire on November 22, 2019.
Cash Flows
Comparison of Nine Months Ended September 30, 2019 to the Nine Months Ended September 30, 2018
Net cash. Cash and cash equivalents and restricted cash were $330.3 million and $284.1 million, respectively, as of September 30, 2019 and 2018. The increase was primarily due to the maturity of investments in short-term time deposits, partially offset by capital improvements and expenditures and the repayment of our exchangeable unsecured senior notes during the nine months ended September 30, 2019.
Operating activities. Net cash provided by operating activities increased by $11.0 million to $198.4 million for the nine months ended September 30, 2019 compared to $187.4 million for the nine months ended September 30, 2018, primarily due to the increase in cash received in advance of revenue recognition.
Investing activities. Net cash provided by investing activities increased by $779.9 million to $210.3 million provided by investing activities for the nine months ended September 30, 2019 compared to $569.6 million net cash used in investing activities for the nine months ended September 30, 2018, due to proceeds from maturing short-term time deposits, partially offset by increased expenditures for additions to building and improvements in the nine months ended September 30, 2019.
Financing activities. Net cash provided by financing activities decreased by $485.3 million to $349.2 million used in financing activities for the nine months ended September 30, 2019 compared to $136.1 million provided by financing activities for the nine months ended September 30, 2018, primarily due to the repayment of our exchangeable unsecured senior notes in the nine months ended September 30, 2019 and the net proceeds from issuance of debt in the nine months ended September 30, 2018 compared to none for the nine months ended September 30, 2019.

Net Operating Income ("NOI")
Our internal financial reports include a discussion of property net operating income. 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 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 net operating income because it is specific to the particular financing capabilities and constraints of the owner. The cost of funds is also eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital which may have changed or may change in the future. Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our office or retail properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale which will usually change from period to period. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly-timed purchases or sales. We believe that eliminating these costs from net income is useful because the resulting measure captures the actual revenue generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs.

However, the usefulness of NOI is limited because it excludes general and administrative 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

41



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,
 
2019
 
2018
 
2019
 
2018
 
(unaudited)
 
(unaudited)
Net income
$
26,784

 
$
29,230

 
$
55,570

 
$
77,472

Add:
 
 
 
 
 
 
 
General and administrative expenses
14,421

 
13,148

 
44,445

 
39,001

Depreciation and amortization
44,260

 
42,475

 
135,179

 
121,826

Interest expense
19,426

 
20,658

 
60,712

 
58,774

Income tax expense
1,338

 
2,135

 
1,219

 
3,330

Less:

 

 

 

Third-party management and other fees
(304
)
 
(312
)
 
(955
)
 
(1,151
)
Interest income
(2,269
)
 
(3,485
)
 
(9,907
)
 
(7,209
)
Net operating income
$
103,656

 
$
103,849

 
$
286,263

 
$
292,043

Other Net Operating Income Data
 
 
 
 
 
 
 
Straight-line rental revenue
$
5,174

 
$
5,000

 
$
13,781

 
$
16,662

Net increase in rental revenue from the amortization of above- and below-market lease assets and liabilities
$
1,682

 
$
1,668

 
$
5,781

 
$
4,387

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-downs of investments in depreciable real estate and investments in in-substance real estate investments, gains or losses from debt restructurings and sales of depreciable operating properties, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs), less distributions to non-controlling interests and gains/losses from discontinued operations and after adjustments for unconsolidated partnerships and joint ventures. FFO is a widely recognized non-GAAP financial measure for REITs that we believe, when considered with financial statements determined in accordance with GAAP, is useful to investors in understanding financial performance and providing a relevant basis for comparison among REITs. In addition, FFO is useful to investors as it captures features particular to real estate performance by recognizing that real estate has generally appreciated over time or maintains residual value to a much greater extent than do other depreciable assets. Investors should review FFO, along with GAAP net income, when trying to understand an equity REIT’s operating performance. We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results of operations, the utility of FFO as a measure of performance is limited. There can be no assurance that FFO presented by us is comparable to similarly titled measures of other REITs. FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. Although FFO is a measure used for comparability in assessing the performance of REITs, as the NAREIT White Paper only provides guidelines for computing FFO, the computation of FFO may vary from one company to another.

Modified Funds From Operations ("Modified FFO")

42



Modified FFO adds back an adjustment for any above or below-market ground lease amortization to traditionally defined FFO. We consider this a useful supplemental measure in evaluating our operating performance due to the non-cash accounting treatment under GAAP, which stems from the third quarter 2014 acquisition of two option properties as they carry significantly below market ground leases, the amortization of which is material to our overall results. We present Modified FFO because we consider it an important supplemental measure of our operating performance in that it adds back the non-cash amortization of below-market ground leases. There can be no assurance that Modified FFO presented by us is comparable to similarly titled measures of other REITs. Modified FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Modified FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions.

Core Funds From Operations ("Core FFO")
Core FFO adds back to Modified FFO the following items: deferred tax asset write-off, loss on early extinguishment of debt and acquisition expenses. The Company presents Core FFO because it considers it an important supplemental measure of its operating performance in that it excludes non-recurring items. There can be no assurance that Core FFO presented by the Company is comparable to similarly titled measures of other REITs. Core FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Core FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. In future periods, we may also exclude other items from Core FFO that we believe may help investors compare our results.

The following table presents a reconciliation of our net income, the most directly comparable GAAP measure, to FFO, Modified FFO and Core FFO for the periods presented (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(unaudited)
 
(unaudited)
Net income
$
26,784

 
$
29,230

 
$
55,570

 
$
77,472

Private perpetual preferred unit distributions
(234
)
 
(234
)
 
(702
)
 
(702
)
Real estate depreciation and amortization
43,303

 
42,004

 
132,217

 
120,521

FFO attributable to common stockholders
69,853

 
71,000

 
187,085

 
197,291

Amortization of below-market ground leases
1,957

 
1,957

 
5,873

 
5,873

Modified FFO attributable to common stockholders
71,810

 
72,957

 
192,958

 
203,164

 
 
 
 
 
 
 
 
Core FFO attributable to common stockholders
$
71,810

 
$
72,957

 
$
192,958

 
$
203,164

 
 
 
 
 
 
 
 
Weighted average Operating Partnership units
 
 
 
 
 
 
 
Basic
298,151

 
297,478

 
298,117

 
297,180

Diluted
298,151

 
297,478

 
298,117

 
297,181

Factors That May Influence Future Results of Operations
Leasing
We signed 1.0 million rentable square feet of new leases, expansions and lease renewals for the year ended December 31, 2018. During the nine months ended September 30, 2019, we signed 1.0 million rentable square feet of new leases, expansions and renewals.
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.

43



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, 2019, there were approximately 0.8 million rentable square feet of space in our portfolio available to lease (excluding leases signed but not yet commenced) representing 8.3% of the net rentable square footage of the properties in our portfolio. In addition, leases representing 3.3% and 7.7% of net rentable square footage of the properties in our portfolio will expire in 2019 and in 2020, respectively. These leases are expected to represent approximately 3.1% and 8.2%, respectively, of our annualized rent for such periods. Our revenues and results of operations can be impacted by expiring leases that are not renewed or re-leased or that are renewed or re-leased at base rental rates equal to, above or below the current average base rental rates. Further, our revenues and results of operations can also be affected by the costs we incur to re-lease available space, including payment of leasing commissions, redevelopments and build-to-suit remodeling that may not be borne by the tenant.
We believe that as we complete the redevelopment and repositioning of our properties we will, over the long-term, experience increased occupancy levels and rents. Over the short term, as we renovate and reposition our properties, which includes aggregating smaller spaces to offer large blocks of space, we may experience lower occupancy levels as a result of having to relocate tenants to alternative space and the strategic expiration of existing leases. We believe that despite the short-term lower occupancy levels we may experience, we will continue to experience increased rental revenues as a result of the increased rents which we expect to obtain following the redevelopment and repositioning of our properties.

Observatory Operations
The Empire State Building Observatory revenue for the third quarter 2019 was $37.6 million, a 6.6% decrease from $40.2 million for the third quarter 2018. The Observatory hosted approximately 1,042,000 visitors in the third quarter 2019 versus 1,167,000 visitors in the third quarter 2018, a decrease of 10.7%. The Observatory revenue decline was driven by the closure of the 102nd floor observation deck as part of the Observatory upgrade program and a visitation decline, partially offset by improved pricing. In the third quarter 2019, there were 12 bad weather days compared to 11 bad weather days in the third quarter 2018.
Observatory revenue for the nine months ended September 30, 2019 declined 5.8% to $91.0 million, compared to the nine months ended September 30, 2018 of $96.7 million, driven by the closure of the 102nd floor observation deck as part of the Observatory upgrade program and a visitation decline, partially offset by improved pricing. For the nine months ended September 30, 2019, the Observatory hosted approximately 2,611,000 visitors, compared to 2,860,000 visitors for the same period in 2018, a decrease of 8.7%. For the nine months ended September 30, 2019, there were 51 bad weather days compared to 37 bad weather days in the nine months ended September 30, 2018.
The 102nd floor Observatory was closed for approximately nine months in 2019 and opened on October 12, 2019. We continue our work on the 80th floor component of our Observatory upgrade program and anticipate opening this floor in November 2019. The elevator servicing the 102nd floor Observatory was closed to visitors during the first quarter of 2018 for the planned replacement of the original machinery and a new, higher speed glass elevator.
Observatory revenues and admissions are dependent upon the following: (i) the number of tourists (domestic and international) that 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, 2018 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, 2018.


44



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. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. One of the principal market risks facing us is interest rate risk on our variable rate indebtedness. As of September 30, 2019, we had no variable rate debt as the LIBOR rate on our unsecured term loan facility of $265.0 million was fixed at 2.1485% under a variable to fixed interest rate swap agreement.
Subject to maintaining ESRT's qualification as a REIT for U.S. federal income tax purposes, we may mitigate the risk of interest rate volatility through the use of hedging instruments, such as interest rate swap agreements and interest rate cap agreements. Our primary objectives when undertaking hedging transactions and derivative positions will be to reduce our floating rate exposure and to fix a portion of the interest rate for anticipated financing and refinancing transactions. This in turn will reduce the risk that the variability of cash flows will impose on floating rate debt. However, we can provide no assurances that our efforts to manage interest rate volatility will successfully mitigate the risks of such volatility on our portfolio. We are not subject to foreign currency risk.
We are exposed to interest rate changes primarily on our unsecured revolving credit facility and debt refinancings. Our objectives with respect to interest rate risk are to limit the impact of interest rate changes on operations and cash flows, and to lower our overall borrowing costs. To achieve these objectives, we may borrow at fixed rates and may enter into derivative financial instruments such as interest rate swaps or caps in order to mitigate our interest rate risk on a related floating rate financial instrument. We do not enter into derivative or interest rate transactions for speculative purposes.

We entered into interest rate LIBOR swap agreements with an aggregate notional value of $515.0 million, which fix LIBOR interest rates between 2.1485% and 2.9580% and mature between August 24, 2022 and July 1, 2026. All interest rate swaps as of September 30, 2019 have been designated as cash flow hedges and are deemed highly effective with a fair value of ($28.8 million) which is included in accounts payable and accrued expenses on the condensed consolidated balance sheet.
As of September 30, 2019, the weighted average interest rate on the $1.7 billion of fixed-rate indebtedness outstanding was 4.03% per annum, with maturities at various dates through March 22, 2033.
As of September 30, 2019, the fair value of our outstanding debt was approximately $1.8 billion, which was approximately $100.2 million more than the historical 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.
Our exposures to market risk have not changed materially since December 31, 2018.

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 ESRT's Chief Executive Officer and Principal 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, 2019, the end of the period covered by this Report, we carried out an evaluation, under the supervision and with the participation of ESRT management, including ESRT's Chief Executive Officer and Principal 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, ESRT's Chief Executive Officer and Principal 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 ESRT's Chief Executive Officer and Principal Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.     

45



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 8 to the Notes to Condensed Consolidated Financial Statements for a description of legal proceedings.

ITEM 1A. RISK FACTORS

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, 2018.

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5. OTHER INFORMATION

None



























46



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
Notes:
 
* Filed herewith.


47



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 OP, L.P.
By: Empire State Realty Trust, Inc., its general partner


Date: October 31, 2019                             By:/s/ John B. Kessler
President and Chief Operating Officer
(Principal Financial Officer)


Date: October 31, 2019                             By:/s/ Andrew J. Prentice    
Acting Chief Financial Officer and Chief Accounting Officer
(Principal Accounting Officer)



48
Exhibit
EXHIBIT 31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Anthony E. Malkin, certify that:
1.    I have reviewed this Quarterly Report on Form 10-Q of Empire State Realty OP, L.P.;
2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.    The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.    Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.    The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.





Dated: October 31, 2019

By: /s/ Anthony E. Malkin 
Anthony E. Malkin Chairman and Chief Executive Officer

 



Exhibit
EXHIBIT 31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, John B. Kessler, certify that:
1.    I have reviewed this Quarterly Report on Form 10-Q of Empire State Realty OP, L.P.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: October 31, 2019

By: /s/ John B. Kessler 
John B. Kessler President, Chief Operating Officer and Principal Financial Officer



Exhibit
EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, the undersigned Chief Executive Officer of Empire State Realty OP, L.P. (the "Company"), hereby certifies, to his knowledge that the Quarterly Report on Form 10-Q for the period ended September 30, 2019 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: October 31, 2019

By: /s/ Anthony E. Malkin 
Anthony E. Malkin Chairman and Chief Executive Officer



Exhibit
EXHIBIT 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, the undersigned, President, Chief Operating Officer and Principal Financial Officer of Empire State Realty OP, L.P. (the "Company"), hereby certifies, to his knowledge that the Quarterly Report on Form 10-Q for the period ended September 30, 2019 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: October 31, 2019

By: /s/ John B. Kessler 
John B. Kessler President, Chief Operating Officer and Principal Financial Officer



v3.19.3
Financial Instruments and Fair Values - Summary of the Carrying and Estimated Fair Values of Financial Instruments (Details) - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Interest rate swaps included in accounts payable and accrued expenses $ 28,850 $ 5,243
Ground lease liabilities 29,355  
Carrying Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Ground lease liabilities 29,355  
Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Ground lease liabilities 29,355  
Mortgages | Carrying Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value 606,313 608,567
Mortgages | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value 643,159 597,424
Senior unsecured notes - Exchangeable | Exchangeable notes | Carrying Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value   247,930
Senior unsecured notes - Exchangeable | Exchangeable notes | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value   250,625
Senior unsecured notes - Series A, B, C, D, E and F | Senior notes | Carrying Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value 798,347 798,289
Senior unsecured notes - Series A, B, C, D, E and F | Senior notes | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value 861,245 795,662
Fair Value, Inputs, Level 1 | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Ground lease liabilities 0  
Fair Value, Inputs, Level 1 | Mortgages | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value 0 0
Fair Value, Inputs, Level 1 | Senior unsecured notes - Exchangeable | Exchangeable notes | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value   0
Fair Value, Inputs, Level 1 | Senior unsecured notes - Series A, B, C, D, E and F | Senior notes | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value 0 0
Fair Value, Inputs, Level 2 | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Ground lease liabilities 0  
Fair Value, Inputs, Level 2 | Mortgages | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value 0 0
Fair Value, Inputs, Level 2 | Senior unsecured notes - Exchangeable | Exchangeable notes | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value   250,625
Fair Value, Inputs, Level 2 | Senior unsecured notes - Series A, B, C, D, E and F | Senior notes | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value 0 0
Fair Value, Inputs, Level 3 | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Ground lease liabilities 29,355  
Fair Value, Inputs, Level 3 | Mortgages | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value 643,159 597,424
Fair Value, Inputs, Level 3 | Senior unsecured notes - Exchangeable | Exchangeable notes | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value   0
Fair Value, Inputs, Level 3 | Senior unsecured notes - Series A, B, C, D, E and F | Senior notes | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value 861,245 795,662
Revolving Credit Facility | Unsecured term loan facility | Carrying Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value 264,517 264,147
Revolving Credit Facility | Unsecured term loan facility | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value 265,000 265,000
Revolving Credit Facility | Fair Value, Inputs, Level 1 | Unsecured term loan facility | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value 0 0
Revolving Credit Facility | Fair Value, Inputs, Level 2 | Unsecured term loan facility | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value 0 0
Revolving Credit Facility | Fair Value, Inputs, Level 3 | Unsecured term loan facility | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Long-term debt, fair value 265,000 265,000
Interest Rate Swap    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Interest rate swaps included in accounts payable and accrued expenses 29,300  
Interest Rate Swap | Carrying Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Interest rate swaps included in prepaid expenses and other assets 0 2,536
Interest rate swaps included in accounts payable and accrued expenses 28,850 5,243
Interest Rate Swap | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Interest rate swaps included in prepaid expenses and other assets 0 2,536
Interest rate swaps included in accounts payable and accrued expenses 28,850 5,243
Interest Rate Swap | Fair Value, Inputs, Level 1 | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Interest rate swaps included in prepaid expenses and other assets 0 0
Interest rate swaps included in accounts payable and accrued expenses 0 0
Interest Rate Swap | Fair Value, Inputs, Level 2 | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Interest rate swaps included in prepaid expenses and other assets 0 2,536
Interest rate swaps included in accounts payable and accrued expenses 28,850 5,243
Interest Rate Swap | Fair Value, Inputs, Level 3 | Estimated Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]    
Interest rate swaps included in prepaid expenses and other assets 0 0
Interest rate swaps included in accounts payable and accrued expenses $ 0 $ 0
v3.19.3
Leases - Information Relating to the Measurement of Lease Liabilities (Details)
$ in Thousands
9 Months Ended
Sep. 30, 2019
USD ($)
Leases [Abstract]  
Weighted average remaining lease term (in years) 50 years 9 months 18 days
Weighted average discount rate 4.49%
Cash paid for operating leases nine months ended September 30, 2019 (in thousands) $ 1,139
v3.19.3
Segment Reporting (Tables)
9 Months Ended
Sep. 30, 2019
Segment Reporting [Abstract]  
Components of Segment Profit for Each Segment
The following tables provide components of segment profit for each segment for the three and nine months ended September 30, 2019 and 2018 (amounts in thousands):

