Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2017
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-36105
EMPIRE STATE REALTY TRUST, INC.
(Exact name of Registrant as specified in its charter)
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Maryland | | 37-1645259 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
111 West 33rd Street, 12th Floor
New York, New York 10120
(Address of principal executive offices) (Zip Code)
(212) 687-8700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x | | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | | Smaller reporting company o |
| | Emerging growth company o |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Class A Common Stock, par value $0.01 per share | | 157,632,894 |
Class B Common Stock, par value $0.01 per share | | 1,078,448 |
(Class) | | (Outstanding on July 31, 2017) |
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| EMPIRE STATE REALTY TRUST, INC. | |
| FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2017 | |
| TABLE OF CONTENTS | PAGE |
PART 1. | FINANCIAL INFORMATION | |
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ITEM 1. | FINANCIAL STATEMENTS | |
| Condensed Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016 | |
| Condensed Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2016 (unaudited) | |
| Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2017 and 2016 (unaudited) | |
| Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2017 (unaudited) | |
| Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2017 and 2016 (unaudited) | |
| Notes to Condensed Consolidated Financial Statements (unaudited) | |
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK | |
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ITEM 4. | CONTROLS AND PROCEDURES | |
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PART II. | OTHER INFORMATION | |
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ITEM 1. | LEGAL PROCEEDINGS | |
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ITEM 1A. | RISK FACTORS | |
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |
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ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | |
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ITEM 4. | MINE SAFETY DISCLOSURES | |
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ITEM 5. | OTHER INFORMATION | |
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ITEM 6. | EXHIBITS | |
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SIGNATURES | |
ITEM 1. FINANCIAL STATEMENTS
Empire State Realty Trust, Inc.
Condensed Consolidated Balance Sheets
(amounts in thousands, except share and per share amounts)
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| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
ASSETS | (unaudited) | | |
Commercial real estate properties, at cost: | | | |
Land | $ | 201,196 |
| | $ | 201,196 |
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Development costs | 7,978 |
| | 7,951 |
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Building and improvements | 2,347,435 |
| | 2,249,482 |
|
| 2,556,609 |
| | 2,458,629 |
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Less: accumulated depreciation | (605,481 | ) | | (556,546 | ) |
Commercial real estate properties, net | 1,951,128 |
| | 1,902,083 |
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Cash and cash equivalents | 440,958 |
| | 554,371 |
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Restricted cash | 68,011 |
| | 61,514 |
|
Tenant and other receivables, net of allowance of $2,901 and $3,333 in 2017 and 2016, respectively | 23,995 |
| | 22,542 |
|
Deferred rent receivables, net of allowance of $521 and $390 in 2017 and 2016, respectively | 165,470 |
| | 152,074 |
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Prepaid expenses and other assets | 54,624 |
| | 53,749 |
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Deferred costs, net | 263,392 |
| | 277,081 |
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Acquired below-market ground leases, net | 372,144 |
| | 376,060 |
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Goodwill | 491,479 |
| | 491,479 |
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Total assets | $ | 3,831,201 |
| | $ | 3,890,953 |
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LIABILITIES AND EQUITY | | | |
Liabilities: | | | |
Mortgage notes payable, net | $ | 724,312 |
| | $ | 759,016 |
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Senior unsecured notes, net | 592,073 |
| | 590,388 |
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Unsecured term loan facility, net | 263,114 |
| | 262,927 |
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Unsecured revolving credit facility | — |
| | — |
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Accounts payable and accrued expenses | 136,617 |
| | 134,064 |
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Acquired below-market leases, net | 74,083 |
| | 82,300 |
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Deferred revenue and other liabilities | 27,380 |
| | 32,212 |
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Tenants’ security deposits | 49,669 |
| | 47,183 |
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Total liabilities | 1,867,248 |
| | 1,908,090 |
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Commitments and contingencies |
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Equity: | | | |
Empire State Realty Trust, Inc. stockholders' equity: | | | |
Preferred stock, $0.01 par value per share, 50,000,000 shares authorized, none issued or outstanding | — |
| | — |
|
Class A common stock, $0.01 par value per share, 400,000,000 shares authorized, 157,493,025 shares issued and outstanding and 154,744,740 shares issued and outstanding in 2017 and 2016, respectively | 1,574 |
| | 1,547 |
|
Class B common stock, $0.01 par value per share, 50,000,000 shares authorized, 1,080,475 and 1,095,737 shares issued and outstanding in 2017 and 2016, respectively | 11 |
| | 11 |
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Additional paid-in capital | 1,113,891 |
| | 1,104,463 |
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Accumulated other comprehensive loss | (9,695 | ) | | (2,789 | ) |
Retained earnings | 44,355 |
| | 50,904 |
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Total Empire State Realty Trust, Inc.'s stockholders' equity | 1,150,136 |
| | 1,154,136 |
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Non-controlling interests in operating partnership | 805,813 |
| | 820,723 |
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Private perpetual preferred units, $16.62 per unit liquidation preference, 1,560,360 issued and outstanding in 2017 and 2016 | 8,004 |
| | 8,004 |
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Total equity | 1,963,953 |
| | 1,982,863 |
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Total liabilities and equity | $ | 3,831,201 |
| | $ | 3,890,953 |
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The accompanying notes are an integral part of these financial statements
Empire State Realty Trust, Inc.
Condensed Consolidated Statements of Income
(unaudited)
(amounts in thousands, except per share amounts)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues: | | | | | | | |
Rental revenue | $ | 120,844 |
| | $ | 112,613 |
| | $ | 237,957 |
| | $ | 227,521 |
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Tenant expense reimbursement | 17,569 |
| | 19,054 |
| | 33,543 |
| | 37,174 |
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Observatory revenue | 33,966 |
| | 31,838 |
| | 54,906 |
| | 53,019 |
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Third-party management and other fees | 392 |
| | 423 |
| | 743 |
| | 968 |
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Other revenue and fees | 4,353 |
| | 1,887 |
| | 14,929 |
| | 4,207 |
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Total revenues | 177,124 |
| | 165,815 |
| | 342,078 |
| | 322,889 |
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Operating expenses: | | | | | | | |
Property operating expenses | 38,529 |
| | 37,386 |
| | 80,739 |
| | 76,490 |
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Ground rent expenses | 2,332 |
| | 2,330 |
| | 4,663 |
| | 4,663 |
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General and administrative expenses | 12,579 |
| | 12,907 |
| | 23,667 |
| | 23,825 |
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Observatory expenses | 7,176 |
| | 6,895 |
| | 14,431 |
| | 14,650 |
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Real estate taxes | 24,542 |
| | 23,557 |
| | 49,100 |
| | 47,082 |
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Acquisition expenses | — |
| | — |
| | — |
| | 98 |
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Depreciation and amortization | 40,532 |
| | 38,548 |
| | 81,378 |
| | 77,775 |
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Total operating expenses | 125,690 |
| | 121,623 |
| | 253,978 |
| | 244,583 |
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Total operating income | 51,434 |
| | 44,192 |
| | 88,100 |
| | 78,306 |
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Other expense: | | | | | | | |
Interest expense | (17,477 | ) | | (17,420 | ) | | (35,219 | ) | | (35,371 | ) |
Loss from derivative financial instruments | (42 | ) | | — |
| | (289 | ) | | — |
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Income before income taxes | 33,915 |
| | 26,772 |
| | 52,592 |
| | 42,935 |
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Income tax expense | (2,556 | ) | | (2,132 | ) | | (2,088 | ) | | (1,590 | ) |
Net income | 31,359 |
| | 24,640 |
| | 50,504 |
| | 41,345 |
|
Private perpetual preferred unit distributions | (234 | ) | | (234 | ) | | (468 | ) | | (468 | ) |
Net income attributable to non-controlling interests | (14,541 | ) | | (13,317 | ) | | (23,467 | ) | | (22,360 | ) |
Net income attributable to common stockholders | $ | 16,584 |
| | $ | 11,089 |
| | $ | 26,569 |
| | $ | 18,517 |
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| | | | | | | |
Total weighted average shares: | | | | | | | |
Basic | 157,921 |
| | 122,502 |
| | 157,265 |
| | 121,640 |
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Diluted | 298,398 |
| | 266,167 |
| | 298,180 |
| | 267,121 |
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| | | | | | | |
Earnings per share attributable to common stockholders: | | | | | | | |
Basic | $ | 0.10 |
| | $ | 0.09 |
| | $ | 0.17 |
| | $ | 0.15 |
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Diluted | $ | 0.10 |
| | $ | 0.09 |
| | $ | 0.17 |
| | $ | 0.15 |
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Dividends per share | $ | 0.105 |
| | $ | 0.105 |
| | $ | 0.21 |
| | $ | 0.19 |
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The accompanying notes are an integral part of these financial statements
Empire State Realty Trust, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
(amounts in thousands)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income | $ | 31,359 |
| | $ | 24,640 |
| | $ | 50,504 |
| | $ | 41,345 |
|
Other comprehensive income (loss): | | | | | | | |
Change in unrealized gain (loss) on valuation of interest rate swap agreements | (14,367 | ) | | (10,864 | ) | | (12,973 | ) | | (30,235 | ) |
Other comprehensive income (loss) | (14,367 | ) | | (10,864 | ) | | (12,973 | ) | | (30,235 | ) |
Comprehensive income (loss) | 16,992 |
| | 13,776 |
| | 37,531 |
| | 11,110 |
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Net income attributable to non-controlling interests and private perpetual preferred unitholders | (14,775 | ) | | (13,551 | ) | | (23,935 | ) | | (22,828 | ) |
Other comprehensive (income) loss attributable to non-controlling interests | 6,742 |
| | 5,900 |
| | 6,084 |
| | 16,540 |
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Comprehensive income (loss) attributable to common stockholders | $ | 8,959 |
| | $ | 6,125 |
| | $ | 19,680 |
| | $ | 4,822 |
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The accompanying notes are an integral part of these financial statements
Empire State Realty Trust, Inc.
