EMPIRE STATE REALTY OP, L.P. FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of 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) a failure of conditions or performance regarding any event or transaction described herein, (iii) resolution of legal proceedings involving the Company; (iv) reduced demand for office, multifamily or retail space, including as a result of the COVID-19 pandemic; (v) changes in our business strategy; (vi) changes in technology and market competition that affect utilization of our office, retail, broadcast or other facilities; (vii) 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; (viii) defaults on, early terminations of, or non-renewal of, leases by tenants; (ix) increases in the Company's borrowing costs as a result of changes in interest rates and other factors, including the potential phasing out of LIBOR after 2021; (x) declining real estate valuations and impairment charges; (xi) termination of our ground leases; (xii) changes in our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due and potential limitations on our ability to borrow additional funds in compliance with drawdown conditions and financial covenants; (xiii) decreased rental rates or increased vacancy rates; (xiv) our failure to execute any newly planned capital project successfully or on the anticipated timeline or at the anticipated costs; (xv) difficulties in identifying and completing acquisitions; (xvi) risks related to our development projects (including ourMetro Tower development site); (xvii) impact of changes in governmental regulations, tax laws and rates and similar matters; (xviii) our failure to qualify as a REIT; (xix) environmental uncertainties and risks related to climate change, adverse weather conditions, rising sea levels and natural disasters; and (xx) accuracy of our methodologies and estimates regarding ESG metrics and goals, tenant willingness and ability to collaborate in reporting ESG metrics and meeting ESG goals, and 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" of this Annual Report on Form 10-K. 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 Annual Report on Form 10-K, 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.
Overview
Unless the context otherwise requires or indicates, references in this section to "our company," "we," "our" and "us" refer toEmpire State Realty OP, L.P. and its consolidated subsidiaries. The following discussion and analysis should be read in conjunction with our consolidated financial statements as ofDecember 31, 2021 and 2020 and for the years endedDecember 31, 2021 , 2020 and 2019 and the notes related thereto which are included in this Annual Report on Form 10-K. 38 -------------------------------------------------------------------------------- 2021 Highlights •Net loss attributable to the company of$13.0 million . •Core FFO of$194.9 million . •Signed 129 leases, new, renewal, and expansion leases, representing 1,005,630 rentable square feet. This included 87 leases representing 801,254 rentable square feet for theManhattan office portfolio. •OnDecember 22, 2021 , we completed the acquisition of 625 units in twoManhattan multifamily assets with a total transaction value of$307 million , inclusive of$186 million of assumed debt. We now own a 90% interest, and aFetner Properties affiliate retained a 10% interest.
Impact of COVID-19
InMarch 2020 , the outbreak of 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. The following sections discuss specific COVID-19 impacts on our business operations.
Liquidity
We currently hold$423.7 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
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 and concerns over health and safety 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, the potential for continued remote work or hybrid remote/in-person work arrangements could negatively impact the office leasing market. As ofDecember 31, 2021 , our portfolio was 85.7% leased, including signed leases not yet commenced, with 5.7% subject to leases scheduled to expire in 2022 and 6.3% subject to leases scheduled to expire in 2023. 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 and fourth quarters of 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. 39 --------------------------------------------------------------------------------
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
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 86th floor observatory deck reopened onJuly 20, 2020 and the 102nd floor observation deck reopened onAugust 24, 2020 . Due to the lifting ofNew York State COVID-19 restrictions, onJune 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 achieve until the broad resumption of international air travel some time in 2022. The closure and gradual 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 we would need to record a non-cash goodwill impairment charge 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 atDecember 31, 2021 .