 
 
Three Months Ended September 30, 2019
 
 
Real Estate
 
Observatory
 
Intersegment Elimination
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
150,225

 
$

 
$

 
$
150,225

Intercompany rental revenue
 
23,242

 

 
(23,242
)
 

Observatory revenue
 

 
37,575

 

 
37,575

Lease termination fees
 
2,361

 

 

 
2,361

Third-party management and other fees
 
304

 

 

 
304

Other revenue and fees
 
2,408

 

 

 
2,408

Total revenues
 
178,540

 
37,575

 
(23,242
)
 
192,873

Operating expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
47,894

 

 

 
47,894

Intercompany rent expense
 

 
23,242

 
(23,242
)
 

Ground rent expense
 
2,331

 

 

 
2,331

General and administrative expenses
 
14,421

 

 

 
14,421

Observatory expenses
 

 
9,089

 

 
9,089

Real estate taxes
 
29,599

 

 

 
29,599

Depreciation and amortization
 
44,253

 
7

 

 
44,260

Total operating expenses
 
138,498

 
32,338

 
(23,242
)
 
147,594

Total operating income
 
40,042

 
5,237

 

 
45,279

Other income (expense):

 
 
 
 
 
 
 
 
Interest income
 
2,269

 

 

 
2,269

Interest expense
 
(19,426
)
 

 

 
(19,426
)
Income before income taxes
 
22,885

 
5,237

 

 
28,122

Income tax expense
 
(267
)
 
(1,071
)
 

 
(1,338
)
Net income
 
$
22,618

 
$
4,166

 
$

 
$
26,784

Segment assets
 
$
3,659,592

 
$
265,725

 
$

 
$
3,925,317

Expenditures for segment assets
 
$
42,901

 
$
18,375

 
$

 
$
61,276




 
 
Three Months Ended September 30, 2018
 
 
Real Estate
 
Observatory
 
Intersegment Elimination
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
123,621

 
$

 
$

 
$
123,621

Intercompany rental revenue
 
23,805

 

 
(23,805
)
 

Tenant expense reimbursement
 
18,627

 

 

 
18,627

Observatory revenue
 

 
40,241

 

 
40,241

Lease termination fees
 
1,185

 

 

 
1,185

Third-party management and other fees
 
312

 

 

 
312

Other revenue and fees
 
2,416

 

 

 
2,416

Total revenues
 
169,966

 
40,241

 
(23,805
)
 
186,402

Operating expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
42,772

 

 

 
42,772

Intercompany rent expense
 

 
23,805

 
(23,805
)
 

Ground rent expense
 
2,331

 

 

 
2,331

General and administrative expenses
 
13,148

 

 

 
13,148

Observatory expenses
 

 
8,854

 

 
8,854

Real estate taxes
 
28,284

 

 

 
28,284

Depreciation and amortization
 
42,458

 
17

 

 
42,475

Total operating expenses
 
128,993

 
32,676

 
(23,805
)
 
137,864

Total operating income
 
40,973

 
7,565

 

 
48,538

Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
3,485

 

 

 
3,485

Interest expense
 
(20,658
)
 

 

 
(20,658
)
Income before income taxes
 
23,800

 
7,565

 

 
31,365

Income tax expense
 
(277
)
 
(1,858
)
 

 
(2,135
)
Net income
 
$
23,523

 
$
5,707

 
$

 
$
29,230

Segment assets
 
$
3,904,454

 
$
262,378

 
$

 
$
4,166,832

Expenditures for segment assets
 
$
52,613

 
$
14,507

 
$

 
$
67,120

 
 
Nine Months Ended September 30, 2019
 
 
Real Estate
 
Observatory
 
Intersegment Elimination
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
434,713

 
$

 
$

 
$
434,713

Intercompany rental revenue
 
58,754

 

 
(58,754
)
 

Observatory revenue
 

 
91,039

 

 
91,039

Lease termination fees
 
3,112

 

 

 
3,112

Third-party management and other fees
 
955

 

 

 
955

Other revenue and fees
 
6,591

 

 

 
6,591

Total revenues
 
504,125

 
91,039

 
(58,754
)
 
536,410

Operating expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
131,076

 

 

 
131,076

Intercompany rent expense
 

 
58,754

 
(58,754
)
 

Ground rent expense
 
6,994

 

 

 
6,994

General and administrative expenses
 
44,445

 

 

 
44,445

Observatory expenses
 

 
25,024

 

 
25,024

Real estate taxes
 
86,098

 

 

 
86,098

Depreciation and amortization
 
135,157

 
22

 

 
135,179

Total operating expenses
 
403,770

 
83,800

 
(58,754
)
 
428,816

Total operating income
 
100,355

 
7,239

 

 
107,594

Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
9,907

 

 

 
9,907

Interest expense
 
(60,712
)
 

 

 
(60,712
)
Income before income taxes
 
49,550

 
7,239

 

 
56,789

Income tax expense
 
(762
)
 
(457
)
 

 
(1,219
)
Net income
 
$
48,788

 
$
6,782

 
$

 
$
55,570

Expenditures for segment assets
 
$
134,865

 
$
46,703

 
$

 
$
181,568

 
 
Nine Months Ended September 30, 2018
 
 
Real Estate
 
Observatory
 
Intersegment Elimination
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
369,970

 
$

 
$

 
$
369,970

Intercompany rental revenue
 
59,356

 

 
(59,356
)
 

Tenant expense reimbursement
 
52,626

 

 

 
52,626

Observatory revenue
 

 
96,691

 

 
96,691

Lease termination fees
 
2,164

 

 

 
2,164

Third-party management and other fees
 
1,151

 

 

 
1,151

Other revenue and fees
 
9,600

 

 

 
9,600

Total revenues
 
494,867

 
96,691

 
(59,356
)
 
532,202

Operating expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
126,375

 

 

 
126,375

Intercompany rent expense
 

 
59,356

 
(59,356
)
 

Ground rent expense
 
6,994

 

 

 
6,994

General and administrative expenses
 
39,001

 

 

 
39,001

Observatory expenses
 

 
23,868

 

 
23,868

Real estate taxes
 
81,771

 

 

 
81,771

Depreciation and amortization
 
121,775

 
51

 

 
121,826

Total operating expenses
 
375,916

 
83,275

 
(59,356
)
 
399,835

Total operating income
 
118,951

 
13,416

 

 
132,367

Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
7,209

 

 

 
7,209

Interest expense
 
(58,774
)
 

 

 
(58,774
)
Income before income taxes
 
67,386

 
13,416

 

 
80,802

Income tax expense
 
(852
)
 
(2,478
)
 

 
(3,330
)
Net income
 
$
66,534

 
$
10,938

 
$

 
$
77,472

Expenditures for segment assets
 
$
148,429

 
$
41,930

 
$

 
$
190,359


v3.19.3
Accounts Payable and Accrued Expenses (Tables)
9 Months Ended
Sep. 30, 2019
Payables and Accruals [Abstract]  
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following as of September 30, 2019 and December 31, 2018 (amounts in thousands):
 
September 30, 2019
 
December 31, 2018
Accrued capital expenditures
$
77,142

 
$
85,242

Accounts payable and accrued expenses
34,328

 
34,585

Interest rate swap agreements liability
28,850

 
5,243

Accrued interest payable
2,851

 
4,990

Due to affiliated companies
30

 
616

     Total accounts payable and accrued expenses
$
143,201

 
$
130,676


v3.19.3
Commitments and Contingencies
9 Months Ended
Sep. 30, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
Legal Proceedings
Except as described below, as of September 30, 2019, 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 in Empire State Building Associates L.L.C. (“ESBA”), which prior to the initial public offering of our company (the "Offering"), owned the fee title to the Empire State Building, filed an arbitration with the American Arbitration Association against Peter L. Malkin, Anthony E. Malkin, Thomas N. Keltner, Jr., and our subsidiary ESRT MH Holdings LLC, the former supervisor of ESBA, as respondents. The statement of claim (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. These investors had opted out of a prior class action bringing similar claims that was settled with court approval. The 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 for a select number of sessions started in May 2016 and concluded in August 2018. Post-hearing briefing is currently scheduled to be completed by March 2020.
The respondents believe the allegations in the arbitration are entirely without merit, and they intend to continue to defend them vigorously.
     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, 2019, we estimate that we will incur approximately $144.2 million of capital expenditures (including tenant improvements and leasing commissions) on our properties pursuant to existing lease agreements. We expect to fund these capital expenditures with operating cash flow, additional property level mortgage financings, our unsecured credit facility, cash on hand and other borrowings. Future property acquisitions may require substantial capital investments for refurbishment and leasing costs. We expect that these financing requirements will be met in a similar fashion.
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, 2019, 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, 2019, management has no plans to remove or alter these properties in a manner that would trigger federal and other applicable regulations for asbestos removal, and accordingly, the obligations to remove the asbestos or asbestos-containing building materials from these properties have indeterminable settlement dates. As such, we are unable to reasonably estimate the fair value of the associated conditional asset retirement obligation. However, ongoing asbestos abatement, maintenance programs and other required documentation are carried out as required and related costs are expensed as incurred.
Other Environmental Matters
Certain of our properties have been inspected for soil contamination due to pollutants, which may have occurred prior to our ownership of these properties or subsequently in connection with its development and/or its use. Required remediation to such properties has been completed, and as of September 30, 2019, 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.
v3.19.3
Debt
9 Months Ended
Sep. 30, 2019
Debt Disclosure [Abstract]  
Debt Debt
Debt consisted of the following as of September 30, 2019 and December 31, 2018 (amounts in thousands):
 
Principal Balance
 
As of September 30, 2019
 
September 30, 2019
 
December 31, 2018
 
Stated
Rate
 
Effective
Rate
(1)
 
Maturity
Date
(2)
Mortgage debt collateralized by:
 
 
 
 
 
 
 
 
 
Fixed rate mortgage debt
 
 
 
 
 
 
 
 
 
Metro Center
$
90,205

 
$
91,838

 
3.59
%
 
3.67
%
 
11/5/2024

10 Union Square
50,000

 
50,000

 
3.70
%
 
3.97
%
 
4/1/2026

1542 Third Avenue
30,000

 
30,000

 
4.29
%
 
4.53
%
 
5/1/2027

First Stamford Place(3)
180,000

 
180,000

 
4.28
%
 
4.44
%
 
7/1/2027

1010 Third Avenue and 77 West 55th Street
38,440

 
38,995

 
4.01
%
 
4.21
%
 
1/5/2028

10 Bank Street
33,138

 
33,779

 
4.23
%
 
4.36
%
 
6/1/2032

383 Main Avenue
30,000

 
30,000

 
4.44
%
 
4.55
%
 
6/30/2032

1333 Broadway
160,000

 
160,000

 
4.21
%
 
4.29
%
 
2/5/2033

Total mortgage debt
611,783

 
614,612

 
 
 
 
 
 
Senior unsecured notes - exchangeable

 
250,000

 

 

 

Senior unsecured notes:(6)


 


 
 
 
 
 
 
   Series A
100,000

 
100,000

 
3.93
%
 
3.96
%
 
3/27/2025

   Series B
125,000

 
125,000

 
4.09
%
 
4.12
%
 
3/27/2027

   Series C
125,000

 
125,000

 
4.18
%
 
4.21
%
 
3/27/2030

   Series D
115,000

 
115,000

 
4.08
%
 
4.11
%
 
1/22/2028

   Series E
160,000

 
160,000

 
4.26
%
 
4.27
%
 
3/22/2030

   Series F
175,000

 
175,000

 
4.44
%
 
4.45
%
 
3/22/2033

Unsecured revolving credit facility(6)

 

 
(4) 
 
(4) 
 
8/29/2021

Unsecured term loan facility(6)
265,000

 
265,000

 
(5) 
 
(5) 
 
8/29/2022

Total principal
1,676,783

 
1,929,612

 
 
 
 
 
 
Unamortized discount, net of unamortized premium


 
(1,647
)
 
 
 
 
 
 
Deferred financing costs, net

(7,606
)
 
(9,032
)
 
 
 
 
 
 
Total
$
1,669,177

 
$
1,918,933

 
 
 
 
 
 
______________

(1)
The effective rate is the yield as of September 30, 2019, including the effects of debt issuance costs and the amortization of the fair value of debt adjustment.
(2)
Pre-payment is generally allowed for each loan upon payment of a customary pre-payment penalty.
(3)
Represents a $164 million mortgage loan bearing interest at 4.09% and a $16 million loan bearing interest at 6.25%.
(4)
At September 30, 2019, the unsecured revolving credit facility bears a floating rate at 30 day LIBOR plus 1.10%. The rate at September 30, 2019 was 3.12%.
(5)
The unsecured term loan facility bears a floating rate at 30 day LIBOR plus 1.20%. Pursuant to an interest rate swap agreement, the LIBOR rate is fixed at 2.1485% through maturity. The rate at September 30, 2019 was 3.35%.
(6)
At September 30, 2019, we were in compliance with all debt covenants.

Principal Payments
Aggregate required principal payments at September 30, 2019 are as follows (amounts in thousands):
 
Year
Amortization
 
Maturities
 
Total
2019
$
961

 
$

 
$
961

2020
3,938

 

 
3,938

2021
4,090

 

 
4,090

2022
5,628

 
265,000

 
270,628

2023
7,876

 

 
7,876

Thereafter
33,868

 
1,355,422

 
1,389,290

Total
$
56,361

 
$
1,620,422

 
$
1,676,783


 


Deferred Financing Costs
Deferred financing costs, net, consisted of the following at September 30, 2019 and December 31, 2018 (amounts in thousands):
 
 
September 30, 2019
 
December 31, 2018
Financing costs
 
$
25,315

 
$
25,315

Less: accumulated amortization
 
(12,991
)
 
(10,027
)
Total deferred financing costs, net
 
$
12,324

 
$
15,288


At September 30, 2019 and December 31, 2018, $4.7 million and $6.3 million, respectively, of net deferred financing costs associated with the unsecured revolving credit facility was included in deferred costs, net on the condensed consolidated balance sheet.
Amortization expense related to deferred financing costs was $0.9 million and $1.1 million for the three months ended September 30, 2019 and 2018, respectively, and $2.9 million and $3.1 million for the nine months ended September 30, 2019 and 2018, respectively.

Unsecured Revolving Credit and Term Loan Facility

During August 2017, we entered into an amended and restated senior unsecured revolving credit and term loan facility (the “Facility”) with Bank of America, N.A., as administrative agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC as Joint Lead Arrangers and Joint Bookrunners, Wells Fargo, National Association and Capital One, National Association, as co-syndication agents, and the lenders party thereto.
    
The Facility is in the original principal amount of up to $1.365 billion, which consists of a $1.1 billion revolving credit facility and a $265 million term loan facility. We may request the Facility be increased through one or more increases in the revolving credit facility or one or more increases in the term loan facility or the addition of new pari passu term loan tranches, for a maximum aggregate principal amount not to exceed $1.75 billion.

The initial maturity of the unsecured revolving credit facility is August 2021. We have the option to extend the initial term for up to two additional 6-month periods, subject to certain conditions, including the payment of an extension fee equal to 0.0625% and 0.075% of the then outstanding commitments under the unsecured revolving credit facility on the first and the second extensions, respectively. The term loan facility matures in August 2022. We may prepay the loans under the Facility at any time, subject to reimbursement of the lenders’ breakage and redeployment costs in the case of prepayment of Eurodollar Rate borrowings.

Exchangeable Senior Notes

During August 2014, we issued $250.0 million 2.625% Exchangeable Senior Notes (“2.625% Exchangeable Senior Notes”) that were due on August 15, 2019. The 2.625% Exchangeable Senior Notes were exchangeable into cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at our election. On August 15, 2019, we settled the principal amount of the 2.625% Exchangeable Senior Notes in cash.

