EMPIRE STATE REALTY OP, L.P. Unless the context otherwise requires or indicates, references in this section to "we," "our," and "us" refer to our company and its consolidated subsidiaries. The following discussion related to our consolidated financial statements should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 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 ourMetro 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 endedMarch 31, 2021 , and in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 , and other risks described in documents subsequently filed by the Company from time to time with theSecurities and Exchange Commission . While forward-looking statements reflect the Company's good faith beliefs, they are not guarantees of future performance. The Company disclaims any obligation to update or revise publicly any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events, or other changes after the date of this Quarterly Report on Form 10-Q, except as required by applicable law. Prospective investors should not place undue reliance on any forward-looking statements, which are based only on information currently available to the Company. 26 --------------------------------------------------------------------------------
Overview
Empire State Realty OP, L.P. is the entity through whichEmpire 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 inManhattan and the greaterNew York metropolitan area. Highlights for the three months endedSeptember 30, 2021 included: •Incurred net loss of$11.2 million and achieved Core Funds From Operations ("Core FFO") of$55.3 million . •Same-Store Property Cash Net Operating Income, excluding lease termination fees, was down 5.7% from the third quarter of 2020 primarily driven by a reduction in revenues due to reduced occupancy, third quarter 2021 revenue from Global Brands Group treated partially as rental revenue and partially as lease termination income and write-offs taken over the one-year period. •Empire StateBuilding Observatory revenue for the third quarter 2021 increased to$12.8 million , from$8.4 million in the second quarter 2021 as visitation continued to ramp up. Observatory net operating income was$6.4 million for the third quarter 2021, which is the second consecutive quarter of positive NOI since the onset of the COVID-19 pandemic and more than double second quarter earnings contribution. •Realized lease termination fees were$11.3 million . In keeping with historical practice, we include lease termination fees when calculating FFO and Core FFO. •Signed 34 new, renewal, and expansion leases, representing a total of 268,055 rentable square feet. This includes 21 leases totaling 212,301 rentable square feet in theManhattan office portfolio. •Collected 95% of third quarter 2021 total billings, stable and in line with recent quarters. •In the third quarter and throughOctober 26, 2021 , the Company repurchased$6.5 million of its common stock at a weighted average price of$10.41 per share. This brings the cumulative total, since the stock repurchase program began onMarch 5, 2020 throughOctober 26, 2021 , to$153.8 million at a weighted average price of$8.41 per share. As ofSeptember 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 midtownManhattan market and aggregate approximately 7.6 million rentable square feet of office space, including theEmpire State Building . OurManhattan 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 inFairfield County, Connecticut andWestchester 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 inStamford, 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 inManhattan and two standalone retail properties located in the city center ofWestport, 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 inManhattan 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. OnMarch 16, 2020 , we complied with governmental mandates regarding the closing of non-essential businesses in response to the COVID-19 pandemic and closed theEmpire State Building Observatory . The Observatory reopened onJuly 20, 2020 . 27 -------------------------------------------------------------------------------- The components of theEmpire State Building revenue are as follows (dollars in thousands): Nine Months Ended September 30, 2021 2020 Office leases$ 105,369 61.8 %$ 106,774 63.9 % Retail leases 5,138 3.0 % 5,177 3.1 % Tenant reimbursements & other income 21,806 12.8 % 16,358 9.8 % Observatory operations 23,758 13.9 % 24,049 14.4 % Broadcasting licenses and leases 14,648 8.5 % 14,793 8.8 % Total$ 170,719 100.0 %$ 167,151 100.0 % We have undertaken a comprehensive redevelopment and repositioning strategy of ourManhattan 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 throughSeptember 30, 2021 , we have invested a total of approximately$959.7 million (excluding tenant improvement costs and leasing commissions) in ourManhattan office properties pursuant to this program. We intend to fund capital improvements through a combination of operating cash flow, cash on hand, and borrowings. TheGreater 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$39.3 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 ofSeptember 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 7.4 years. 