Capital

As of September 30, 2014, there were 267,129,680 operating partnership units outstanding, of which 98,267,542, or 36.8%, were owned by ESRT and 168,862,138, or 63.2%, were owned by other partners, including ESRT directors, members of ESRT senior management and other ESRT employees.

Long-term incentive plan ("LTIP") units are a special class of partnership interests. Each LTIP unit awarded will be deemed equivalent to an award of one share of ESRT stock under the Empire State Realty Trust, Inc. Empire State 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. Cash distributions on each LTIP unit, whether vested or not, will be the same as those made on the operating partnership units. Under the terms of the LTIP units, we 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 unitholders. Subject to any agreed upon exceptions, once vested and having achieved parity with unitholders, LTIP units are convertible into Series PR operating partnership units on a one-for-one basis.

Private Perpetual Preferred Units

During August 2014, we completed an exchange offer whereby we issued 1,609,813 new Private Perpetual Preferred Units ("Preferred Units") in exchange for OP Units on a one-for-one basis, in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended. The exchange offer was made only to then current holders of OP Units and was not made or offered to the public or holders of our common stock or any other security. The Preferred Units have a liquidation preference of $16.62 per unit and are entitled to receive cumulative preferential annual cash distributions of $0.60 per unit payable in arrears on a quarterly basis. The Preferred Units are not redeemable at the option of the holders and are redeemable at our option only in the case of specific defined events. In connection with this exchange offer, we incurred $1.4 million of costs, which were expensed as incurred.

Distributions

During the three months ended September 30, 2014, we declared, for the third quarter of 2014, a distribution of $0.085 per operating partnership unit, which was paid on September 30, 2014, to securityholders of record on September 15, 2014. During the three months ended June 30, 2014, we declared, for the second quarter of 2014, a distribution of $0.085 per operating partnership unit, which was paid on June 30, 2014, to securityholders of record on June 13, 2014. During the three months ended March 31, 2014, we declared, for the first quarter of 2014, a distribution of $0.085 per operating partnership unit, which was paid on March 31, 2014, to securityholders of record on March 14, 2014.

During the three months ended September 30, 2014, we declared, for the third quarter of 2014, a distribution of $0.15 per Preferred Unit, which was paid on September 30, 2014, to Preferred unitholders of record on September 15, 2014.

Total distributions paid to OP unitholders and Preferred unitholders during 2014 totaled $64.5 million and $0.2 million, respectively.

Incentive and Share-Based Compensation

The 2013 Plan provides for grants to directors, employees and consultants of our company and ESRT, stock options, restricted stock, dividend equivalents, stock payments, performance shares, LTIP units, stock appreciation rights and other incentive awards. An aggregate of 12,220,515 shares of ESRT common stock are authorized for issuance under awards granted pursuant to the 2013 Plan, and as of September 30, 2014, 10,668,465 shares of ESRT common stock remain available for future issuance.

In June 2014, we made grants of LTIP units to our non-employee directors under the 2013 Plan. At such time, we granted a total of 32,196 LTIP units that are subject to time-based vesting, with fair market values of $0.5 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 April 2014, we made a grant of LTIP units to an employee under the 2013 Plan. We granted a total of 48,923 LTIP units with a fair market value of $0.7 million. The award is subject to time-based vesting of 30% after three years (April 2017), 30% after four years (April 2018), and 40% after five years (April 2019), subject to the grantee's continued employment.

In January 2014, we and ESRT made grants of LTIP units to executive officers under the 2013 Plan. We granted a total of 180,260 LTIP units that are subject to time-based vesting and 180,263 LTIP units that are subject to performance-based vesting, with fair market values of $2.5 million for the time-based vesting awards and $0.9 million for the performance-based vesting awards. The awards subject to time-based vesting vest ratably over four years from the date of the grant, subject generally to the grantee's continued employment. The first installment vests on January 1, 2015 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, 2014. Following the completion of the three-year performance period, our compensation committee will determine the number of shares 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 initial award grant. These units then vest in two installments, with the first installment vesting on January 1, 2017 and the second installment vesting on January 1, 2018, subject generally to the grantee's continued employment on those dates.

In January 2014 and April 2014, we and ESRT made grants of LTIP units and ESRT restricted stock to certain other employees under the 2013 Plan. At such time, we and ESRT granted a total of 23,487 LTIP units and 7,061 shares of ESRT restricted stock that are subject to time-based vesting and 23,484 LTIP units and 7,059 shares of ESRT restricted stock that are subject to performance-based vesting, with fair market values of $0.4 million for the time-based vesting awards and $0.2 million for the performance-based vesting awards. These shares are subject to time-based and performance-based vesting, with the terms described above. We issued operating partnership units to ESRT for each share of restricted stock issued by ESRT.

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 units and restricted stock grants that are time-vesting, we estimate the stock compensation expense based on the fair value of the stock at the grant date.

LTIP units and ESRT restricted stock issued during the nine months ended September 30, 2014 were valued at $5.3 million. The weighted-average per unit or share fair value was $10.65 for grants in 2014. The per unit or share granted in 2014 was estimated on the date of grant using the following assumptions: an expected life of 3.0 years, a dividend rate of 2.60%, a risk-free interest rate of 0.8%, and an expected price volatility of 26.0%.

No other stock options, dividend equivalents, or stock appreciation rights were issued or outstanding in 2014.

The following is a summary of ESRT restricted stock and LTIP unit activity for the nine months ended September 30, 2014:



	Restricted Stock		LTIP Units		Weighted Average Grant Price
Unvested balance at December 31, 2013	144,371		913,561		$	13.00
Vested	(8,491	)	—		(13.40		)
Granted	14,120		488,613		15.04
Forfeited	(17,709	)	(3,413	)	(13.14		)
Unvested balance at September 30, 2014	132,291		1,398,761		$	13.67

The LTIP unit and ESRT restricted stock award agreements 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 $0.3 million for the nine months ended September 30, 2014. Unrecognized compensation expense was $0.4 million at September 30, 2014, which will be recognized over a period of 2.0 years.

For the remainder of the LTIP unit and ESRT restricted stock awards, we recognize noncash compensation expense ratably over the vesting period, and accordingly, we recognized $2.8 million in noncash compensation expense for the nine months ended September 30, 2014. Unrecognized compensation expense was $10.5 million at September 30, 2014, which will be recognized over a weighted average period of 3.0 years.

Earnings Per Unit

Earnings per unit for the three and nine months ended September 30, 2014 is computed as follows (amounts in thousands, except per unit amounts):



	Three Months Ended			Nine Months Ended
	September 30, 2014			September 30, 2014
Numerator:
Net income	$	22,734		$	59,246
Preferred unit distributions	(241		)	(241		)
Earnings allocated to unvested units	(127		)	(374		)
Net income attributable to common unitholders - basic and diluted	$	22,366		$	58,631

Denominator -
Weighted average units outstanding - basic and diluted	263,041			250,696

Earnings per unit - basic and diluted	$	0.09		$	0.23

There were 674,642 and 607,654 antidilutive units for the three and nine months ended September 30, 2014, respectively.