Results of Operations
Overview
The discussion below relates to the financial condition and results of
operations for the years ended
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Year Ended
The following table summarizes the historical results of operations for the
years ended
Years Ended December 31,
2021 2020 Change %
Revenues:
Rental revenue $ 559,690 $ 563,071 $ (3,381) (0.6) %
Observatory revenue 41,474 29,057 12,417 42.7 %
Lease termination fees 16,230 9,416 6,814 72.4 %
Third-party management and other fees 1,219 1,225 (6) (0.5) %
Other revenues and fees 5,481 6,459 (978) (15.1) %
Total revenues 624,094 609,228 14,866 2.4 %
Operating expenses:
Property operating expenses 126,986 136,141 9,155 6.7 %
Ground rent expenses 9,326 9,326 - - %
General and administrative expenses 55,947 62,244 6,297 10.1 %
Observatory expenses 23,206 23,723 517 2.2 %
Real estate taxes 119,967 121,923 1,956 1.6 %
Impairment charges 7,723 6,204 (1,519) (24.5) %
Depreciation and amortization 201,806 191,006 (10,800) (5.7) %
Total operating expenses 544,961 550,567 5,606 1.0 %
Operating income 79,133 58,661 20,472 34.9 %
Other income (expense):
Interest income 704 2,637 (1,933) (73.3) %
Interest expense (94,394) (89,907) (4,487) (5.0) %
Loss on early extinguishment of debt (214) (86) (128) (148.8) %
IPO litigation expense - (1,165) 1,165 100.0 %
Loss before income taxes (14,771) (29,860) 15,089 (50.5) %
Income tax benefit 1,734 6,971 (5,237) (75.1) %
Net loss (13,037) (22,889) 9,852 (43.0) %
Private perpetual preferred unit distributions (4,201) (4,197) (4) (0.1) %
Net loss attributable to non-controlling interests 17 - 17 - %
Net loss attributable to common unit holders
$ (27,086) $ 9,865 (36.4) %
Rental Revenue and Tenant Expense Reimbursement
The decrease in rental revenue was attributable to lower occupancy, straight-line rent write-offs and lower tenant expense reimbursements, consistent with lower property operating expenses.
Observatory Revenue
Observatory revenues were higher driven by increased visitation due to a reduction in COVID-19 restrictions in 2021.
Lease Termination Fees
Higher termination fees were earned in the year ended
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--------------------------------------------------------------------------------Property Operating Expenses
The decrease in property operating expenses was primarily due to lower payroll costs, lower repair and maintenance costs, and other lower operating expenses. The lower costs are primarily driven by lower tenant utilization in our buildings.
General and Administrative Expenses
The decrease in general and administrative expenses was primarily due to lower equity compensation expense, lower severance costs and lower legal costs than the year endedDecember 31, 2020 .
Observatory Expenses
The modest decline in observatory expenses was driven by cost controls and reduced hours of operation instituted in response to reduced visitors due to COVID-19 travel restrictions for the vast majority of 2021.
Real Estate Taxes
Lower real estate taxes in the year ended
Depreciation and Amortization
The increase in depreciation and amortization reflects tenant improvement
write-offs primarily related to
Interest Income
The decrease in interest income reflects higher cash investments in the year endedDecember 31, 2020 compared to the year endedDecember 31, 2021 and lower interest rates in the year endedDecember 31, 2021 .
Interest Expense
Interest expense increased due to higher debt balances and higher deferred financing cost amortization reflecting higher deferred financing cost balances associated with new debt.
Income Taxes
The decrease in income tax benefit was attributable to lower net operating 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 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.
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,
short term investments, cash generated from our operating activities, debt
issuances and unused borrowing capacity under our unsecured revolving credit and
term loan 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
and term loan 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 and term loan 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
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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
At December 31, 2021 , we had approximately $2.3 billion of total
consolidated indebtedness outstanding, with a weighted average interest rate of
3.89% and a weighted average maturity of 7.5 years. As of December 31, 2021 ,
excluding debt amortization, we have no outstanding debt maturing until November
2024 when principal repayments would amount to $77.7 million in 2024, $315.0
million in 2025 and $1.8 billion thereafter. As of December 31, 2021 , interest
expense obligations from 2022 through 2026 and thereafter amount to $612.9
million while debt amortization amount to $85.8 million . Our net debt to total
market capitalization was 42.4% as of December 31, 2021 .
In connection with our three ground leases (i.e. long-term leaseholds of the
land and the improvements) at 1350 Broadway , 111 West 33rd Street and 1400
Broadway ), we also have contractual rent obligations totaling $71.3 million as
of December 31, 2021 of which $7.6 million is due within the next five years.