Condensed Consolidated Statements of Stockholders' Equity
For The Six Months Ended June 30, 2017
(unaudited)
(amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Class A Common Shares | | Class A Common Stock | | Number of Class B Common Shares | | Class B Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders' Equity | | Non-controlling Interests | | Private Perpetual Preferred Units | | Total Equity |
| | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2016 | 154,745 |
| | $ | 1,547 |
| | 1,096 |
| | $ | 11 |
| | $ | 1,104,463 |
| | $ | (2,789 | ) | | $ | 50,904 |
| | $ | 1,154,136 |
| | $ | 820,723 |
| | $ | 8,004 |
| | $ | 1,982,863 |
|
Conversion of operating partnership units and Class B shares to Class A shares | 2,719 |
| | 27 |
| | (15 | ) | | — |
| | 9,134 |
| | (17 | ) | | — |
| | 9,144 |
| | (9,144 | ) | | — |
| | — |
|
Equity compensation: | | | | | | | | | | | | | | |
|
| | | | | |
|
|
LTIP units | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,673 |
| | — |
| | 6,673 |
|
Restricted stock, net of forfeitures | 29 |
| | — |
| | — |
| | — |
| | 294 |
| | — |
| | — |
| | 294 |
| | — |
| | — |
| | 294 |
|
Dividends and distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (33,118 | ) | | (33,118 | ) | | (29,822 | ) | | (468 | ) | | (63,408 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 26,569 |
| | 26,569 |
| | 23,467 |
| | 468 |
| | 50,504 |
|
Unrealized gain (loss) on valuation of interest rate swap agreements | — |
| | — |
| | — |
| | — |
| | — |
| | (6,889 | ) | | — |
| | (6,889 | ) | | (6,084 | ) | | — |
| | (12,973 | ) |
Balance at June 30, 2017 | 157,493 |
| | $ | 1,574 |
| | 1,081 |
| | $ | 11 |
| | $ | 1,113,891 |
| | $ | (9,695 | ) | | $ | 44,355 |
| | $ | 1,150,136 |
| | $ | 805,813 |
| | $ | 8,004 |
| | $ | 1,963,953 |
|
The accompanying notes are an integral part of these financial statements
Empire State Realty Trust, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(amounts in thousands)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2017 | | 2016 |
Cash Flows From Operating Activities | | | |
Net income | $ | 50,504 |
| | $ | 41,345 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 81,378 |
| | 77,775 |
|
Amortization of deferred financing costs and debt premiums and discount | 487 |
| | 293 |
|
Amortization of acquired above- and below-market leases, net | (2,548 | ) | | (5,075 | ) |
Amortization of acquired below-market ground leases | 3,916 |
| | 3,916 |
|
Straight-lining of rental revenue | (13,396 | ) | | (11,876 | ) |
Equity based compensation | 6,967 |
| | 4,646 |
|
Unrealized loss from derivative financial instruments | (6,003 | ) | | — |
|
Increase (decrease) in cash flows due to changes in operating assets and liabilities: | | | |
Restricted cash | (2,423 | ) | | 337 |
|
Tenant and other receivables | (1,452 | ) | | 4,261 |
|
Deferred leasing costs | (12,766 | ) | | (10,528 | ) |
Prepaid expenses and other assets | (1,489 | ) | | 2,566 |
|
Accounts payable and accrued expenses | (10,909 | ) | | (7,239 | ) |
Deferred revenue and other liabilities | (4,832 | ) | | (8,369 | ) |
Net cash provided by operating activities | 87,434 |
| | 92,052 |
|
Cash Flows From Investing Activities | | | |
Decrease (increase) in restricted cash for investing activities | (1,587 | ) | | 5,077 |
|
Development costs | (27 | ) | | (450 | ) |
Additions to building and improvements | (103,614 | ) | | (78,656 | ) |
Net cash used in investing activities | (105,228 | ) | | (74,029 | ) |
The accompanying notes are an integral part of these financial statements
Empire State Realty Trust, Inc.
Condensed Consolidated Statements of Cash Flows (continued)
(unaudited)
(amounts in thousands)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2017 | | 2016 |
Cash Flows From Financing Activities | | | |
Proceeds from mortgage notes payable | 315,000 |
| | 50,000 |
|
Repayment of mortgage notes payable | (342,703 | ) | | (26,215 | ) |
Proceeds from unsecured revolving credit facility | — |
| | 40,000 |
|
Repayments of unsecured revolving credit facility | — |
| | (40,000 | ) |
Deferred financing costs | (4,508 | ) | | (1,366 | ) |
Private perpetual preferred unit distributions | (468 | ) | | (468 | ) |
Dividends paid to common stockholders | (33,118 | ) | | (23,253 | ) |
Distributions paid to non-controlling interests in the operating partnership | (29,822 | ) | | (27,952 | ) |
Net cash used in financing activities | (95,619 | ) | | (29,254 | ) |
Net decrease in cash and cash equivalents | (113,413 | ) | | (11,231 | ) |
Cash and cash equivalents—beginning of period | 554,371 |
| | 46,685 |
|
Cash and cash equivalents—end of period | $ | 440,958 |
| | $ | 35,454 |
|
| | | |
Supplemental disclosures of cash flow information: | | | |
Cash paid for interest | $ | 35,751 |
| | $ | 34,034 |
|
Cash paid for income taxes | $ | 3,014 |
| | $ | 2,058 |
|
| | | |
Non-cash investing and financing activities: | | | |
Building and improvements included in accounts payable and accrued expenses | $ | 72,363 |
| | $ | 59,504 |
|
Derivative instruments at fair values included in accounts payable and accrued expenses | 11,947 |
| | 30,235 |
|
Conversion of operating partnership units and Class B shares to Class A shares | 9,134 |
| | 15,201 |
|
The accompanying notes are an integral part of these financial statements
Empire State Realty Trust, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Description of Business and Organization
As used in these condensed consolidated financial statements, unless the context otherwise requires, “we,” “us,” “our,” the “company,” and "ESRT" mean Empire State Realty Trust, Inc. and its consolidated subsidiaries.
We are a self-administered and self-managed real estate investment trust ("REIT") that owns, manages, operates, acquires and repositions office and retail properties in Manhattan and the greater New York metropolitan area.
As of June 30, 2017, our total portfolio contained 10.1 million rentable square feet of office and retail space. We owned 14 office properties (including three long-term ground leasehold interests) encompassing approximately 9.4 million rentable square feet of office space. Nine of these properties are located in the midtown Manhattan market and aggregate approximately 7.6 million rentable square feet of office space, including the Empire State Building. Our Manhattan office properties also contain an aggregate of 495,310 rentable square feet of retail space on their ground floor and/or contiguous levels. Our remaining five office properties are located in Fairfield County, Connecticut and Westchester County, New York, encompassing in the aggregate approximately 1.9 million rentable square feet. The majority of square footage for these five properties is located in densely populated metropolitan communities with immediate access to mass transportation. Additionally, we have entitled land at the Stamford Transportation Center in Stamford, Connecticut, adjacent to one of our office properties, that will support the development of an approximately 380,000 rentable square foot office building and garage, which we refer to herein as Metro Tower. As of June 30, 2017, our portfolio included four standalone retail properties located in Manhattan and two standalone retail properties located in the city center of Westport, Connecticut, encompassing 204,452 rentable square feet in the aggregate.
We were organized as a Maryland corporation on July 29, 2011 and commenced operations upon completion of our initial public offering and related formation transactions on October 7, 2013. Our operating partnership, Empire State Realty OP, L.P. (the "Operating Partnership"), holds substantially all of our assets and conducts substantially all of our business. As of June 30, 2017, we owned approximately 52.8% of the aggregate operating partnership units in the Operating Partnership. We, as the sole general partner in the Operating Partnership, have responsibility and discretion in the management and control of the Operating Partnership, and the limited partners in the Operating Partnership, in such capacity, have no authority to transact business for, or participate in the management activities of, the Operating Partnership. Accordingly, the Operating Partnership has been consolidated by us. We elected to be taxed as a REIT and operate in a manner that we believe allows us to qualify as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2013.
