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, 2020.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). We intend these forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995 and are including this
statement for purposes of complying with those safe harbor provisions. You can
identify forward-looking statements by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should," "seeks,"
"approximately," "intends," "plans," "estimates," "contemplates," "aims,"
"continues," "would" or "anticipates" or the negative of these words and phrases
or similar words or phrases. In particular, statements pertaining to our capital
resources, portfolio performance, dividend policy and results of operations
contain forward-looking statements. Likewise, all of our statements regarding
anticipated growth in our portfolio from operations, acquisitions and
anticipated market conditions, demographics and results of operations are
forward-looking statements.
Forward-looking statements are subject to substantial risks and uncertainties,
many of which are difficult to predict and are generally beyond our control, and
you should not rely on them as predictions of future events. Forward-looking
statements depend on assumptions, data or methods which may be incorrect or
imprecise, and we may not be able to realize them. We do not guarantee that the
transactions and events described will happen as described (or that they will
happen at all).
The following factors, among others, could cause actual results and future
events to differ materially from those set forth or contemplated in the
forward-looking statements: (i) economic, political and social impact of, and
uncertainty relating to, the COVID-19 pandemic; (ii) resolution of legal
proceedings involving the Company; (iii) reduced demand for office or retail
space, including as a result of the COVID-19 pandemic; (iv) changes in our
business strategy; (v) changes in technology and market competition that affect
utilization of our office, retail, broadcast or other facilities; (vi) changes
in domestic or international tourism, including due to health crises such as the
COVID-19 pandemic, geopolitical events and/or currency exchange rates, which may
cause a decline in Observatory visitors; (vii) defaults on, early terminations
of, or non-renewal of, leases by tenants; (viii) increases in the Company's
borrowing costs as a result of changes in interest rates and other factors,
including the potential phasing out of LIBOR after 2021; (ix) declining real
estate valuations and impairment charges; (x) termination or expiration of our
ground leases; (xi) changes in our ability to pay down, refinance, restructure
or extend our indebtedness as it becomes due and potential limitations on our
ability to borrow additional funds in compliance with drawdown conditions and
financial covenants; (xii) decreased rental rates or increased vacancy rates;
(xiii) our failure to redevelop and reposition properties, or to execute any
newly planned capital project successfully or on the anticipated timeline or at
the anticipated costs; (xiv) difficulties in identifying properties to acquire
and completing acquisitions; (xv) risks related to our development projects
(including our Metro Tower development site) and capital projects, including the
cost of construction delays and cost overruns; (xvi) impact of changes in
governmental regulations, tax laws and rates and similar matters; (xvii) our
failure to qualify as a real estate investment trust ("REIT"); (xviii)
environmental uncertainties and risks related to adverse weather conditions,
rising sea levels and natural disasters, and (xix) the accuracy of our
methodologies and estimates regarding ESG metrics, goals and targets, tenant
willingness and ability to collaborate towards reporting ESG metrics and meeting
ESG goals and targets, and the impact of governmental regulation on our ESG
efforts. For a further discussion of these and other factors that could impact
the Company's future results, performance or transactions, see the section
entitled "Risk Factors" in the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2021, and in the Company's Annual Report on
Form 10-K for the year ended December 31, 2020, and other risks described in
documents subsequently filed by the Company from time to time with the
Securities and Exchange Commission.
While forward-looking statements reflect the Company's good faith beliefs, they
are not guarantees of future performance. The Company disclaims any obligation
to update or revise publicly any forward-looking statement to reflect changes in
underlying assumptions or factors, new information, data or methods, future
events, or other changes after the date of this Quarterly
Report on Form 10-Q, except as required by applicable law. Prospective investors
should not place undue reliance on any forward-looking statements, which are
based only on information currently available to the Company.
27
--------------------------------------------------------------------------------Overview
Empire State Realty OP, L.P. is the entity through which Empire State Realty
Trust, Inc. ("ESRT"), a self-administered and self-managed REIT, conducts all of
its business and owns (either directly or through subsidiaries) substantially
all of its assets. We own, manage, operate, acquire and reposition office and
retail properties in Manhattan and the greater New York metropolitan area.
Highlights for the three months ended June 30, 2021 included:
•Incurred net income of $3.4 million and achieved Core Funds From Operations of
$48.8 million.
•Same-Store Property Cash NOI, excluding lease termination fees, was down 6.0%
from the second quarter of 2020 primarily driven by a reduction in revenues due
to write-offs taken over the one-year period.
•Empire State Building Observatory revenue for the second quarter 2021 increased
to $8.4 million, from $2.6 million in the first quarter 2021 as visitation
continued to ramp up. Observatory net operating income was $3.1 million for the
second quarter 2021.
•Realized lease termination fees were $3.3 million. In keeping with historical
practice, we include lease termination fees when calculating FFO and Core FFO.
•Signed 35 new, renewal, and expansion leases, representing a total of 190,838
rentable square feet.
•Collected 95% of second quarter 2021 total billings with 95% for office tenants
and 91% for retail tenants.
•Reinstated quarterly dividend at $0.035 per share for the second quarter of
2021, which is one quarter earlier than previously announced, driven by
confidence in the New York City recovery and improvement in our results and
liquidity.
•From January 1, 2021 and through July 27, 2021, we repurchased $3.5 million of
our common stock at a weighted average price of $9.22 per share. This brings the
cumulative total, since the stock repurchase program began on March 5, 2020
through August 5, 2021, to $147.2 million at a weighted average price of $8.34
per share.
As of June 30, 2021, our total portfolio contained 10.1 million rentable
square feet of office and retail space. We owned 14 office properties (including
three long-term ground leasehold interests) encompassing approximately 9.4
million rentable square feet of office space. Nine of these properties are
located in the midtown Manhattan market and aggregate approximately 7.6 million
rentable square feet of office space, including the Empire State Building. Our
Manhattan office properties also contain an aggregate of approximately 0.5
million rentable square feet of 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 0.4 million rentable square foot
office building and garage. Our portfolio includes four standalone retail
properties located in Manhattan and two standalone retail properties located in
the city center of Westport, Connecticut, encompassing approximately 0.2 million
rentable square feet in the aggregate.