94.2% of our total debt outstanding is fixed-rate indebtedness. Excluding principal amortization, we had no outstanding debt maturing untilNovember 2024 . As ofSeptember 30, 2021 , we had cash and cash equivalents of$582.2 million . Our consolidated net debt to total market capitalization was 34.7% as ofSeptember 30, 2021 . Impact of COVID-19 InMarch 2020 , the outbreak of the novel COVID-19 was recognized as a pandemic by theWorld 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 inthe 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$582.2 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 inMarch 2025 and has two six-month extension options, subject to certain conditions. Property Operations 28
-------------------------------------------------------------------------------- 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. 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, increased concessions and potentially lower rental rates. In addition, potential work from home could negatively impact the office leasing market. As ofSeptember 30, 2021 , our portfolio was 86.5% leased, including signed leases not yet commenced, with 2.3% subject to leases scheduled to expire in 2021 and 5.5% 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. OnJune 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 experienced a sustained increase in leasing tour volume in ourManhattan office portfolio which led to our improved leasing performance in the third quarter 2021. 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. We intend to support our food and service retailers so that they can service our office tenants as they continue to 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 tenants that are financially challenged. Some of these tenants may end up in bankruptcy or default in their leases in the near term.
OnJuly 29, 2021 ,GBG USA Inc. , an indirect wholly-owned subsidiary of Global Brands Group Holding Limited, announced that itsNorth America wholesale business and certain subsidiaries and affiliates (collectively, "GBG USA ") filed for bankruptcy under Chapter 11 (the "GBG Bankruptcy"). At the time of the filing,GBG USA leased 353,325 square feet of office space at1333 Broadway and theEmpire 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 bothGBG 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 forGBG USA's entire premises at1333 Broadway and have been in effect for several years. We have current discussions to convert the subtenants to direct tenants. Subsequently,GBG USA filed to reject their leases and both lease rejections were approved by the bankruptcy court during the third quarter.
In the third quarter we recorded a
We collected rent fromGBG USA throughJune 2021 and have converted the full balance of its$17.0 million letter of credit to cash, which was applied as follows: •$5.2 million was applied againstGBG USA's straight-line rent receivable balance related to their lease at theEmpire State Building , •$1.7 million was recognized as GAAP rental revenue for the partial period in the third quarter when their lease remained in place, and •$10.1 million was recognized as lease termination income.
Observatory Operations
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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 86th floor observatory deck
reopened on July 20, 2020 and the 102nd floor observation deck 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 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. For the third quarter,
visitor recapture versus 2019 was above our hypothetical admissions forecast in
July and early August, but below our hypothetical admissions forecast for the
balance of the third quarter. This was primarily due to the resurgent COVID-19
Delta variant and the impact on travel as U.S borders remain closed to
international tourism. The government has announced that the borders will reopen
to fully vaccinated international travelers in November 2021 .
The closure and slow ramp-up of our observatory operations caused us during each
quarter of 2020 and throughout each quarter 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
most recent 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 September 30, 2021 .