For the three and nine months ended September 30, 2019, total interest expense related to the 2.625% Exchangeable Senior Notes was $1.2 million and $6.1 million, respectively, consisting of (i) the contractual interest expense of $0.8 million and $4.1 million, respectively, (ii) the additional non-cash interest expense of $0.3 million and $1.6 million, respectively, relating to the accretion of the debt discount and (iii) the amortization of deferred financing costs of $0.1 million and $0.4 million, respectively. For the three and nine months ended September 30, 2018, total interest expense related to the 2.625% Exchangeable Senior Notes was $2.4 million and $7.3 million, respectively, consisting of (i) the contractual interest expense of $1.6 million and $4.9 million, respectively, (ii) the additional non-cash interest expense of $0.7 million and $2.0 million, respectively, relating to the accretion of the debt discount, and (iii) the amortization of deferred financing costs of $0.1 million and $0.4 million, respectively.
v3.19.3
Subsequent Events
9 Months Ended
Sep. 30, 2019
Subsequent Events [Abstract]  
Subsequent Events Subsequent Events
None.
v3.19.3
Description of Business and Organization
9 Months Ended
Sep. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Description of Business and Organization Description of Business and Organization
As used in these condensed consolidated financial statements, unless the context otherwise requires, “we,” “us,” "our," and the "company,” mean Empire State Realty OP, L.P. and its consolidated subsidiaries.
Empire State Realty OP, L.P. (the "Operating Partnership") is the entity through which Empire State Realty Trust, Inc. (“ESRT”), a self-administered and self-managed real estate investment trust ("REIT"), conducts all of its business and owns (either directly or through subsidiaries) substantially all of its assets. We own, manage, operate, acquire and reposition office and retail properties in Manhattan and the greater New York metropolitan area. As of September 30, 2019, our total portfolio contained 10.1 million rentable square feet of office and retail space. We owned 14 office properties (including three long-term ground leasehold interests) encompassing approximately 9.4 million rentable square feet of office space. Nine of these properties are located in the midtown Manhattan market and aggregate approximately 7.6 million rentable square feet of office space, including the Empire State Building. Our Manhattan office properties also contain an aggregate of 511,755 rentable square feet of retail space on their ground floor and/or contiguous levels. Our remaining five office properties are located in Fairfield County, Connecticut and Westchester County, New York, encompassing in the aggregate approximately 1.8 million rentable square feet. The majority of square footage for these five properties is located in densely populated metropolitan communities with immediate access to mass transportation. Additionally, we have entitled land at the Stamford Transportation Center in Stamford, Connecticut, adjacent to one of our office properties, that will support the development of an approximately 380,000 rentable square foot office building and garage. As of September 30, 2019, our portfolio included four standalone retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut, encompassing 205,595 rentable square feet in the aggregate.
We were organized as a Delaware limited partnership on November 28, 2011 and operations commenced upon completion of the initial public offering of ESRT’s Class A common stock and related formation transactions on October 7, 2013. ESRT, as the sole general partner in our company, has responsibility and discretion in the management and control of our company, and our limited partners, in such capacity, have no authority to transact business for, or participate in the management activities, of our company. As of September 30, 2019, ESRT owned approximately 59.2% of our operating partnership units.
v3.19.3
Deferred Costs, Acquired Lease Intangibles and Goodwill - Amortizing Acquired Intangible Assets and Liabilities (Details) - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Acquired below-market ground leases    
Acquired below-market ground leases, gross $ 396,916 $ 396,916
Less: accumulated amortization (42,392) (36,518)
Acquired below-market ground leases, net 354,524 360,398
Acquired below-market leases    
Acquired below-market leases, gross (113,625) (118,462)
Less: accumulated amortization 70,970 66,012
Acquired below-market leases, net $ (42,655) $ (52,450)
v3.19.3
Debt - Unsecured Revolving Credit and Term Loan Facility (Details) - Revolving Credit Facility
1 Months Ended
Aug. 31, 2017
USD ($)
option
Unsecured Revolving Credit Facility and Term Loan  
Line of Credit Facility [Line Items]  
Maximum borrowing capacity $ 1,365,000,000
Unsecured revolving credit facility, higher borrowing capacity option 1,750,000,000
Unsecured revolving credit facility  
Line of Credit Facility [Line Items]  
Current borrowing capacity $ 1,100,000,000
Number of options to extend maturity | option 2
Extension period (in months) 6 months
Unsecured term loan facility  
Line of Credit Facility [Line Items]  
Current borrowing capacity $ 265,000,000
Minimum | Unsecured revolving credit facility  
Line of Credit Facility [Line Items]  
Extension fee, as a percent of outstanding commitments under revolving credit facility (percentage) 0.0625%
Maximum | Unsecured revolving credit facility  
Line of Credit Facility [Line Items]  
Extension fee, as a percent of outstanding commitments under revolving credit facility (percentage) 0.075%
v3.19.3
Condensed Consolidated Statements of Income (unaudited) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Revenues:        
Rental revenue $ 150,225   $ 434,713  
Rental revenue   $ 123,621   $ 369,970
Tenant expense reimbursement 0 18,627 0 52,626
Observatory revenue 37,575 40,241 91,039 96,691
Lease termination fees 2,361 1,185 3,112 2,164
Third-party management and other fees 304 312 955 1,151
Other revenue and fees 2,408 2,416 6,591 9,600
Total revenues 192,873 186,402 536,410 532,202
Operating expenses:        
Property operating expenses 47,894 42,772 131,076 126,375
Ground rent expenses 2,331 2,331 6,994 6,994
General and administrative expenses 14,421 13,148 44,445 39,001
Observatory expenses 9,089 8,854 25,024 23,868
Real estate taxes 29,599 28,284 86,098 81,771
Depreciation and amortization 44,260 42,475 135,179 121,826
Total operating expenses 147,594 137,864 428,816 399,835
Total operating income 45,279 48,538 107,594 132,367
Other income (expense):        
Interest income 2,269 3,485 9,907 7,209
Interest expense (19,426) (20,658) (60,712) (58,774)
Income before income taxes 28,122 31,365 56,789 80,802
Income tax expense (1,338) (2,135) (1,219) (3,330)
Net income 26,784 29,230 55,570 77,472
Private perpetual preferred unit distributions (234) (234) (702) (702)
Net income attributable to common unitholders $ 26,550 $ 28,996 $ 54,868 $ 76,770
Total weighted average units:        
Basic (in units) 298,151 297,478 298,117 297,180
Diluted (in units) 298,151 297,478 298,117 297,181
Earnings per unit attributable to common unitholders:        
Basic (in USD per unit) $ 0.09 $ 0.10 $ 0.18 $ 0.26
Diluted (in USD per unit) 0.09 0.10 0.18 0.26
Dividends per unit (in USD per unit) $ 0.105 $ 0.105 $ 0.315 $ 0.315
v3.19.3
Segment Reporting - Components of Segment Profit for Each Segment (Details) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Dec. 31, 2018
Revenues:          
Rental revenue $ 150,225   $ 434,713    
Rental revenue   $ 123,621   $ 369,970  
Intercompany rental revenue 0 0 0 0  
Tenant expense reimbursement 0 18,627 0 52,626  
Observatory revenue 37,575 40,241 91,039 96,691  
Lease termination fees 2,361 1,185 3,112 2,164  
Third-party management and other fees 304 312 955 1,151  
Other revenue and fees 2,408 2,416 6,591 9,600  
Total revenues 192,873 186,402 536,410 532,202  
Operating expenses:          
Property operating expenses 47,894 42,772 131,076 126,375  
Intercompany rent expense 0 0 0 0  
Ground rent expense 2,331 2,331 6,994 6,994  
General and administrative expenses 14,421 13,148 44,445 39,001  
Observatory expenses 9,089 8,854 25,024 23,868  
Real estate taxes 29,599 28,284 86,098 81,771  
Depreciation and amortization 44,260 42,475 135,179 121,826  
Total operating expenses 147,594 137,864 428,816 399,835  
Total operating income 45,279 48,538 107,594 132,367  
Other income (expense):          
Interest income 2,269 3,485 9,907 7,209  
Interest expense (19,426) (20,658) (60,712) (58,774)  
Income before income taxes 28,122 31,365 56,789 80,802  
Income tax expense (1,338) (2,135) (1,219) (3,330)  
Net income 26,784 29,230 55,570 77,472  
Segment assets 3,925,317 4,166,832 3,925,317 4,166,832 $ 4,195,780
Expenditures for segment assets 61,276 67,120 181,568 190,359  
Intersegment Elimination          
Revenues:          
Rental revenue 0   0    
Rental revenue   0   0  
Intercompany rental revenue (23,242) (23,805) (58,754) (59,356)  
Tenant expense reimbursement   0   0  
Observatory revenue 0 0 0 0  
Lease termination fees 0 0 0 0  
Third-party management and other fees 0 0 0 0  
Other revenue and fees 0 0 0 0  
Total revenues (23,242) (23,805) (58,754) (59,356)  
Operating expenses:          
Property operating expenses 0 0 0 0  
Intercompany rent expense (23,242) (23,805) (58,754) (59,356)  
Ground rent expense 0 0 0 0  
General and administrative expenses 0 0 0 0  
Observatory expenses 0 0 0 0  
Real estate taxes 0 0 0 0  
Depreciation and amortization 0 0 0 0  
Total operating expenses (23,242) (23,805) (58,754) (59,356)  
Total operating income 0 0 0 0  
Other income (expense):          
Interest income 0 0 0 0  
Interest expense 0 0 0 0  
Income before income taxes 0 0 0 0  
Income tax expense 0 0 0 0  
Net income 0 0 0 0  
Segment assets 0 0 0 0  
Expenditures for segment assets 0 0 0 0  
Real Estate | Operating Segments          
Revenues:          
Rental revenue 150,225   434,713    
Rental revenue   123,621   369,970  
Intercompany rental revenue 23,242 23,805 58,754 59,356  
Tenant expense reimbursement   18,627   52,626  
Observatory revenue 0 0 0 0  
Lease termination fees 2,361 1,185 3,112 2,164  
Third-party management and other fees 304 312 955 1,151  
Other revenue and fees 2,408 2,416 6,591 9,600  
Total revenues 178,540 169,966 504,125 494,867  
Operating expenses:          
Property operating expenses 47,894 42,772 131,076 126,375  
Intercompany rent expense 0 0 0 0  
Ground rent expense 2,331 2,331 6,994 6,994  
General and administrative expenses 14,421 13,148 44,445 39,001  
Observatory expenses 0 0 0 0  
Real estate taxes 29,599 28,284 86,098 81,771  
Depreciation and amortization 44,253 42,458 135,157 121,775  
Total operating expenses 138,498 128,993 403,770 375,916  
Total operating income 40,042 40,973 100,355 118,951  
Other income (expense):          
Interest income 2,269 3,485 9,907 7,209  
Interest expense (19,426) (20,658) (60,712) (58,774)  
Income before income taxes 22,885 23,800 49,550 67,386  
Income tax expense (267) (277) (762) (852)  
Net income 22,618 23,523 48,788 66,534  
Segment assets 3,659,592 3,904,454 3,659,592 3,904,454  
Expenditures for segment assets 42,901 52,613 134,865 148,429  
Observatory | Operating Segments          
Revenues:          
Rental revenue 0   0    
Rental revenue   0   0  
Intercompany rental revenue 0 0 0 0  
Tenant expense reimbursement   0   0  
Observatory revenue 37,575 40,241 91,039 96,691  
Lease termination fees 0 0 0 0  
Third-party management and other fees 0 0 0 0  
Other revenue and fees 0 0 0 0  
Total revenues 37,575 40,241 91,039 96,691  
Operating expenses:          
Property operating expenses 0 0 0 0  
Intercompany rent expense 23,242 23,805 58,754 59,356  
Ground rent expense 0 0 0 0  
General and administrative expenses 0 0 0 0  
Observatory expenses 9,089 8,854 25,024 23,868  
Real estate taxes 0 0 0 0  
Depreciation and amortization 7 17 22 51  
Total operating expenses 32,338 32,676 83,800 83,275  
Total operating income 5,237 7,565 7,239 13,416  
Other income (expense):          
Interest income 0 0 0 0  
Interest expense 0 0 0 0  
Income before income taxes 5,237 7,565 7,239 13,416  
Income tax expense (1,071) (1,858) (457) (2,478)  
Net income 4,166 5,707 6,782 10,938  
Segment assets 265,725 262,378 265,725 262,378  
Expenditures for segment assets $ 18,375 $ 14,507 $ 46,703 $ 41,930  
v3.19.3
Capital - Summary of ESRT Restricted Stock and LTIP Unit Activity (Details)
9 Months Ended
Sep. 30, 2019
$ / shares
shares
Weighted Average Grant Fair Value  
Beginning balance, Unvested (in USD per share) | $ / shares $ 9.68
Vested (in USD per share) | $ / shares 15.98
Granted (in USD per share) | $ / shares 9.55
Forfeited or unearned (in USD per share) | $ / shares 7.34
Ending balance, Unvested (in USD per share) | $ / shares $ 9.72
Restricted Stock  
Restricted Stock and LTIP Units  
Beginning balance, Unvested (in shares) 91,158
Vested (in shares) (35,724)
Granted (in shares) 69,358
Forfeited or unearned (in shares) (5,762)
Ending balance, Unvested (in shares) 119,030
LTIP Units  
Restricted Stock and LTIP Units  
Beginning balance, Unvested (in shares) 5,702,821
Vested (in shares) (598,402)
Granted (in shares) 2,848,726
Forfeited or unearned (in shares) (1,972,548)
Ending balance, Unvested (in shares) 5,980,597
v3.19.3
Segment Reporting
9 Months Ended
Sep. 30, 2019
Segment Reporting [Abstract]  
Segment Reporting 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 rent as if the sales or rent were to third parties, that is, at current market prices.
The following tables provide components of segment profit for each segment for the three and nine months ended September 30, 2019 and 2018 (amounts in thousands):

 
 
Three Months Ended September 30, 2019
 
 
Real Estate
 
Observatory
 
Intersegment Elimination
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
150,225

 
$

 
$

 
$
150,225

Intercompany rental revenue
 
23,242

 

 
(23,242
)
 

Observatory revenue
 

 
37,575

 

 
37,575

Lease termination fees
 
2,361

 

 

 
2,361

Third-party management and other fees
 
304

 

 

 
304

Other revenue and fees
 
2,408

 

 

 
2,408

Total revenues
 
178,540

 
37,575

 
(23,242
)
 
192,873

Operating expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
47,894

 

 

 
47,894

Intercompany rent expense
 

 
23,242

 
(23,242
)
 

Ground rent expense
 
2,331

 

 

 
2,331

General and administrative expenses
 
14,421

 

 

 
14,421

Observatory expenses
 

 
9,089

 

 
9,089

Real estate taxes
 
29,599

 

 

 
29,599

Depreciation and amortization
 
44,253

 
7

 

 
44,260

Total operating expenses
 
138,498

 
32,338

 
(23,242
)
 
147,594

Total operating income
 
40,042

 
5,237

 

 
45,279

Other income (expense):

 
 
 
 
 
 
 
 
Interest income
 
2,269

 

 

 
2,269

Interest expense
 
(19,426
)
 

 

 
(19,426
)
Income before income taxes
 
22,885

 
5,237

 

 
28,122

Income tax expense
 
(267
)
 
(1,071
)
 

 
(1,338
)
Net income
 
$
22,618

 
$
4,166

 
$

 
$
26,784

Segment assets
 
$
3,659,592

 
$
265,725

 
$

 
$
3,925,317

Expenditures for segment assets
 
$
42,901

 
$
18,375

 
$

 
$
61,276




 
 
Three Months Ended September 30, 2018
 
 
Real Estate
 
Observatory
 
Intersegment Elimination
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
123,621

 
$

 
$

 
$
123,621

Intercompany rental revenue
 
23,805

 

 
(23,805
)
 

Tenant expense reimbursement
 
18,627

 

 

 
18,627

Observatory revenue
 

 
40,241

 

 
40,241

Lease termination fees
 
1,185

 

 

 
1,185

Third-party management and other fees
 
312

 

 

 
312

Other revenue and fees
 
2,416

 

 

 
2,416

Total revenues
 
169,966

 
40,241

 
(23,805
)
 
186,402

Operating expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
42,772

 

 

 
42,772

Intercompany rent expense
 

 
23,805

 
(23,805
)
 

Ground rent expense
 
2,331

 

 

 
2,331

General and administrative expenses
 
13,148

 

 

 
13,148

Observatory expenses
 

 
8,854

 

 
8,854

Real estate taxes
 
28,284

 

 

 
28,284

Depreciation and amortization
 
42,458

 
17

 

 
42,475

Total operating expenses
 
128,993

 
32,676

 
(23,805
)
 
137,864

Total operating income
 
40,973

 
7,565

 

 
48,538

Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
3,485

 

 

 
3,485

Interest expense
 
(20,658
)
 

 

 
(20,658
)
Income before income taxes
 
23,800

 
7,565

 

 
31,365

Income tax expense
 
(277
)
 
(1,858
)
 

 
(2,135
)
Net income
 
$
23,523

 
$
5,707

 
$

 
$
29,230

Segment assets
 
$
3,904,454

 
$
262,378

 
$

 
$
4,166,832

Expenditures for segment assets
 
$
52,613

 
$
14,507

 
$

 
$
67,120

 
 
Nine Months Ended September 30, 2019
 
 
Real Estate
 
Observatory
 
Intersegment Elimination
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
434,713

 
$

 
$

 
$
434,713

Intercompany rental revenue
 
58,754

 

 
(58,754
)
 

Observatory revenue
 

 
91,039

 

 
91,039

Lease termination fees
 
3,112

 

 

 
3,112

Third-party management and other fees
 
955

 

 

 
955

Other revenue and fees
 
6,591

 

 

 
6,591

Total revenues
 
504,125

 
91,039

 
(58,754
)
 
536,410

Operating expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
131,076

 

 

 
131,076

Intercompany rent expense
 

 
58,754

 
(58,754
)
 

Ground rent expense
 
6,994

 

 

 
6,994

General and administrative expenses
 
44,445

 

 

 
44,445

Observatory expenses
 

 
25,024

 

 
25,024

Real estate taxes
 
86,098

 

 

 
86,098

Depreciation and amortization
 
135,157

 
22

 

 
135,179

Total operating expenses
 
403,770

 
83,800

 
(58,754
)
 
428,816

Total operating income
 
100,355

 
7,239

 

 
107,594

Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
9,907

 

 

 
9,907

Interest expense
 
(60,712
)
 

 

 
(60,712
)
Income before income taxes
 
49,550

 
7,239

 

 
56,789

Income tax expense
 
(762
)
 
(457
)
 

 
(1,219
)
Net income
 
$
48,788

 
$
6,782

 
$

 
$
55,570

Expenditures for segment assets
 
$
134,865

 
$
46,703

 
$

 
$
181,568

 
 
Nine Months Ended September 30, 2018
 
 
Real Estate
 
Observatory
 
Intersegment Elimination
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
369,970

 
$

 
$

 
$
369,970

Intercompany rental revenue
 
59,356

 

 
(59,356
)
 

Tenant expense reimbursement
 
52,626

 

 

 
52,626

Observatory revenue
 

 
96,691

 

 
96,691

Lease termination fees
 
2,164

 

 

 
2,164

Third-party management and other fees
 
1,151

 

 

 
1,151

Other revenue and fees
 
9,600

 

 

 
9,600

Total revenues
 
494,867

 
96,691

 
(59,356
)
 
532,202

Operating expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
126,375

 

 

 
126,375

Intercompany rent expense
 

 
59,356

 
(59,356
)
 

Ground rent expense
 
6,994

 

 

 
6,994

General and administrative expenses
 
39,001

 

 

 
39,001

Observatory expenses
 

 
23,868

 

 
23,868

Real estate taxes
 
81,771

 

 

 
81,771

Depreciation and amortization
 
121,775

 
51

 

 
121,826

Total operating expenses
 
375,916

 
83,275

 
(59,356
)
 
399,835

Total operating income
 
118,951

 
13,416

 

 
132,367

Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
7,209

 

 

 
7,209

Interest expense
 
(58,774
)
 

 

 
(58,774
)
Income before income taxes
 
67,386

 
13,416

 

 
80,802

Income tax expense
 
(852
)
 
(2,478
)
 

 
(3,330
)
Net income
 
$
66,534

 
$
10,938

 
$

 
$
77,472

Expenditures for segment assets
 
$
148,429

 
$
41,930

 
$

 
$
190,359


v3.19.3
Leases
9 Months Ended
Sep. 30, 2019
Leases [Abstract]  
Leases 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, 2019 condensed consolidated statement of income as rental revenue and in our September 30, 2018 condensed consolidated statement of income as tenant expense reimbursement.

