EMPIRE STATE REALTY OP, L.P. FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor provisions. You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," "contemplates," "aims," "continues," "would" or "anticipates" or the negative of these words and phrases or similar words or phrases. In particular, statements pertaining to our capital resources, portfolio performance, dividend policy and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our commercial portfolio from operations, acquisitions and anticipated market conditions, demographics and results of operations are forward-looking statements. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: (i) economic, market, political and social impact of, and uncertainty relating to, any pandemic; (ii) a failure of conditions or performance regarding any event or transaction described herein, (iii) resolution of legal proceedings involving the Company; (iv) reduced demand for office, multifamily or retail space, including as a result of the changes in the use of office space and remote work; (v) changes in our business strategy; (vi) changes in technology and market competition that affect utilization of our office, retail, observatory, broadcast or other facilities; (vii) changes in domestic or international tourism, including due to health crises and pandemics, geopolitical events, including global hostilities, currency exchange rates, and/or competition from recently opened observatories inNew York City , any or all of which may cause a decline in Observatory visitors; (viii) defaults on, early terminations of, or non-renewal of, leases by tenants; (ix) increases in the Company's borrowing costs as a result of changes in interest rates and other factors, including the current phasing out of LIBOR; (x) declining real estate valuations and impairment charges; (xi) termination of our ground leases; (xii) changes in our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due and potential limitations on our ability to borrow additional funds in compliance with drawdown conditions and financial covenants; (xiii) decreased rental rates or increased vacancy rates; (xiv) our failure to execute any newly planned capital project successfully or on the anticipated timeline or budget; (xv) difficulties in identifying and completing acquisitions; (xvi) risks related to any development project (including ourMetro Tower potential development site); (xvii) impact of changes in governmental regulations, tax laws and rates and similar matters; (xviii) our failure to qualify as a REIT; (xix) environmental uncertainties and risks related to climate change, adverse weather conditions, rising sea levels and natural disasters; (xx) incurrence of taxable capital gain on disposition of an asset due to failure of use or compliance with a 1031 exchange program; and (xxi) accuracy of our methodologies and estimates regarding ESG metrics and goals, tenant willingness and ability to collaborate in reporting ESG metrics and meeting ESG goals, and impact of governmental regulation on our ESG efforts. For a further discussion of these and other factors that could impact the company's future results, performance or transactions, see the section entitled "Risk Factors" of this Annual Report on Form 10-K. While forward-looking statements reflect the company's good faith beliefs, they are not guarantees of future performance. The company disclaims any obligation to update or revise publicly any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events, or other changes after the date of this Annual Report on Form 10-K, except as required by applicable law. Prospective investors should not place undue reliance on any forward-looking statements, which are based only on information currently available to the company.
Overview
Unless the context otherwise requires or indicates, references in this section to "our company," "we," "our" and "us" refer toEmpire State Realty OP, L.P. and its consolidated subsidiaries. The following discussion and analysis should be read in conjunction with our consolidated financial statements as ofDecember 31, 2022 and 2021 and for the years endedDecember 31, 2022 , 2021 and 2020 and the notes related thereto which are included in this Annual Report on Form 10-K. 2022 Highlights •Net income attributable to the company of$59.3 million . 38 -------------------------------------------------------------------------------- •Core FFO of$243.6 million . •Signed a total of 1,118,579 rentable square feet of new, renewal and expansion leases. •Completed the acquisition of a multifamily asset located at298 Mulberry Street inManhattan in the fourth quarter. •Completed the dispositions of an office asset located at10 Bank Street inWhite Plains, NY in the fourth quarter, and retail assets located inWestport, Connecticut subsequent to year-end in a tax-efficient manner through transactions that qualify as like-kind exchanges.