Investments in Real Estate
OnDecember 22, 2021 , we closed on the acquisition of two multifamily assets located inManhattan , theVictory (561 10th Avenue ) and345 East 94th Street , previously owned by a joint venture ofFetner Properties and an institutional owner. The total transaction value was$307 million , inclusive of$186 million of assumed debt.Fetner Properties retained a 10% equity stake and continues to manage onsite operations. We will asset manage the properties, make all decisions, and have the right to assume day-to-day management at any time and for any reason for no additional consideration.
Unsecured Revolving Credit and Term Loan Facilities
OnMarch 31, 2021 , we entered into a second amendment to an existing credit agreement datedAugust 29, 2017 ("Amended Credit Agreement") that will govern an amended senior unsecured credit facility (the "Credit Facility") withBank of America, N.A ., as administrative agent, andBank of America ,Wells Fargo Bank, National Association ,Capital One, National Association andJPMorgan Chase Bank, N.A ., as co-syndication agents, and the lenders and the letter of credit issuers party thereto. The Credit Facility is in the initial maximum principal amount of up to$1.065 billion , which consists of a$850.0 million revolving credit facility and a$215.0 million term loan facility. We borrowed the term loan facility in full inAugust 2017 . We may request the Credit Facility be increased through one or more increases in the revolving credit facility or one or more increases in the term loan facility or the addition of new pari passu term loan tranches, for a maximum aggregate principal amount not to exceed$1.50 billion . The Credit Facility will be used for our working capital needs and for other general corporate purposes. As ofDecember 31, 2021 , we had no borrowings under the revolving credit facility and$215.0 million under the term loan facility. The revolving credit facility matures onMarch 31, 2025 . We have the option to extend the initial term for up to two additional 6-month periods, subject to certain conditions, including the payment of an extension fee equal to 0.0625% and 0.075% of the then outstanding commitments under the revolving credit facility on the first and the second extensions, respectively. The term loan facility matures onMarch 19, 2025 . We may prepay the loans under the Credit Facility at any time in whole or in part, subject to reimbursement of the lenders' breakage and redeployment costs in the case of prepayment of Eurodollar Rate borrowings. OnMarch 19, 2020 , we entered into a senior unsecured term loan facility (the "Term Loan Facility") withWells Fargo Bank, National Association , as administrative agent,Wells Fargo Securities, LLC as sole bookrunner,Wells Fargo Securities, LLC ,Capital One, National Association ,U.S. Bank National Association andSunTrust Robinson Humphrey, Inc. as Joint Lead Arrangers,Capital One, National Association , as syndication agent,U.S. Bank National Association andTruist Bank , as documentation agents, and the lenders party thereto. The Term Loan Facility is in the original principal amount of$175 million which we borrowed in full at closing. We may request the Term Loan Facility be increased through one or more increases or the addition of new pari passu term loan tranches, for a maximum aggregate principal amount not to exceed$225 million . As ofDecember 31, 2021 , our borrowings amounted to$175.0 million under the Term Loan Facility. 43 -------------------------------------------------------------------------------- The Term Loan Facility matures onDecember 31, 2026 . We may prepay loans under the Term Loan Facility at any time in whole or in part, subject to reimbursement of the lenders' breakage and redeployment costs in the case of prepayment of Eurodollar rate borrowings and, if the prepayment occurs on or beforeDecember 31, 2021 , a prepayment fee. 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. 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, invalidity of loan documents, loss of real estate investment trust qualification, and occurrence of a change of control. As ofDecember 31, 2021 , we were in compliance with the covenants, as described below: Financial Covenant Required December 31, 2021 In Compliance Maximum total leverage < 60% 43.5 % Yes Maximum secured debt < 40% 17.9 % Yes Minimum fixed charge coverage > 1.50x 2.4x Yes Minimum unencumbered interest coverage > 1.75x 4.4x Yes Maximum unsecured leverage < 60% 34.7 % Yes Mortgage Debt OnDecember 22, 2021 , we acquired 90% of two multifamily assets, theVictory (561 10th Avenue) and 345 East 94th Street. In connection with this acquisition, we assumed$134.0 million of principal balance of debt on theVictory , which matures inNovember 2033 and has an effective interest rate of 3.85%, and$52 million of principal balance of debt on345 East 94th Street , which matures inNovember 2030 and has an effective interest rate of 3.56%.