2. Summary of Significant Accounting Policies
There have been no material changes to the summary of significant accounting policies included in the section entitled "Summary of Significant Accounting Policies" in our December 31, 2016 Annual Report on Form 10-K.
Basis of Quarterly Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), for interim financial information, and with the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments and eliminations (including intercompany balances and transactions), consisting of normal recurring adjustments, considered necessary for the fair presentation of the financial statements have been included.
The results of operations for the periods presented are not necessarily indicative of the results that may be expected for the corresponding full years. These financial statements should be read in conjunction with the financial statements and accompanying notes included in the financial statements for the year ended December 31, 2016 contained in our Annual Report on Form 10-K. We do not consider our business to be subject to material seasonal fluctuations, except that our observatory business is subject to tourism seasonality. During the past ten years, approximately 16.0% to 18.0% of our annual observatory
revenue was realized in the first quarter, 26.0% to 28.0% was realized in the second quarter, 31.0% to 33.0% was realized in the third quarter and 23.0% to 25.0% was realized in the fourth quarter.
We consolidate entities in which we have a controlling financial interest. In determining whether we have a controlling financial interest in a partially owned entity and the requirement to consolidate the accounts of that entity, we consider factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members. For variable interest entities ("VIE"), we consolidate the entity if we are deemed to have a variable interest in the entity and through that interest we are deemed the primary beneficiary. The primary beneficiary of a VIE is the entity that has (i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. The primary beneficiary is required to consolidate the VIE. The Operating Partnership is a variable interest entity of our company, Empire State Realty Trust, Inc. As the Operating Partnership is already consolidated in the financial statements of Empire State Realty Trust, Inc., the identification of this entity as a variable interest entity has no impact on our consolidated financial statements.
We will assess the accounting treatment for each investment we may have in the future. This assessment will include a review of each entity’s organizational agreement to determine which party has what rights and whether those rights are protective or participating. For all VIEs, we will review such agreements in order to determine which party has the power to direct the activities that most significantly impact the entity’s economic performance and benefit. In situations where we or our partner could approve, among other things, the annual budget, or leases that cover more than a nominal amount of space relative to the total rentable space at each property, we would not consolidate the investment as we consider these to be substantive participation rights that result in shared power of the activities that would most significantly impact the performance and benefit of such joint venture investment.
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Non-controlling interests are required to be presented as a separate component of equity in the condensed consolidated balance sheets and in the condensed consolidated statements of income by requiring earnings and other comprehensive income to be attributed to controlling and non-controlling interests.
Accounting Estimates
The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to use estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Significant items subject to such estimates and assumptions include allocation of the purchase price of acquired real estate properties among tangible and intangible assets, determination of the useful life of real estate properties and other long-lived assets, valuation and impairment analysis of commercial real estate properties and other long-lived assets, estimate of tenant expense reimbursements, valuation of the allowance for doubtful accounts, and valuation of derivative instruments, senior unsecured notes, mortgage notes payable, unsecured term loan and revolving credit facilities, and equity based compensation. These estimates are prepared using management’s best judgment, after considering past, current, and expected events and economic conditions. Actual results could differ from those estimates.
Recently Issued or Adopted Accounting Standards
During January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which contain amendments that modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. ASU No. 2017-04 should be applied on a prospective basis and the amendments adopted for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are evaluating the impact of adopting this new accounting standard on our consolidated financial statements.
During January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which contain amendments to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in ASU No. 2017-01 provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. Real estate acquisitions that do not meet the definition of a business will be accounted for as asset acquisitions and the corresponding acquisition costs will be capitalized rather than expensed. These amendments narrow the definition of the term output so that the term is consistent with how outputs are described in Topic 606, Revenue from Contracts with Customers. ASU No. 2017-01 will be effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments should be applied prospectively on or after the effective date. No disclosures are required at transition. We believe that future acquisitions of real estate properties will be considered asset acquisitions.
During November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which contain amendments that require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU No. 2016-18 will be effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition method to each period presented. We are evaluating the impact of adopting this new accounting standard on our consolidated financial statements.
During August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Earlier adoption is permitted including adoption in an interim period. We are evaluating the impact of adopting this new accounting standard on our consolidated financial statements.
During June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which contains amendments that replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU No. 2016-13 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Earlier adoption as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, is permitted. The amendments must be adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified retrospective approach). We are evaluating the impact of adopting this new accounting standard on our consolidated financial statements.
During February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. ASU No. 2016-02 leaves the accounting for leases by lessors largely unchanged from previous GAAP. ASU No. 2016-02 will be effective for fiscal years beginning after December 15, 2018 and subsequent interim periods. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. This ASU is expected to result in the recognition of a right-to-use asset and related liability to account for our future obligations under our ground lease agreements for which we are the lessee. As of June 30, 2017, the remaining contractual payments under our ground lease agreements aggregated $62.0 million. In addition, under ASU 2016-02, lessors may only capitalize incremental direct leasing costs. As a result, we expect that we will no longer capitalize our internal leasing costs and instead will expense these costs as incurred. These costs totaled $2.3 million for the year ended December 31, 2016. We continue to evaluate the impact of adopting this new accounting standard on our consolidated financial statements.
During May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which will replace all current GAAP guidance related to revenue recognition and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a
company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. ASU No. 2014-09 was amended in August 2015 by ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU No. 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. ASU No. 2014-09 was further amended in December 2016 by ASU No. 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers which contain amendments that are intended to clarify or correct unintended application of the guidance. Those items generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements for Topic 606. Our initial analysis of this ASU indicates that it will not have a material effect on our observatory revenue and third party management and other fee revenue in our consolidated financial statements. We are still in the process of evaluating this new accounting standard as it relates to our rental revenue and tenant expense reimbursements.
3. Deferred Costs, Acquired Lease Intangibles and Goodwill
Deferred costs, net, consisted of the following as of June 30, 2017 and December 31, 2016 (amounts in thousands):
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Leasing costs | $ | 147,910 |
| | $ | 140,325 |
|
Acquired in-place lease value and deferred leasing costs | 245,164 |
| | 253,113 |
|
Acquired above-market leases | 70,733 |
| | 74,770 |
|
| 463,807 |
| | 468,208 |
|
Less: accumulated amortization | (203,827 | ) | | (195,617 | ) |
Total deferred costs, net, excluding net deferred financing costs | $ | 259,980 |
| | $ | 272,591 |
|
At June 30, 2017 and December 31, 2016, $3.4 million and $4.5 million, respectively, of net deferred financing costs associated with the unsecured revolving credit facility was included in deferred costs, net on the condensed consolidated balance sheet.
Amortization expense related to deferred leasing costs and acquired deferred leasing costs was $5.9 million and $5.7 million for the three months ended June 30, 2017 and 2016, respectively, and $12.1 million and $11.5 million for the six months ended June 30, 2017 and 2016, respectively. Amortization expense related to acquired lease intangibles was $4.6 million and $7.0 million for the three months ended June 30, 2017 and 2016, respectively, and $9.0 million and $14.7 million for the six months ended June 30, 2017 and 2016, respectively.
Amortizing acquired intangible assets and liabilities consisted of the following as of June 30, 2017 and December 31, 2016 (amounts in thousands):
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Acquired below-market ground leases | $ | 396,916 |
| | $ | 396,916 |
|
Less: accumulated amortization | (24,772 | ) | | (20,856 | ) |
Acquired below-market ground leases, net | $ | 372,144 |
| | $ | 376,060 |
|
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Acquired below-market leases | $ | (133,170 | ) | | $ | (135,026 | ) |
Less: accumulated amortization | 59,087 |
| | 52,726 |
|
Acquired below-market leases, net | $ | (74,083 | ) | | $ | (82,300 | ) |
Rental revenue related to the amortization of below-market leases, net of above-market leases, was $1.1 million and $0.9 million for the three months ended June 30, 2017 and 2016, respectively, and $2.5 million and $5.1 million for the six months ended June 30, 2017 and 2016, respectively.
As of June 30, 2017, we had goodwill of $491.5 million. Goodwill was allocated $227.5 million to the observatory reportable segment and $264.0 million to the real estate segment.