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, 2019 are as follows (amounts in thousands):
 
Three months ended September 30, 2019
 
Nine months ended September 30, 2019
Fixed payments
$
129,030

 
$
380,647

Variable payments
21,195

 
54,066

Total rental revenue
$
150,225

 
$
434,713



As of September 30, 2019, 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 2038 (amounts in thousands):
Remainder of 2019
$
124,080

2020
496,805

2021
477,068

2022
446,300

2023
419,857

Thereafter
1,954,810

 
$
3,918,920



As of December 31, 2018, 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 2038 (amounts in thousands):
2019
$
485,441

2020
460,127

2021
423,365

2022
391,395

2023
362,738

Thereafter
1,536,461

 
$
3,659,527



The above future minimum lease payments exclude tenant recoveries, amortization of deferred rent receivables and the net accretion of above-below-market lease intangibles. Some leases are subject to termination options generally upon payment of a termination fee. The preceding tables are prepared assuming such options are not exercised.
Lessee
We make payments under ground leases related to three of our properties. Minimum rent is expensed on a straight-line basis over the non-cancellable term of the leases. 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 of September 30, 2019, our balance sheet included $29.4 million and $29.4 million in right-of-use assets and lease liabilities, respectively, that are associated with these three ground leases.

The rate implicit in the lease was not determinable for any of these ground leases and accordingly, we measured the related lease liabilities using discount rates based on estimated incremental borrowing rates. Our estimates required significant judgment given that the lease terms of our ground leases are significantly longer than the terms of borrowings on a fully-collateralized basis and considered factors such as U.S. Treasury rates and our own credit rating.



Information relating to the measurement of our lease liabilities as of September 30, 2019 are as follows:
Weighted average remaining lease term (in years)
50.8

Weighted average discount rate
4.49
%
Cash paid for operating leases nine months ended September 30, 2019 (in thousands)
$
1,139



Future minimum lease payments to be paid over the terms of the leases as of September 30, 2019 are as follows (amounts in thousands):
Remainder of 2019
$
380

2020
1,518

2021
1,518

2022
1,518

2023
1,518

Thereafter
68,298

Total undiscounted cash flows
74,750

Present value discount
(45,395
)
Ground lease liabilities
$
29,355



Future minimum lease payments to be paid over the terms of the leases as of December 31, 2018 are as follows (amounts in thousands):
2019
$
1,518

2020
1,518

2021
1,518

2022
1,518

2023
1,518

Thereafter
68,298

 
$
75,888


Leases 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, 2019 condensed consolidated statement of income as rental revenue and in our September 30, 2018 condensed consolidated statement of income as tenant expense reimbursement.

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, 2019 are as follows (amounts in thousands):
 
Three months ended September 30, 2019
 
Nine months ended September 30, 2019
Fixed payments
$
129,030

 
$
380,647

Variable payments
21,195

 
54,066

Total rental revenue
$
150,225

 
$
434,713



As of September 30, 2019, 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 2038 (amounts in thousands):
Remainder of 2019
$
124,080

2020
496,805

2021
477,068

2022
446,300

2023
419,857

Thereafter
1,954,810

 
$
3,918,920



As of December 31, 2018, 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 2038 (amounts in thousands):
2019
$
485,441

2020
460,127

2021
423,365

2022
391,395

2023
362,738

Thereafter
1,536,461

 
$
3,659,527



The above future minimum lease payments exclude tenant recoveries, amortization of deferred rent receivables and the net accretion of above-below-market lease intangibles. Some leases are subject to termination options generally upon payment of a termination fee. The preceding tables are prepared assuming such options are not exercised.
Lessee
We make payments under ground leases related to three of our properties. Minimum rent is expensed on a straight-line basis over the non-cancellable term of the leases. 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 of September 30, 2019, our balance sheet included $29.4 million and $29.4 million in right-of-use assets and lease liabilities, respectively, that are associated with these three ground leases.

The rate implicit in the lease was not determinable for any of these ground leases and accordingly, we measured the related lease liabilities using discount rates based on estimated incremental borrowing rates. Our estimates required significant judgment given that the lease terms of our ground leases are significantly longer than the terms of borrowings on a fully-collateralized basis and considered factors such as U.S. Treasury rates and our own credit rating.



Information relating to the measurement of our lease liabilities as of September 30, 2019 are as follows:
Weighted average remaining lease term (in years)
50.8

Weighted average discount rate
4.49
%
Cash paid for operating leases nine months ended September 30, 2019 (in thousands)
$
1,139



Future minimum lease payments to be paid over the terms of the leases as of September 30, 2019 are as follows (amounts in thousands):
Remainder of 2019
$
380

2020
1,518

2021
1,518

2022
1,518

2023
1,518

Thereafter
68,298

Total undiscounted cash flows
74,750

Present value discount
(45,395
)
Ground lease liabilities
$
29,355



Future minimum lease payments to be paid over the terms of the leases as of December 31, 2018 are as follows (amounts in thousands):
2019
$
1,518

2020
1,518

2021
1,518

2022
1,518

2023
1,518

Thereafter
68,298

 
$
75,888


v3.19.3
Deferred Costs, Acquired Lease Intangibles and Goodwill
9 Months Ended
Sep. 30, 2019
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]  
Deferred Costs, Acquired Lease Intangibles and Goodwill Deferred Costs, Acquired Lease Intangibles and Goodwill
Deferred costs, net, consisted of the following as of September 30, 2019 and December 31, 2018 (amounts in thousands):  

 
September 30, 2019
 
December 31, 2018
Leasing costs
$
185,698

 
$
178,120

Acquired in-place lease value and deferred leasing costs
206,026

 
214,550

Acquired above-market leases
49,906

 
52,136

 
441,630

 
444,806

Less: accumulated amortization
(222,651
)
 
(209,839
)
Total deferred costs, net, excluding net deferred financing costs
$
218,979

 
$
234,967


At September 30, 2019 and December 31, 2018, $4.7 million and $6.3 million, respectively, of net deferred financing costs associated with the unsecured revolving credit facility was included in deferred costs, net on the condensed consolidated balance sheet.
Amortization expense related to deferred leasing costs and acquired deferred leasing costs was $6.2 million and $6.3 million for the three months ended September 30, 2019 and 2018, respectively, and $18.3 million and $18.4 million for the nine months ended September 30, 2019 and 2018, respectively. Amortization expense related to acquired lease intangibles was $2.4 million and $2.9 million for the three months ended September 30, 2019 and 2018, respectively, and $8.2 million and $9.3 million for the nine months ended September 30, 2019 and 2018, respectively.
Amortizing acquired intangible assets and liabilities consisted of the following as of September 30, 2019 and December 31, 2018 (amounts in thousands):
 
September 30, 2019
 
December 31, 2018
Acquired below-market ground leases
$
396,916

 
$
396,916

Less: accumulated amortization
(42,392
)
 
(36,518
)
Acquired below-market ground leases, net
$
354,524

 
$
360,398

 
September 30, 2019
 
December 31, 2018
Acquired below-market leases
$
(113,625
)
 
$
(118,462
)
Less: accumulated amortization
70,970

 
66,012

Acquired below-market leases, net
$
(42,655
)
 
$
(52,450
)

    
Rental revenue related to the amortization of below-market leases, net of above-market leases, was $1.7 million and $1.7 million for the three months ended September 30, 2019 and 2018, respectively, and $5.8 million and $4.4 million for the nine months ended September 30, 2019 and 2018, respectively.
As of September 30, 2019, we had goodwill of $491.5 million. Goodwill was allocated $227.5 million to the observatory reportable segment and $264.0 million to the real estate segment.
v3.19.3
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Statement of Comprehensive Income [Abstract]        
Net income $ 26,784 $ 29,230 $ 55,570 $ 77,472
Other comprehensive income (loss):        
Unrealized gain (loss) on valuation of interest rate swap agreements (6,256) 3,884 (25,992) 9,827
Less: amount reclassified into interest expense 319 427 637 1,562
Other comprehensive income (loss) (5,937) 4,311 (25,355) 11,389
Comprehensive income (loss) $ 20,847 $ 33,541 $ 30,215 $ 88,861
v3.19.3
Cover Page - shares
9 Months Ended
Sep. 30, 2019
Oct. 24, 2019
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Sep. 30, 2019  
Document Transition Report false  
Entity File Number 001-36106  
Entity Registrant Name EMPIRE STATE REALTY OP, L.P.  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 45-4685158  
Entity Address, Address Line One 111 West 33rd Street  
Entity Address, Address Line Two 12th Floor  
Entity Address, City or Town New York  
Entity Address, State or Province NY  
Entity Address, Postal Zip Code 10120  
City Area Code 212  
Local Phone Number 687-8700  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Central Index Key 0001553079  
Current Fiscal Year End Date --12-31  
Amendment Flag false  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q3  
Series ES operating partnership units    
Title of 12(b) Security Series ES operating partnership units  
Trading Symbol ESBA  
Security Exchange Name NYSEArca  
Entity Common Stock, Shares Outstanding   27,916,614
Series 60 operating partnership units    
Title of 12(b) Security Series 60 operating partnership units  
Trading Symbol OGCP  
Security Exchange Name NYSEArca  
Entity Common Stock, Shares Outstanding   7,505,315
Series 250 operating partnership units    
Title of 12(b) Security Series 250 operating partnership units  
Trading Symbol FISK  
Security Exchange Name NYSEArca  
Entity Common Stock, Shares Outstanding   3,766,134
v3.19.3
Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2019
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies 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, 2018 Annual Report on Form 10-K, with the exception of the adoption of Financial Accounting Standards Board ("FASB") Topic 842, Lease Accounting on January 1, 2019.