Results of Operations
Overview
The discussion below relates to our financial condition and results of
operations for the three and nine months ended
Three Months Ended
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Three Months Ended September 30,
2021 2020 Change %
Revenues:
Rental revenue $ 139,558 $ 139,909 $ (351) (0.3) %
Observatory revenue 12,796 4,419 8,377 189.6 %
Lease termination fees 11,321 331 10,990 3,320.2 %
Third-party management and other fees 314 283 31 11.0 %
Other revenues and fees 1,059 1,633 (574) (35.2) %
Total revenues 165,048 146,575 18,473 12.6 %
Operating expenses:
Property operating expenses 33,357 33,836 479 1.4 %
Ground rent expenses 2,331 2,331 - - %
General and administrative expenses 14,427 14,517 90 0.6 %
Observatory expenses 6,370 5,931 (439) (7.4) %
Real estate taxes 29,566 31,196 1,630 5.2 %
Impairment charge - 2,103 2,103 100.0 %
Depreciation and amortization 65,794 44,733 (21,061) (47.1) %
Total operating expenses 151,845 134,647 (17,198) (12.8) %
Operating income 13,203 11,928 1,275 10.7 %
Other income (expense):
Interest income 211 366 (155) (42.3) %
Interest expense (23,577) (23,360) (217) (0.9) %
IPO litigation expense - (1,165) 1,165 100.0 %
Loss before income taxes (10,163) (12,231) 2,068 16.9 %
Income tax expense (20) (38) 18 47.4 %
Net loss (10,183) (12,269) 2,086 17.0 %
Private perpetual preferred unit
distributions (1,050) (1,050) - - %
Net loss attributable to common
unitholders $ (11,233) $ (13,319) $ 2,086 15.7 %
Rental Revenue
Rental revenue was consistent with prior year.
Observatory Revenue The increase in revenues reflects increased visitors due to the lifting of certain COVID-19 pandemic restrictions in the second quarter 2021. Lease Termination Fees Higher termination fees, primarily from one tenant, were earned in the three months endedSeptember 30, 2021 compared to the three months endedSeptember 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 a$0.8 million development project reimbursement received in the three months endedSeptember 30, 2020 . 31 -------------------------------------------------------------------------------- Property Operating Expenses Property operating expenses were consistent with 2020.
Ground Rent Expenses
Ground rent expense was consistent with 2020. General and Administrative Expenses General and administrative expenses were consistent with 2020. Observatory Expenses With the lifting of certain COVID-19 pandemic restrictions, the observatory operating hours were increased which increased variable costs such as labor, union, security, and cleaning costs. Real Estate Taxes The decrease in real estate taxes was primarily due to reduction in assessed value for the tax periodJuly 1, 2021 toJune 30, 2022 . Impairment Charge During the third quarter 2020, we wrote off$2.1 million of prior expenditures on a build-to-suit development project in our real estate segment that was halted due to reconsideration by the user driven by the COVID-19 pandemic. Depreciation and Amortization
The increase in depreciation and amortization reflects write-offs primarily related to one tenant.
Interest Income
The decrease in interest income reflects higher weighted-average cash investments in 2020 compared to 2021 and lower interest rates in 2021. Interest Expense Interest expense was consistent with 2020.
IPO Litigation Expense The three months endedSeptember 30, 2020 included an accrued expense which reflected an estimated liability associated with the Initial Public Offering-related litigation. Income Taxes Income taxes were consistent with prior year. Nine Months EndedSeptember 30, 2021 Compared to the Nine Months EndedSeptember 30, 2020 The following table summarizes our historical results of operations for the nine months endedSeptember 30, 2021 and 2020 (dollars in thousands): 32 --------------------------------------------------------------------------------
Nine Months Ended September 30,
2021 2020 Change %
Revenues:
Rental revenue $ 420,586 $ 426,021 $ (5,435) (1.3) %
Observatory revenue 23,758 24,049 (291) (1.2) %
Lease termination fees 15,949 1,575 14,374 912.6 %
Third-party management and other fees 917 930 (13) (1.4) %
Other revenues and fees 2,550 5,254 (2,704) (51.5) %
Total revenues 463,760 457,829 5,931 1.3 %
Operating expenses:
Property operating expenses 92,429 105,054 12,625 12.0 %
Ground rent expenses 6,994 6,994 - - %
General and administrative expenses 42,369 48,617 6,248 12.9 %
Observatory expenses 16,226 18,087 1,861 10.3 %
Real estate taxes 92,367 90,029 (2,338) (2.6) %
Impairment charges - 6,204 6,204 100.0 %
Depreciation and amortization 155,339 143,609 (11,730) (8.2) %
Total operating expenses 405,724 418,594 12,870 3.1 %
Operating income 58,036 39,235 18,801 47.9 %
Other income (expense):
Interest income 497 2,529 (2,032) (80.3) %
Interest expense (70,553) (66,906) (3,647) (5.5) %
Loss on early extinguishment of debt (214) (86) (128) (148.8) %
IPO litigation expense - (1,165) 1,165 100.0 %
Loss before income taxes (12,234) (26,393) 14,159 53.6 %
Income tax benefit 3,271 2,794 477 17.1 %
Net loss (8,963) (23,599) 14,636 62.0 %
Private perpetual preferred unit
distributions (3,151) (3,147) (4) (0.1) %
Net loss attributable to common
unitholders $ (12,114) $ (26,746) $ 14,632 54.7 %
Rental Revenue
The decrease in rental revenue was primarily driven by write-offs taken over the period.