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 and currently impacted by the COVID-19 pandemic. Historically, prior
to the outbreak of the COVID-19 pandemic, approximately 16.0% to 18.0% of our
annual observatory revenue was realized in the first quarter, 26.0% to 28.0% was
realized in the second quarter, 31.0% to 33.0% was realized in the third
quarter, and 23.0% to 25.0% was realized in the fourth quarter. On March 16,
2020, we complied with governmental mandates regarding the closing of
non-essential businesses in response to the COVID-19 pandemic and closed the
Empire State Building Observatory. The Observatory reopened on July 20, 2020.
28
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The components of the Empire State Building revenue are as follows (dollars in
thousands):
Six Months Ended June 30,
2021 2020
Office leases $ 70,827 68.8 % $ 74,907 62.4 %
Retail leases 3,526 3.4 % 3,058 2.6 %
Tenant reimbursements & other income 7,681 7.5 % 12,900 10.7 %
Observatory operations 10,962 10.6 %
19,630 16.3 %
Broadcasting licenses and leases 9,972 9.7 % 9,596 8.0 %
Total $ 102,968 100.0 % $ 120,091 100.0 %
We have undertaken a comprehensive redevelopment and repositioning strategy of
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. These improvements
include restored, renovated and upgraded or new lobbies, elevator modernization,
renovated public areas and bathrooms, refurbished or new windows, upgrade and
standardization of retail storefront and signage, façade restorations,
modernization of building-wide systems, and enhanced tenant amenities. We have
also aggregated smaller spaces in order to offer larger blocks of office space,
including multiple floors, that are attractive to larger, higher credit-quality
tenants as well as to offer new, pre-built suites with improved layouts. This
strategy has shown what we believe to be attractive results to date, and we
believe has the potential to improve our operating margins and cash flows in the
future. From 2002 through June 30, 2021, we have invested a total of
approximately $956.4 million (excluding tenant improvement costs and leasing
commissions) in our Manhattan office properties pursuant to this program. We
intend to fund capital improvements through a combination of operating cash
flow, cash on hand, and borrowings.
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 have spent approximately $37.3 million over 2018 through 2021
on these well-maintained and our well-located properties' common areas and
amenities to ensure competitiveness and protect our market position.
As of June 30, 2021, we had total debt outstanding of approximately $2.1
billion, with a weighted average interest rate of 3.9%, and a weighted average
maturity of 7.7 years. 94.2% of our total debt outstanding is fixed-rate
indebtedness. Excluding principal amortization, we had no outstanding debt
maturing until November 2024. As of June 30, 2021, we had cash and cash
equivalents of $540.6 million. Our consolidated net debt to total market
capitalization was 31.4% as of June 30, 2021.
Impact of COVID-19
In March 2020, the outbreak of the novel COVID-19 was recognized as a pandemic
by the World Health Organization. The spread of COVID-19 has created a global
public health crisis that has resulted in unprecedented economic, social and
political uncertainty, volatility and disruption in the United States and
globally. We have taken the following actions in response to the impact of the
COVID-19 pandemic on our business.
Liquidity
We currently hold $540.6 million in cash and cash equivalents on our balance sheet and have $850 million undrawn capacity under our unsecured revolving credit facility. Our $850 million unsecured revolving credit facility matures in March 2025 and has two six-month extension options, subject to certain conditions.
Property Operations
All of our office buildings have remained open during the COVID-19 pandemic. We
have scaled back certain building operations in cleaning, security, lobby
concierge and recurring maintenance, which reduced costs until buildings are
repopulated. A portion of the reduction in operating expenses was offset by a
reduction in tenant expense recoveries.
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Our operations team worked diligently to develop and implement plans for
tenants' reoccupation of our buildings to ensure a safe, clean and healthy work
environment. These plans involved staff reassigned to screen tenants and
visitors, changes to cleaning and maintenance standards, and changes to building
operations for access by tenants and their guests.
Despite the challenge of the uncertain near-term environment, we continue to
believe in the long-term demand for office space. We believe many tenants have
acknowledged the challenges, inequities, and worries about divided workplaces
between home and office work, the challenges with onboarding new employees and
miss the connectivity and productivity that an office environment provides.
Leasing
The economic uncertainty relating to the COVID-19 pandemic has slowed the pace
of our leasing activity and could result in higher vacancy than we otherwise
would have experienced, a longer amount of time to fill vacancies and
potentially lower rental rates. As of June 30, 2021, our portfolio was 88.2%
leased, including signed leases not yet commenced, with 4.9% subject to leases
scheduled to expire in 2021 and 5.6% subject to leases scheduled to expire in
2022.
New leasing activity was impacted during 2020 by the COVID-19 pandemic and
shelter-in-place rules that were in effect for much of the period. On June 15,
2021, New York State ended pandemic-linked restrictions given the broad-based
distribution of the COVID-19 vaccine. During the second quarter 2021, we have
seen a sustained increase in leasing tour volume in our Manhattan office
portfolio to about 84% of pre-Covid-19 pandemic levels. While the recent
increase is a positive sign that some tenants are beginning to re-engage, any
potential lease transactions that stem from these tours will likely appear in
the second half of the year.
Our smaller food and service type retailers have been hit particularly hard.
They provide critical amenities and services to our office tenants. In many
instances, we have converted some of their fixed rent to a percentage rent
structure, with a payback of the difference between current and percentage rent
over a defined period. We intend to support our food and service retailers so
that they can service our office tenants when they re-occupy.
Retailers, in general, have been hardest hit by the pandemic. Our
retail-orientated tenants are no exception. As with all landlords, we are
working with some of our retail tenants that are financially challenged. Some of
these tenants may end up in bankruptcy or default in their leases in the near
term.