We adopted FASB Topic 842, Lease Accounting, using the modified retrospective approach on January 1, 2019 and elected to apply the transition provisions of the standard at adoption. As such, the prior period amounts presented under Topic 840 were not restated to conform with the 2019 presentation. We adopted the practical expedient in Topic 842, which allows us to avoid separating lease and non-lease rental income. Consequently, all rental income earned pursuant to tenant leases in 2019 is reflected as one category, “Rental Revenue,” in the 2019 consolidated statement of income.
Topic 842 also requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The adoption of this standard resulted in the recognition of right-of-use assets and lease liabilities for our operating leases on our balance sheet of approximately $29.5 million.
In addition, under Topic 842, lessors may only capitalize incremental direct leasing costs. As a result, we no longer capitalize our non-contingent leasing costs and instead expense these costs as incurred. These costs totaled $3.7 million for the nine months ended September 30, 2019.
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, 2018 contained in our Annual Report on Form 10-K. We do not consider our business to be subject to material seasonal fluctuations, except that our observatory business is subject to tourism seasonality. During the past ten years, approximately 16.0% to 18.0% of our annual observatory 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. We had no VIEs as of September 30, 2019 and December 31, 2018.
We will assess the accounting treatment for each investment we may have in the future. This assessment will include a review of each entity’s organizational agreement to determine which party has what rights and whether those rights are protective or participating. For all VIEs, we will review such agreements in order to determine which party has the power to direct the activities that most significantly impact the entity’s economic performance and benefit. In situations where we or our partner could approve, among other things, the annual budget, or leases that cover more than a nominal amount of space relative to the total rentable space at each property, we would not consolidate the investment as we consider these to be substantive participation rights that result in shared power of the activities that would most significantly impact the performance and benefit of such joint venture investment.
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Non-controlling interests are required to be presented as a separate component of equity in the condensed consolidated balance sheets and in the condensed consolidated statements of income by requiring earnings and other comprehensive income to be attributed to controlling and non-controlling interests.
Accounting Estimates
The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to use estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Significant items subject to such estimates and assumptions include allocation of the purchase price of acquired real estate properties among tangible and intangible assets, determination of the useful life of real estate properties and other long-lived assets, valuation and impairment analysis of commercial real estate properties, right of use assets and other long-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.
Recently Issued or Adopted Accounting Standards
During August 2018, the FASB issued Accounting Standards Update ("ASU") No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force), which contain amendments that align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software
(and hosting arrangements that include an internal use software license). Accordingly, for entities in a hosting arrangement that is a service contract, costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. The amendments in ASU No. 2018-15 also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments is permitted, including adoption in any interim period. The amendments in ASU No. 2018-15 should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are evaluating the impact of adopting this new accounting standard on our consolidated financial statements.
During January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which contain amendments that modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. ASU No. 2017-04 should be applied on a prospective basis and the amendments adopted for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are evaluating the impact of adopting this new accounting standard on our consolidated financial statements.
During June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which contains amendments that replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU No. 2016-13 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Earlier adoption as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, is permitted. The amendments must be adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified retrospective approach). We do not anticipate the adoption of this new accounting standard to have a material impact on our consolidated financial statements.
During February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In addition, lessors may only capitalize incremental direct leasing costs. Subsequent amendments to ASU No. 2016-02 also provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component provided that (1) the timing and pattern of transfer are the same for the nonlease components and associated lease component and (2) the lease component, if accounted separately, would be classified as an operating lease.  We adopted this standard and related amendments on January 1, 2019 and elected the available practical expedients. Such adoption resulted in the recognition of right-of-use assets and lease liabilities for our operating leases on our balance sheet of approximately $29.5 million.
v3.19.3
Debt - Long-Term Debt (Details) - USD ($)
9 Months Ended
Sep. 30, 2019
Dec. 31, 2018
Aug. 31, 2014
Debt Instrument [Line Items]      
Total $ 606,313,000 $ 608,567,000  
Unsecured facility 0 0  
Deferred financing costs, net (12,324,000) (15,288,000)  
Mortgages      
Debt Instrument [Line Items]      
Fixed rate mortgage debt 611,783,000 614,612,000  
Total 1,669,177,000 1,918,933,000  
Total principal 1,676,783,000 1,929,612,000  
Unamortized discount, net of unamortized premium 0 (1,647,000)  
Deferred financing costs, net (7,606,000) (9,032,000)  
Metro Center | Mortgages      
Debt Instrument [Line Items]      
Fixed rate mortgage debt $ 90,205,000 91,838,000  
Stated rate (as a percent) 3.59%    
Effective Rate (as a percentage) 3.67%    
10 Union Square | Mortgages      
Debt Instrument [Line Items]      
Fixed rate mortgage debt $ 50,000,000 50,000,000  
Stated rate (as a percent) 3.70%    
Effective Rate (as a percentage) 3.97%    
1542 Third Avenue | Mortgages      
Debt Instrument [Line Items]      
Fixed rate mortgage debt $ 30,000,000 30,000,000  
Stated rate (as a percent) 4.29%    
Effective Rate (as a percentage) 4.53%    
First Stamford Place | Mortgages      
Debt Instrument [Line Items]      
Fixed rate mortgage debt $ 180,000,000 180,000,000  
Stated rate (as a percent) 4.28%    
Effective Rate (as a percentage) 4.44%    
First Stamford Place - First Lien | Mortgages      
Debt Instrument [Line Items]      
Face amount $ 164,000,000    
Stated rate (as a percent) 4.09%    
First Stamford Place - Second Lien | Mortgages      
Debt Instrument [Line Items]      
Face amount $ 16,000,000    
Stated rate (as a percent) 6.25%    
1010 Third Avenue and 77 West 55th Street | Mortgages      
Debt Instrument [Line Items]      
Fixed rate mortgage debt $ 38,440,000 38,995,000  
Stated rate (as a percent) 4.01%    
Effective Rate (as a percentage) 4.21%    
10 Bank Street | Mortgages      
Debt Instrument [Line Items]      
Fixed rate mortgage debt $ 33,138,000 33,779,000  
Stated rate (as a percent) 4.23%    
Effective Rate (as a percentage) 4.36%    
383 Main Avenue | Mortgages      
Debt Instrument [Line Items]      
Fixed rate mortgage debt $ 30,000,000 30,000,000  
Stated rate (as a percent) 4.44%    
Effective Rate (as a percentage) 4.55%    
1333 Broadway | Mortgages      
Debt Instrument [Line Items]      
Fixed rate mortgage debt $ 160,000,000 160,000,000  
Stated rate (as a percent) 4.21%    
Effective Rate (as a percentage) 4.29%    
Senior unsecured notes - exchangeable | Convertible debt      
Debt Instrument [Line Items]      
Fixed rate mortgage debt $ 0 250,000,000  
Face amount     $ 250,000,000.0
Stated rate (as a percent) 0.00%   2.625%
Effective Rate (as a percentage) 0.00%    
Senior unsecured notes, Series A | Senior notes      
Debt Instrument [Line Items]      
Total $ 100,000,000 100,000,000  
Stated rate (as a percent) 3.93%    
Effective Rate (as a percentage) 3.96%    
Senior unsecured notes, Series B | Senior notes      
Debt Instrument [Line Items]      
Total $ 125,000,000 125,000,000  
Stated rate (as a percent) 4.09%    
Effective Rate (as a percentage) 4.12%    
Senior unsecured notes, Series C | Senior notes      
Debt Instrument [Line Items]      
Total $ 125,000,000 125,000,000  
Stated rate (as a percent) 4.18%    
Effective Rate (as a percentage) 4.21%    
Senior unsecured notes, Series D | Senior notes      
Debt Instrument [Line Items]      
Total $ 115,000,000 115,000,000  
Stated rate (as a percent) 4.08%    
Effective Rate (as a percentage) 4.11%    
Senior unsecured notes, Series E | Senior notes      
Debt Instrument [Line Items]      
Total $ 160,000,000 160,000,000  
Stated rate (as a percent) 4.26%    
Effective Rate (as a percentage) 4.27%    
Senior unsecured notes, Series F | Senior notes      
Debt Instrument [Line Items]      
Total $ 175,000,000 175,000,000  
Stated rate (as a percent) 4.44%    
Effective Rate (as a percentage) 4.45%    
Unsecured revolving credit facility | Revolving credit facility      
Debt Instrument [Line Items]      
Unsecured facility $ 0 0  
Effective Rate (as a percentage) 3.12%    
Unsecured revolving credit facility | Revolving credit facility | LIBOR      
Debt Instrument [Line Items]      
Basis spread on variable rate (as a percentage) 1.10%    
Unsecured term loan facility | Revolving credit facility      
Debt Instrument [Line Items]      
Unsecured facility $ 265,000,000 $ 265,000,000  
Stated rate (as a percent) 3.35%    
Pay rate (as a percent) 2.1485%    
Unsecured term loan facility | Revolving credit facility | LIBOR      
Debt Instrument [Line Items]      
Basis spread on variable rate (as a percentage) 1.20%    
v3.19.3
Debt - Exchangeable Senior Notes (Details) - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Aug. 31, 2014
Debt Instrument [Line Items]          
Amortization of deferred financing costs $ 900,000 $ 1,100,000 $ 2,900,000 $ 3,100,000  
Convertible debt | Exchangeable Senior Notes due August 15, 2019          
Debt Instrument [Line Items]          
Face amount         $ 250,000,000.0
Stated rate (as a percent) 0.00%   0.00%   2.625%
Debt interest expense $ 1,200,000 2,400,000 $ 6,100,000 7,300,000  
Contractual interest expense 800,000 1,600,000 4,100,000 4,900,000  
Additional non-cash interest expense 300,000 700,000 1,600,000 2,000,000.0  
Amortization of deferred financing costs $ 100,000 $ 100,000 $ 400,000 $ 400,000  
v3.19.3
Segment Reporting - Narrative (Details)
9 Months Ended
Sep. 30, 2019
segment
Segment Reporting [Abstract]  
Number of reportable segments 2
v3.19.3
Capital - Incentive and Share-based Compensation (Details)
$ / shares in Units, $ in Millions
1 Months Ended 3 Months Ended 9 Months Ended
May 31, 2019
USD ($)
shares
Mar. 31, 2019
USD ($)
vesting_installment
shares
Sep. 30, 2019
USD ($)
shares
Sep. 30, 2018
USD ($)
Sep. 30, 2019
USD ($)
$ / shares
shares
Sep. 30, 2018
USD ($)
May 16, 2019
shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Expected volatility rate look-back period (in years)         6 years    
Weighted-average per unit or share fair value (in USD per share) | $ / shares         $ 9.55    
Age of grantee at which LTIP unit and restricted stock awards immediately vest         60 years    
Period of service, upon completion of which, grantee's LTIP unit and restricted stock awards will immediately vest (in years)         10 years    
Awards that meet age and service requirements for vesting              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Noncash share-based compensation expense recognized | $     $ 0.3 $ 0.4 $ 1.8 $ 1.7  
Unrecognized compensation expense | $     1.4   $ 1.4    
Unrecognized compensation expense, period for recognition         2 years 3 months 18 days    
Awards that do not meet age and service requirements for vesting              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Noncash share-based compensation expense recognized | $     3.4 $ 4.5 $ 13.6 $ 12.4  
Unrecognized compensation expense | $     $ 33.8   $ 33.8    
Unrecognized compensation expense, period for recognition         2 years 3 months 18 days    
Long-Term Incentive Plan Units and Restricted Stock              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Fair value of share-based awards granted in period | $         $ 27.9    
Weighted-average per unit or share fair value (in USD per share) | $ / shares         $ 9.55    
Dividend rate (as a percent)         2.40%    
Risk free interest rate, minimum (as a percent)         2.48%    
Risk free interest rate, maximum (as a percent)         2.63%    
Expected price volatility, minimum (as a percent)         17.00%    
Expected price volatility, maximum (as a percent)         22.00%    
Time Based Long-Tern Incentive Plan Unit | 2013 Plan Units              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Shares granted (in shares) | shares   61,432          
Fair value of share-based awards granted in period | $   $ 2.0          
Award vesting period   4 years          
Number of vesting installments | vesting_installment   3          
Performance Based Long-Term Incentive Plan Unit | 2013 Plan Units              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Shares granted (in shares) | shares   113,383          
Fair value of share-based awards granted in period | $   $ 0.9          
Award vesting period   3 years          
Number of vesting installments | vesting_installment   2          
Time Restricted Shares | 2013 Plan Units              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Shares granted (in shares) | shares   69,358          
Executive Officer | Time Based Long-Tern Incentive Plan Unit | 2013 Plan Units              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Shares granted (in shares) | shares   461,693          
Fair value of share-based awards granted in period | $   $ 6.4          
Executive Officer | Time Based Long-Tern Incentive Plan Unit | 2013 Plan Units, connected with bonus program              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Shares granted (in shares) | shares   334,952          
Fair value of share-based awards granted in period | $   $ 4.6          
Award vesting period         3 years    
Vesting percentage of award face amount     125.00%   125.00%    
Executive Officer | Time Based Long-Tern Incentive Plan Unit | Vesting immediately              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Shares granted (in shares) | shares   26,056          
Executive Officer | Time Based Long-Tern Incentive Plan Unit | Vest ratably over three years              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Shares granted (in shares) | shares   308,896          
Award vesting period   3 years          
Executive Officer | Time Based Long-Tern Incentive Plan Unit | Vest in two equal annual installments              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Number of vesting installments | vesting_installment   2          
Executive Officer | Performance Based Long-Term Incentive Plan Unit | 2013 Plan Units              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Shares granted (in shares) | shares   1,806,520          
Fair value of share-based awards granted in period | $   $ 12.8          
Director | Time Based Long-Tern Incentive Plan Unit | 2019 Plan Units              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Shares granted (in shares) | shares 70,746            
Fair value of share-based awards granted in period | $ $ 1.0            
Award vesting period 3 years            
2019 Plan              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Number of shares authorized under the plan (in shares) | shares     11,000,000.0   11,000,000.0   11,000,000.0
Number of shares that remain available for future issuance (in shares) | shares     11,500,000   11,500,000    
Minimum | Long-Term Incentive Plan Units and Restricted Stock              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Expected term         2 years    
Maximum | Long-Term Incentive Plan Units and Restricted Stock              
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]              
Expected term         5 years 3 months 18 days    
v3.19.3
Leases - Narrative (Details)
$ in Thousands
Sep. 30, 2019
USD ($)
property
Operating Leases [Line Items]  
Number of properties subject to ground leases | property 3
Right-of-use assets $ 29,355
Lease liabilities $ 29,355
Minimum  
Operating Leases [Line Items]  
Term of lease 1 year
Maximum  
Operating Leases [Line Items]  
Term of lease 21 years
v3.19.3
Leases - Future Minimum Lease Payments on Ground Leases (Details) - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Leases [Abstract]    
Remainder of 2019 $ 380  
2020 1,518  
2021 1,518  
2022 1,518  
2023 1,518  
Thereafter 68,298  
Total undiscounted cash flows 74,750  
Present value discount (45,395)  
Ground lease liabilities $ 29,355  
2019   $ 1,518
2020   1,518
2021   1,518
2022   1,518
2023   1,518
Thereafter   68,298
Total future minimum lease payments   $ 75,888
v3.19.3
Capital (Tables)
9 Months Ended
Sep. 30, 2019
Stockholders' Equity Note Disclosure, Disclosure of Compensation Related Costs, Share-based Payments and Earnings Per Share [Abstract]  
Summary of ERST Restricted Stock and LTIP Unit
The following is a summary of ESRT restricted stock and LTIP unit activity for the nine months ended September 30, 2019:
 
Restricted Stock
 
LTIP Units
 
Weighted Average Grant Fair Value
Unvested balance at December 31, 2018
91,158

 
5,702,821

 
$
9.68

Vested
(35,724
)
 
(598,402
)
 
15.98

Granted
69,358

 
2,848,726

 
9.55

Forfeited or unearned
(5,762
)
 
(1,972,548
)
 
7.34

Unvested balance at September 30, 2019
119,030

 
5,980,597

 
$
9.72


Earnings Per Unit
Earnings per unit for the three and nine months ended September 30, 2019 and 2018 is computed as follows (amounts in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Numerator:
 
 
 
 
 
 
 
Net income
$
26,784

 
$
29,230

 
$
55,570

 
$
77,472

Private perpetual preferred unit distributions
(234
)
 
(234
)
 
(702
)
 
(702
)
Earnings allocated to unvested units
(243
)
 
(212
)
 
(646
)
 
(586
)
Net income attributable to common unitholders - basic and diluted
$
26,307

 
$
28,784

 
$
54,222

 
$
76,184

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average units outstanding - basic
298,151

 
297,478

 
298,117

 
297,180

Effect of dilutive securities:
 
 
 
 
 
 
 
  Stock-based compensation plans


 

 

 
1

Weighted average units outstanding - diluted
298,151

 
297,478

 
298,117

 
297,181

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.09

 
$
0.10

 
$
0.18

 
$
0.26

Diluted
$
0.09

 
$
0.10

 
$
0.18

 
$
0.26


v3.19.3
Debt (Tables)
9 Months Ended
Sep. 30, 2019
Debt Disclosure [Abstract]  
Long-Term Debt
Debt consisted of the following as of September 30, 2019 and December 31, 2018 (amounts in thousands):
 
Principal Balance
 
As of September 30, 2019
 
September 30, 2019
 
December 31, 2018
 
Stated
Rate
 
Effective
Rate
(1)
 
Maturity
Date
(2)
Mortgage debt collateralized by:
 
 
 
 
 
 
 
 
 
Fixed rate mortgage debt
 
 
 
 
 
 
 
 
 
Metro Center
$
90,205

 
$
91,838

 
3.59
%
 
3.67
%
 
11/5/2024

10 Union Square
50,000

 
50,000

 
3.70
%
 
3.97
%
 
4/1/2026

1542 Third Avenue
30,000

 
30,000

 
4.29
%
 
4.53
%
 
5/1/2027

First Stamford Place(3)
180,000

 
180,000

 
4.28
%
 
4.44
%
 
7/1/2027

1010 Third Avenue and 77 West 55th Street
38,440

 
38,995

 
4.01
%
 
4.21
%
 
1/5/2028

10 Bank Street
33,138

 
33,779

 
4.23
%
 
4.36
%
 
6/1/2032

383 Main Avenue
30,000

 
30,000

 
4.44
%
 
4.55
%
 
6/30/2032

1333 Broadway
160,000

 
160,000

 
4.21
%
 
4.29
%
 
2/5/2033

Total mortgage debt
611,783

 
614,612

 
 
 
 
 
 
Senior unsecured notes - exchangeable

 
250,000

 

 

 

Senior unsecured notes:(6)


 


 
 
 
 
 
 
   Series A
100,000

 
100,000

 
3.93
%
 
3.96
%
 
3/27/2025

   Series B
125,000

 
125,000

 
4.09
%
 
4.12
%
 
3/27/2027

   Series C
125,000

 
125,000

 
4.18
%
 
4.21
%
 
3/27/2030

   Series D
115,000

 
115,000

 
4.08
%
 
4.11
%
 
1/22/2028

   Series E
160,000

 
160,000

 
4.26
%
 
4.27
%
 
3/22/2030

   Series F
175,000

 
175,000

 
4.44
%
 
4.45
%
 
3/22/2033

Unsecured revolving credit facility(6)

 

 
(4) 
 
(4) 
 
8/29/2021

Unsecured term loan facility(6)
265,000

 
265,000

 
(5) 
 
(5) 
 
8/29/2022

Total principal
1,676,783

 
1,929,612

 
 
 
 
 
 
Unamortized discount, net of unamortized premium


 
(1,647
)
 
 
 
 
 
 
Deferred financing costs, net

(7,606
)
 
(9,032
)
 
 
 
 
 
 
Total
$
1,669,177

 
$
1,918,933

 
 
 
 
 
 
______________

(1)
The effective rate is the yield as of September 30, 2019, including the effects of debt issuance costs and the amortization of the fair value of debt adjustment.
(2)
Pre-payment is generally allowed for each loan upon payment of a customary pre-payment penalty.
(3)
Represents a $164 million mortgage loan bearing interest at 4.09% and a $16 million loan bearing interest at 6.25%.
(4)
At September 30, 2019, the unsecured revolving credit facility bears a floating rate at 30 day LIBOR plus 1.10%. The rate at September 30, 2019 was 3.12%.
(5)
The unsecured term loan facility bears a floating rate at 30 day LIBOR plus 1.20%. Pursuant to an interest rate swap agreement, the LIBOR rate is fixed at 2.1485% through maturity. The rate at September 30, 2019 was 3.35%.
(6)
At September 30, 2019, we were in compliance with all debt covenants.
Aggregate Required Principal Payments
Aggregate required principal payments at September 30, 2019 are as follows (amounts in thousands):
 
Year
Amortization
 
Maturities
 
Total
2019
$
961

 
$

 
$
961

2020
3,938

 

 
3,938

2021
4,090

 

 
4,090

2022
5,628

 
265,000

 
270,628

2023
7,876

 

 
7,876

Thereafter
33,868

 
1,355,422

 
1,389,290

Total
$
56,361

 
$
1,620,422

 
$
1,676,783


Deferred Costs, Net
Deferred costs, net, consisted of the following as of September 30, 2019 and December 31, 2018 (amounts in thousands):  

 
September 30, 2019
 
December 31, 2018
Leasing costs
$
185,698

 
$
178,120

Acquired in-place lease value and deferred leasing costs
206,026

 
214,550

Acquired above-market leases
49,906

 
52,136

 
441,630

 
444,806

Less: accumulated amortization
(222,651
)
 
(209,839
)
Total deferred costs, net, excluding net deferred financing costs
$
218,979

 
$
234,967


Deferred financing costs, net, consisted of the following at September 30, 2019 and December 31, 2018 (amounts in thousands):
 
 
September 30, 2019
 
December 31, 2018
Financing costs
 
$
25,315

 
$
25,315

Less: accumulated amortization
 
(12,991
)
 