Observatory Revenue Observatory revenues were slightly lower due to the COVID-19 pandemic, as the nine months to dateSeptember 30, 2020 results included the strong first quarter 2020, pre-COVID-19 performance. For the nine months ended September, 30, 2021, revenues have been growing with increased visitors due to the lifting of certain COVID-19 pandemic restrictions in the second quarter 2021. Lease Termination Fees Higher termination fees, primarily from one tenant, were earned in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Third-Party Management and Other Fees
Management fee income was consistent with prior year.
33
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Other Revenues and Fees
The decrease in other revenues and fees was due to higher bad debt recovery
income received in the nine months ended September 30, 2020 and lower food and
beverage sales and lower parking income due to the COVID-19 pandemic in the nine
months ended September 30, 2021 . The nine months ended September 30, 2020 also
included a $0.8 million development project reimbursement.
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 nine months endedSeptember 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 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 nine months endedSeptember 30, 2020 included a$4.1 million write-off of prior expenditures on aCombined Heat Power / Redundancy onsite power generation project in our real estate segment that was rendered economically unviable due toNew York City's Local Law 97 and from its measurement of carbon from natural gas combustion generates fines, and a$2.1 million write-off of prior expenditures on a build-to-suit development project in our real estate segment that was halted due to reconsideration by the user driven by the COVID-19 pandemic. Depreciation and Amortization
The increase in depreciation and amortization reflects tenant improvement write-offs primarily related to one tenant.
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
reflecting higher deferred financing cost balances associated with new debt.
Income Taxes
The increase in income tax benefit was attributable to higher net loss for the
Observatory segment.
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Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, including lease-up costs, fund our redevelopment and repositioning programs, acquire properties, make distributions to our securityholders and fulfill other general business needs. Based on the historical experience of our management and our business strategy, in the foreseeable future we anticipate we will generate positive cash flows from operations. In order for ESRT to qualify as a REIT, ESRT is required under the Internal Revenue Code of 1986 to distribute to its stockholders, on an annual basis, at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We expect to make quarterly distributions, as required, to our securityholders. While we may be able to anticipate and plan for certain liquidity needs, there may be unexpected increases in uses of cash that are beyond our control and which would affect our financial condition and results of operations. For example, we may be required to comply with new laws or regulations that cause us to incur unanticipated capital expenditures for our properties, thereby increasing our liquidity needs. Even if there are no material changes to our anticipated liquidity requirements, our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or needed. Our primary sources of liquidity will generally consist of cash on hand and cash generated from our operating activities, debt issuances and unused borrowing capacity under our unsecured revolving credit facility. We expect to meet our short-term liquidity requirements, including distributions, operating expenses, working