On July 29, 2021, GBG USA Inc., an indirect wholly-owned subsidiary of Global
Brands Group Holding Limited, announced that its North America wholesale
business and certain subsidiaries and affiliates (collectively, "GBG USA") filed
for bankruptcy under Chapter 11. At the time of the filing, GBG USA leased
353,325 square feet of office space at 1333 Broadway and the Empire State
Building, or 3.5%, of our total portfolio rentable square feet, representing
approximately 3.6% of total portfolio annualized rent. Of that total, all but
191,000 square feet, or 1.9% of our total portfolio rentable square feet, has
been sublet to tenants, where both GBG USA and the subtenant are liable for the
rent, and we have the right to require the subtenant to pay directly to us.
The sublets are for GBG USA's entire premises at 1333 Broadway and have been in
effect for several years. We have current discussions to convert the subtenants
to direct tenants.
We collected rent from GBG USA through June 2021 and have converted the full
balance of its $17.0 million letter of credit to cash, which we will apply
against amounts due to us. In the short-term, we expect the current
circumstances will cause us to record a non-cash write-off in the third quarter
of $1.6 million in straight line rent receivables.
We actively monitor these developments to review our alternatives.
Observatory Operations
On March 16, 2020, we complied with governmental mandates regarding the
closing of non-essential businesses in response to the COVID-19 pandemic and
closed the Empire State Building Observatory. The observatory reopened under New
York State's Phase 4 guidelines, Low-Risk Outdoor Arts and Entertainment, on
July 20, 2020. The 102nd observation deck was reopened on August 24, 2020.
Due to the lifting of New York State COVID-19 restrictions, on June 16, 2021,
the observatory fully reopened with interactive exhibits. We continue to operate
with reduced hours, staffing, services, operating costs, credit card fees and
marketing expenses. We have seen a higher local visitor mix, followed by a ramp
up of nationally sourced travel. We anticipate
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this pattern will then be followed by a restoration of our typical visitor mix
that is approximately two-thirds international which we do not expect to be
achieved until the broad resumption of international air travel some time in
2022. Second quarter 2021 attendance was at nearly 17% of 2019 comparable
attendance; a gradual improvement from 2020 levels and above our hypothetical
admissions forecast.
We anticipate expenses to be approximately $6-7 million per quarter for the
balance of 2021 dependent upon the pace of visitor ramp-up.
The closure of our observatory caused us during each quarter of 2020 and during
the first and second quarters of 2021 to choose to perform an impairment test
related to goodwill. We engaged a third-party valuation consulting firm to
perform the valuation process. Based upon the results of the goodwill impairment
test of the stand-alone observatory reporting unit, which is after the
intercompany rent expense paid to the Real Estate reporting unit, we determined
that the fair value of the observatory reporting unit exceeded its carrying
value by less than 15.0%. Many of the factors employed in determining whether or
not goodwill is impaired are outside of our control and it is reasonably likely
that assumptions and estimates will change in future periods. We will continue
to assess the impairment of the observatory reporting unit goodwill going
forward and that continued assessment may again utilize a third-party valuation
consulting firm. Goodwill allocated to the observatory reporting unit was $227.5
million at June 30, 2021.
Results of Operations
OverviewThe discussion below relates to our financial condition and results of operations for the three and six months ended June 30, 2021 and 2020, respectively.
Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30,
2020
The following table summarizes our historical results of operations for the
three months ended June 30, 2021 and 2020 (dollars in thousands):
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Three Months Ended June 30,
2021 2020 Change %
Revenues:
Rental revenue $ 140,797 $ 137,999 $ 2,798 2.0 %
Observatory revenue 8,359 86 8,273 9,619.8 %
Lease termination fees 3,339 1,033 2,306 223.2 %
Third-party management and other fees 327 301 26 8.6 %
Other revenues and fees 586 1,611 (1,025) (63.6) %
Total revenues 153,408 141,030 12,378 8.8 %
Operating expenses:
Property operating expenses 28,793 29,750 957 3.2 %
Ground rent expenses 2,332 2,332 - - %
General and administrative expenses 14,089 18,149 4,060 22.4 %
Observatory expenses 5,268 4,002 (1,266) (31.6) %
Real estate taxes 31,354 29,579 (1,775) (6.0) %
Impairment charges - 4,101 4,101 100.0 %
Depreciation and amortization 45,088 52,783 7,695 14.6 %
Total operating expenses 126,924 140,696 13,772 9.8 %
Operating income 26,484 334 26,150 7,829.3 %
Other income (expense):
Interest income 164 1,526 (1,362) (89.3) %
Interest expense (23,422) (23,928) 506 2.1 %
Loss on early extinguishment of debt - - - - %
Income (loss) before income taxes 3,226 (22,068) 25,294 114.6 %
Income tax benefit (expense) 1,185 2,450 (1,265) (51.6) %
Net income (loss) 4,411 (19,618) 24,029 122.5 %
Private perpetual preferred unit
distributions (1,051) (1,047) (4) (0.4) %
Net income (loss) attributable to common
unitholders $ 3,360 $ (20,665) $ 24,025 116.3 %
Rental Revenue
The increase in rental revenue as compared to the prior year was attributable
to the prior year write-off of straight-line receivables in the three months
ended June 30, 2020.
Observatory Revenue
The Observatory was closed for the entire second quarter 2020 due to COVID-19
pandemic restrictions. The increase in revenues reflects increased visitors due
to the lifting of COVID-19 pandemic restrictions in the second quarter 2021.
Lease Termination Fees
Higher termination fees were earned in the three months ended June 30, 2021
compared to the three months ended June 30, 2020.
Third-Party Management and Other Fees
Management fee income was consistent with prior year. Other Revenues and Fees The decrease in other revenues and fees was due to higher bad debt recovery income received in the three months ended June 30, 2020.
32 -------------------------------------------------------------------------------- Property Operating Expenses Property operating expenses were consistent with 2020.