As of
Senior Unsecured Notes Series A, B, C, D, E, F, G and H Senior Notes (collectively, "Senior Unsecured Notes") are senior unsecured obligations with an aggregate principal amount of$975.0 million maturing on various dates from 2025 to 2035. These Senior Unsecured Notes are unconditionally guaranteed by each of our subsidiaries that guarantees indebtedness under the unsecured revolving credit and term loan facility. Interest on the Senior Unsecured Notes is payable quarterly. The terms of the Senior Unsecured Notes include customary covenants, including limitations on liens, investment, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. These terms 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 agreement also contains customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, the occurrence of certain change of control transactions and loss of real estate investment trust qualification.
As of
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 has not adopted
a policy that limits the total amount of indebtedness that we may incur, we
anticipate that ESRT's board 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
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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 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 tenant improvement costs, leasing commission costs and our capital expenditures for each of the periods presented (dollars in thousands, except per square foot amounts).
Years Ended December 31,
Total New Leases, Expansions, and Renewals 2021 2020 2019
Number of leases signed(2) 118 90 152
Total square feet 983,182 854,068 1,216,037
Leasing commission costs(3) $ 19,802 $ 9,969 $ 21,227
Tenant improvement costs(3) 65,133 32,896 70,643
Total leasing commissions and tenant improvement costs(3)
$ 42,865 $ 91,870 Leasing commission costs per square foot(3)$ 20.14 $ 11.67 $ 17.46 Tenant improvement costs per square foot(3) 66.25 38.52 58.09 Total leasing commissions and tenant improvement costs per square foot(3)$ 86.39 $ 50.19 $ 75.55 Retail Properties(4) Years Ended December 31, Total New Leases, Expansions, and Renewals 2021 2020 2019 Number of leases signed(2) 11 14 9 Total Square Feet 22,448 69,311 87,538 Leasing commission costs(3)$ 1,286 $ 2,239 $ 3,557 Tenant improvement costs(3) 1,386 7,575 3,337
Total leasing commissions and tenant improvement costs(3)
$ 9,814 $ 6,894 Leasing commission costs per square foot(3)$ 57.27 $ 32.31 $ 40.71 Tenant improvement costs per square foot(3) 61.75 109.29 38.20 Total leasing commissions and tenant improvement costs per square foot(3)$ 119.02 $ 141.60 $ 78.91 _______________ (1)Excludes an aggregate of 507,276, 504,284 and 511,984 rentable square feet of retail space in ourManhattan office properties in 2021, 2020 and 2019, respectively. Includes theEmpire 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 507,276, 504,284 and 511,984 rentable square feet of retail space in ourManhattan office properties in 2021, 2020 and 2019, respectively. Excludes theEmpire State Building broadcasting licenses and observatory operations. (5)The tables above exclude two multifamily properties. Years Ended December 31, 2021 2020 2019 Total Portfolio Capital expenditures (1)$ 24,279 $ 43,022 $ 138,560 _______________
(1)Includes all capital expenditures, excluding tenant improvements and leasing
commission costs, which are primarily attributable to the redevelopment and
repositioning program conducted at our
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As of December 31, 2021 , we expect to incur additional costs relating to
obligations under signed new leases of approximately $109.6 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, short term investments and borrowings under the unsecured revolving
credit and term loan facilities.
Capital expenditures are considered part of both our short-term and long-term
liquidity requirements. We intend to fund the capital improvements to complete
the redevelopment and repositioning program through a combination of operating
cash flow, cash on hand, short term investments and borrowings under the
unsecured revolving credit and term loan facilities.