capital, debt service, and capital expenditures from cash flows from operations, cash on hand, debt issuances, and available borrowing capacity under our unsecured revolving credit facility. The availability of these borrowings is subject to the conditions set forth in the applicable loan agreements. We expect to meet our long-term capital requirements, including acquisitions, redevelopments and capital expenditures through our cash flows from operations, cash on hand, our unsecured revolving credit facility, mortgage financings, debt issuances, common and/or preferred equity issuances and asset sales. Our properties require periodic 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. AtSeptember 30, 2021 , we had$582.2 million available in cash and cash equivalents, and$850 million available under our unsecured revolving credit facility. As ofSeptember 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 7.4 years. As ofSeptember 30, 2021 , excluding principal amortization, we have no outstanding debt maturing untilNovember 2024 . Our consolidated net debt to total market capitalization was 34.7% as ofSeptember 30, 2021 . Unsecured Revolving Credit and Term Loan Facilities As described more fully in our Form 10-Q for the quarterly period endedMarch 31, 2021 (the "Q1 2021 10-Q"), in Q1 2021, we entered into an amended senior unsecured credit facility (the "Credit Facility") withBank 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 onMarch 31, 2025 , and a$215.0 million term loan facility that matures onMarch 19, 2025 . As ofSeptember 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 onMarch 19, 2020 withWells 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 onDecember 31, 2026 . As ofSeptember 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 ofSeptember 30, 2021 , we were in compliance with the covenants. 35 --------------------------------------------------------------------------------
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 ofSeptember 30, 2021 , we were in compliance with the covenants under the outstanding senior unsecured notes.
Financial Covenants
As ofSeptember 30, 2021 , we were in compliance with the following financial covenants: Financial covenant Required September 30, 2021 In Compliance Maximum total leverage < 60% 35.7 % Yes Maximum secured debt < 40% 13.0 % Yes Minimum fixed charge coverage > 1.50x 2.8x Yes Minimum unencumbered interest coverage > 1.75x 5.2x Yes Maximum unsecured leverage < 60% 28.7 % 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). 36
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Nine Months Ended September 30,
Total New Leases, Expansions, and Renewals 2021 2020
Number of leases signed(2) 88 64
Total square feet 614,328 459,033
Leasing commission costs(3) $ 10,507 $ 4,356
Tenant improvement costs(3) 36,737 20,486
Total leasing commissions and tenant improvement costs(3) $ 47,244 $ 24,842
Leasing commission costs per square foot(3) $ 17.10 $ 9.49
Tenant improvement costs per square foot(3) 59.80 44.63
Total leasing commissions and tenant improvement costs per square
foot(3) $ 76.90 $ 54.12
Retail Properties(4)
Nine Months Ended September 30,
Total New Leases, Expansions, and Renewals 2021 2020
Number of leases signed(2) 7 7
Total square feet 16,382 50,990
Leasing commission costs(3) $ 703 $ 1,997
Tenant improvement costs(3) 592 7,345
Total leasing commissions and tenant improvement costs(3) $ 1,295 $ 9,342
Leasing commission costs per square foot(3) $ 42.88 $ 39.16
Tenant improvement costs per square foot(3) 36.18 144.04
Total leasing commissions and tenant improvement costs per square
foot(3) $ 79.06 $ 183.20
_______________
(1)Excludes an aggregate of 504,402 and 506,453 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 504,402 and 506,453 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.