Ground Rent Expenses
Ground rent expense was consistent with 2020. General and Administrative Expenses The decrease in general and administrative expenses was primarily due to lower equity compensation expense and lower legal leasing costs. Also contributing to the decrease were higher severance costs recorded in the three months ended June 30, 2020. Observatory Expenses Due to the observatory closure in the second quarter 2020, we reduced variable costs such as labor, union, security, and cleaning costs. During the second quarter 2021, the observatory was open to visitors, which resulted in increased expenses compared to the second quarter 2020. Real Estate Taxes The increase in real estate taxes was primarily due to higher assessed values for multiple properties. Impairment charge The variance reflects a $4.1 million of prior expenditures on a Combined Heat Power/ Redundancy onsite power generation project in our real estate segment that is rendered economically unviable due to New York City's Local Law 97 and from its measurement of carbon from natural gas combustion generates fines, recorded in the second quarter 2020. Depreciation and Amortization
The decrease in depreciation and amortization reflects tenant improvement write-offs due to the early termination of a tenant in the second quarter 2020.
Interest Income
The decrease in interest income reflects higher cash investments in 2020
compared to 2021 and lower interest rates in 2021.
Interest Expense
Interest expense was consistent with 2020.
Income Taxes
The decrease in income tax benefit was attributable to lower net loss for the
Observatory segment.
Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020
The following table summarizes our historical results of operations for the six
months ended June 30, 2021 and 2020 (dollars in thousands):
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Six Months Ended June 30,
2021 2020 Change %
Revenues:
Rental revenue $ 281,028 $ 286,112 $ (5,084) (1.8) %
Observatory revenue 10,962 19,630 (8,668) (44.2) %
Lease termination fees 4,628 1,244 3,384 272.0 %
Third-party management and other fees 603 647 (44) (6.8) %
Other revenues and fees 1,491 3,621 (2,130) (58.8) %
Total revenues 298,712 311,254 (12,542) (4.0) %
Operating expenses:
Property operating expenses 59,072 71,218 12,146 17.1 %
Ground rent expenses 4,663 4,663 - - %
General and administrative expenses 27,942 34,100 6,158 18.1 %
Observatory expenses 9,856 12,156 2,300 18.9 %
Real estate taxes 62,801 58,833 (3,968) (6.7) %
Impairment charges - 4,101 4,101 100.0 %
Depreciation and amortization 89,545 98,876 9,331 9.4 %
Total operating expenses 253,879 283,947 30,068 10.6 %
Operating income 44,833 27,307 17,526 64.2 %
Other income (expense):
Interest income 286 2,163 (1,877) (86.8) %
Interest expense (46,976) (43,546) (3,430) (7.9) %
Loss on early extinguishment of debt (214) (86) (128) (148.8) %
Income (loss) before income taxes (2,071) (14,162) 12,091 85.4 %
Income tax benefit 3,291 2,832 459 16.2 %
Net income (loss) 1,220 (11,330) 12,550 110.8 %
Private perpetual preferred unit
distributions (2,101) (2,097) (4) (0.2) %
Net income (loss) attributable to common
unitholders $ (881) $ (13,427) $ 12,546 93.4 %
Rental Revenue
The decrease in rental revenue was attributable to lower tenant expense reimbursements, consistent with lower operating expenses.
Observatory Revenue
Observatory revenues were lower due to the COVID-19 pandemic as our results
continue to be impacted the strong first quarter 2020, pre-COVID-19 performance
and the rebuild of tourist travel and by international travel restrictions.
Lease Termination Fees
Higher termination fees were earned in the six months ended June 30, 2021
compared to the six months ended June 30, 2020.
Third-Party Management and Other Fees
Management fee income was consistent with prior year.
Other Revenues and Fees
The decrease in other revenues and fees was due to higher bad debt recovery
income received in the six months ended June 30, 2020 and lower food and
beverage sales and lower parking income due to the COVID-19 pandemic in the six
months ended June 30, 2021.
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Property Operating Expenses
The decrease in property operating expenses was primarily due to lower payroll
costs, lower cleaning costs, lower repair and maintenance costs, and other lower
operating expenses. The lower costs are primarily driven by lower tenant
utilization in our buildings.
Ground Rent Expenses
Ground rent expense was consistent with 2020. General and Administrative Expenses The decrease in general and administrative expenses was primarily due to lower equity compensation expense and lower legal leasing costs. Also contributing to the decrease were higher severance costs recorded in the six months ended June 30, 2020. Observatory Expenses The decrease in observatory expenses was driven by cost controls and reduced hours of operation instituted in response to reduced tourist demand during the six months ended June 30, 2021 due to COVID-19 reduced travel and international travel restrictions. Real Estate Taxes The increase in real estate taxes was primarily due to higher assessed values for multiple properties. Impairment charge The variance reflects a $4.1 million of prior expenditures on a Combined Heat Power/ Redundancy onsite power generation project in our real estate segment that is rendered economically unviable due to New York City's Local Law 97 and from its measurement of carbon from natural gas combustion generates fines, recorded in the second quarter 2020. Depreciation and Amortization
The decrease in depreciation and amortization reflects tenant improvement write-offs due to the early termination of a tenant in 2020.
Interest Income
The decrease in interest income reflects higher cash investments in 2020 compared to 2021 and lower interest rates in 2021. Interest Expense Interest expense increased due to higher deferred financing cost amortization and higher interest associated with variable to fixed interest rate swap agreements. Income Taxes The increase in income tax benefit was attributable to higher net loss for the Observatory segment.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements,
including ongoing commitments to repay borrowings, fund and maintain our assets
and operations, including lease-up costs, fund our redevelopment and
repositioning programs, acquire properties, make distributions to our
securityholders and fulfill other general business needs. Based on the
historical experience of our management and our business strategy, in the
foreseeable future we anticipate we will generate positive cash flows from
operations. In order for ESRT to qualify as a REIT, ESRT is required under the
Internal Revenue Code of 1986 to distribute to its stockholders, on an annual
basis, at least 90% of its REIT taxable income, determined without regard to the
deduction for dividends paid and excluding net capital gains. We expect to make
quarterly distributions, as required, to our securityholders.