4. Debt
Debt consisted of the following as of June 30, 2017 and December 31, 2016 (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| Principal Balance | | As of June 30, 2017 |
| June 30, 2017 | | December 31, 2016 | | Stated Rate | | Effective Rate(1) | | Maturity Date(2) |
Mortgage debt collateralized by: | | | | | | | | | |
Fixed rate mortgage debt | | | | | | | | | |
1333 Broadway | $ | 67,138 |
| | $ | 67,656 |
| | 6.32 | % | | 3.74 | % | | 1/5/2018 |
1400 Broadway | | | | | | | | | |
(first lien mortgage loan) | 67,181 |
| | 67,714 |
| | 6.12 | % | | 3.37 | % | | 2/5/2018 |
(second lien mortgage loan) | 9,281 |
| | 9,389 |
| | 3.35 | % | | 3.35 | % | | 2/5/2018 |
111 West 33rd Street | | | | | | | | | |
(first lien mortgage loan) | 74,662 |
| | 75,261 |
| | 6.01 | % | | 3.31 | % | | 4/5/2018 |
(second lien mortgage loan) | 9,440 |
| | 9,509 |
| | 6.56 | % | | 3.62 | % | | 4/5/2018 |
1350 Broadway | 37,458 |
| | 37,764 |
| | 5.87 | % | | 3.71 | % | | 4/5/2018 |
Metro Center | 94,976 |
| | 95,985 |
| | 3.59 | % | | 3.65 | % | | 11/5/2024 |
10 Union Square | 50,000 |
| | 50,000 |
| | 3.70 | % | | 3.97 | % | | 4/1/2026 |
1542 Third Avenue | 30,000 |
| | 17,795 |
| | 4.29 | % | | 4.68 | % | | 5/1/2027 |
First Stamford Place(3) | 180,000 |
| | 235,067 |
| | 4.28 | % | | 4.81 | % | | 7/1/2027 |
1010 Third Avenue and 77 West 55th Street | 40,000 |
| | 26,502 |
| | 4.01 | % | | 4.50 | % | | 1/5/2028 |
10 Bank Street | 35,000 |
| | 31,544 |
| | 4.23 | % | | 4.50 | % | | 6/1/2032 |
383 Main Avenue | 30,000 |
| | 28,654 |
| | 4.44 | % | | 4.88 | % | | 6/30/2032 |
Total mortgage debt | 725,136 |
| | 752,840 |
| | | | | | |
Senior unsecured notes - exchangeable | 250,000 |
| | 250,000 |
| | 2.63 | % | | 3.93 | % | | 8/15/2019 |
Senior unsecured notes:(6) | | | | | | | | | |
Series A | 100,000 |
| | 100,000 |
| | 3.93 | % | | 3.98 | % | | 3/27/2025 |
Series B | 125,000 |
| | 125,000 |
| | 4.09 | % | | 4.14 | % | | 3/27/2027 |
Series C | 125,000 |
| | 125,000 |
| | 4.18 | % | | 4.23 | % | | 3/27/2030 |
Unsecured revolving credit facility(6) | — |
| | — |
| | (4) | | (4) | | 1/23/2019 |
Unsecured term loan facility(6) | 265,000 |
| | 265,000 |
| | (5) | | (5) | | 8/24/2022 |
Total principal | 1,590,136 |
| | 1,617,840 |
| | | | | | |
Unamortized premiums, net of unamortized discount | (1,232 | ) | | 905 |
| | | | | | |
Deferred financing costs, net
| (9,405 | ) | | (6,414 | ) | | | | | | |
Total | $ | 1,579,499 |
| | $ | 1,612,331 |
| | | | | | |
______________
| |
(1) | The effective rate is the yield as of June 30, 2017, including the effects of debt issuance costs and the amortization of the fair value of debt adjustment. |
| |
(2) | Pre-payment is generally allowed for each loan upon payment of a customary pre-payment penalty. |
| |
(3) | Represents a $164 million mortgage loan bearing interest of 4.09% and a $16 million loan bearing interest at 6.25%. |
| |
(4) | At June 30, 2017, the unsecured revolving credit facility bears a floating rate at 30 day LIBOR plus 1.15%. The rate at June 30, 2017 was 2.37%. |
| |
(5) | The unsecured term loan facility bears a floating rate at 30 day LIBOR plus 1.60%. The rate at June 30, 2017 was 2.82%. Pursuant to a forward interest rate swap agreement, the LIBOR rate is fixed at 2.1485% for the period beginning on August 31, 2017 through maturity. |
| |
(6) | At June 30, 2017, we were in compliance with all debt covenants. |
Mortgage Debt
During April 2017, we refinanced a mortgage loan collateralized by 1542 Third Avenue. The new $30.0 million loan bears interest at a fixed rate of 4.29% and matures in May 2027.
During May 2017, we refinanced a mortgage loan collateralized by 10 Bank Street. The new $35.0 million loan bears interest at a fixed rate of 4.23% and matures in June 2032.
During June 2017, we refinanced a mortgage loan collateralized by First Stamford Place. The new $180.0 million loans bear a blended interest rate of 4.28% and mature in July 2027. One mortgage loan is for $164.0 million and bears an interest rate of 4.09%. The second loan is for $16.0 million and bears an interest rate of 6.25%.
During June 2017, we refinanced a mortgage loan collateralized by 1010 Third Avenue and 77 West 55th Street. The new $40.0 million loan bears interest at a fixed rate of 4.01% and matures in January 2028.
During June 2017, we refinanced a mortgage loan collateralized by 383 Main Avenue. The new $30.0 million loan bears interest at a fixed rate of 4.44% and matures in June 2032.
Principal Payments
Aggregate required principal payments at June 30, 2017 are as follows (amounts in thousands):
|
| | | | | | | | | | | |
Year | Amortization | | Maturities | | Total |
2017 | $ | 3,898 |
| | $ | — |
| | $ | 3,898 |
|
2018 | 4,417 |
| | 262,210 |
| | 266,627 |
|
2019 | 3,790 |
| | 250,000 |
| | 253,790 |
|
2020 | 3,938 |
| | — |
| | 3,938 |
|
2021 | 4,090 |
| | — |
| | 4,090 |
|
Thereafter | 43,310 |
| | 1,014,483 |
| | 1,057,793 |
|
Total | $ | 63,443 |
| | $ | 1,526,693 |
| | $ | 1,590,136 |
|
Deferred Financing Costs
Deferred financing costs, net, consisted of the following at June 30, 2017 and December 31, 2016 (amounts in thousands):
|
| | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
Financing costs | | $ | 17,803 |
| | $ | 23,145 |
|
Less: accumulated amortization | | (4,986 | ) | | (12,241 | ) |
Total deferred financing costs, net | | $ | 12,817 |
| | $ | 10,904 |
|
At June 30, 2017 and December 31, 2016, $3.4 million and $4.5 million, respectively, of net deferred financing costs associated with the unsecured revolving credit facility was included in deferred costs, net on the condensed consolidated balance sheet.
Amortization expense related to deferred financing costs was $1.3 million and $1.1 million for the three months ended June 30, 2017 and 2016, respectively, and $2.6 million and $2.4 million for the six months ended June 30, 2017 and 2016, respectively, and was included in interest expense.
Unsecured Revolving Credit Facility
Our unsecured revolving credit facility is comprised of a revolving credit facility in the maximum principal amount of $1.1 billion. The unsecured revolving credit facility contains an accordion feature that would allow us to increase the maximum aggregate principal amount to $1.25 billion under specified circumstances.
The initial maturity of the unsecured revolving credit facility is January 2019. 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 0.075% of the then outstanding commitments under the unsecured revolving credit facility.
Exchangeable Senior Notes
Issued in August 2014, the $250.0 million 2.625% Exchangeable Senior Notes (“2.625% Exchangeable Senior Notes”) are due August 15, 2019. The 2.625% Exchangeable Senior Notes will be exchangeable into cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at our election. We have asserted that it is our intent and ability to settle the principal amount of the 2.625% Exchangeable Senior Notes in cash. As of June 30, 2017, the exchange rate of the 2.625% Exchangeable Senior Notes was 51.6590 shares per $1,000 principal amount of notes (equivalent to an initial exchange price of approximately $19.36 per share of Class A common stock), subject to adjustment, as described in the related indenture governing the 2.625% Exchangeable Senior Notes.
For the three and six months ended June 30, 2017, total interest expense related to the 2.625% Exchangeable Senior Notes was $2.5 million and $4.9 million, respectively, consisting of (i) the contractual interest expense of $1.7 million and $3.3 million, respectively, (ii) the additional non-cash interest expense of $0.6 million and $1.3 million, respectively, relating to the accretion of the debt discount, and (iii) the amortization of deferred financing costs of $0.2 million and $0.3 million, respectively. For the three and six months ended June 30, 2016, total interest expense related to the 2.625% Exchangeable Senior Notes was $2.5 million and $4.9 million, respectively, consisting of (i) the contractual interest expense of $1.7 million and $3.3 million, respectively, (ii) the additional non-cash interest expense of $0.6 million and $1.3 million, respectively, relating to the accretion of the debt discount, and (iii) the amortization of deferred financing costs of $0.2 million and $0.3 million, respectively.
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following as of June 30, 2017 and December 31, 2016 (amounts in thousands):
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Accounts payable and accrued expenses | $ | 100,878 |
| | $ | 102,866 |
|
Payable to the estate of Leona M. Helmsley (1) | 18,367 |
| | 18,367 |
|
Interest rate swap agreements liability | 11,947 |
| | 5,591 |
|
Accrued interest payable | 4,903 |
| | 6,230 |
|
Due to affiliated companies | 522 |
| | 1,010 |
|
Accounts payable and accrued expenses | $ | 136,617 |
| | $ | 134,064 |
|
___________
| |
(1) | Reflects a payable to the estate of Leona M. Helmsley for New York City transfer taxes which would have been payable in absence of the estate's exemption from such tax. |
6. Financial Instruments and Fair Values
Derivative Financial Instruments
We use derivative financial instruments primarily to manage interest rate risk and such derivatives are not considered speculative. These derivative instruments are typically in the form of interest rate swap and forward agreements and the primary objective is to minimize interest rate risks associated with investing and financing activities. The counterparties of these arrangements are major financial institutions with which we may also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties; however, we currently do not anticipate that any of the counterparties will fail to meet their obligations.
