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, 2021 .
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor provisions. You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," "contemplates," "aims," "continues," "would" or "anticipates" or the negative of these words and phrases or similar words or phrases. In particular, statements pertaining to our capital resources, portfolio performance, dividend policy and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our portfolio from operations, acquisitions and anticipated market conditions, demographics and results of operations are forward-looking statements. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: (i) economic, market, political and social impact of, and uncertainty relating to, the COVID-19 pandemic; (ii) a failure of conditions or performance regarding any event or transaction described herein, (iii) resolution of legal proceedings involving the Company; (iv) reduced demand for office, multifamily or retail space, including as a result of the COVID-19 pandemic and/or hybrid work schedules which allow work from remote locations other than the employer's office premises; (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, including global hostilities, currency exchange rates, and/or competition from recently opened observatories inNew York City , any or all of which may cause a decline in observatory visitors; (viii) defaults on, early terminations of, or non-renewal of, leases by tenants; (ix) increases in the Company's borrowing costs as a result of changes in interest rates and other factors, including the 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 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 this Quarterly Report on Form 10-Q, and in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , 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. 25 --------------------------------------------------------------------------------
Overview
Empire State Realty OP, L.P. is the entity through which 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 and manage a well-positioned property portfolio of office, retail and multifamily assets inManhattan and the greaterNew York metropolitan area. As the owner of theEmpire State Building , theWorld's Most Famous Building , ESRT also owns and operates its iconic, newly reimagined Observatory Experience.
Highlights for the three months ended
•Incurred net loss of$18.2 million and achieved Core Funds From Operations ("Core FFO") of$49.2 million . •Total portfolio 87.0% leased,New York City office portfolio 88.6% leased.
•Signed a total of 318,646 rentable square feet of new, renewal, and expansion leases.
•Empire State Building observatory revenue was$13.2 million and observatory NOI was$7.0 million for the first quarter of 2022. •Repurchased$23.3 million of our common stock at a weighted average price of$9.34 per share in the first quarter and throughApril 21, 2022 . Since the stock repurchase program began onMarch 5, 2020 throughApril 21, 2022 , approximately$215 million at a weighted average price of$8.67 per share has been repurchased. Results of Operations Overview
The discussion below relates to our financial condition and results of
operations for the three months ended
Three Months Ended
The following table summarizes our historical results of operations for the
three months ended
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Three Months Ended March 31,
2022 2021 Change %
Revenues:
Rental revenue $ 147,514 $ 140,231 $ 7,283 5.2 %
Observatory revenue 13,241 2,603 10,638 408.7 %
Lease termination fees 1,173 1,289 (116) (9.0) %
Third-party management and other fees 310 276 34 12.3 %
Other revenues and fees 1,796 905 891 98.5 %
Total revenues 164,034 145,304 18,730 12.9 %
Operating expenses:
Property operating expenses 38,644 30,279 (8,365) (27.6) %
Ground rent expenses 2,331 2,331 - - %
General and administrative expenses 13,686 13,853 167 1.2 %
Observatory expenses 6,215 4,588 (1,627) (35.5) %
Real estate taxes 30,004 31,447 1,443 4.6 %
Depreciation and amortization 67,106 44,457 (22,649) (50.9) %
Total operating expenses 157,986 126,955 (31,031) (24.4) %
Operating income 6,048 18,349 (12,301) (67.0) %
Other income (expense):
Interest income 149 122 27 22.1 %
Interest expense (25,014) (23,554) (1,460) (6.2) %
Loss on early extinguishment of debt - (214) 214 100.0 %
Loss before income taxes (18,817) (5,297) (13,520) (255.2) %
Income tax benefit 1,596 2,106 (510) 24.2 %
Net loss (17,221) (3,191) (14,030) (439.7) %
Private perpetual preferred unit
distributions (1,050) (1,050) - - %
Net loss attributable to non-controlling
interests in other partnerships 63 - 63 100.0 %
Net loss attributable to common
unitholders $ (18,208) $ (4,241) $ (13,967) (329.3) %
Rental Revenue
The increase in rental revenue reflects additional below market lease amortization, net and the inclusion of revenue from our recently acquired multifamily properties.
Observatory Revenue
Observatory revenues were higher driven by increased visitation
Other Revenues and Fees
The increase in other revenues and fees was due to higher food and beverage sales, parking income, bad debt recovery income and other income.
Property Operating Expenses
The increase in property operating expenses reflect higher payroll, utilities, repairs and maintenance, cleaning and other operating expenses, and the inclusion of operating expenses from our recently acquired multifamily properties.
Observatory Expenses
The increase in observatory expenses was driven by increased operating hours, which increased variable costs such as labor, union, security, cleaning and maintenance costs.