(10,027
)
Total deferred financing costs, net
 
$
12,324

 
$
15,288


v3.19.3
Condensed Consolidated Statements of Cash Flows (unaudited) - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Cash Flows From Operating Activities    
Net income $ 55,570 $ 77,472
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 135,179 121,826
Amortization of non-cash items within interest expense 5,400 5,142
Amortization of acquired above- and below-market leases, net (5,780) (4,387)
Amortization of acquired below-market ground leases 5,873 5,873
Straight-lining of rental revenue (13,781) (16,662)
Equity based compensation 15,392 14,064
Increase (decrease) in cash flows due to changes in operating assets and liabilities:    
Security deposits (25,961) (4,566)
Tenant and other receivables 149 (3,176)
Deferred leasing costs (14,513) (18,578)
Prepaid expenses and other assets 19,883 20,308
Accounts payable and accrued expenses (2,970) (1,181)
Deferred revenue and other liabilities 23,932 (8,732)
Net cash provided by operating activities 198,373 187,403
Cash Flows From Investing Activities    
Short-term investments 400,000 (400,000)
Development costs (2) (1)
Additions to building and improvements (189,666) (169,622)
Net cash provided by (used in) investing activities 210,332 (569,623)
Cash Flows From Financing Activities    
Proceeds from mortgage notes payable 0 160,000
Repayment of mortgage notes payable (2,829) (265,688)
Proceeds from unsecured senior notes 0 335,000
Repayment of unsecured senior notes (250,000) 0
Proceeds from the sale of common stock 0 4,749
Deferred financing costs 0 (1,977)
Distributions (96,370) (95,960)
Net cash (used in) provided by financing activities (349,199) 136,124
Net increase (decrease) in cash and cash equivalents and restricted cash 59,506 (246,096)
Cash and cash equivalents and restricted cash—beginning of period 270,813 530,197
Cash and cash equivalents and restricted cash—end of period 330,319 284,101
Reconciliation of Cash and Cash Equivalents and Restricted Cash:    
Cash and cash equivalents at beginning of period 204,981 464,344
Restricted cash at beginning of period 65,832 65,853
Cash and cash equivalents at end of period 293,710 229,745
Restricted cash at end of period 36,609 54,356
Supplemental disclosures of cash flow information:    
Cash paid for interest 59,173 56,597
Cash paid for income taxes 1,589 3,690
Non-cash investing and financing activities:    
Building and improvements included in accounts payable and accrued expenses 77,142 92,506
Write-off of fully depreciated assets 26,516 32,059
Derivative instruments at fair values included in prepaid expenses and other assets 0 9,944
Derivative instruments at fair values included in accounts payable and accrued expenses 28,850 0
Conversion of limited partners' operating partnership units to ESRT partner's capital 21,654 $ 31,660
Right of use assets 29,452  
Ground lease liabilities $ 29,452  
v3.19.3
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Assets    
Tenant and other receivables allowance   $ 488
Deferred rent receivables allowance   $ 19
Capital    
Private perpetual preferred units, liquidation preference (in USD per share) $ 16.62 $ 16.62
Private perpetual preferred units, issued (in shares) 1,560,360 1,560,360
Private perpetual preferred units, outstanding (in shares) 1,560,360 1,560,360
Series PR Operating Partnership Units    
Capital    
Limited partner operating partnership units, outstanding (in shares) 84,561,214 86,202,638
Series ES operating partnership units    
Capital    
Limited partner operating partnership units, outstanding (in shares) 28,159,590 30,129,556
Series 60 operating partnership units    
Capital    
Limited partner operating partnership units, outstanding (in shares) 7,544,485 8,019,509
Series 250 operating partnership units    
Capital    
Limited partner operating partnership units, outstanding (in shares) 3,841,730 4,063,737
ESRT | Series PR Operating Partnership Units    
Capital    
General partner operating partnership units, outstanding (in shares) 3,042,566 3,033,261
Limited partner operating partnership units, outstanding (in shares) 177,106,987 171,877,365
v3.19.3
Financial Instruments and Fair Values - Narrative (Details) - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Dec. 31, 2018
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]          
Interest rate swap agreements liability $ 28,850,000   $ 28,850,000   $ 5,243,000
Interest Rate Swap          
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]          
Interest rate swap agreements liability 29,300,000   29,300,000    
Designated as Hedging Instrument | Cash Flow Hedging          
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]          
Net loss to be reclassified into interest expense within the next 12 months     (5,600,000)    
Designated as Hedging Instrument | Cash Flow Hedging | Interest Rate Swap          
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]          
Aggregate notional value 515,000,000.0   515,000,000.0   515,000,000.0
Net unrealized gain (loss) (5,900,000) $ 4,300,000 (25,400,000) $ 11,400,000  
Accounts payable and accrued expenses | Designated as Hedging Instrument | Cash Flow Hedging | Interest Rate Swap          
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]          
Interest rate swap agreements liability $ 28,800,000   $ 28,800,000   5,200,000
Prepaid expenses and other assets | Designated as Hedging Instrument | Cash Flow Hedging | Interest Rate Swap          
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]          
Interest rate swap agreements asset         $ 2,500,000
v3.19.3
Deferred Costs, Acquired Lease Intangibles and Goodwill - Narrative (Details) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Dec. 31, 2018
Deferred Costs [Line Items]          
Amortization expense related to deferred leasing costs $ 6,200   $ 18,300    
Amortization expense related to deferred leasing costs   $ 6,300   $ 18,400  
Rental revenue related to amortization of below-market leases, net of above-market leases 1,700 1,700 5,780 4,387  
Goodwill 491,479   491,479   $ 491,479
Lease agreements          
Deferred Costs [Line Items]          
Amortization expense related to acquired lease intangibles 2,400 $ 2,900 8,200 $ 9,300  
Observatory          
Deferred Costs [Line Items]          
Goodwill 227,500   227,500    
Real estate          
Deferred Costs [Line Items]          
Goodwill 264,000   264,000    
Revolving credit facility | Unsecured revolving credit facility          
Deferred Costs [Line Items]          
Net deferred financing costs $ 4,700   $ 4,700   $ 6,300
v3.19.3
Debt - Deferred Financing Costs, Net (Details) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Dec. 31, 2018
Debt Instrument [Line Items]          
Financing costs $ 25,315   $ 25,315   $ 25,315
Less: accumulated amortization (12,991)   (12,991)   (10,027)
Total deferred financing costs, net 12,324   12,324   15,288
Amortization expense related to deferred financing costs 900 $ 1,100 2,900 $ 3,100  
Revolving credit facility | Unsecured revolving credit facility          
Debt Instrument [Line Items]          
Net deferred financing costs $ 4,700   $ 4,700   $ 6,300
v3.19.3
Capital
9 Months Ended
Sep. 30, 2019
Stockholders' Equity Note Disclosure, Disclosure of Compensation Related Costs, Share-based Payments and Earnings Per Share [Abstract]  
Capital Capital
As of September 30, 2019, there were 304,256,572 operating partnership units outstanding, of which 180,149,553, or 59.2%, were owned by ESRT and 124,107,019, or 40.8%, were owned by other partners, including ESRT directors, members of senior management and other employees.
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 ESRT and the 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 ESRT common
stock is 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 ESRT 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 ESRT 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 and 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 ESRT Class A common stock available for issuance under the 2019 Plan. In addition, shares of ESRT Class A common stock repurchased on the open market will not be added back to the shares of ESRT Class A common stock available for issuance under the 2019 Plan.
Long-term incentive plan ("LTIP") units are a special class of partnership interests. Each LTIP unit awarded will be deemed equivalent to an award of one share of ESRT 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, we will revalue for tax purposes its assets upon the occurrence of certain specified events, and any increase in valuation from the time of grant until such event will be allocated first to the holders of LTIP units to equalize the capital accounts of such holders with the capital accounts of unitholders. Subject to any agreed upon exceptions, once vested and having achieved parity with unitholders, LTIP units are convertible into Series PR operating partnership units on a one-for-one basis.     
LTIP units subject to time based vesting, whether vested or not, receive the same per unit distributions as operating partnership units, which equal per share dividends (both regular and special) on our common stock. Performance based LTIP units receive 10% of such distributions currently, unless and until such LTIP units are earned based on performance, at which time they will receive the accrued and unpaid 90% and will commence receiving 100% of such distributions thereafter.

Private Perpetual Preferred Units
During September 2019, we commenced an offer to exchange 15,000,000 newly issued Series 2019 Private Perpetual Preferred Units ("Series 2019 Preferred Units") for outstanding Series ES operating partnership units, Series 60 operating partnership units, Series 250 operating partnership units and Series PR operating partnership units on a one-for-one basis, in reliance upon an exemption from registration under Section 3(a)(9) of the Securities Act of 1933, as amended. 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 2019 Preferred Units are not redeemable at the option of the holders and are redeemable at our option only upon the occurrence of certain events involving a change in control and the payment of an amount equal to 200% of such liquidation preference. The offering is set to expire on November 22, 2019.
Distributions
Total distributions paid to OP unitholders were $31.9 million and $95.7 million for the three and nine months ended September 30, 2019, respectively, and $31.9 million and $95.3 million for the three and nine months ended September 30, 2018, respectively. Total distributions paid to preferred unitholders were $0.2 million and $0.7 million for the three and nine months ended September 30, 2019, respectively, and $0.2 million and $0.7 million for the three and nine months ended September 30, 2018, 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 ESRT common stock is authorized for issuance under awards granted pursuant to the 2019 Plan, and as of September 30, 2019, 11.5 million shares of ESRT common stock remain available for future issuance.
In March 2019, we made grants of LTIP units to executive officers under the 2013 Plan. At such time, we granted to executive officers a total of 461,693 LTIP units that are subject to time-based vesting and 1,806,520 LTIP units that are subject to performance-based vesting, with fair market values of $6.4 million for the time-based vesting awards and $12.8 million for the performance-based vesting awards. In March 2019, we made grants of LTIP units and restricted stock to certain other employees under the 2013 Plan. At such time, we granted to certain other employees a total of 61,432 LTIP units and 69,358 shares of restricted stock that are subject to time-based vesting and 113,383 LTIP units that are subject to performance-based
vesting, with fair market values of $2.0 million for the time-based vesting awards and $0.9 million for the performance-based vesting awards. The awards subject to time-based vesting vest ratably over four years from January 1, 2019, subject generally to the grantee's continued employment. The first installment vests on January 1, 2020 and the remainder will vest thereafter in three equal annual installments. The vesting of the LTIP units subject to performance-based vesting is based on the achievement of relative total stockholder return hurdles over a three-year performance period, commencing on January 1, 2019. Following the completion of the three-year performance period, our compensation committee will determine the number of LTIP units to which the grantee is entitled based on our performance relative to the performance hurdles set forth in the LTIP unit award agreements the grantee entered into in connection with the award grant. These units then vest in two installments, with the first installment vesting on January 1, 2022 and the second installment vesting on January 1, 2023, subject generally to the grantee's continued employment on those dates.
Our named executive officers can elect to receive their annual incentive bonus in any combination of (i) cash or vested LTIP's at the face amount of such bonus or (ii) time-vesting LTIP's which would vest over three years, subject to continued employment, at 125% of such face amount. In March 2019, we made grants of LTIP units to executive officers under the 2013 Plan in connection with the 2018 bonus election program. We granted to executive officers a total of 334,952 LTIP units that are subject to time based vesting with a fair market value of $4.6 million. Of these LTIP units, 26,056 LTIP units vested immediately on the grant date and 308,896 LTIP units vest ratably over three years from January 1, 2019, subject generally to the grantee's continued employment. The first installment vests on January 1, 2020 and the remainder will vest thereafter in two equal annual installments.
In May 2019, we made grants of LTIP units to our non-employee directors under the 2019 Plan. At such time, we granted a total of 70,746 LTIP units that are subject to time-based vesting with fair market values of $1.0 million. The awards vest ratably over three years from the date of the grant, subject generally to the director's continued service on our Board of Directors.
Share-based compensation is measured at the fair value of the award on the date of grant and recognized as an expense on a straight-line basis over the vesting period. For the performance-based LTIP units, 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 a six-year look-back period.  The expected growth rate of the stock prices over the performance period is determined with consideration of the risk free rate as of the grant date.  For LTIP unit awards that are time-based, the fair value of the awards was estimated based on the fair value of our stock at the grant date discounted for the restriction period during which the LTIP units cannot be redeemed or transferred and the uncertainty regarding if, and when, the book capital account of the LTIP units will equal that of the common units.  For restricted stock awards that are time-based, we estimate the stock compensation expense based on the fair value of the stock at the grant date.
LTIP units and ESRT restricted stock issued during the nine months ended September 30, 2019 were valued at $27.9 million. The weighted-average per unit or share fair value was $9.55 for grants issued in 2019. The per unit or share granted in 2019 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 2.40%, a risk-free interest rate from 2.48% to 2.63%, and an expected price volatility from 17.0% to 22.0%.
No other stock options, dividend equivalents, or stock appreciation rights were issued or outstanding in 2019.
The following is a summary of ESRT restricted stock and LTIP unit activity for the nine months ended September 30, 2019:
 
Restricted Stock
 
LTIP Units
 
Weighted Average Grant Fair Value
Unvested balance at December 31, 2018
91,158

 
5,702,821

 
$
9.68

Vested
(35,724
)
 
(598,402
)
 
15.98

Granted
69,358

 
2,848,726

 
9.55

Forfeited or unearned
(5,762
)
 
(1,972,548
)
 
7.34

Unvested balance at September 30, 2019
119,030

 
5,980,597

 
$
9.72


The LTIP unit and ESRT restricted stock awards will immediately vest upon the later of (i) the date the grantee attains the age of 60 and (ii) the date on which grantee has first completed ten years of continuous service with our company or its affiliates. For award agreements that qualify, we recognize noncash compensation expense on the grant date for the time-based awards and ratably over the vesting period for the performance-based awards, and accordingly, we recognized $0.3 million and $1.8 million for the three and nine months ended September 30, 2019, respectively, and $0.4 million and $1.7 million for the three and nine months ended September 30, 2018, respectively. Unrecognized compensation expense was $1.4 million at September 30, 2019, which will be recognized over a weighted average period of 2.3 years.
For the remainder of the LTIP unit and ESRT restricted stock awards, we recognize noncash compensation expense ratably over the vesting period, and accordingly, we recognized noncash compensation expense of $3.4 million and $13.6 million for the three and nine months ended September 30, 2019, respectively, and $4.5 million and $12.4 million for the three and nine months ended September 30, 2018, respectively. Unrecognized compensation expense was $33.8 million at September 30, 2019, which will be recognized over a weighted average period of 2.3 years.

Earnings Per Unit
Earnings per unit for the three and nine months ended September 30, 2019 and 2018 is computed as follows (amounts in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Numerator:
 
 
 
 
 
 
 
Net income
$
26,784

 
$
29,230

 
$
55,570

 
$
77,472

Private perpetual preferred unit distributions
(234
)
 
(234
)
 
(702
)
 
(702
)
Earnings allocated to unvested units
(243
)
 
(212
)
 
(646
)
 
(586
)
Net income attributable to common unitholders - basic and diluted
$
26,307

 
$
28,784

 
$
54,222

 
$
76,184

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average units outstanding - basic
298,151

 
297,478

 
298,117

 
297,180

Effect of dilutive securities:
 
 
 
 
 
 
 
  Stock-based compensation plans


 

 

 
1

Weighted average units outstanding - diluted
298,151

 
297,478

 
298,117

 
297,181

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.09

 
$
0.10

 
$
0.18

 
$
0.26

Diluted
$
0.09

 
$
0.10

 
$
0.18

 
$
0.26


There were 452,457 and 288,053 antidilutive shares and LTIP units for the three and nine months ended September 30, 2019, respectively, and 541,947 and 458,698 antidilutive shares and LTIP units for the three and nine months ended September 30, 2018, respectively.
v3.19.3
Accounts Payable and Accrued Expenses
9 Months Ended
Sep. 30, 2019
Payables and Accruals [Abstract]  
Accounts Payable and Accrued Expenses Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following as of September 30, 2019 and December 31, 2018 (amounts in thousands):
 
September 30, 2019
 
December 31, 2018
Accrued capital expenditures
$
77,142

 
$
85,242

Accounts payable and accrued expenses
34,328

 
34,585

Interest rate swap agreements liability
28,850

 
5,243

Accrued interest payable
2,851

 
4,990

Due to affiliated companies
30

 
616

     Total accounts payable and accrued expenses
$
143,201

 
$
130,676


v3.19.3
Capital - Earnings Per Unit (Details) - USD ($)
$ / shares in Units, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Numerator:        
Net income $ 26,784 $ 29,230 $ 55,570 $ 77,472
Private perpetual preferred unit distributions (234) (234) (702) (702)
Earnings allocated to unvested units (243) (212) (646) (586)
Net income attributable to common unitholders - basic and diluted $ 26,307 $ 28,784 $ 54,222 $ 76,184
Denominator:        
Weighted average units outstanding - basic (in units) 298,151,000 297,478,000 298,117,000 297,180,000
Effect of dilutive securities:        
Stock-based compensation plans (in units) 0 0 0 1,000
Weighted average units outstanding - diluted (in units) 298,151,000 297,478,000 298,117,000 297,181,000
Earnings per share:        
Basic (in USD per unit) $ 0.09 $ 0.10 $ 0.18 $ 0.26
Diluted (in USD per unit) $ 0.09 $ 0.10 $ 0.18 $ 0.26
Antidilutive securities (in units) 452,457 541,947 288,053 458,698
v3.19.3
Capital - Additional Information and Private Perpetual Preferred Units (Details) - $ / shares
9 Months Ended
Sep. 30, 2019
May 16, 2019
Shares and Units [Abstract]    
OP units outstanding (in shares) 304,256,572  
Dividends on common stock received until performance criteria met for LTIP units (as a percent) 10.00%  
Dividends on common stock received after performance criteria met for LTIP units (as a percent) 90.00%  
Dividends on common stock received in periods after performance criteria met for LTIP units (as a percent) 100.00%  
2019 Plan    
Shares and Units [Abstract]    
Number of shares authorized under the plan (in shares) 11,000,000.0 11,000,000.0
Private Perpetual Preferred Units    
Shares and Units [Abstract]    
Maximum number of shares offered in exchange (in shares) 15,000,000  
Liquidation preference (in USD per share) $ 13.52  
Cumulative preferential annual cash distributions per unit (in USD per share) $ 0.70  
Percentage of liquidation preference 200.00%  
Empire State Realty Trust    
Shares and Units [Abstract]    
OP units owned by the Company (in shares) 180,149,553  
Other Partners, Certain Directors, Officers And Other Members Of Executive Management    
Shares and Units [Abstract]    
OP units not owned by the Company (in shares) 124,107,019  
Empire State Realty OP | Empire State Realty Trust    
Shares and Units [Abstract]    
OP units owned by the Company (as a percent) 59.20%  
Empire State Realty OP | Other Partners, Certain Directors, Officers And Other Members Of Executive Management    
Shares and Units [Abstract]    
OP units not owned by the Company (as a percent) 40.80%  
v3.19.3
Commitments and Contingencies - Unfunded Capital Expenditures (Details)
$ in Millions
Sep. 30, 2019
USD ($)
Commitments and Contingencies Disclosure [Abstract]  
Estimated capital expenditures to be incurred $ 144.2
v3.19.3
Financial Instruments and Fair Values - Effect of Derivative Financial Instruments Designated as Cash Flow Hedges (Details) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Derivative Instruments, Gain (Loss) [Line Items]        
Amount of gain (loss) recognized in other comprehensive income (loss) $ (6,256) $ 3,884 $ (25,992) $ 9,827
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense (319) (427) (637) (1,562)
Interest expense (19,426) (20,658) (60,712) (58,774)
Interest Rate Swap        
Derivative Instruments, Gain (Loss) [Line Items]        
Amount of gain (loss) recognized in other comprehensive income (loss) (6,256) 3,884 (25,992) 9,827
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense (319) (427) (637) (1,562)
Reclassification out of Accumulated Other Comprehensive Income | Accumulated other comprehensive income (loss) | Interest Rate Swap        
Derivative Instruments, Gain (Loss) [Line Items]        
Interest expense $ (319) $ (427) $ (637) $ (1,562)
v3.19.3
Leases - Future Contractual Minimum Lease Payments On Non-Cancellable Operating Leases To Be Received (Details) - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Leases [Abstract]    
Remainder of 2019 $ 124,080  
2020 496,805  
2021 477,068  
2022 446,300  
2023 419,857  
Thereafter 1,954,810  
Total future minimum lease payments on non-cancellable operating leases to be received $ 3,918,920  
2019   $ 485,441
2020   460,127
2021   423,365
2022   391,395
2023   362,738
Thereafter   1,536,461
Total future minimum lease payments on non-cancellable operating leases to be received   $ 3,659,527
v3.19.3
Financial Instruments and Fair Values (Tables)
9 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
Summary of the Terms of Agreements and the Fair Value of Derivative Financial Instruments
The table below summarizes the terms of agreements and the fair values of our derivative financial instruments as of September 30, 2019 and December 31, 2018 (dollar amounts in thousands):     
 