We have agreements with our derivative counterparties that contain a provision where if we either default or are capable of being declared in default on any of our indebtedness, then we could also be declared in default on our derivative obligations. As of June 30, 2017, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $12.0 million. If we had breached any of these provisions at June 30, 2017, we could have been required to settle our obligations under the agreements at their termination value of $12.0 million.
As of June 30, 2017, we had interest rate LIBOR swaps with an aggregate notional value of $790.0 million. The notional value does not represent exposure to credit, interest rate or market risks. As of June 30, 2017, the fair value of these
derivative instruments amounted to ($11.9 million) which is included in accounts payable and accrued expenses on the condensed consolidated balance sheet. As of December 31, 2016, the fair value of these derivative instruments amounted to $0.6 million which is included in prepaid expenses and other assets and ($5.6 million) which was included in accounts payable and accrued expenses on the condensed consolidated balance sheet. These interest rate swaps have been designated as cash flow hedges and hedge the future cash outflows on our mortgage debt and also on our term loan facility that is subject to a floating interest rate. As of June 30, 2017 and 2016, these cash flow hedges are deemed effective and a net unrealized loss of $(14.4) million and $(10.9) million for the three months ended June 30, 2017 and 2016, respectively, and a net unrealized loss of $(13.0) million and $(30.2) million for the six months ended June 30, 2017 and 2016, respectively, are reflected in the condensed consolidated statements of comprehensive income (loss). Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the debt. We estimate that $2.5 million of the current balance held in accumulated other comprehensive income (loss) will be reclassified into interest expense within the next 12 months relating to the interest rate swap contracts in effect as of June 30, 2017.
The table below summarizes the terms of agreements and the fair values of our derivative financial instruments as of June 30, 2017 and December 31, 2016 (dollar amounts in thousands): |
| | | | | | | | | | | | | | | | | | | | | | |
| | As of June 30, 2017 | | June 30, 2017 | | December 31, 2016 |
Derivative | | Notional Amount | Receive Rate | Pay Rate | Effective Date | Expiration Date | | Asset | Liability | | Asset | Liability |
Interest rate swap | | $ | 265,000 |
| 1 Month LIBOR | 2.1485% | August 31, 2017 | August 24, 2022 | | $ | — |
| $ | (3,338 | ) | | $ | — |
| $ | (1,634 | ) |
Interest rate swap (1) | | 100,000 |
| 3 Month LIBOR | 2.5050% | July 5, 2017 | July 5, 2027 | | — |
| — |
| | — |
| (684 | ) |
Interest rate swap (1) (2) | | 80,000 |
| 3 Month LIBOR | 2.5050% | July 5, 2017 | July 5, 2027 | | — |
| — |
| | — |
| (685 | ) |
Interest rate swap | | 100,000 |
| 3 Month LIBOR | 2.4860% | January 5, 2018 | January 5, 2028 | | — |
| (1,207 | ) | | 224 |
| — |
|
Interest rate swap | | 100,000 |
| 3 Month LIBOR | 2.4860% | January 5, 2018 | January 5, 2028 | | — |
| (1,207 | ) | | 223 |
| — |
|
Interest rate swap | | 75,000 |
| 3 Month LIBOR | 2.4860% | January 5, 2018 | January 5, 2028 | | — |
| (905 | ) | | 167 |
| — |
|
Interest rate swap | | 75,000 |
| 3 Month LIBOR | 2.7620% | June 1, 2018 | June 1, 2028 | | — |
| (2,387 | ) | | — |
| (1,295 | ) |
Interest rate swap | | 75,000 |
| 3 Month LIBOR | 2.7620% | June 1, 2018 | June 1, 2028 | | — |
| (2,386 | ) | | — |
| (1,293 | ) |
Interest rate swap | | 100,000 |
| 3 Month LIBOR | 2.4625% | June 1, 2018 | June 1, 2028 | | — |
| (517 | ) | | — |
| — |
|
| | | | | | | | $ | — |
| $ | (11,947 | ) | | $ | 614 |
| $ | (5,591 | ) |
| |
(1) | During June 2017, these swaps aggregating $180.0 million were terminated in connection with the refinancing of several of our mortgage debt (see Note 4 Debt). As of June 30, 2017, the deferred net losses from these terminated hedges amounted to $6.0 million which is included in accumulated other comprehensive loss relating to net unrealized loss from derivative financial instruments. |
| |
(2) | During March 2017, $20.0 million of an original notional amount of $100.0 million was terminated. In connection with the partial termination and re-designation of the related cash flow hedges, $0.3 million is recognized as a loss from derivative financial instruments and included in Other Expense on the condensed consolidated statement of income for the six months ended June 30, 2017. There was no loss from derivative financial instruments for the three and six months ended June 30, 2016. |
The table below shows the effect of our derivative financial instruments designated as cash flow hedges for the three and six months ended June 30, 2017 and 2016 (amounts in thousands): |
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
Effects of Cash Flow Hedges | | June 30, 2017 | | June 30, 2016 | | June 30, 2017 | | June 30, 2016 |
Amount of gain (loss) recognized in other comprehensive income (loss) - effective portion | | $ | (14,367 | ) | | $ | (10,864 | ) | | $ | (12,973 | ) | | $ | (30,235 | ) |
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense - effective portion | | (43 | ) | | — |
| | (43 | ) | | — |
|
Amount of gain (loss) recognized in other expense - ineffective portion | | (42 | ) | | — |
| | (289 | ) | | — |
|
Fair Valuation
The estimated fair values at June 30, 2017 and December 31, 2016 were determined by management, using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we
could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The fair value of our senior unsecured notes - Exchangeable was derived from quoted prices in active markets and is classified as Level 2 since trading volumes are low.
The fair value of derivative instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Although the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our counterparties. The impact of such credit valuation adjustments, determined based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of our derivatives were classified as Level 2 of the fair value hierarchy.
The fair value of our mortgage notes payable, senior unsecured notes - Series A, B and C, and unsecured term loan facility which are determined using Level 3 inputs, are estimated by discounting the future cash flows using current interest rates at which similar borrowings could be made to us.
The following tables summarize the carrying and estimated fair values of our financial instruments as of June 30, 2017 and December 31, 2016 (amounts in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2017 |
| | | Estimated Fair Value |
| Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 |
Interest rate swaps included in prepaid expenses and other assets
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Interest rate swaps included in accounts payable and accrued expenses | 11,947 |
| | 11,947 |
| | — |
| | 11,947 |
| | — |
|
Mortgage notes payable | 724,312 |
| | 712,213 |
| | — |
| | — |
| | 712,213 |
|
Senior unsecured notes - Exchangeable | 243,106 |
| | 282,878 |
| | — |
| | 282,878 |
| | — |
|
Senior unsecured notes - Series A, B, and C | 348,967 |
| | 345,258 |
| | — |
| | — |
| | 345,258 |
|
Unsecured term loan facility | 263,114 |
| | 265,000 |
| | — |
| | — |
| | 265,000 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| | | Estimated Fair Value |
| Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 |
Interest rate swaps included in prepaid expenses and other assets
| $ | 614 |
| | $ | 614 |
| | $ | — |
| | $ | 614 |
| | $ | — |
|
Interest rate swaps included in accounts payable and accrued expenses | 5,591 |
| | 5,591 |
| | — |
| | 5,591 |
| | — |
|
Mortgage notes payable | 759,016 |
| | 755,640 |
| | — |
| | — |
| | 755,640 |
|
Senior unsecured notes - Exchangeable | 241,474 |
| | 282,435 |
| | — |
| | 282,435 |
| | — |
|
Senior unsecured notes - Series A, B, and C | 348,914 |
| | 339,274 |
| | — |
| | — |
| | 339,274 |
|
Unsecured term loan facility | 262,927 |
| | 265,000 |
| | — |
| | — |
| | 265,000 |
|
Disclosure about the fair value of financial instruments is based on pertinent information available to us as of June 30, 2017 and December 31, 2016. Although we are not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
7. Rental Income
We lease various office spaces to tenants over terms ranging from one to 16 years. Certain leases have renewal options for additional terms. The leases provide for base monthly rentals and reimbursements for real estate taxes, escalations linked to
the consumer price index or common area maintenance known as operating expense escalation. Operating expense reimbursements are reflected in our condensed consolidated statements of income as tenant expense reimbursement.
8. Commitments and Contingencies
Legal Proceedings
Except as described below, as of June 30, 2017, we were not involved in any material litigation, nor, to our knowledge, was any material litigation threatened against us or our properties, other than routine litigation arising in the ordinary course of business such as disputes with tenants. We believe that the costs and related liabilities, if any, which may result from such actions will not materially affect our condensed consolidated financial position, operating results or liquidity.