Nine Months Ended September 30,
2021 2020
Total Portfolio
Capital expenditures (1) $ 15,552 $ 35,618 _______________
(1)Excludes tenant improvements and leasing commission costs. As ofSeptember 30, 2021 , we expect to incur additional costs relating to obligations under existing lease agreements of approximately$85.2 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. 37 -------------------------------------------------------------------------------- Contractual Obligations Refer to our Annual Report on Form 10-K for the year endedDecember 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 nine months endedSeptember 30, 2021 . Off-Balance Sheet Arrangements As ofSeptember 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 toU.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 underU.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 avoidU.S. federal income tax liability on its income and the 4% nondeductible excise tax. Before we pay any distribution, whether forU.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 avoidU.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. DuringAugust 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. DuringDecember 2020 , we announced the continued dividend suspension for the first and second quarters of 2021. DuringMay 2021 , we announced our decision to reinstate the quarterly dividend, one quarter earlier than previously announced, driven by confidence in theNew York City recovery and improvement in our results and liquidity. We declared a dividend of$0.035 per share for the third 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 ofSeptember 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 endedDecember 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$22.6 million and$65.4 million have been made to securityholders for the nine months endedSeptember 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 theOperating Partnership's Series ES, Series 250 and Series 60 operating partnership units throughDecember 31, 2021 . Under the 38 -------------------------------------------------------------------------------- program, ESRT may purchase ESRT Class A common stock and we may purchase our Series ES, Series 250 and Series 60 operating partnership units in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by ESRT and us at our discretion and will be subject to stock price, availability, trading volume and general market conditions. The authorization does not obligate ESRT or us to acquire any particular amount of securities, and the program may be suspended or discontinued at ESRT and our discretion without prior notice. re any particular amount of securities, and the program may be suspended or discontinued at our discretion without prior notice. See "Financial Statements - Note 9- Capital" for a summary of ESRT's purchases of equity securities in each of the three months endedSeptember 30, 2021 . Cash Flows Comparison of Nine Months EndedSeptember 30, 2021 to the Nine Months EndedSeptember 30, 2020 Net cash. Cash and cash equivalents and restricted cash were$621.0 million and$428.0 million , respectively, as ofSeptember 30, 2021 and 2020. The increase was primarily due to lower spending for capital expenditures, lower dividends paid and lower repurchases of common shares in 2021. Operating activities. Net cash provided by operating activities increased by$3.4 million to$167.0 million for the nine months endedSeptember 30, 2021 compared to$163.6 million for the nine months endedSeptember 30, 2020 , primarily due to changes in working capital. Investing activities. Net cash used in investing activities decreased by$42.6 million to$70.8 million for the nine months endedSeptember 30, 2021 compared to$113.4 million for the nine months endedSeptember 30, 2020 , due to lower capital expenditures. Financing activities. Net cash used in financing activities decreased by$149.4 million to$43.2 million used in financing activities for the nine months endedSeptember 30, 2021 compared to$106.2 million provided by financing activities for the nine months endedSeptember 30, 2020 , primarily due to$300.0 million of net proceeds from issuance of debt, partially offset by higher repurchases of common shares of$111.9 million and higher dividends and distributions of$42.8 million which occurred in the nine months endedSeptember 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.
39
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NOI is a measure of the operating performance of our properties but does not
measure our performance as a whole. NOI is therefore not a substitute for net
income as computed in accordance with GAAP. This measure should be analyzed in
conjunction with net income computed in accordance with GAAP and discussions
elsewhere in this Management's Discussion and Analysis of Financial Condition
and Results of Operations regarding the components of net income that are
eliminated in the calculation of NOI. Other companies may use different methods
for calculating NOI or similarly titled measures and, accordingly, our NOI may
not be comparable to similarly titled measures reported by other companies that
do not define the measure exactly as we do.