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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 June 30, 2021, we had $540.6 million available in cash and cash equivalents,
and $850 million available under our unsecured revolving credit facility.
For a five year right of first offer period expiring August 23, 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
beyond its original expiration date so long as at least one joint venture
transaction is consummated by us and QIA during the initial five year term, and
will be extended for a further 30-month term if at least one more joint venture
transaction is consummated during such initial extension period.
As of June 30, 2021, we had approximately $2.1 billion of total consolidated
indebtedness outstanding, with a weighted average interest rate of 3.9% and a
weighted average maturity of 7.7 years. As of June 30, 2021, excluding principal
amortization, we have no outstanding debt maturing until November 2024. Our
consolidated net debt to total market capitalization was 31.4% as of June 30,
2021.
Unsecured Revolving Credit and Term Loan Facilities
As described more fully in our Form 10-Q for the quarterly period ended March
31, 2021 (the "Q1 2021 10-Q"), in Q1 2021, we entered into an amended senior
unsecured credit facility (the "Credit Facility") with Bank of America, N.A., as
administrative agent and the other lenders party thereto. The Credit Facility is
in the initial maximum principal amount of up to $1.065 billion, which consists
of $850.0 million revolving credit facility that matures on March 31, 2025, and
a $215.0 million term loan facility that matures on March 19, 2025. As of June
30, 2021, we had no borrowings under the revolving credit facility and $215.0
million under the term loan facility.
Additionally, as described more fully in the Q1 2021 10-Q, we have outstanding a
senior unsecured term loan facility (the "Term Loan Facility") that we entered
into on March 19, 2020 with Wells Fargo Bank, National Association, as
administrative agent, and the other lenders party thereto. The Term loan
Facility is in the original principal amount of $175.0 million and matures on
December 31, 2026. As of June 30, 2021, our borrowings amounted to $175.0
million under the Term Loan Facility.
The terms of both the Credit Facility and the Term Loan Facility include
customary covenants, including limitations on liens, investment, distributions,
debt, fundamental changes, and transactions with affiliates and require certain
customary financial reports. Both facilities also require compliance with
financial ratios including a maximum leverage ratio, a maximum secured leverage
ratio, a minimum fixed charge coverage ratio, a minimum unencumbered interest
coverage ratio, and a maximum unsecured leverage ratio. The agreements governing
both facilities also contain customary events of default (subject in certain
cases to specified cure periods), including but not limited to non-payment,
breach of covenants, representations or warranties, cross defaults, bankruptcy
or other insolvency events, judgments, ERISA events, invalidity of loan
documents, loss of real estate investment trust qualification, and occurrence of
a change of control. As of June 30, 2021, we were in compliance with the
covenants.
36
--------------------------------------------------------------------------------Senior Unsecured Notes
The terms of the senior unsecured notes include customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. It also requires compliance with financial ratios including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a minimum unencumbered interest coverage ratio, and a maximum unsecured leverage ratio. The agreements also contain customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, the occurrence of certain change of control transactions and loss of real estate investment trust qualification. As of June 30, 2021, we were in compliance with the covenants under the outstanding senior unsecured notes.
Financial Covenants
As of June 30, 2021, we were in compliance with the following financial covenants: Financial covenant Required June 30, 2021 In Compliance Maximum total leverage < 60% 37.6 % Yes Maximum secured debt < 40% 13.7 % Yes Minimum fixed charge coverage > 1.50x 2.6x
Yes
Minimum unencumbered interest coverage > 1.75x 5.3x Yes Maximum unsecured leverage < 60% 29.4 % Yes Leverage Policies We expect to employ leverage in our capital structure in amounts determined from time to time by ESRT's board of directors. Although ESRT's board of directors has not adopted a policy that limits the total amount of indebtedness that we may incur, we anticipate that ESRT's board of directors will consider a number of factors in evaluating our level of indebtedness from time to time, as well as the amount of such indebtedness that will be either fixed or floating rate. ESRT's charter and bylaws do not limit the amount or percentage of indebtedness that we may incur nor do they restrict the form in which our indebtedness will be taken (including, but not limited to, recourse or non-recourse debt and cross-collateralized debt). Our overall leverage will depend on our mix of investments and the cost of leverage, however, we initially intend to maintain a level of indebtedness consistent with our plan to seek an investment grade credit rating. ESRT's board of directors may from time to time modify our leverage policies in light of the then-current economic conditions, relative costs of debt and equity capital, market values of our properties, general market conditions for debt and equity securities, fluctuations in the market price of ESRT's common stock and our traded OP units, growth and acquisition opportunities and other factors. Capital Expenditures The following tables summarize our leasing commission costs, tenant improvement costs and our capital expenditures for each of the periods presented (dollars in thousands, except per square foot amounts).
Office Properties(1)
Six Months Ended June 30,
Total New Leases, Expansions, and Renewals 2021 2020
Number of leases signed(2) 57 48
Total square feet 350,196 216,710
Leasing commission costs(3) $ 6,397 $ 2,548
Tenant improvement costs(3) 20,529 10,147
Total leasing commissions and tenant improvement costs(3) $ 26,926 $ 12,695
Leasing commission costs per square foot(3) $ 18.27 $ 11.76
Tenant improvement costs per square foot(3) 58.62 46.83
Total leasing commissions and tenant improvement costs per square
foot(3) $ 76.89 $ 58.59
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Retail Properties(4)
Six Months Ended June 30,
Total New Leases, Expansions, and Renewals 2021 2020
Number of leases signed(2) 4 6
Total square feet 12,459 45,864
Leasing commission costs(3) $ 573 $ 1,997
Tenant improvement costs(3) 405 7,345
Total leasing commissions and tenant improvement costs(3) $ 978 $ 9,342
Leasing commission costs per square foot(3) $ 46.03 $ 43.54
Tenant improvement costs per square foot(3) 32.49 160.14
Total leasing commissions and tenant improvement costs per square
foot(3) $ 78.52 $ 203.68
_______________
(1)Excludes an aggregate of 504,284 and 506,452 rentable square feet of retail
space in our Manhattan office properties in 2021 and 2020, 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 504,284 and 506,452 rentable square feet of retail
space in our Manhattan office properties in 2021 and 2020, respectively.