As previously disclosed, on or about October 14, 2014, 12 former investors in Empire State Building Associates L.L.C. (“ESBA”), which prior to the initial public offering of our company, (the "Offering"), owned the fee title to the Empire State Building, filed an arbitration with the American Arbitration Association against Peter L. Malkin, Anthony E. Malkin, Thomas N. Keltner, Jr., and our subsidiary ESRT MH Holdings LLC, the former supervisor of ESBA, as respondents. The statement of claim alleges breach of fiduciary duty and related claims in connection with the Offering and formation transactions. These investors had opted out of a prior class action brought regarding the Offering and formation transactions that was settled with court approval. The statement of claim in the arbitration seeks monetary damages and declaratory relief. The respondents filed an answering statement and counterclaims. On December 18, 2014, these claimants also filed a complaint in the United States District Court for the Southern District of New York alleging the same claims that they asserted in the arbitration. As alleged in the complaint, the claimants filed this lawsuit to toll the statute of limitations on their claims in the event it is determined that the claims are not subject to arbitration, and they planned to move to stay the lawsuit in favor of the pending arbitration. On February 2, 2015, the claimants filed an amended complaint adding an additional claim and making other non-substantive modifications to the original complaint. On March 12, 2015, the court stayed the action on consent of all parties pending the arbitration. The arbitration hearings commenced in May 2016 and have proceeded for a select number of hearing sessions since that time. Additional hearing sessions are scheduled to resume in November 2017.
The respondents believe the allegations in the arbitration are entirely without merit, and they intend to defend vigorously.
In connection with the Offering and formation transactions, we entered into indemnification agreements with our directors, executive officers and chairman emeritus, providing for the indemnification by us for certain liabilities and expenses incurred as a result of actions brought, or threatened to be brought, against them. As a result, Anthony E. Malkin, Peter L. Malkin and Thomas N. Keltner, Jr. have defense and indemnity rights from us with respect to the above-referenced arbitration.
Unfunded Capital Expenditures
At June 30, 2017, we estimate that we will incur approximately $52.5 million of capital expenditures (including tenant improvements and leasing commissions) on our properties pursuant to existing lease agreements. We expect to fund these capital expenditures with operating cash flow, additional property level mortgage financings, our unsecured credit facility, cash on hand and other borrowings. Future property acquisitions may require substantial capital investments for refurbishment and leasing costs. We expect that these financing requirements will be met in a similar fashion.
Ground Leases
Aggregate required payments on ground leases at June 30, 2017 were as follows (amounts in thousands): |
| | | |
2017 | $ | 759 |
|
2018 | 1,518 |
|
2019 | 1,518 |
|
2020 | 1,518 |
|
2021 | 1,518 |
|
Thereafter | 55,212 |
|
| $ | 62,043 |
|
Concentration of Credit Risk
Financial instruments that subject us to credit risk consist primarily of cash and cash equivalents, restricted cash, tenant and other receivables and deferred rent receivables. At June 30, 2017, we held on deposit at various major financial
institutions cash and cash equivalents and restricted cash balances in excess of amounts insured by the Federal Deposit Insurance Corporation.
Asset Retirement Obligations
We are required to accrue costs that we are legally obligated to incur on retirement of our properties which result from acquisition, construction, development and/or normal operation of such properties. Retirement includes sale, abandonment or disposal of a property. Under that standard, a conditional asset retirement obligation represents a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement is conditional on a future event that may or may not be within a company’s control and a liability for a conditional asset retirement obligation must be recorded if the fair value of the obligation can be reasonably estimated. Environmental site assessments and investigations have identified asbestos or asbestos-containing building materials in certain of our properties. As of June 30, 2017, management has no plans to remove or alter these properties in a manner that would trigger federal and other applicable regulations for asbestos removal, and accordingly, the obligations to remove the asbestos or asbestos-containing building materials from these properties have indeterminable settlement dates. As such, we are unable to reasonably estimate the fair value of the associated conditional asset retirement obligation. However, ongoing asbestos abatement, maintenance programs and other required documentation are carried out as required and related costs are expensed as incurred.
Other Environmental Matters
Certain of our properties have been inspected for soil contamination due to pollutants, which may have occurred prior to our ownership of these properties or subsequently in connection with its development and/or its use. Required remediation to such properties has been completed, and as of June 30, 2017, management believes that there are no obligations related to environmental remediation other than maintaining the affected sites in conformity with the relevant authority’s mandates and filing the required documents. All such maintenance costs are expensed as incurred. We expect that resolution of the environmental matters relating to the above will not have a material impact on our business, assets, consolidated financial condition, results of operations or liquidity. However, we cannot be certain that we have identified all environmental liabilities at our properties, that all necessary remediation actions have been or will be undertaken at our properties or that we will be indemnified, in full or at all, in the event that such environmental liabilities arise.
Insurance Coverage
We carry insurance coverage on our properties of types and in amounts with deductibles that we believe are in line with coverage customarily obtained by owners of similar properties.
9. Equity
During 2016, Q REIT Holding LLC, a Qatar Financial Centre limited liability company and a wholly owned
subsidiary of the Qatar Investment Authority, a governmental authority of the State of Qatar (“QIA”) purchased 29,610,854 newly issued Class A common shares at $21.00 per share, equivalent to a 9.9% economic interest in us on a fully diluted basis (representing a 19.4% ownership of Class A common shares). However, QIA can only vote shares equivalent to 9.9% of all voting securities, with the balance of their shares to be voted by us in accord with the votes of all other voting securities. We received approximately $621.8 million in gross proceeds from the sale. QIA has a top-up right to acquire a pro rata number of additional shares from us in the future should we issue new shares to third parties.
In connection with the share issuance to QIA, we agreed, subject to certain minimum thresholds and conditions, to indemnify QIA for certain applicable U.S. federal and state taxes paid by QIA in connection with any dividends we pay that are attributable to capital gains from the sale or exchange of any U.S. real property interests. If we were to trigger our tax indemnification obligations under this agreement, we would be required to pay QIA for the resulting tax consequences, as applicable.
Shares and Units
An operating partnership unit of the Operating Partnership ("OP Unit") and a share of our common stock have essentially the same economic characteristics as they receive the same per unit profit distributions of the Operating Partnership. On the one-year anniversary of issuance, an OP Unit may be tendered for redemption for cash; however, we have sole and absolute discretion, and sufficient authorized common stock, to exchange OP Units for shares of common stock on a one-for-one basis instead of cash.
Long-term incentive plan ("LTIP") units are a special class of partnership interests in the Operating Partnership. Each LTIP unit awarded will be deemed equivalent to an award of one share of stock under the First Amended and Restated Empire State Realty Trust, Inc. and Empire State Realty OP, L.P. 2013 Equity Incentive Plan ("2013 Plan"), reducing the availability for other equity awards on a one-for-one basis. The vesting period for LTIP units, if any, will be determined at the time of issuance. Under the terms of the LTIP units, the Operating Partnership will revalue for tax purposes its assets upon the occurrence of certain specified events, and any increase in valuation from the time of grant until such event will be allocated first to the holders of LTIP units to equalize the capital accounts of such holders with the capital accounts of OP unitholders. Subject to any agreed upon exceptions, once vested and having achieved parity with OP unitholders, LTIP units are convertible into OP Units in the Operating Partnership on a one-for-one basis.
With the exception of performance based LTIP units granted in 2016 and 2017, all LTIP units issued in connection with annual equity awards, whether vested or not, receive the same per unit distributions as OP units, which equal per share dividends (both regular and special) on our common stock. Performance based LTIP units granted in 2016 and 2017 receive 10% of such distributions currently, unless and until such LTIP units are earned based on performance, at which time they will receive the accrued and unpaid 90% and will commence receiving 100% of such distributions thereafter.
The following is net income attributable to common stockholders and the issuance of our Class A shares in exchange for the conversion of OP Units into common stock (amounts in thousands): |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2017 | | June 30, 2016 | | June 30, 2017 | | June 30, 2016 |
Net income attributable to common stockholders | $ | 16,584 |
| | $ | 11,089 |
| | $ | 26,569 |
| | $ | 18,517 |
|
Increase in additional paid-in capital for the conversion of OP Units into common stock | 1,323 |
| | 8,343 |
| | 9,134 |
| | 15,201 |
|
Change from net income attributable to common stockholders and transfers from non-controlling interests | $ | 17,907 |
| | $ | 19,432 |
| | $ | 35,703 |
| | $ | 33,718 |
|
As of June 30, 2017, there were 300,417,839 OP Units outstanding, of which 158,573,500, or 52.8%, were owned by us and 141,844,339, or 47.2%, were owned by other partners, including certain directors, officers and other members of executive management.
Dividends and Distributions
Total dividends paid to common stockholders were $16.6 million and $33.1 million for the three and six months ended June 30, 2017, respectively, and $13.0 million and $23.3 million for the three and six months ended June 30, 2016, respectively. Total distributions paid to OP unitholders, excluding inter-company distributions, were $14.9 million and $29.8 million for the three and six months ended June 30, 2017, respectively, and $15.4 million and $28.0 million for the three and six months ended June 30, 2016, respectively. Total distributions paid to preferred unitholders were $0.2 million and $0.5 million for the three and six months ended June 30, 2017, respectively, and $0.2 million and $0.5 million for the three and six months ended June 30, 2016, respectively.