 
 
 
September 30, 2019
 
December 31, 2018
Derivative
 
Notional Amount
Receive Rate
Pay Rate
Effective Date
Expiration Date
 
Asset
Liability
 
Asset
Liability
Interest rate swap
 
$
265,000

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

$
(5,594
)
 
$
2,536

$

Interest rate swap
 
125,000

3 Month LIBOR
2.9580%
July 1, 2019
July 1, 2026
 

(11,628
)
 

(2,623
)
Interest rate swap
 
125,000

3 Month LIBOR
2.9580%
July 1, 2019
July 1, 2026
 

(11,628
)
 

(2,620
)
 
 
 
 
 
 
 
 
$

$
(28,850
)
 
$
2,536

$
(5,243
)
Effect of Derivative Financial Instruments Designated as Cash Flow Hedges
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, 2019 and 2018 (amounts in thousands):    
 
 
Three Months Ended
 
Nine Months Ended
Effects of Cash Flow Hedges
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Amount of gain (loss) recognized in other comprehensive income (loss)
 
$
(6,256
)
 
$
3,884

 
$
(25,992
)
 
$
9,827

Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense
 
(319
)
 
(427
)
 
(637
)
 
(1,562
)
The table below shows the effect of our derivative financial instruments designated as cash flow hedges on the condensed consolidated statements of income for the three and nine months ended September 30, 2019 and 2018 (amounts in thousands):
 
 
Three Months Ended
 
Nine Months Ended
Effects of Cash Flow Hedges
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Total interest (expense) presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded
 
$
(19,426
)
 
$
(20,658
)
 
$
(60,712
)
 
$
(58,774
)
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense
 
(319
)
 
(427
)
 
(637
)
 
(1,562
)

Summary of the Carrying and Estimated Fair Values of Financial Instruments
The following tables summarize the carrying and estimated fair values of our financial instruments as of September 30, 2019 and December 31, 2018 (amounts in thousands):
 
September 30, 2019
 
 
 
Estimated Fair Value
 
Carrying
Value
 
Total
 
Level 1
 
Level 2
 
Level 3
Interest rate swaps included in prepaid expenses and other assets

$

 
$

 
$

 
$

 
$

Interest rate swaps included in accounts payable and accrued expenses
28,850

 
28,850

 

 
28,850

 

Mortgage notes payable
606,313

 
643,159

 

 

 
643,159

Senior unsecured notes - Series A, B, C, D, E and F
798,347

 
861,245

 

 

 
861,245

Unsecured term loan facility
264,517

 
265,000

 

 

 
265,000

Ground lease liabilities
29,355

 
29,355

 

 

 
29,355

 
December 31, 2018
 
 
 
Estimated Fair Value
 
Carrying
Value
 
Total
 
Level 1
 
Level 2
 
Level 3
Interest rate swaps included in prepaid expenses and other assets

$
2,536

 
$
2,536

 
$

 
$
2,536

 
$

Interest rate swaps included in accounts payable and accrued expenses
5,243

 
5,243

 

 
5,243

 

Mortgage notes payable
608,567

 
597,424

 

 

 
597,424

Senior unsecured notes - Exchangeable
247,930

 
250,625

 

 
250,625

 

Senior unsecured notes - Series A, B, C, D, E and F
798,289

 
795,662

 

 

 
795,662

Unsecured term loan facility
264,147

 
265,000

 

 

 
265,000


v3.19.3
Summary of Significant Accounting Policies (Policies)
9 Months Ended
Sep. 30, 2019
Accounting Policies [Abstract]  
Recently Issued or Adopted Accounting Standards
During August 2018, the FASB issued Accounting Standards Update ("ASU") No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force), which contain amendments that align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software
(and hosting arrangements that include an internal use software license). Accordingly, for entities in a hosting arrangement that is a service contract, costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. The amendments in ASU No. 2018-15 also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments is permitted, including adoption in any interim period. The amendments in ASU No. 2018-15 should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are evaluating the impact of adopting this new accounting standard on our consolidated financial statements.
During January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which contain amendments that modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. ASU No. 2017-04 should be applied on a prospective basis and the amendments adopted for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are evaluating the impact of adopting this new accounting standard on our consolidated financial statements.
During June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which contains amendments that replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU No. 2016-13 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Earlier adoption as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, is permitted. The amendments must be adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified retrospective approach). We do not anticipate the adoption of this new accounting standard to have a material impact on our consolidated financial statements.
During February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In addition, lessors may only capitalize incremental direct leasing costs. Subsequent amendments to ASU No. 2016-02 also provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component provided that (1) the timing and pattern of transfer are the same for the nonlease components and associated lease component and (2) the lease component, if accounted separately, would be classified as an operating lease.  We adopted this standard and related amendments on January 1, 2019 and elected the available practical expedients. Such adoption resulted in the recognition of right-of-use assets and lease liabilities for our operating leases on our balance sheet of approximately $29.5 million.
We adopted FASB Topic 842, Lease Accounting, using the modified retrospective approach on January 1, 2019 and elected to apply the transition provisions of the standard at adoption. As such, the prior period amounts presented under Topic 840 were not restated to conform with the 2019 presentation. We adopted the practical expedient in Topic 842, which allows us to avoid separating lease and non-lease rental income. Consequently, all rental income earned pursuant to tenant leases in 2019 is reflected as one category, “Rental Revenue,” in the 2019 consolidated statement of income.
Topic 842 also requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The adoption of this standard resulted in the recognition of right-of-use assets and lease liabilities for our operating leases on our balance sheet of approximately $29.5 million.
In addition, under Topic 842, lessors may only capitalize incremental direct leasing costs. As a result, we no longer capitalize our non-contingent leasing costs and instead expense these costs as incurred. These costs totaled $3.7 million for the nine months ended September 30, 2019.
Basis of Quarterly Presentation
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.
Principles of Consolidation 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, 2018 contained in our Annual Report on Form 10-K. We do not consider our business to be subject to material seasonal fluctuations, except that our observatory business is subject to tourism seasonality.
Principles of Consolidation for Variable Interest Entities
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. We had no VIEs as of September 30, 2019 and December 31, 2018.
We will assess the accounting treatment for each investment we may have in the future. This assessment will include a review of each entity’s organizational agreement to determine which party has what rights and whether those rights are protective or participating. For all VIEs, we will review such agreements in order to determine which party has the power to direct the activities that most significantly impact the entity’s economic performance and benefit. In situations where we or our partner could approve, among other things, the annual budget, or leases that cover more than a nominal amount of space relative to the total rentable space at each property, we would not consolidate the investment as we consider these to be substantive participation rights that result in shared power of the activities that would most significantly impact the performance and benefit of such joint venture investment.
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Non-controlling interests are required to be presented as a separate component of equity in the condensed consolidated balance sheets and in the condensed consolidated statements of income by requiring earnings and other comprehensive income to be attributed to controlling and non-controlling interests.
Accounting Estimates The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to use estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Significant items subject to such estimates and assumptions include allocation of the purchase price of acquired real estate properties among tangible and intangible assets, determination of the useful life of real estate properties and other long-lived assets, valuation and impairment analysis of commercial real estate properties, right of use assets and other long-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.
v3.19.3
Description of Business and Organization (Details)
Sep. 30, 2019
ft²
parcel
office_and_property
Organization, Consolidation and Presentation of Financial Statements Disclosure [Line Items]  
Area of real estate property (in square feet) 10,100,000
Office Building  
Organization, Consolidation and Presentation of Financial Statements Disclosure [Line Items]  
Area of real estate property (in square feet) 9,400,000
Number of properties | office_and_property 14
Office Building | Manhattan  
Organization, Consolidation and Presentation of Financial Statements Disclosure [Line Items]  
Area of real estate property (in square feet) 7,600,000
Number of properties | office_and_property 9
Office Building | Fairfield County, Connecticut and Westchester County, New York  
Organization, Consolidation and Presentation of Financial Statements Disclosure [Line Items]  
Area of real estate property (in square feet) 1,800,000
Number of properties | office_and_property 5
Development Parcel  
Organization, Consolidation and Presentation of Financial Statements Disclosure [Line Items]  
Number of properties | parcel 3
Retail Site | Manhattan and Westport, Connecticut  
Organization, Consolidation and Presentation of Financial Statements Disclosure [Line Items]  
Area of real estate property (in square feet) 205,595
Retail Site | Manhattan  
Organization, Consolidation and Presentation of Financial Statements Disclosure [Line Items]  
Area of real estate property (in square feet) 511,755
Number of properties | office_and_property 4
Retail Site | Westport, Connecticut  
Organization, Consolidation and Presentation of Financial Statements Disclosure [Line Items]  
Number of properties | office_and_property 2
Other Property | Stamford, Connecticut  
Organization, Consolidation and Presentation of Financial Statements Disclosure [Line Items]  
Area of real estate property (in square feet) 380,000
v3.19.3
Financial Instruments and Fair Values - Summary of the Terms of Agreements and the Fair Value of Derivative Financial Instruments (Details) - Cash Flow Hedging - Designated as Hedging Instrument - USD ($)
Sep. 30, 2019
Dec. 31, 2018
Derivatives, Fair Value [Line Items]    
Asset $ 0 $ 2,536,000
Liability (28,850,000) (5,243,000)
LIBOR | Interest Rate Swap, One Month LIBOR, 2.1485%    
Derivatives, Fair Value [Line Items]    
Notional Amount $ 265,000,000  
Pay Rate 2.1485%  
Asset $ 0 2,536,000
Liability (5,594,000) 0
LIBOR | Interest Rate Swap, Three Month LIBOR, 2.9580%, Swap 1    
Derivatives, Fair Value [Line Items]    
Notional Amount $ 125,000,000  
Pay Rate 2.958%  
Asset $ 0 0
Liability (11,628,000) (2,623,000)
LIBOR | Interest Rate Swap, Three Month LIBOR, 2.9580%, Swap 2    
Derivatives, Fair Value [Line Items]    
Notional Amount $ 125,000,000  
Pay Rate 2.958%  
Asset $ 0 0
Liability $ (11,628,000) $ (2,620,000)
v3.19.3
Leases - Components of Rental Revenue (Details) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2019
Leases [Abstract]    
Fixed payments $ 129,030 $ 380,647
Variable payments 21,195 54,066
Total rental revenue $ 150,225 $ 434,713
v3.19.3
Commitments and Contingencies - Legal Proceedings (Details)
1 Months Ended
Oct. 31, 2014
participant
New York State Supreme Court, New York County  
Loss Contingencies [Line Items]  
Number of participants opting out of settlement 12
v3.19.3
Summary of Significant Accounting Policies (Details) - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2019
Jan. 01, 2019
Accounting Policies [Line Items]    
Operating lease, right-of-use assets $ 29,355  
Operating lease, liabilities 29,355  
Leasing cost $ 3,700  
Minimum    
Accounting Policies [Line Items]    
Observatory revenue realized during the first quarter, previous ten years (as a percent) 16.00%  
Observatory revenue realized during the second quarter, previous ten years (as a percent) 26.00%  
Observatory revenue realized during the third quarter, previous ten years (as a percent) 31.00%  
Observatory revenue realized during the fourth quarter, previous ten years (as a percent) 23.00%  
Maximum    
Accounting Policies [Line Items]    
Observatory revenue realized during the first quarter, previous ten years (as a percent) 18.00%  
Observatory revenue realized during the second quarter, previous ten years (as a percent) 28.00%  
Observatory revenue realized during the third quarter, previous ten years (as a percent) 33.00%  
Observatory revenue realized during the fourth quarter, previous ten years (as a percent) 25.00%  
ASU 2016-02    
Accounting Policies [Line Items]    
Operating lease, right-of-use assets   $ 29,500
Operating lease, liabilities   $ 29,500
v3.19.3
Leases (Tables)
9 Months Ended
Sep. 30, 2019
Leases [Abstract]  
Schedule of Components of Rental Revenue The components of rental revenue for the three and nine months ended September 30, 2019 are as follows (amounts in thousands):
 
Three months ended September 30, 2019
 
Nine months ended September 30, 2019
Fixed payments
$
129,030

 
$
380,647

Variable payments
21,195

 
54,066

Total rental revenue
$
150,225

 
$
434,713


Schedule of Future Contractual Minimum Lease Payments On Non-Cancellable Operating Leases To Be Received
As of September 30, 2019, 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 2038 (amounts in thousands):
Remainder of 2019
$
124,080

2020
496,805

2021
477,068

2022
446,300

2023
419,857

Thereafter
1,954,810

 
$
3,918,920


Schedule of Future Contractual Minimum Lease Payments On Non-Cancellable Operating Leases To Be Received
Future minimum lease payments to be paid over the terms of the leases as of December 31, 2018 are as follows (amounts in thousands):
2019
$
1,518

2020
1,518

2021
1,518

2022
1,518

2023
1,518

Thereafter
68,298

 
$
75,888


As of December 31, 2018, 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 2038 (amounts in thousands):
2019
$
485,441

2020
460,127

2021
423,365

2022
391,395

2023
362,738

Thereafter
1,536,461

 
$
3,659,527


Schedule of Information Relating to the Measurement of Lease Liabilities
Information relating to the measurement of our lease liabilities as of September 30, 2019 are as follows:
Weighted average remaining lease term (in years)
50.8

Weighted average discount rate
4.49
%
Cash paid for operating leases nine months ended September 30, 2019 (in thousands)
$
1,139


Schedule of Future Minimum Lease Payments
Future minimum lease payments to be paid over the terms of the leases as of September 30, 2019 are as follows (amounts in thousands):
Remainder of 2019
$
380

2020
1,518

2021
1,518

2022
1,518

2023
1,518

Thereafter
68,298

Total undiscounted cash flows
74,750

Present value discount
(45,395
)
Ground lease liabilities
$
29,355


v3.19.3
Deferred Costs, Acquired Lease Intangibles and Goodwill (Tables)
9 Months Ended
Sep. 30, 2019
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]  
Deferred Costs, Net
Deferred costs, net, consisted of the following as of September 30, 2019 and December 31, 2018 (amounts in thousands):  

 
September 30, 2019
 
December 31, 2018
Leasing costs
$
185,698

 
$
178,120

Acquired in-place lease value and deferred leasing costs
206,026

 
214,550

Acquired above-market leases
49,906

 
52,136

 
441,630

 
444,806

Less: accumulated amortization
(222,651
)
 
(209,839
)
Total deferred costs, net, excluding net deferred financing costs
$
218,979

 
$
234,967


Deferred financing costs, net, consisted of the following at September 30, 2019 and December 31, 2018 (amounts in thousands):
 
 
September 30, 2019
 
December 31, 2018
Financing costs
 
$
25,315

 
$
25,315

Less: accumulated amortization
 
(12,991
)
 
(10,027
)
Total deferred financing costs, net
 
$
12,324

 
$
15,288


Amortizing Acquired Intangible Assets and Liabilities
Amortizing acquired intangible assets and liabilities consisted of the following as of September 30, 2019 and December 31, 2018 (amounts in thousands):
 
September 30, 2019
 
December 31, 2018
Acquired below-market ground leases
$
396,916

 
$
396,916

Less: accumulated amortization
(42,392
)
 
(36,518
)
Acquired below-market ground leases, net
$
354,524

 
$
360,398

 
September 30, 2019
 
December 31, 2018
Acquired below-market leases
$
(113,625
)
 
$
(118,462
)
Less: accumulated amortization
70,970

 
66,012

Acquired below-market leases, net
$
(42,655
)
 