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Lower real estate taxes were attributable to the overall reduction in property assessment values due to the impact of COVID-19.
Depreciation and Amortization
The increase in depreciation and amortization reflects accelerated depreciation at one property due to an impairment charge taken in the fourth quarter of 2021 and additional depreciation from our recently acquired multifamily properties.
Interest Expense
The increase reflects additional interest expense from our recently acquired multifamily properties.
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 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.
At
As ofMarch 31, 2022 , we had approximately$2.3 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 3.9% and a weighted average maturity of 7.2 years. As ofMarch 31, 2022 , excluding principal amortization, we have no outstanding debt maturing untilNovember 2024 . Our consolidated net debt to total market capitalization was 40.0% as ofMarch 31, 2022 .
Unsecured Revolving Credit and Term Loan Facilities
OnMarch 31, 2021 , we entered into a second amendment to an existing credit agreement ("Amended Credit Agreement") that governs an amended senior unsecured credit facility (the "Credit Facility") withBank of America, N.A ., as administrative agent and the other lenders party thereto. The Amended Credit Agreement amended the amended and restated 28 -------------------------------------------------------------------------------- credit agreement datedAugust 29, 2017 by and among the parties named therein. 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 ofMarch 31, 2022 , we had no borrowings under the revolving credit facility and$215.0 million under the term loan facility. OnMarch 19, 2020 , we entered into a senior unsecured term loan facility (the "Term Loan Facility") 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 . 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 ofMarch 31, 2022 , 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 ofMarch 31, 2022 , we were in compliance with the covenants.
Mortgage Debt
As ofMarch 31, 2022 , mortgage notes payable amounted to$966.7 million . The first maturity is in 2024. See Note 4 - Debt for more information on mortgage debt. Senior Unsecured Notes The terms of the senior unsecured notes include customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. It also requires compliance with financial ratios including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a minimum unencumbered interest coverage ratio, and a maximum unsecured leverage ratio. The agreements also contain customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, the occurrence of certain change of control transactions and loss of real estate investment trust qualification. As ofMarch 31, 2022 , we were in compliance with the covenants under the outstanding senior unsecured notes.
Financial Covenants
As ofMarch 31, 2022 , we were in compliance with the following financial covenants: Financial covenant Required March 31, 2022 In Compliance Maximum total leverage < 60% 38.9 % Yes Maximum secured debt < 40% 15.9 % Yes Minimum fixed charge coverage > 1.50x 2.8x
Yes
Minimum unencumbered interest coverage > 1.75x 5.2x Yes
Maximum unsecured leverage < 60% 30.3 % 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
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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).
Three months ended March 31,
Total New Leases, Expansions, and Renewals 2022 2021
Number of leases signed(2) 42 25
Total square feet 317,633 170,757
Leasing commission costs(3) $ 6,258 $ 3,473
Tenant improvement costs(3) 21,047 12,782
Total leasing commissions and tenant improvement costs(3) $ 27,305 $ 16,255
Leasing commission costs per square foot(3) $ 19.70 $ 20.34
Tenant improvement costs per square foot(3) 66.26 74.85
Total leasing commissions and tenant improvement costs per square
foot(3) $ 85.96 $ 95.19
Retail Properties(4)
Three months ended March 31,
Total New Leases, Expansions, and Renewals 2022 2021
Number of leases signed(2) 2 1
Total square feet 1,013 1,060
Leasing commission costs(3) $ 36 $ 31
Tenant improvement costs(3) - -
Total leasing commissions and tenant improvement costs(3) $ 36 $ 31
Leasing commission costs per square foot(3) $ 35.54 $ 29.37
Tenant improvement costs per square foot(3) - -
Total leasing commissions and tenant improvement costs per square
foot(3) $ 35.54 $ 29.37
_______________
(1)Excludes an aggregate of 504,953 and 504,284 rentable square feet of retail
space in our Manhattan office properties in 2022 and 2021, respectively.
Includes the Empire State Building broadcasting licenses and observatory
operations.
(2)Presents a renewed and expansion lease as one lease signed.
(3)Presents all tenant improvement and leasing commission costs as if they were
incurred in the period in which the lease was signed, which may be different
than the period in which they were actually paid.
(4)Includes an aggregate of 504,953 and 504,284 rentable square feet of retail
space in our Manhattan office properties in 2022 and 2021, respectively.
Excludes the Empire State Building broadcasting licenses and observatory
operations.
Three months ended March 31,
2022 2021
Total Portfolio
Capital expenditures (1) $ 10,138 $ 3,662
_______________
(1)Excludes tenant improvements and leasing commission costs.
As of
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and leasing commission costs through a combination of operating cash flow, cash
on hand, additional property level mortgage financings and borrowings under the
unsecured revolving credit facility.