Incentive and Share-Based Compensation
The 2013 Plan provides for grants to directors, employees and consultants consisting of stock options, restricted stock, dividend equivalents, stock payments, performance shares, LTIP units, stock appreciation rights and other incentive awards. An aggregate of 12.2 million shares of our common stock is authorized for issuance under awards granted pursuant to the 2013 Plan, and as of June 30, 2017, 7.0 million shares of common stock remain available for future issuance.
In March 2017, we made grants of LTIP units to executive officers under the 2013 Plan. At such time, we granted to executive officers a total of 313,275 LTIP units that are subject to time-based vesting and 865,742 LTIP units that are subject to performance-based vesting, with fair market values of $6.1 million for the time-based vesting awards and $9.6 million for the performance-based vesting awards. In March 2017, we made grants of LTIP units and restricted stock to certain other employees under the 2013 Plan. At such time, we granted to certain other employees a total of 47,993 LTIP units and 34,407 shares of restricted stock that are subject to time-based vesting and 95,156 LTIP units that are subject to performance-based vesting, with fair market values of $1.6 million for the time-based vesting awards and $1.0 million for the performance-based vesting awards. The awards subject to time-based vesting vest ratably over four years from January 1, 2017, subject generally to the grantee's continued employment. The first installment vests on January 1, 2018 and the remainder will vest thereafter in
three equal annual installments. The vesting of the LTIP units subject to performance-based vesting is based on the achievement of absolute and relative total stockholder return hurdles over a three-year performance period, commencing on January 1, 2017. Following the completion of the three-year performance period, our compensation committee will determine the number of LTIP units to which the grantee is entitled based on our performance relative to the performance hurdles set forth in the LTIP unit award agreements the grantee entered into in connection with the award grant. These units then vest in two installments, with the first installment vesting on January 1, 2020 and the second installment vesting on January 1, 2021, subject generally to the grantee's continued employment on those dates.
In May 2017, we made grants of LTIP units to our non-employee directors under the 2013 Plan. At such time, we granted a total of 50,408 LTIP units that are subject to time-based vesting with fair market values of $1.0 million. The awards vest ratably over three years from the date of the grant, subject generally to the director's continued service on our Board of Directors.
In February 2016, we made grants of LTIP units to executive officers under the 2013 Plan. At such time, we granted to executive officers a total of 368,225 LTIP units that are subject to time-based vesting and 1,230,228 LTIP units that are subject to performance-based vesting, with fair market values of $5.6 million for the time-based vesting awards and $8.8 million for the performance-based vesting awards. In February 2016, we made grants of LTIP units and restricted stock to certain other employees under the 2013 Plan. At such time, we granted to certain other employees a total of 47,168 LTIP units and 44,198 shares of restricted stock that are subject to time-based vesting and 112,925 LTIP units that are subject to performance-based vesting, with fair market values of $1.4 million for the time-based vesting awards and $0.8 million for the performance-based vesting awards. The awards subject to time-based vesting vest ratably over four years from January 1, 2016, subject generally to the grantee's continued employment. The first installment vested on January 1, 2017 and the remainder will vest thereafter in three equal annual installments. The vesting of the LTIP units subject to performance-based vesting is based on the achievement of absolute and relative total stockholder return hurdles over a three-year performance period, commencing on January 1, 2016. Following the completion of the three-year performance period, our compensation committee will determine the number of LTIP units to which the grantee is entitled based on our performance relative to the performance hurdles set forth in the LTIP unit award agreements the grantee entered into in connection with the award grant. These units then vest in two installments, with the first installment vesting on January 1, 2019 and the second installment vesting on January 1, 2020, subject generally to the grantee's continued employment on those dates.
In February 2016, we made a grant of LTIP units to an executive officer under the 2013 Plan. We granted a total of 62,814 LTIP units with a fair market value of $1.0 million. The award is subject to time-based vesting of 30% after three years, 30% after four years, and 40% after five years, subject to the grantee's continued employment.
In June 2016, we made grants of LTIP units to our non-employee directors under the 2013 Plan. At such time, we granted a total of 43,257 LTIP units that are subject to time-based vesting with fair market values of $0.8 million. The awards vest ratably over three years from the date of the grant, subject generally to the director's continued service on our Board of Directors.
We made other grants during 2016 under the 2013 Plan with fair market values of $0.1 million in the aggregate.
Share-based compensation is measured at the fair value of the award on the date of grant and recognized as an expense on a straight-line basis over the vesting period. For the performance-based LTIP units and restricted stock awards, the fair value of the awards was estimated using a Monte Carlo Simulation model. Our stock price, along with the prices of the comparative indexes, is assumed to follow the Geometric Brownian Motion Process. Geometric Brownian Motion is a common assumption when modeling in financial markets, as it allows the modeled quantity (in this case the stock price) to vary randomly from its current value and take any value greater than zero. The volatilities of the returns on our stock price and the comparative indexes were estimated based on implied volatilities and historical volatilities using a six-year look-back period. The expected growth rate of the stock prices over the performance period is determined with consideration of the risk free rate as of the grant date. For LTIP unit awards that are time-based, the fair value of the awards was estimated based on the fair value of our stock at the grant date discounted for the restriction period during which the LTIP units cannot be redeemed or transferred and the uncertainty regarding if, and when, the book capital account of the LTIP units will equal that of the common units. For restricted stock awards that are time-based, we estimate the stock compensation expense based on the fair value of the stock at the grant date.
LTIP units and restricted stock issued during the six months ended June 30, 2017 and 2016 were valued at $19.4 million and $18.4 million, respectively. The weighted-average per unit or share fair value was $13.77 and $9.60 for grants issued in 2017 and 2016, respectively. The per unit or share granted in 2017 was estimated on the respective dates of grant using the following assumptions: an expected life of 2.8 years, a dividend rate of 2.05%, a risk-free interest rate of 1.55%, and
an expected price volatility of 20.0%. The per unit or share granted in 2016 was estimated on the respective dates of grant using the following assumptions: an expected life of 2.8 years, a dividend rate of 2.10%, a risk-free interest rate of 0.84% and an expected price volatility of 24.0%.
No other stock options, dividend equivalents, or stock appreciation rights were issued or outstanding in 2017.
The following is a summary of restricted stock and LTIP unit activity for the six months ended June 30, 2017:
|
| | | | | | | | | |
| Restricted Stock | | LTIP Units | | Weighted Average Grant Fair Value |
Unvested balance at December 31, 2016 | 107,793 |
| | 2,881,629 |
| | $ | 10.01 |
|
Vested | (17,552 | ) | | (307,500 | ) | | 13.66 |
|
Granted | 34,407 |
| | 1,372,574 |
| | 13.77 |
|
Forfeited or unearned | (1,531 | ) | | (77,227 | ) | | 5.27 |
|
Unvested balance at June 30, 2017 | 123,117 |
| | 3,869,476 |
| | $ | 11.13 |
|
The LTIP unit and restricted stock awards will immediately vest upon the later of (i) the date the grantee attains the age of 60 and (ii) the date on which grantee has first completed ten years of continuous service with our company or its affiliates. For award agreements that qualify, we recognize noncash compensation expense on the grant date for the time-based awards and ratably over the vesting period for the performance-based awards, and accordingly, we recognized $0.2 million and $0.8 million for the three and six months ended June 30, 2017, respectively, and $0.1 million and $0.5 million for the three and six months ended June 30, 2016, respectively. Unrecognized compensation expense was $1.1 million at June 30, 2017, which will be recognized over a weighted average period of 2.5 years.
For the remainder of the LTIP unit and restricted stock awards, we recognize noncash compensation expense ratably over the vesting period, and accordingly, we recognized noncash compensation expense of $3.6 million and $6.2 million for the three and six months ended June 30, 2017, respectively, and $2.5 million and $4.2 million for the three and six months ended June 30, 2016, respectively. Unrecognized compensation expense was $30.2 million at June 30, 2017, which will be recognized over a weighted average period of 2.7 years.