Distribution Policy
We intend to distribute our net taxable income to our security holders in a
manner intended to satisfy REIT distribution requirements and to avoid
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 shares in order to satisfy REIT distribution requirements. We and our board continue to prioritize balance sheet flexibility and the maximization of our operating runway amidst an uncertain environment. 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. 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 second, third and fourth quarters 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.
Distribution to Equity Holders
Distributions and dividends have been made to equity holders in 2019, 2020 and 2021 as follows (amounts in thousands):
Year ended December 31, 2019 127,761
Year ended December 31, 2020 65,047
Year ended December 31, 2021 32,764
Stock and Publicly Traded Operating Partnership Unit Repurchase Program
ESRT's Board of Directors authorized the repurchase of up to$500 million of our Class A common stock and theOperating Partnership's Series ES, Series 250 and Series 60 operating partnership units fromJanuary 1, 2021 throughDecember 31, 2021 and reauthorized a new$500 million fromJanuary 1, 2022 throughDecember 31, 2023 . Under the program, ESRT may purchase its Class A common stock and 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 us at our discretion and will be subject to stock price, availability, trading volume and general market conditions. The authorization does not obligate us to acquire any particular amount of securities, and the program may be suspended or discontinued at our discretion without prior notice.
The following table summarizes our purchases of equity securities for the year
ended
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Maximum
Approximate
Total Number of Dollar Value
Shares Purchased as Available for
Total Number of Average Price Paid Part of Publicly Future Purchase
Period Shares Purchased per Share Announced Plan (in thousands)
Year ended December 31, 2021 4,886,932 $ 9.56 4,886,932 $ 453,296
Cash Flows
Comparison of Year Ended
Net cash. Cash and cash equivalents and restricted cash were$474.6 million and$567.9 million as ofDecember 31, 2021 and 2020, respectively. The decrease was primarily due to the acquisition of real estate property, partially offset by 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$30.2 million to$212.5 million primarily due to the settlement of a derivative contract in the year endedDecember 31, 2020 . Investing activities. Net cash from investing activities increased by$69.6 million to$212.7 million used in investing activities due to the acquisition of real estate property in the year endedDecember 31, 2021 and lower spending on building and improvements due to COVID-19. Financing activities. Net cash from financing activities decreased by$350.2 million to$93.0 million used in financing activities primarily due to the net proceeds from issuance of debt in the year endedDecember 31, 2020 .
Net Operating Income
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
47
--------------------------------------------------------------------------------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):
Years Ended December 31,
2021 2020 2019
Net income (loss) $ (13,037) $ (22,889) $ 84,290
Add:
General and administrative expenses 55,947 62,244 61,063
Depreciation and amortization 201,806 191,006 181,588
Interest expense 94,394 89,907 79,246
Loss on early extinguishment of debt 214 86 -
Income tax expense (benefit) (1,734) (6,971) 2,429
Impairment charges 7,723 5,360 -
IPO litigation expense - 1,165 -
Less:
Interest income (704) (2,637) (11,259)
Third-party management and other fees (1,219) (1,225) (1,254)
Net operating income $ 343,390 $ 316,046 $ 396,103
Other Net Operating Income Data
Straight line rental revenue $ 21,078 $ 3,627 $ 7,311 Amortization of acquired below-market ground leases$ 7,831
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 writedowns 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. 48 --------------------------------------------------------------------------------
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")
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 net income, the most directly comparable GAAP measure, to FFO, Modified FFO and Core FFO for the periods presented (amounts in thousands):
Years Ended December 31,
2021 2020 2019
Net income (loss) $ (13,037) $ (22,889) $ 84,290
Private perpetual preferred unit distributions (4,201) (4,197) (1,743)
Real estate depreciation and amortization 196,360 184,245 177,515
Impairment charges 7,723 5,360 -
Funds from operations attributable to common
stockholders and non-controlled interests 186,845 162,519 260,062
Amortization of below-market ground leases 7,831 7,831 7,831
Modified funds from operations attributable to common stockholders and non-controlled interests
194,676 170,350 267,893
Loss on early extinguishment of debt 214 86 -
Severance expenses - 3,813 -
IPO litigation expense - 1,165 -
Core funds from operations attributable to common
stockholders and non-controlled interests $ 194,890 $
175,414
Weighted averageOperating Partnership units Basic 277,420 283,826 297,798 Diluted 277,420 283,837 297,798
Factors That May Influence Future Results of Operations
Impact of COVID-19
See "Overview" section.