Results of Operations
Overview
The discussion below relates to the financial condition and results of operations for the years endedDecember 31, 2022 and 2021. For a discussion of our 2020 financial results as compared to our 2021 financial results, please see our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . 39
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Year Ended
The following table summarizes the historical results of operations for the
years ended
Years Ended December 31,
2022 2021 Change %
Real Estate Observatory Real Estate Observatory
Segment Segment Total Segment Segment TotalRevenues: Rental revenue$ 591,048 $ -$ 591,048 $ 559,690 $ -$ 559,690 $ 31,358 5.6 % Observatory revenue - 105,978 105,978 - 41,474 41,474 64,504 155.5 % Lease termination fees 20,032 - 20,032 16,230 - 16,230 3,802 23.4 % Third-party management and other fees 1,361 - 1,361 1,219 - 1,219 142 11.6 % Other revenues and fees 8,622 - 8,622 5,343 138 5,481 3,141 57.3 % Total revenues 621,063 105,978 727,041 582,482 41,612 624,094 102,947 16.5 % Operating expenses: Property operating expenses 157,935 - 157,935 126,986 - 126,986 (30,949) (24.4) % Ground rent expenses 9,326 - 9,326 9,326 - 9,326 - - % General and administrative expenses 61,765 - 61,765 55,947 - 55,947 (5,818) (10.4) % Observatory expenses - 31,036 31,036 - 23,206 23,206 (7,830) (33.7) % Real estate taxes 123,057 - 123,057 119,967 - 119,967 (3,090) (2.6) % Impairment charge - - - 7,723 - 7,723 7,723 100.0 % Depreciation and amortization 216,707 187 216,894 201,676 130 201,806 (15,088) (7.5) % Total operating expenses 568,790 31,223 600,013 521,625 23,336 544,961 (55,052) (10.1) % Operating income 52,273 74,755 127,028 60,857 18,276 79,133 47,895 60.5 % Intercompany rent income (expense) 65,005 (65,005) - 23,413 (23,413) - - - % Other income (expense): Interest income 4,901 47 4,948 701 3 704 4,244 602.8 % Interest expense (101,206) - (101,206) (94,292) (102) (94,394) (6,812) (7.2) % Gain on sale/disposition of properties 33,988 - 33,988 - - - 33,988 - % Loss on early extinguishment of debt - - - (214) - (214) 214
100.0 %
Income (loss) before income taxes 54,961 9,797 64,758 (9,535) (5,236) (14,771) 79,529 (538.4) % Income tax (expense) benefit (584) (962) (1,546) (613) 2,347 1,734 (3,280) (189.2) % Net income (loss) 54,377 8,835 63,212 (10,148) (2,889) (13,037) 76,249 (584.9) % Private perpetual preferred unit distributions (4,201) - (4,201) (4,201) - (4,201) - - % Net loss attributable to non-controlling interests$ 243 $ - 243 17 - 17 226 - % Net loss attributable to common unit holders$ 50,419 $ 8,835 $ 59,254 $ (14,332) $ (2,889) $ (17,221) $ 76,475 (447.1) % Real Estate Segment Rental Revenue
The increase in rental revenue reflects the inclusion of revenues from our
multifamily properties which were acquired on
Other Revenues and Fees
The increase in other revenues and fees was due to higher food and beverage sales, insurance claim income, parking income and bad debt recovery income.
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--------------------------------------------------------------------------------Property Operating Expenses
The increase in property operating expenses reflects higher payroll, utilities, repairs and maintenance costs, cleaning and other operating expenses due to increased building utilization at our office properties and the inclusion of operating expenses from our multifamily properties which were acquired onDecember 22, 2021 .
General and Administrative Expenses
The increase in general and administrative expenses reflects higher equity compensation and payroll costs, information technology costs and professional fees.
Real Estate Taxes Higher real estate taxes were primarily attributable to the inclusion of real estate taxes from our multifamily properties which were acquired onDecember 22, 2021 . Impairment Charge
The impairment charge in 2021 related to
Depreciation and Amortization
The increase in depreciation and amortization reflects accelerated depreciation at one property due to an impairment charge in the fourth quarter of 2021 and additional depreciation from our multifamily properties which were acquired onDecember 22, 2021 . Interest Income
The increase in interest income was due to higher interest rates compared to the prior year.
Interest Expense
The increase in interest expense was primarily attributable to interest expense
from our multifamily properties which were acquired on
Gain on Sale/Disposition of Properties
Represents a gain on the sale of
Observatory Segment
Observatory Revenue
Observatory revenues were higher driven by increased visitation due to a reduction in COVID-19 restrictions.
Observatory Expenses
The increase in observatory expenses was driven by increased operating hours, which increased variable costs such as labor, union, security, cleaning and maintenance costs.
Income Taxes
The increase in income tax expense was attributable to higher taxable income for the observatory segment.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, including lease-up costs, fund our redevelopment and repositioning programs, acquire properties, make
41
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distributions to our securityholders and other general business needs. Based on
the historical experience of our management and our business strategy, in the
foreseeable future we anticipate we will generate positive cash flows from
operations.