Earnings Per Share
Earnings per share for the three and six months ended June 30, 2017 and 2016 is computed as follows (amounts in thousands, except per share amounts): |
| | | | | | | | | | | | | | | |
| Three Months Ended, | | Six Months Ended, |
| June 30, 2017 | | June 30, 2016 | | June 30, 2017 | | June 30, 2016 |
Numerator - Basic: | | | | | | | |
Net income | $ | 31,359 |
| | $ | 24,640 |
| | $ | 50,504 |
| | $ | 41,345 |
|
Private perpetual preferred unit distributions | (234 | ) | | (234 | ) | | (468 | ) | | (468 | ) |
Net income attributable to non-controlling interests | (14,541 | ) | | (13,317 | ) | | (23,467 | ) | | (22,360 | ) |
Earnings allocated to unvested shares | (10 | ) | | (10 | ) | | (17 | ) | | (18 | ) |
Net income attributable to common stockholders - basic | $ | 16,574 |
| | $ | 11,079 |
| | $ | 26,552 |
| | $ | 18,499 |
|
| | | | | | | |
Numerator - Diluted: | | | | | | | |
Net income | $ | 31,359 |
| | $ | 24,640 |
| | $ | 50,504 |
| | $ | 41,345 |
|
Private perpetual preferred unit distributions | (234 | ) | | (234 | ) | | (468 | ) | | (468 | ) |
Earnings allocated to unvested shares | (10 | ) | | (215 | ) | | (17 | ) | | (387 | ) |
Net income attributable to common stockholders - diluted | $ | 31,115 |
| | $ | 24,191 |
| | $ | 50,019 |
| | $ | 40,490 |
|
| | | | | | | |
Denominator: | | | | | | | |
Weighted average shares outstanding - basic | 157,921 |
| | 122,502 |
| | 157,265 |
| | 121,640 |
|
Operating partnership units | 138,467 |
| | 143,665 |
| | 139,123 |
| | 144,511 |
|
Effect of dilutive securities: | | | | | | | |
Stock-based compensation plans | 973 |
| | — |
| | 874 |
| | 970 |
|
Exchangeable senior notes | 1,037 |
| | — |
| | 918 |
| | — |
|
Weighted average shares outstanding - diluted | 298,398 |
| | 266,167 |
| | 298,180 |
| | 267,121 |
|
| | | | | | | |
Earnings per share: | | | | | | | |
Basic | $ | 0.10 |
| | $ | 0.09 |
| | $ | 0.17 |
| | $ | 0.15 |
|
Diluted | $ | 0.10 |
| | $ | 0.09 |
| | $ | 0.17 |
| | $ | 0.15 |
|
There were 909,591 and 766,078 antidilutive shares and LTIP units for the three and six months ended June 30, 2017, respectively, and 1,069,803 antidilutive shares and LTIP units and no antidilutive shares and LTIP units for the three and six months ended June 30, 2016, respectively.
10. Related Party Transactions
Supervisory Fee Revenue
We earned supervisory fees from entities affiliated with Anthony E. Malkin, our Chairman and Chief Executive Officer, of $0.3 million and $0.4 million for the three months ended June 30, 2017 and 2016, respectively, and $0.6 million and $0.8 million for the six months ended June 30, 2017 and 2016, respectively. These fees are included within third-party management and other fees.
Property Management Fee Revenue
We earned property management fees from entities affiliated with Anthony E. Malkin of $0.1 million and $0.1 million for the three months ended June 30, 2017 and 2016, respectively, and $0.2 million and $0.2 million for the six months ended June 30, 2017 and 2016, respectively. These fees are included within third-party management and other fees.
Other
We were reimbursed at allocable cost for 647 square feet of shared office space, equipment, and administrative support, as was done prior to our formation, and we received rent generally at market rental rate for 3,074 square feet of leased space, from entities affiliated with Anthony E. Malkin, at one of our properties aggregating $0.05 million and $0.1 million for the three and six months ended June 30, 2016, respectively.
During August 2016, such entities moved from the previously shared office and leased spaces to relocate to a new 5,351 square foot leased space at one of our properties, paying rent generally at a market rental rate. Under such new lease, the tenant has the right to cancel such lease without special payment on 90 days’ notice. We now have a shared use agreement with such tenant, to occupy a portion of the leased premises as the office location for Peter L. Malkin, our chairman emeritus and employee, utilizing approximately 15% of the space, for which we pay an allocable pro rata share of the cost to such tenant. We also have agreements with these entities to provide them with general computer-related support. Total revenue aggregated $0.1 million and $0.2 million for the three and six months ended June 30, 2017, respectively.
One of our directors, James D. Robinson IV, is a general partner in an investment fund, which owns more than a 10% economic and voting interest in one of our tenants, OnDeck Capital, with an annualized rent of $5.7 million and $5.7 million as of June 30, 2017 and 2016, respectively.
11. Segment Reporting
We have identified two reportable segments: (1) real estate and (2) observatory. Our real estate segment includes all activities related to the ownership, management, operation, acquisition, redevelopment, repositioning and disposition of our real estate assets. Our observatory segment includes the operation of the 86th and 102nd floor observatories at the Empire State Building. These two lines of businesses are managed separately because each business requires different support infrastructures, provides different services and has dissimilar economic characteristics such as investments needed, stream of revenues and marketing strategies. We account for intersegment sales and rent as if the sales or rent were to third parties, that is, at current market prices.
The following tables provide components of segment profit for each segment for the three and six months ended June 30, 2017 and 2016 (amounts in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2017 |
| | Real Estate | | Observatory | | Intersegment Elimination | | Total |
Revenues: | | | | | | | | |
Rental revenue | | $ | 120,844 |
| | $ | — |
| | $ | — |
| | $ | 120,844 |
|
Intercompany rental revenue | | 20,675 |
| | — |
| | (20,675 | ) | | — |
|
Tenant expense reimbursement | | 17,569 |
| | — |
| | — |
| | 17,569 |
|
Observatory revenue | | — |
| | 33,966 |
| | — |
| | 33,966 |
|
Third-party management and other fees | | 392 |
| | — |
| | — |
| | 392 |
|
Other revenue and fees | | 4,353 |
| | — |
| | — |
| | 4,353 |
|
Total revenues | | 163,833 |
| | 33,966 |
| | (20,675 | ) | | 177,124 |
|
Operating expenses: | | | | | | | | |
Property operating expenses | | 38,529 |
| | — |
| | — |
| | 38,529 |
|
Intercompany rent expense | | — |
| | 20,675 |
| | (20,675 | ) | | — |
|
Ground rent expense | | 2,332 |
| | — |
| | — |
| | 2,332 |
|
General and administrative expenses | | 12,579 |
| | — |
| | — |
| | 12,579 |
|
Observatory expenses | | — |
| | 7,176 |
| | — |
| | 7,176 |
|
Real estate taxes | | 24,542 |
| | — |
| | — |
| | 24,542 |
|
Depreciation and amortization | | 40,458 |
| | 74 |
| | — |
| | 40,532 |
|
Total operating expenses | | 118,440 |
| | 27,925 |
| | (20,675 | ) | | 125,690 |
|
Total operating income | | 45,393 |
| | 6,041 |
| | — |
| | 51,434 |
|
Other expense:
| | | | | | | | |
Interest expense | | (17,477 | ) | | — |
| | — |
| | (17,477 | ) |
Loss from derivative financial instruments
| | (42 | ) | | — |
| | — |
| | (42 | ) |
Income before income taxes | | 27,874 |
| | 6,041 |
| | — |
| | 33,915 |
|
Income tax expense | | (413 | ) | | (2,143 | ) | | — |
| | (2,556 | ) |
Net income | | $ | 27,461 |
| | $ | 3,898 |
| | $ | — |
| | $ | 31,359 |
|
Segment assets | | $ | 3,579,873 |
| | $ | 251,328 |
| | $ | — |
| | $ | 3,831,201 |
|
Expenditures for segment assets | | $ | 54,474 |
| | $ | 6,850 |
| | $ | — |
| | $ | 61,324 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2016 |
| | Real Estate | | Observatory | | Intersegment Elimination | | Total |
Revenues: | | | | | | | | |
Rental revenue | | $ | 112,613 |
| | $ | — |
| | $ | — |
| | $ | 112,613 |
|
Intercompany rental revenue | | 18,488 |
| | — |
| | (18,488 | ) | | — |
|
Tenant expense reimbursement | | 19,054 |
| | — |
| | — |
| | 19,054 |
|
Observatory revenue | | — |
| | 31,838 |
| | — |
| | 31,838 |
|
Third-party management and other fees | | 423 |
| | — |
| | — |
| | 423 |
|
Other revenue and fees | | 1,882 |
| | 5 |
| | — |
| | 1,887 |
|
Total revenues | | 152,460 |
| | 31,843 |
| | (18,488 | ) | | 165,815 |
|
Operating expenses: | | | | | | | | |
Property operating expenses | | 37,386 |
| | — |
| | — |
| | 37,386 |
|
Intercompany rent expense | | — |
| | 18,488 |
| | (18,488 | ) | | — |
|
Ground rent expense | | 2,330 |
| | — |
| | — |
| | 2,330 |
|
General and administrative expenses | | 12,907 |
| | — |
| | — |
| | 12,907 |
|
Observatory expenses | | — |
| | 6,895 |
| | — |
| | 6,895 |
|
Real estate taxes | | 23,557 |
| | — |
| | — |
| | 23,557 |
|
Acquisition expenses | | — |
| | — |
| | — |
| | — |
|
Depreciation and amortization | | 38,451 |
| | 97 |
| | — |
| | 38,548 |
|
Total operating expenses | | 114,631 |
| | 25,480 |
| | (18,488 | ) | | 121,623 |
|
Total operating income | | 37,829 |
| | 6,363 |
| | — |
| | 44,192 |
|
Interest expense | | (17,420 | ) | | — |
| | — |
| | (17,420 | ) |
Income before income taxes | | 20,409 |
| | 6,363 |
| | — |
|