Capital expenditures are considered part of both our short-term and long-term liquidity requirements. We intend to fund capital improvements through a combination of operating cash flow, cash on hand and borrowings under the unsecured revolving credit facility.
Off-Balance Sheet Arrangements
As of
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.
Distribution to Equity Holders
Distributions and dividends amounting to$10.8 million and$1.1 million have been made to equity holders for the three months endedMarch 31, 2022 and 2021, 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, 2023 . Under the program, ESRT may purchase ESRT Class A common stock and we may purchase our Series ES, Series 250 and Series 60 operating partnership units in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by ESRT and us at our discretion and will be subject to stock price, availability, trading volume and general market conditions. The authorization does not obligate ESRT or us to acquire any particular amount of securities, and the program may be suspended or discontinued at ESRT and our discretion without prior notice. 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 endedMarch 31, 2022 .
Cash Flows
Comparison of Three Months Ended
Net cash. Cash and cash equivalents and restricted cash were$482.7 million and$607.4 million , respectively, as ofMarch 31, 2022 and 2021. The decrease was primarily due to the acquisition of real estate property at the end of 2021 and higher spending for capital expenditures, higher repurchases of common shares and higher dividends paid in 2022.
Operating activities. Net cash provided by operating activities decreased by
Investing activities. Net cash used in investing activities increased by
Financing activities. Net cash used in financing activities increased by$11.6 million to$24.7 million primarily due to higher repurchases of common shares and higher dividends and distributions.
Net Operating Income ("NOI")
Our financial reports include a discussion of property net operating income,
or NOI. NOI is a non-GAAP financial measure of performance. NOI is used by our
management to evaluate and compare the performance of our
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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 to investors because the resulting measure captures the
actual revenue, generated and actual expenses incurred in operating our
properties as well as trends in occupancy rates, rental rates and operating
costs.
However, the usefulness of NOI is limited because it excludes general and
administrative costs, interest expense, depreciation and amortization expense
and gains or losses from the sale of properties, and other gains and losses as
stipulated by GAAP, the level of capital expenditures and leasing costs
necessary to maintain the operating performance of our properties, all of which
are significant economic costs. NOI may fail to capture significant trends in
these components of net income which further limits its usefulness.
NOI is a measure of the operating performance of our properties but does not
measure our performance as a whole. NOI is therefore not a substitute for net
income as computed in accordance with GAAP. This measure should be analyzed in
conjunction with net income computed in accordance with GAAP and discussions
elsewhere in this Management's Discussion and Analysis of Financial Condition
and Results of Operations regarding the components of net income that are
eliminated in the calculation of NOI. Other companies may use different methods
for calculating NOI or similarly titled measures and, accordingly, our NOI may
not be comparable to similarly titled measures reported by other companies that
do not define the measure exactly as we do.
The following table presents a reconciliation of our net income, the most directly comparable GAAP measure, to NOI for the periods presented (amounts in thousands):
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Three months ended
March 31,
2022 2021
(unaudited)
Net loss $ (17,221) $ (3,191)
Add:
General and administrative expenses 13,686 13,853
Depreciation and amortization 67,106 44,457
Interest expense 25,014 23,768
Income tax expense (benefit) (1,596) (2,106)
Less:
Third-party management and other fees (310) (276) Interest income (149) (122) Net operating income$ 86,530 $ 76,383 Other Net Operating Income Data Straight-line rental revenue
$ 1,784 $ 654 Amortization of acquired below-market ground leases
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, we believe FFO is useful to investors as it captures features particular to real estate performance by recognizing that real estate has generally appreciated over time or maintains residual value to a much greater extent than do other depreciable assets. Investors should review FFO, along with GAAP net income, when trying to understand an equity REIT's operating performance. We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results of operations, the utility of FFO as a measure of performance is limited. There can be no assurance that FFO presented by us is comparable to similarly titled measures of other REITs. FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. Although FFO is a measure used for comparability in assessing the performance of REITs, as the NAREIT White Paper only provides guidelines for computing FFO, the computation of FFO may vary from one company to another.
Modified Funds From Operations ("Modified FFO")
Modified FFO adds back an adjustment for any above or below-market ground
lease amortization to traditionally defined FFO. We believe this a useful
supplemental measure in evaluating our operating performance due to the non-cash
accounting treatment under GAAP, which stems from the third quarter 2014
acquisition of two option properties following our formation transactions as
they carry significantly below market ground leases, the amortization of which
is material to our overall results. We present Modified FFO because we believe
it is an important supplemental measure of our operating performance in that it
adds back the non-cash amortization of below-market ground leases. There can be
no assurance that Modified FFO presented by us is comparable to similarly titled
measures of other REITs. Modified FFO does not represent
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