49
--------------------------------------------------------------------------------Rental Revenue
We derive revenues primarily from rents, rent escalations, expense reimbursements and other income received from tenants under existing leases at each of our properties. "Escalations and expense reimbursements" consist of payments made by tenants to us under contractual lease obligations to reimburse a portion of the property operating expenses and real estate taxes incurred at each property. We believe that the average rental rates for in-place leases at our properties are generally below the current market rates, although individual leases at particular properties presently may be leased above, at or below the current market rates within its particular submarket. The amount of net rental income and reimbursements that we receive depends principally on our ability to lease currently available space, re-lease space to new tenants upon the scheduled or unscheduled termination of leases or renew expiring leases and to maintain or increase our rental rates. Factors that could affect our rental incomes include, but are not limited to: local, regional or national economic conditions; an oversupply of, or a reduction in demand for, office or retail space; changes in market rental rates; our ability to provide adequate services and maintenance at our properties; and fluctuations in interest rates, all of which could adversely affect our rental income in future periods. Future economic or regional downturns affecting our submarkets, or downturns in our tenants' industries, could impair our ability to lease vacant space and renew or re-lease space as well as the ability of our tenants to fulfill their lease commitments, and could adversely affect our ability to maintain or increase the occupancy at our properties.
Tenant Credit Risk
The economic condition of our tenants may also deteriorate, which could negatively impact their ability to fulfill their lease commitments and in turn adversely affect our ability to maintain or increase the occupancy level and/or rental rates of our properties. Potential tenants may look to consolidate, reduce overhead and preserve operating capital and may also defer strategic decisions, including entering into new, long-term leases at properties.
Leasing
We signed 1.0 million, 0.9 million, and 1.3 million rentable square feet of
new leases, expansions and lease renewals, for the years ended
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 ofDecember 31, 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 14.3% of the net rentable square footage of the properties in our portfolio. In addition, leases representing 5.7% and 6.3% of net rentable square footage of the properties in our portfolio will expire in 2022 and in 2023, respectively. These leases are expected to represent approximately 6.2% and 7.6%, 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. Market Conditions The properties in our portfolio are located inManhattan and the greaterNew York metropolitan area, which includesFairfield County, Connecticut andWestchester County, New York . Positive or negative changes in conditions in these markets, such as business hirings or layoffs or downsizing, industry growth or slowdowns, relocations of businesses, increases or decreases in real estate and other taxes, costs of complying with governmental regulations or changed regulation, can impact our overall performance. 50 --------------------------------------------------------------------------------
Observatory and Broadcasting Operations
For the year endedDecember 31, 2021 , the observatory hosted 827,000 visitors, compared to 507,000 visitors for the same period in 2020, an increase of 63.1%. Our return of attendance to pre-COVID-19 levels is closely tied to national and international travel trends and these remain adversely impacted by developments around the COVID-19 pandemic.
Observatory revenue for the year ended
Observatory revenue and admissions are dependent upon the following: (i) the number of tourists (domestic and international) that 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. We license the use of theEmpire State Building mast to third party television and radio broadcasters and providers of data communications. We also lease space in the upper floors of the building to such licensees to house their transmission equipment and related facilities. During the year endedDecember 31, 2021 , we derived$13.5 million of revenue and$5.6 million of expense reimbursements from theEmpire State Building's broadcasting licenses and related leases. Operating Expenses Our operating expenses generally consist of depreciation and amortization, real estate taxes, ground lease expenses, repairs and maintenance, security, utilities, property-related payroll, and insurance. Factors that may affect our ability to control these operating costs include: increases in insurance premiums, tax rates, the cost of periodic repair, redevelopment costs and the cost of re-leasing space, the cost of compliance with governmental regulation, including zoning and tax laws, the potential for liability under applicable laws and interest rate levels. If our operating costs increase as a result of any of the foregoing factors, our future cash flow and results of operations may be adversely affected. The expenses of owning and operating a property are not necessarily reduced when circumstances, such as market factors and competition, cause a reduction in income from the property. If revenues drop, we may not be able to reduce our expenses accordingly. Costs associated with real estate investments, such as real estate taxes and maintenance generally, will not be materially reduced even if a property is not fully occupied or other circumstances cause our revenues to decrease. As a result, if revenues decrease in the future, static operating costs may adversely affect our future cash flow and results of operations. If similar economic conditions exist in the future, we may experience future losses.
