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Capital | 6 Months Ended
--- | ---
Jun. 30, 2017
Stockholders' Equity Note Disclosure, Disclosure of Compensation Related Costs, Share-based Payments and Earnings Per Share [Abstract] |
Capital | Capital 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 ESRT Class A common shares at $21.00 per share, resulting in gross proceeds of $621.8 million. The proceeds were contributed to us and we issued 29,610,854 Series PR units to ESRT. At August 23, 2016, the 29,610,854 units were equivalent to a 9.9% economic interest in us. QIA has a top-up right to acquire a pro rata number of additional shares from ESRT if ESRT should issue new shares to third parties. In connection with the share issuance to QIA, ESRT 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 ESRT pays that are attributable to capital gains from the sale or exchange of any U.S. real property interests. If ESRT were to trigger its tax indemnification obligations under this agreement, we and ESRT would be required to pay QIA for the resulting tax consequences, as applicable. As of June 30, 2017, there were 300,417,839 operating partnership units outstanding, of which 158,573,500, or 52.8%, were owned by ESRT and 141,844,339, or 47.2%, were owned by other partners, including ESRT directors, members of senior management and other 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 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, 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. 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 operating partnership 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. Distributions Total distributions paid to OP unitholders were $31.5 million and $62.9 million for the three and six months ended June 30, 2017, respectively, and $28.3 million and $51.2 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 ESRT 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 ESRT 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 ESRT 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 ESRT 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 ESRT 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 ESRT 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 Unit Earnings per unit 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: |  |  |  |  |  |  |
Net income | $ | 31,359 |  |  | $ | 24,640 |  |  | $ | 50,504 |  |  | $ | 41,345 |
Private perpetual preferred unit distributions | (234 | ) |  | (234 | ) |  | (468 | ) |  | (468 | )
Earnings allocated to unvested units | (200 | ) |  | (215 | ) |  | (354 | ) |  | (387 | )
Net income attributable to common unitholders - basic and diluted | $ | 30,925 |  |  | $ | 24,191 |  |  | $ | 49,682 |  |  | $ | 40,490 |
Denominator: |  |  |  |  |  |  |
Weighted average units outstanding - basic | 296,388 |  |  | 266,167 |  |  | 296,388 |  |  | 266,151 |
Effect of dilutive securities: |  |  |  |  |  |  |
Stock-based compensation plans | 973 |  |  | — |  |  | 874 |  |  | — |
Exchangeable senior notes | 1,037 |  |  | — |  |  | 918 |  |  | — |
Weighted average units outstanding - diluted | 298,398 |  |  | 266,167 |  |  | 298,180 |  |  | 266,151 |
Earnings per unit - basic and diluted | $ | 0.10 |  |  | $ | 0.09 |  |  | $ | 0.17 |  |  | $ | 0.15 |
There were 909,591 and 766,078 antidilutive units for the three and six months ended June 30, 2017, respectively 1,069,803 and 970,431 antidilutive units for the three and six months ended June 30, 2016, respectively.

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