Excludes the Empire State Building broadcasting licenses and observatory
operations.
Six Months Ended June 30,
2021 2020
Total Portfolio
Capital expenditures (1) $ 9,331 $ 23,884_______________
(1)Excludes tenant improvements and leasing commission costs.
As of June 30, 2021, we expect to incur additional costs relating to obligations
under existing lease agreements of approximately $89.1 million for tenant
improvements and leasing commissions. We intend to fund the tenant improvements
and leasing commission costs through a combination of operating cash flow, cash
on hand, additional property level mortgage financings and borrowings under the
unsecured revolving credit facility.
Capital expenditures are considered part of both our short-term and long-term
liquidity requirements. We intend to fund capital improvements through a
combination of operating cash flow, cash on hand and borrowings under the
unsecured revolving credit facility.
Contractual Obligations
Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for
a discussion of our contractual obligations. There have been no material
changes, outside the ordinary course of business, to these contractual
obligations during the six months ended June 30, 2021.
Off-Balance Sheet Arrangements
As of June 30, 2021, 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%
38
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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.
In 2020, we had a unique situation whereby we had no requirement to pay a
dividend beyond the quarterly dividends paid in the first and second quarters of
2020 due to two primary factors: (i) the significant decline in revenue due to
lower levels of observatory visitation, and (ii) ESRT had a net operating loss
carryforward available to reduce the amount of REIT taxable income otherwise
required to be distributed by ESRT to meet REIT requirements. After careful
consideration and focus on long-term shareholder value creation and preservation
of our balance sheet strength and flexibility, our management and the Board of
Directors concluded the best course of action was to temporarily suspend our
quarterly dividend and to activate our share repurchase program. During August
2020, we announced the suspension of our third and fourth quarter 2020 dividends
to holders of ESRT's Class A common stock and Class B common stock and to
holders of our Series ES, Series 250 and Series 60 operating partnership units
and Series PR operating partnership units. During December 2020, we announced
the continued dividend suspension for the first and second quarters of 2021.
During May 2021, we announced our decision to reinstate the quarterly dividend,
one quarter earlier than previously announced, driven by confidence in the New
York City recovery and improvement in our results and liquidity. We declared a
dividend of $0.035 per share for the second quarter of 2021, which equates to an
annualized rate of $0.14 per share. The Board of Directors will continue its
regular review of its dividend and capital allocation policies at each Board
meeting.
As of June 30, 2021, our parent and general partner, Empire State Realty Trust,
Inc., had net operating loss ("NOL") carryforwards that may be used in the
future to reduce the amount otherwise required to be distributed by ESRT to meet
REIT requirements. However, for federal income tax purposes, the NOL will not be
able to offset more than 80% of ESRT's REIT taxable income and, therefore, may
not be able to reduce the amount required to be distributed by ESRT to meet REIT
requirements to zero, except for the tax year ended December 31, 2020, of which
ESRT was able to offset 100% of its taxable income in accordance with the
Coronavirus Aid, Relief, and Economic Security (CARES) Act. The federal NOL may
be carried forward indefinitely. Other limitations may apply to ESRT's ability
to use its NOL to offset taxable income.
Distribution to Securityholders
Distributions and dividends amounting to $11.6 million and $64.3 million have
been made to securityholders for the six months ended June 30, 2021 and 2020,
respectively.
Stock and Publicly Traded Operating Partnership Unit Repurchase Program
ESRT's Board of Directors authorized the repurchase of up to $500 million of
ESRT Class A common stock and the Operating Partnership's Series ES, Series 250
and Series 60 operating partnership units through December 31, 2021. Under the
program, ESRT may purchase ESRT Class A common stock and we may purchase our
Series ES, Series 250 and Series 60 operating partnership units in accordance
with applicable securities laws from time to time in the open market or in
privately negotiated transactions. The timing, manner, price and amount of any
repurchases will be determined by ESRT and us at our discretion and will be
subject to stock price, availability, trading volume and general market
conditions. The authorization does not obligate ESRT or us to acquire any
particular amount of securities, and the program may be suspended or
discontinued at ESRT and our discretion without prior notice. There were no
purchases of equity securities during the three months ended June 30, 2021.
Cash Flows
Comparison of Six Months Ended June 30, 2021 to the Six Months Ended June 30,
2020
Net cash. Cash and cash equivalents and restricted cash were $578.6 million and
$931.8 million, respectively, as of June 30, 2021 and 2020. The decrease was
primarily due to a $550.0 million draw on the unsecured revolving credit
facility in March 2020 which was subsequently repaid in September 2020.
39
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Operating activities. Net cash provided by operating activities increased by
$9.3 million to $83.7 million for the six months ended June 30, 2021 compared to
$74.4 million for the six months ended June 30, 2020, primarily due to changes
in working capital.
Investing activities. Net cash used in investing activities decreased by $31.3
million to $48.4 million for the six months ended June 30, 2021 compared to
$79.7 million for the six months ended June 30, 2020, due to lower capital
expenditures.
Financing activities. Net cash provided by financing activities decreased by
$690.2 million to $24.7 million used in financing activities for the six months
ended June 30, 2021 compared to $665.5 million provided by financing activities
for the six months ended June 30, 2020, primarily due to $850.0 million of net
proceeds from issuance of debt, partially offset by higher repurchases of common
shares of $111.1 million and higher dividends and distributions of $52.8 million
which occurred in the six months ended June 30, 2020.