Cost of Funds and Interest Rates
As of
Competition The leasing of real estate is highly competitive inManhattan and the greaterNew York metropolitan market in which we operate. We compete with numerous acquirers, developers, owners and operators of commercial real estate, many of which own or may seek to acquire or develop properties similar to ours in the same markets in which our properties are located. The principal means of competition are rent charged, location, services provided and the nature and condition of the facility to be leased. In addition, we face competition from other real estate companies including other REITs, private real estate funds, domestic and foreign financial institutions, life insurance companies, pension trusts, partnerships, individual investors and others that may have greater financial resources or access to capital than we do or that are willing to acquire properties in transactions which are more highly leveraged or are less attractive from a financial viewpoint than we are willing to pursue. In addition, competition from new and existing observatories and/or broadcasting operations could have a negative impact on revenues from our observatory and/or broadcasting operations. Adverse impacts on domestic travel and changes in foreign currency exchange rates may also decrease demand in the future, which could have a material adverse effect on our results of operations. If our competitors offer space at rental rates below current market rates, below the rental rates we currently charge our tenants, in better locations within our markets or in higher quality facilities, we may lose potential tenants and may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when our tenants' leases expire. 51 --------------------------------------------------------------------------------
Reference is made to ITEM 1A. Risk Factors in this Annual Report on Form 10-K for additional factors that that may influence future results of operations.
Critical Accounting Estimates
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
conformity with GAAP and with the rules and regulations of the
We consolidate entities in which we have a controlling financial interest. In
determining whether we have a controlling financial interest in a partially
owned entity and the requirement to consolidate the accounts of that entity, we
consider factors such as ownership interest, board representation, management
representation, authority to make decisions, and contractual and substantive
participating rights of the partners/members as well as whether the entity is a
variable interest entity ("VIE") and we are the primary beneficiary. The primary
beneficiary of a VIE is the entity that has (i) the power to direct the
activities that most significantly impact the entity's economic performance and
(ii) the obligation to absorb losses of the VIE or the right to receive benefits
from the VIE that could be significant to the VIE. The primary beneficiary is
required to consolidate the VIE. We had no VIEs as of December 31, 2021 and
2020.
We will assess the accounting treatment for each investment we may have in the
future. This assessment will include a review of each entity's organizational
agreement to determine which party has what rights and whether those rights are
protective or participating. For all VIEs, we will review such agreements in
order to determine which party has the power to direct the activities that most
significantly impact the entity's economic performance and benefit. In
situations where we or our partner could approve, among other things, the annual
budget, or leases that cover more than a nominal amount of space relative to the
total rentable space at each property, we would not consolidate the investment
as we consider these to be substantive participation rights that result in
shared power of the activities that would most significantly impact the
performance and benefit of such joint venture investment.
A non-controlling interest in a consolidated subsidiary is defined as the
portion of the equity (net assets) in a subsidiary not attributable, directly or
indirectly, to a parent. Non-controlling interests are required to be presented
as a separate component of equity in the consolidated balance sheets and in the
consolidated statements of income by requiring earnings and other comprehensive
income to be attributed to controlling and non-controlling interests.