The following table presents a reconciliation of our net income, the most directly comparable GAAP measure, to NOI for the periods presented (amounts in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(unaudited) (unaudited)
Net loss $ (10,183) $ (12,269) $ (8,963) $ (23,599)
Add:
General and administrative expenses 14,427 14,517 42,369 48,617
Depreciation and amortization 65,794 44,733 155,339 143,609
Interest expense 23,577 23,360 70,553 66,906
Loss on early extinguishment of debt - - 214 86
Income tax expense (benefit) 20 38 (3,271) (2,794)
Impairment charges - 1,259 - 5,360
IPO litigation expense - 1,165 - 1,165
Less:
Third-party management and other fees (314) (283) (917) (930)
Interest income (211) (366) (497) (2,529)
Net operating income $ 93,110 $ 72,154 $ 254,827 $ 235,891
Other Net Operating Income Data
Straight-line rental revenue $ 3,087 $ 395 $ 13,197 $ 5,878
Net increase in rental revenue from the
amortization of above-and below-market lease
assets and liabilities $ 4,244 $ 679 $ 5,615 $ 2,953
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 theNational Association of Real Estate Investment Trusts , or NAREIT, which defines FFO as net income (loss) (determined in accordance with GAAP), excluding impairment write-off of investments in depreciable real estate and investments in in-substance real estate investments, gains or losses from debt restructurings and sales of depreciable operating properties, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs), less distributions to non-controlling interests and gains/losses from discontinued operations and after adjustments for unconsolidated partnerships and joint ventures. FFO is a widely recognized non-GAAP financial measure for REITs that we believe, when considered with financial statements determined in accordance with GAAP, is useful to investors in understanding financial performance and providing a relevant basis for comparison among REITs. In addition, 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 40 -------------------------------------------------------------------------------- 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 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 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 September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(unaudited) (unaudited)
Net loss $ (10,183) $ (12,269) $ (8,963) $ (23,599)
Private perpetual preferred unit
distributions (1,050) (1,050) (3,151) (3,147)
Real estate depreciation and amortization 64,565 43,029 151,149 138,555
Impairment charges - 1,259 - 5,360
FFO attributable to common stockholders 53,332 30,969 139,035 117,169
Amortization of below-market ground leases 1,957 1,957 5,873 5,873
Modified FFO attributable to common
stockholders 55,289 32,926 144,908 123,042
Loss on early extinguishment of debt - - 214 86
Severance expenses - 805 - 3,813
IPO litigation expense - 1,165 - 1,165
Core FFO attributable to common
stockholders $ 55,289 $ 34,896 Weighted averageOperating Partnership units Basic 277,716 280,940 277,829 285,640 Diluted 277,716 280,940 277,829 285,640 41
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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 endedDecember 31, 2020 . During the nine months endedSeptember 30, 2021 , we signed 0.6 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. 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 ofSeptember 30, 2021 , there were approximately 1.4 million rentable square feet of space in our portfolio available to lease (excluding leases signed but not yet commenced) representing 13.5% of the net rentable square footage of the properties in our portfolio. In addition, leases representing 2.3% and 5.5% 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 2.3% and 6.2%, respectively, of our annualized rent for such periods. Our revenues and results of operations can be impacted by expiring leases that are not renewed or re-leased or that are renewed or re-leased at base rental rates equal to, above or below the current average base rental rates. Further, our revenues and results of operations can also be affected by the costs we incur to re-lease available space, including payment of leasing commissions, redevelopments and build-to-suit remodeling that may not be borne by the tenant. Despite the challenge of the uncertain near-term environment, we continue to believe that as we have largely completed the redevelopment and repositioning of our properties we will, over the long-term, experience increased occupancy levels and 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
OnMarch 16, 2020 , we complied with governmental mandates regarding the closing of non-essential businesses in response to the COVID-19 pandemic and closed theEmpire State Building Observatory . The observatory was closed for the entirety of the second quarter 2020 and reopened the 86th floor observation deck onJuly 20, 2020 with new protocols and processes underNew York State's Phase 4'sLow-Risk Outdoor Arts and Entertainment guidelines. The 102nd floor observation deck reopened onAugust 24, 2020 . The Observatory hosted approximately 255,000 visitors in the third quarter of 2021, compared to 162,000 visitors in the second quarter of 2021 and 30,000 visitors in the third quarter of 2020. 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 and admissions are dependent upon the following: (i) the number of tourists (domestic and international)who come toNew York City and visit the observatory, as well as any related tourism trends; (ii) the prices per admission that can be charged; (iii) seasonal trends affecting the number of visitors to the observatory; (iv) competition, in particular from other new and existing observatories; and (v) weather trends. 42 --------------------------------------------------------------------------------
Critical Accounting Estimates
Refer to our Annual Report on Form 10-K for the year endedDecember 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 endedDecember 31, 2020 . 43
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