Net Operating Income ("NOI")
Our financial reports include a discussion of property net operating income,
or NOI. NOI is a non-GAAP financial measure of performance. NOI is used by our
management to evaluate and compare the performance of our properties and to
determine trends in earnings and to compute the fair value of our properties as
it is not affected by: (i) the cost of funds of the property owner, (ii) the
impact of depreciation and amortization expenses as well as gains or losses from
the sale of operating real estate assets that are included in net income
computed in accordance with GAAP, (iii) acquisition expenses, loss on early
extinguishment of debt and loss from derivative financial instruments, or (iv)
general and administrative expenses and other gains and losses that are specific
to the property owner. The cost of funds is eliminated from NOI because it is
specific to the particular financing capabilities and constraints of the owner
and because it is dependent on historical interest rates and other costs of
capital as well as past decisions made by us regarding the appropriate mix of
capital which may have changed or may change in the future. Depreciation and
amortization expenses as well as gains or losses from the sale of operating real
estate assets are eliminated because they may not accurately represent the
actual change in value in our office or retail properties that result from use
of the properties or changes in market conditions. While certain aspects of real
property do decline in value over time in a manner that is reasonably captured
by depreciation and amortization, the value of the properties as a whole have
historically increased or decreased as a result of changes in overall economic
conditions instead of from actual use of the property or the passage of time.
Gains and losses from the sale of real property vary from property to property
and are affected by market conditions at the time of sale which will usually
change from period to period. These gains and losses can create distortions when
comparing one period to another or when comparing our operating results to the
operating results of other real estate companies that have not made
similarly-timed purchases or sales. We believe that eliminating these costs from
net income is useful because the resulting measure captures the actual revenue,
generated and actual expenses incurred in operating our properties as well as
trends in occupancy rates, rental rates and operating costs.
However, the usefulness of NOI is limited because it excludes general and
administrative costs, interest expense, depreciation and amortization expense
and gains or losses from the sale of properties, and other gains and losses as
stipulated by GAAP, the level of capital expenditures and leasing costs
necessary to maintain the operating performance of our properties, all of which
are significant economic costs. NOI may fail to capture significant trends in
these components of net income which further limits its usefulness.
NOI is a measure of the operating performance of our properties but does not
measure our performance as a whole. NOI is therefore not a substitute for net
income as computed in accordance with GAAP. This measure should be analyzed in
conjunction with net income computed in accordance with GAAP and discussions
elsewhere in this Management's Discussion and Analysis of Financial Condition
and Results of Operations regarding the components of net income that are
eliminated in the calculation of NOI. Other companies may use different methods
for calculating NOI or similarly titled measures and, accordingly, our NOI may
not be comparable to similarly titled measures reported by other companies that
do not define the measure exactly as we do.
40--------------------------------------------------------------------------------
The following table presents a reconciliation of our net income, the most
directly comparable GAAP measure, to NOI for the periods presented (amounts in
thousands):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(unaudited) (unaudited)
Net income (loss) $ 4,411 $ (19,618) $ 1,220 $ (11,330) Add: General and administrative expenses
14,089 18,149 27,942 34,100
Depreciation and amortization 45,088 52,783 89,545 98,876
Interest expense 23,422 23,928 46,976 43,546
Loss on early extinguishment of debt - - 214 86
Income tax (benefit) (1,185) (2,450) (3,291) (2,832)
Impairment charges - 4,101 - 4,101
Less:
Third-party management and other fees (327) (301) (603) (647)
Interest income (164) (1,526) (286) (2,163)
Net operating income $ 85,334 $ 75,066 $ 161,717 $ 163,737
Other Net Operating Income Data
Straight-line rental revenue $ 3,763 $ (2,710) $ 10,110 $ 5,483
Net increase in rental revenue from the
amortization of above-and below-market lease
assets and liabilities $ 717 $ 1,366 $ 1,371 $ 2,274
Amortization of acquired below-market ground
leases $ 1,958 $ 1,958 $ 3,916 $ 3,916
Funds from Operations ("FFO")
We present below a discussion of FFO. We compute FFO in accordance with the
"White Paper" on FFO published by the National Association of Real Estate
Investment Trusts, or NAREIT, which defines FFO as net income (loss) (determined
in accordance with GAAP), excluding impairment write-off of investments in
depreciable real estate and investments in in-substance real estate investments,
gains or losses from debt restructurings and sales of depreciable operating
properties, plus real estate-related depreciation and amortization (excluding
amortization of deferred financing costs), less distributions to non-controlling
interests and gains/losses from discontinued operations and after adjustments
for unconsolidated partnerships and joint ventures. FFO is a widely recognized
non-GAAP financial measure for REITs that we believe, when considered with
financial statements determined in accordance with GAAP, is useful to investors
in understanding financial performance and providing a relevant basis for
comparison among REITs. In addition, FFO is useful to investors as it captures
features particular to real estate performance by recognizing that real estate
has generally appreciated over time or maintains residual value to a much
greater extent than do other depreciable assets. Investors should review FFO,
along with GAAP net income, when trying to understand an equity REIT's operating
performance. We present FFO because we consider it an important supplemental
measure of our operating performance and believe that it is frequently used by
securities analysts, investors and other interested parties in the evaluation of
REITs. However, because FFO excludes depreciation and amortization and captures
neither the changes in the value of our properties that result from use or
market conditions nor the level of capital expenditures and leasing commissions
necessary to maintain the operating performance of our properties, all of which
have real economic effect and could materially impact our results of operations,
the utility of FFO as a measure of performance is limited. There can be no
assurance that FFO presented by us is comparable to similarly titled measures of
other REITs. FFO does not represent cash generated from operating activities and
should not be considered as an alternative to net income (loss) determined in
accordance with GAAP or to cash flow from operating activities determined in
accordance with GAAP. FFO is not indicative of cash available to fund ongoing
cash needs, including the ability to make cash distributions. Although FFO is a
measure used for comparability in assessing the performance of REITs, as the
NAREIT White Paper only provides guidelines for computing FFO, the computation
of FFO may vary from one company to another.