Goodwill is tested annually for impairment and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount, including goodwill, exceeds the reporting unit's fair value and the implied fair value of goodwill is less than the carrying amount of that goodwill. Non-amortizing intangible assets, such as trade names and trademarks, are subject to an annual impairment test based on fair value and amortizing intangible assets are tested whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The closure of our observatory and subsequent reopening under international, national, and local travel restrictions and quarantines caused us during the second quarter of 2020 to choose to perform an impairment test related to goodwill. We engaged a third-party valuation consulting firm to perform the valuation process. The analysis used a combination of the discounted cash flow method (a form of the income approach) utilizing Level 3 unobservable inputs and the guideline company method (a form of the market approach). Significant assumptions under the former included revenue and cost projections, weighted average cost of capital, long-term growth rate and income tax considerations while the latter included guideline company enterprise values, revenue multiples and control premium rates. Our methodology to review goodwill impairment, which included a significant amount of judgment and estimates, provided a reasonable basis to determine whether impairment had occurred. Based upon the results of the goodwill impairment test of the standalone 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% atDecember 31, 2021 . 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. 52 --------------------------------------------------------------------------------
Income Taxes
We are generally not subject to federal and state income taxes as our taxable income or loss is reportable by our partners. Accordingly, no provision has been made for federal and state income taxes. ESRT elected, together with ESRT observatoryTRS, L.L.C. , our subsidiary which holds our observatory operations, to treat ESRT observatoryTRS, L.L.C. as a taxable REIT subsidiary ("TRS"), and ESRT has elected, together withESRT Holdings TRS, L.L.C. , our subsidiary that holds our third party management, construction (through cessation of our construction business in the first quarter of 2015), restaurant, cafeteria, health clubs and certain cleaning operations, to treatESRT Holdings TRS, L.L.C. as a TRS. TRSs may participate in non-real estate activities and/or perform non-customary services for tenants and their operations are generally subject to regular corporate income taxes. Each of our TRSs account for their income taxes in accordance with GAAP, which includes an estimate of the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. The calculation of the TRSs tax provisions may require interpreting tax laws and regulations and could result in the use of judgments or estimates which could cause its recorded tax liability to differ from the actual amount due. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The TRSs periodically assess the realizability of deferred tax assets and the adequacy of deferred tax liabilities, including the results of local, state, or federal tax audits or estimates and judgments used. As ofDecember 31, 2021 , our parent and general partner,Empire State Realty Trust, Inc. , had$73.0 million of 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. The federal NOL may be carried forward indefinitely. Other limitations may apply to ESRT's ability to use its NOL to offset taxable income. As ofDecember 31, 2021 , the observatory TRS had a federal income tax receivable of$5.5 million . This receivable reflects an anticipated refund resulting from the carryback of 2020 NOL to previous tax years. The observatory TRS had$3.1 million NOL carryforwards that may be used to offset future taxable income, if any. The federal NOL may be carried forward indefinitely and the state and local NOL can be carried forward for up to 20 years. We apply provisions for measuring and recognizing tax benefits associated with uncertain income tax positions. Penalties and interest, if incurred, would be recorded as a component of income tax expense. As ofDecember 31, 2021 and 2020, we do not have a liability for uncertain tax positions. As ofDecember 31, 2021 , the tax years endedDecember 31, 2018 throughDecember 31, 2021 remain open for an audit by the Internal Revenue Service, state or local authorities.
Share-Based Compensation
Share-based compensation for market based equity awards is measured at the fair value of the award on the date of grant and recognized as an expense on a straight-line basis over the stated vesting period, which is generally three or four years, depending on retirement eligibility. Share-based compensation for time-based equity awards is measured at the fair value of the award on the date of grant and recognized as an expense on a straight-line basis over the shorter of (i) the stated vesting period, which is generally three, four or five years, or (ii) the period from the date of grant to the date the employee becomes retirement eligible, which may occur upon grant. The determination of fair value of these awards is subjective and involves significant estimates and assumptions including expected volatility of ESRT stock, expected dividend yield, expected term, and assumptions of whether these awards will achieve parity with other operating partnership units or achieve performance thresholds. We believe that the assumptions and estimates utilized are appropriate based on the information available to management at the time of grant.
Accounting Standards Update
Reference is made to Note 2 in the accompanying consolidated financial statements for information about recently issued and recently adopted accounting standards.
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