$
(52,450
)

v3.19.3
Deferred Costs, Acquired Lease Intangibles and Goodwill - Deferred Costs, Net (Details) - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Finite-Lived Intangible Assets [Line Items]    
Leasing costs $ 185,698 $ 178,120
Deferred costs, gross 441,630 444,806
Less: accumulated amortization (222,651) (209,839)
Total deferred costs, net, excluding net deferred financing costs 218,979 234,967
Acquired in-place lease value and deferred leasing costs    
Finite-Lived Intangible Assets [Line Items]    
Acquired finite-lived intangible assets 206,026 214,550
Acquired above-market leases    
Finite-Lived Intangible Assets [Line Items]    
Acquired finite-lived intangible assets $ 49,906 $ 52,136
v3.19.3
Debt - Aggregate Required Principal Payments (Details) - Mortgages - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Amortization    
2019 $ 961  
2020 3,938  
2021 4,090  
2022 5,628  
2023 7,876  
Thereafter 33,868  
Total 56,361  
Maturities    
2019 0  
2020 0  
2021 0  
2022 265,000  
2023 0  
Thereafter 1,355,422  
Total 1,620,422  
Total    
2019 961  
2020 3,938  
2021 4,090  
2022 270,628  
2023 7,876  
Thereafter 1,389,290  
Total $ 1,676,783 $ 1,929,612
v3.19.3
Condensed Consolidated Statements of Capital (unaudited) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Increase (Decrease) in Partners' Capital [Roll Forward]        
Beginning balance $ 1,948,032 $ 1,983,141 $ 1,991,109 $ 1,977,737
Issuance of OP units, net of costs 0 0 0 4,749
Conversion of operating partnership units to ESRT Partner's Capital 0 0 0 0
Equity compensation 3,647 4,853 15,392 14,064
Distributions (32,180) (32,084) (96,370) (95,960)
Net income 26,784 29,230 55,570 77,472
Other comprehensive income (loss) (5,937) 4,311 (25,355) 11,389
Ending balance $ 1,940,346 $ 1,989,451 $ 1,940,346 $ 1,989,451
General Partner | Series PR Operating Partnership Units        
Increase (Decrease) in Partners' Capital [Roll Forward]        
Beginning balance (in units) 178,021 167,704 174,912 161,477
Beginning balance $ 1,215,647 $ 1,194,533 $ 1,238,482 $ 1,168,282
Issuance of OP units, net of costs (in units) 0 0 0 284
Issuance of OP units, net of costs $ 0 $ 0 $ 0 $ 4,749
Conversion of operating partnership units to ESRT Partner's Capital (in units) 2,130 1,517 5,185 7,436
Conversion of operating partnership units to ESRT Partner's Capital $ 12,796 $ 5,815 $ 21,654 $ 31,660
Equity compensation (in units) (1)   53 24
Equity compensation $ 191 153 $ 421 $ 269
Distributions (18,907) (17,727) (56,098) (52,519)
Net income 15,882 16,342 32,646 42,761
Other comprehensive income (loss) $ (3,590) $ 2,430 $ (15,086) $ 6,344
Ending balance (in units) 180,150 169,221 180,150 169,221
Ending balance $ 1,222,019 $ 1,201,546 $ 1,222,019 $ 1,201,546
Limited Partners | Series PR Operating Partnership Units        
Increase (Decrease) in Partners' Capital [Roll Forward]        
Beginning balance (in units) 86,749 91,447 86,202 91,760
Beginning balance $ 713,039 $ 759,895 $ 725,108 $ 778,279
Conversion of operating partnership units to ESRT Partner's Capital (in units) (1,554) (647) (2,517) (3,576)
Conversion of operating partnership units to ESRT Partner's Capital $ (12,672) $ (5,396) $ (20,655) $ (29,835)
Equity compensation (in units) (634)   876 2,616
Equity compensation $ 3,456 4,700 $ 14,971 $ 13,795
Distributions (8,880) (9,558) (26,884) (28,725)
Net income 7,114 8,294 14,760 22,340
Other comprehensive income (loss) $ (1,578) $ 1,233 $ (6,821) $ 3,314
Ending balance (in units) 84,561 90,800 84,561 90,800
Ending balance $ 700,479 $ 759,168 $ 700,479 $ 759,168
Limited Partners | Series ES Operating Partnership Units Limited Partners        
Increase (Decrease) in Partners' Capital [Roll Forward]        
Beginning balance (in units) 28,518 31,407 30,129 33,774
Beginning balance $ 8,508 $ 15,238 $ 14,399 $ 17,132
Conversion of operating partnership units to ESRT Partner's Capital (in units) (358) (497) (1,969) (2,864)
Conversion of operating partnership units to ESRT Partner's Capital $ (85) $ (253) $ (788) $ (1,394)
Distributions (2,960) (3,252) (9,020) (9,984)
Net income 2,547 3,084 5,322 8,291
Other comprehensive income (loss) $ (556) $ 458 $ (2,459) $ 1,230
Ending balance (in units) 28,160 30,910 28,160 30,910
Ending balance $ 7,454 $ 15,275 $ 7,454 $ 15,275
Limited Partners | Series 60 Operating Partnership Units Limited Partners        
Increase (Decrease) in Partners' Capital [Roll Forward]        
Beginning balance (in units) 7,686 8,545 8,020 8,988
Beginning balance $ 1,871 $ 3,580 $ 3,385 $ 3,992
Conversion of operating partnership units to ESRT Partner's Capital (in units) (142) (301) (476) (744)
Conversion of operating partnership units to ESRT Partner's Capital $ (25) $ (133) $ (143) $ (318)
Distributions (794) (872) (2,431) (2,689)
Net income 662 841 1,427 2,226
Other comprehensive income (loss) $ (135) $ 125 $ (659) $ 330
Ending balance (in units) 7,544 8,244 7,544 8,244
Ending balance $ 1,579 $ 3,541 $ 1,579 $ 3,541
Limited Partners | Series 250 Operating Partnership Units Limited Partners        
Increase (Decrease) in Partners' Capital [Roll Forward]        
Beginning balance (in units) 3,917 4,230 4,064 4,410
Beginning balance $ 963 $ 1,891 $ 1,731 $ 2,048
Conversion of operating partnership units to ESRT Partner's Capital (in units) (75) (72) (222) (252)
Conversion of operating partnership units to ESRT Partner's Capital $ (14) $ (33) $ (68) $ (113)
Distributions (405) (441) (1,235) (1,341)
Net income 345 435 713 1,152
Other comprehensive income (loss) $ (78) $ 65 $ (330) $ 171
Ending balance (in units) 3,842 4,158 3,842 4,158
Ending balance $ 811 $ 1,917 $ 811 $ 1,917
Private Perpetual Preferred Units        
Increase (Decrease) in Partners' Capital [Roll Forward]        
Beginning balance (in units) 1,560 1,560 1,560 1,560
Beginning balance $ 8,004 $ 8,004 $ 8,004 $ 8,004
Distributions (234) (234) (702) (702)
Net income $ 234 $ 234 $ 702 $ 702
Ending balance (in units) 1,560 1,560 1,560 1,560
Ending balance $ 8,004 $ 8,004 $ 8,004 $ 8,004
v3.19.3
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Commercial real estate properties, at cost:    
Land $ 201,196 $ 201,196
Development costs 7,989 7,987
Building and improvements 2,830,353 2,675,303
Commercial real estate properties, at cost 3,039,538 2,884,486
Less: accumulated depreciation (829,495) (747,304)
Commercial real estate properties, net 2,210,043 2,137,182
Cash and cash equivalents 293,710 204,981
Restricted cash 36,609 65,832
Short-term investments 0 400,000
Tenant and other receivables, net of allowance of $488 as of December 31, 2018 29,287 29,437
Deferred rent receivables, net of allowance of $19 as of December 31, 2018 214,685 200,903
Prepaid expenses and other assets 41,927 64,345
Deferred costs, net 223,698 241,223
Acquired below-market ground leases, net 354,524 360,398
Right of use assets 29,355  
Goodwill 491,479 491,479
Total assets 3,925,317 4,195,780
Liabilities:    
Mortgage notes payable, net 606,313 608,567
Senior unsecured notes, net 798,347 1,046,219
Unsecured term loan facility, net 264,517 264,147
Unsecured revolving credit facility 0 0
Accounts payable and accrued expenses 143,201 130,676
Acquired below-market leases, net 42,655 52,450
Ground lease liabilities 29,355  
Deferred revenue and other liabilities 68,742 44,810
Tenants’ security deposits 31,841 57,802
Total liabilities 1,984,971 2,204,671
Commitments and contingencies
Capital:    
Private perpetual preferred units, $16.62 per unit liquidation preference, 1,560,360 issued and outstanding in 2019 and 2018 8,004 8,004
Total capital 1,940,346 1,991,109
Total liabilities and capital 3,925,317 4,195,780
Series PR Operating Partnership Units    
Capital:    
ESRT partner's capital (3,042,566 and 3,033,261 general partner operating partnership units and 177,106,987 and 171,877,365 limited partner operating partnership units outstanding in 2019 and 2018, respectively) 1,222,019 1,238,482
Limited partner operating partnership units 700,479 725,108
Series ES operating partnership units    
Capital:    
Limited partner operating partnership units 7,454 14,399
Series 60 operating partnership units    
Capital:    
Limited partner operating partnership units 1,579 3,385
Series 250 operating partnership units    
Capital:    
Limited partner operating partnership units $ 811 $ 1,731
v3.19.3
Accounts Payable and Accrued Expenses (Details) - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Payables and Accruals [Abstract]    
Accrued capital expenditures $ 77,142 $ 85,242
Accounts payable and accrued expenses 34,328 34,585
Interest rate swap agreements liability 28,850 5,243
Accrued interest payable 2,851 4,990
Due to affiliated companies 30 616
Total accounts payable and accrued expenses $ 143,201 $ 130,676
v3.19.3
Related Party Transactions
9 Months Ended
Sep. 30, 2019
Related Party Transactions [Abstract]  
Related Party Transactions Related Party Transactions
Supervisory Fee Revenue

We earned supervisory fees from entities affiliated with Anthony E. Malkin, our Chairman and Chief Executive Officer, of $0.2 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively, and $0.7 million and $0.9 million for the nine months ended September 30, 2019 and 2018, respectively. These fees are included within third-party management and other fees.


Property Management Fee Revenue
We earned property management fees from entities affiliated with Anthony E. Malkin of $0.1 million and $0.1 million for the three months ended September 30, 2019 and 2018, respectively, and $0.2 million and $0.3 million for the nine months ended September 30, 2019 and 2018, respectively. These fees are included within third-party management and other fees.
Other
We receive rent generally at market rental rate for 5,351 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, 2019 and 2018, respectively, and $0.2 million and $0.3 million for the nine months ended September 30, 2019 and 2018, respectively.
One of ESRT's directors, James D. Robinson IV, is a general partner in an investment fund, which owns more than a 10% economic and voting interest in one of our tenants, OnDeck Capital, with an annualized rent of $4.6 million as of September 30, 2019.
v3.19.3
Financial Instruments and Fair Values
9 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
Financial Instruments and Fair Values Financial Instruments and Fair Values
Derivative Financial Instruments
We use derivative financial instruments primarily to manage interest rate risk and such derivatives are not considered speculative. These derivative instruments are typically in the form of interest rate swap and forward agreements and the primary objective is to minimize interest rate risks associated with investing and financing activities. The counterparties of these arrangements are major financial institutions with which we may also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties; however, we currently do not anticipate that any of the counterparties will fail to meet their obligations.
    
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, 2019, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $29.3 million. If we had breached any of these provisions at September 30, 2019, we could have been required to settle our obligations under the agreements at their termination value of $29.3 million.

As of September 30, 2019 and December 31, 2018, we had interest rate LIBOR swaps with an aggregate notional value of $515.0 million and $515.0 million, respectively. The notional value does not represent exposure to credit, interest rate or market risks. As of September 30, 2019, the fair value of our derivative instruments amounted to $(28.8) million which is included in accounts payable and accrued expenses on the condensed consolidated balance sheet. As of December 31, 2018, the fair value of our derivative instruments amounted to $2.5 million which is included in prepaid expenses and other assets and $(5.2) 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 facility and with a forecast refinancing of our exchangeable senior notes.

As of September 30, 2019 and 2018, our cash flow hedges are deemed highly effective and a net unrealized gain (loss) of $(5.9) million and $4.3 million for the three months ended September 30, 2019 and 2018, respectively, and a net unrealized gain (loss) of $(25.4) million and $11.4 million for the nine months ended September 30, 2019 and 2018, respectively, relating to both active and terminated hedges of interest rate risk, are reflected in the condensed consolidated statements of comprehensive income. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the debt. We estimate that $(5.6) 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, 2019 and December 31, 2018 (dollar amounts in thousands):     
 
 
 
 
September 30, 2019
 
December 31, 2018
Derivative
 
Notional Amount
Receive Rate
Pay Rate
Effective Date
Expiration Date
 
Asset
Liability
 
Asset
Liability
Interest rate swap
 
$
265,000

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

$
(5,594
)
 
$
2,536

$

Interest rate swap
 
125,000

3 Month LIBOR
2.9580%
July 1, 2019
July 1, 2026
 

(11,628
)
 

(2,623
)
Interest rate swap
 
125,000

3 Month LIBOR
2.9580%
July 1, 2019
July 1, 2026
 

(11,628
)
 

(2,620
)
 
 
 
 
 
 
 
 
$

$
(28,850
)
 
$
2,536

$
(5,243
)
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, 2019 and 2018 (amounts in thousands):    
 
 
Three Months Ended
 
Nine Months Ended
Effects of Cash Flow Hedges
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Amount of gain (loss) recognized in other comprehensive income (loss)
 
$
(6,256
)
 
$
3,884

 
$
(25,992
)
 
$
9,827

Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense
 
(319
)
 
(427
)
 
(637
)
 
(1,562
)
The table below shows the effect of our derivative financial instruments designated as cash flow hedges on the condensed consolidated statements of income for the three and nine months ended September 30, 2019 and 2018 (amounts in thousands):
 
 
Three Months Ended
 
Nine Months Ended
Effects of Cash Flow Hedges
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Total interest (expense) presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded
 
$
(19,426
)
 
$
(20,658
)
 
$
(60,712
)
 
$
(58,774
)
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense
 
(319
)
 
(427
)
 
(637
)
 
(1,562
)


Fair Valuation

The estimated fair values at September 30, 2019 and December 31, 2018 were determined by management, using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The fair value of our senior unsecured notes - exchangeable was derived from quoted prices in active markets and is classified as Level 2 since trading volumes are low.

The fair value of derivative instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Although the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our counterparties. The impact of such credit valuation adjustments, determined based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of our derivatives were classified as Level 2 of the fair value hierarchy.

The fair value of our mortgage notes payable, senior unsecured notes - Series A, B, C, D, E and F, unsecured term loan facility and ground lease liabilities which are determined using Level 3 inputs, are estimated by discounting the future cash flows using current interest rates at which similar borrowings could be made to us.

The following tables summarize the carrying and estimated fair values of our financial instruments as of September 30, 2019 and December 31, 2018 (amounts in thousands):
 
September 30, 2019
 
 
 
Estimated Fair Value
 
Carrying
Value
 
Total
 
Level 1
 
Level 2
 
Level 3
Interest rate swaps included in prepaid expenses and other assets

$

 
$

 
$

 
$

 
$

Interest rate swaps included in accounts payable and accrued expenses
28,850

 
28,850

 

 
28,850

 

Mortgage notes payable
606,313

 
643,159

 

 

 
643,159

Senior unsecured notes - Series A, B, C, D, E and F
798,347

 
861,245

 

 

 
861,245

Unsecured term loan facility
264,517

 
265,000

 

 

 
265,000

Ground lease liabilities
29,355

 
29,355

 

 

 
29,355

 
December 31, 2018
 
 
 
Estimated Fair Value
 
Carrying
Value
 
Total
 
Level 1
 
Level 2
 
Level 3
Interest rate swaps included in prepaid expenses and other assets

$
2,536

 
$
2,536

 
$

 
$
2,536

 
$

Interest rate swaps included in accounts payable and accrued expenses
5,243

 
5,243

 

 
5,243

 

Mortgage notes payable
608,567

 
597,424

 

 

 
597,424

Senior unsecured notes - Exchangeable
247,930

 
250,625

 

 
250,625

 

Senior unsecured notes - Series A, B, C, D, E and F
798,289

 
795,662

 

 

 
795,662

Unsecured term loan facility
264,147

 
265,000

 

 

 
265,000


Disclosure about the fair value of financial instruments is based on pertinent information available to us as of September 30, 2019 and December 31, 2018. 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.
v3.19.3
Related Party Transactions (Details)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2019
USD ($)
ft²
property
director
Sep. 30, 2018
USD ($)
Sep. 30, 2019
USD ($)
ft²
property
director
Sep. 30, 2018
USD ($)
Related Party Transaction [Line Items]        
Area of real estate property (in square feet) | ft² 10,100,000   10,100,000  
Number of directors | director 1   1  
Affliliated entity | Supervisory fee revenue        
Related Party Transaction [Line Items]        
Revenue from related parties $ 0.2 $ 0.2 $ 0.7 $ 0.9
Affliliated entity | Property management fee revenue        
Related Party Transaction [Line Items]        
Revenue from related parties 0.1 0.1 0.2 0.3
Affliliated entity | Leased space rental        
Related Party Transaction [Line Items]        
Revenue from related parties $ 0.1 $ 0.1 $ 0.2 $ 0.3
Number of properties | property 1   1  
Lease cancellation, notice period (in days)     90 days  
Affliliated entity | Annualized rent revenue        
Related Party Transaction [Line Items]        
Revenue from related parties     $ 4.6  
Undivided Interest        
Related Party Transaction [Line Items]        
Area of real estate property (in square feet) | ft² 5,351   5,351  
Chairman emeritus | Leased space rental        
Related Party Transaction [Line Items]        
Percentage of lease space occupied by Chairman emeritus and employee     15.00%  
v3.19.3
Capital - Distributions (Details) - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Stockholders' Equity Note Disclosure, Disclosure of Compensation Related Costs, Share-based Payments and Earnings Per Share [Abstract]        
Distributions paid to OP unitholders $ 31.9 $ 31.9 $ 95.7 $ 95.3
Distributions paid to preferred unitholders $ 0.2 $ 0.2 $ 0.7 $ 0.7