Modified Funds From Operations ("Modified FFO")
Modified FFO adds back an adjustment for any above or below-market ground lease amortization to traditionally defined FFO. We consider this a useful supplemental measure in evaluating our operating performance due to the non-cash
41 -------------------------------------------------------------------------------- accounting treatment under GAAP, which stems from the third quarter 2014 acquisition of two option properties following our formation transactions as they carry significantly below market ground leases, the amortization of which is material to our overall results. We present Modified FFO because we consider it an important supplemental measure of our operating performance in that it adds back the non-cash amortization of below-market ground leases. There can be no assurance that Modified FFO presented by us is comparable to similarly titled measures of other REITs. Modified FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Modified FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions.
Core Funds From Operations ("Core FFO")
Core FFO adds back to Modified FFO the following items: IPO litigation expense, severance expenses and loss on early extinguishment of debt. The company presents Core FFO because it considers it an important supplemental measure of its operating performance in that it excludes items associated with its IPO and formation transactions and other non-recurring items. There can be no assurance that Core FFO presented by the company is comparable to similarly titled measures of other REITs. Core FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Core FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. In future periods, we may also exclude other items from Core FFO that we believe may help investors compare our results.
The following table presents a reconciliation of our net income, the most directly comparable GAAP measure, to FFO, Modified FFO and Core FFO for the periods presented (amounts in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(unaudited) (unaudited)
Net income (loss) $ 4,411 $(19,618) $ 1,220 $ (11,330) Private perpetual preferred unit distributions
(1,051) (1,047) (2,101) (2,097) Real estate depreciation and amortization 43,480 51,096 86,584 95,526 Impairment charge - 4,101 - 4,101 FFO attributable to common stockholders 46,840 34,532 85,703 86,200 Amortization of below-market ground leases 1,958 1,958 3,916 3,916 Modified FFO attributable to common stockholders 48,798 36,490 89,619 90,116 Loss on early extinguishment of debt - - 214 86 Severance expenses - 3,008 - 3,008
Core FFO attributable to common stockholders $ 48,798 $ 39,498 $ 89,833 $ 93,210
Weighted average Operating Partnership units Basic 277,893 283,384 277,887 288,015 Diluted 278,436 283,384 277,887 288,015
Factors That May Influence Future Results of Operations Impact of COVID-19
See "Overview" section. Leasing
We signed 0.9 million rentable square feet of new leases, expansions and lease renewals for the year ended December 31, 2020. During the six months ended June 30, 2021, we signed 0.4 million rentable square feet of new leases, expansions and renewals.
42 -------------------------------------------------------------------------------- Due to the relatively small number of leases that are signed in any particular quarter, one or more larger leases may have a disproportionately positive or negative impact on average rent, tenant improvement and leasing commission costs for that period. As a result, we believe it is more appropriate when analyzing trends in average rent and tenant improvement and leasing commission costs to review activity over multiple quarters or years. Tenant improvement costs include expenditures for general improvements occurring concurrently with, but that are not directly related to, the cost of installing a new tenant. Leasing commission costs are similarly subject to significant fluctuations depending upon the length of leases being signed and the mix of tenants from quarter to quarter. As of June 30, 2021, there were approximately 1.2 million rentable square feet of space in our portfolio available to lease (excluding leases signed but not yet commenced) representing 11.8% of the net rentable square footage of the properties in our portfolio. In addition, leases representing 4.9% and 5.6% of net rentable square footage of the properties in our portfolio will expire in 2021 and in 2022, respectively. These leases are expected to represent approximately 5.0% and 6.1%, respectively, of our annualized rent for such periods. Our revenues and results of operations can be impacted by expiring leases that are not renewed or re-leased or that are renewed or re-leased at base rental rates equal to, above or below the current average base rental rates. Further, our revenues and results of operations can also be affected by the costs we incur to re-lease available space, including payment of leasing commissions, redevelopments and build-to-suit remodeling that may not be borne by the tenant. Despite the challenge of the uncertain near-term environment, we continue to believe that as we have largely completed the redevelopment and repositioning of our properties we will, over the long-term, experience increased occupancy levels and rents. Over the short-term, as we renovate and reposition our properties, including aggregating smaller spaces to offer large blocks of space, we may experience lower occupancy levels as a result of having to relocate tenants to alternative space and the strategic expiration of existing leases. We believe that despite the short-term lower occupancy levels we may experience, we will continue to experience increased rental revenues as a result of the increased rents which we expect to obtain following the redevelopment and repositioning of our properties.
Observatory Operations
On March 16, 2020, we complied with governmental mandates regarding the
closing of non-essential businesses in response to the COVID-19 pandemic and
closed the Empire State Building Observatory. The observatory was closed for the
entirety of the second quarter 2020 and reopened the 86th floor observation deck
on July 20, 2020 with new protocols and processes under New York State's Phase
4's Low-Risk Outdoor Arts and Entertainment guidelines. The 102nd floor
observation deck reopened on August 24, 2020.
The Observatory hosted approximately 162,000 visitors in the second quarter of
2021, compared to 51,000 visitors in the first quarter of 2021 and no visitors
in the second quarter of 2020. In spite of the ongoing nature of international,
national, and local travel restrictions and quarantines, the observatory has
seen steady, weekly increases in visitors. Our return of attendance to
pre-COVID-19 levels is closely tied to national and international travel trends
and these remain adversely impacted by developments around the COVID-19
pandemic.
Observatory revenues for the three months ended June 30, 2021 were $8.4 million,
driven by low visitation levels. Observatory expenses were $5.3 million for the
three months ended June 30, 2021.
Observatory revenues and admissions are dependent upon the following: (i) the
number of tourists (domestic and international) who come to New York City and
visit the observatory, as well as any related tourism trends; (ii) the prices
per admission that can be charged; (iii) seasonal trends affecting the number of
visitors to the observatory; (iv) competition, in particular from other new and
existing observatories; and (v) weather trends.
Critical Accounting Estimates
Refer to our Annual Report on Form 10-K for the year ended December 31, 2020
for a discussion of our critical accounting estimates. There were no material
changes to our critical accounting estimates disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2020.
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