While we may be able to anticipate and plan for certain liquidity needs, there
may be unexpected increases in uses of cash that are beyond our control and
which would affect our financial condition and results of operations. For
example, we may be required to comply with new laws or regulations that cause us
to incur unanticipated capital expenditures for our properties, thereby
increasing our liquidity needs. Even if there are no material changes to our
anticipated liquidity requirements, our sources of liquidity may be fewer than,
and the funds available from such sources may be less than, anticipated or
needed. Our primary sources of liquidity will generally consist of cash on hand,
short term investments, cash generated from our operating activities, debt
issuances and unused borrowing capacity under our unsecured revolving credit and
term loan facilities. We expect to meet our short-term liquidity requirements,
including distributions, operating expenses, working capital, debt service, and
capital expenditures from cash flows from operations, cash on hand, debt
issuances, and available borrowing capacity under our unsecured revolving credit
and term loan facilities. The availability of these borrowings is subject to the
conditions set forth in the applicable loan agreements. We expect to meet our
long-term capital requirements, including acquisitions, redevelopments and
capital expenditures through our cash flows from operations, cash on hand, our
unsecured revolving credit and term loan facilities, mortgage financings, debt
issuances, common and/or preferred equity issuances and asset sales. Our
properties require periodic investments of capital for individual lease related
tenant improvements allowances, general capital improvements and costs
associated with capital expenditures. Our overall leverage will depend on our
mix of investments and the cost of leverage. ESRT's charter does not restrict
the amount of leverage that we may use. See ITEM 1A. Risk Factors - Risks
Relating to Our Indebtedness and Liquidity in this Annual Report on Form 10-K
for more information.
At
AtDecember 31, 2022 , we had approximately$2.3 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 3.9% and a weighted average maturity of 6.4 years. As ofDecember 31, 2022 , excluding debt amortization, we have no debt maturity untilNovember 2024 when principal repayments would amount to$77.7 million in 2024,$315.0 million in 2025$225.0 million in 2026,$319.0 million in 2027 and$1.3 billion thereafter. As ofDecember 31, 2022 , interest expense obligations from 2023 through 2027 and thereafter amount to$593.7 million while debt amortization amount to$60.3 million . In connection with our three ground leases (i.e. long-term leaseholds of the land and the improvements) at1350 Broadway ,111 West 33rd Street and1400 Broadway ), we also have contractual rent obligations totaling$69.8 million as ofDecember 31, 2022 of which$7.5 million is due within the next five years.
Portfolio Transaction Activity
OnDecember 7, 2022 , we closed on the sale of10 Bank Street ,White Plains, NY , which was encumbered by a$30.0 million mortgage, at a gross asset valuation of$42.0 million .
On
Subsequent to the year endedDecember 31, 2022 , onFebruary 1, 2023 we closed on the sale of 69-97 and103-107 Main Street inWestport, Connecticut at a gross asset valuation of$40.0 million . InDecember 2022 , we also entered into a purchase and sale agreement for500 Mamaroneck Avenue inHarrison, NY at a gross asset valuation of$53.0 million . This transaction is expected to close in the first quarter of 2023, subject to customary closing conditions.
Unsecured Revolving Credit and Term Loan Facilities
See "Financial Statements - Note 5 Debt" for a summary of our unsecured revolving credit and term loan facilities.
Financial Covenants
As of
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--------------------------------------------------------------------------------Financial Covenant Required December 31, 2022 In Compliance Maximum total leverage < 60% 35.6 % Yes Maximum secured debt < 40% 14.0 % Yes Minimum fixed charge coverage > 1.50x 2.8x Yes Minimum unencumbered interest coverage > 1.75x 5.0x Yes Maximum unsecured leverage < 60% 25.8 % Yes Mortgage Debt
As of
Senior Unsecured Notes
The terms of the senior unsecured notes include customary covenants, including limitations on liens, investment, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. These terms also require compliance with financial ratios including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a minimum unencumbered interest coverage ratio, and a maximum unsecured leverage ratio. The agreement also contains customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, the occurrence of certain change of control transactions and loss of real estate investment trust qualification. As ofDecember 31, 2022 , we were in compliance with the covenants under the outstanding senior unsecured notes.
Leverage Policies
We expect to employ leverage in our capital structure in amounts determined from time to time by ESRT's board of directors. Although ESRT's board has not adopted a policy that limits the total amount of indebtedness that we may incur, we anticipate that ESRT's board will consider a number of factors in evaluating our level of indebtedness from time to time, as well as the amount of such indebtedness that will be either fixed or floating rate. ESRT's charter and bylaws do not limit the amount or percentage of indebtedness that we may incur nor do they restrict the form in which our indebtedness will be taken (including, but not limited to, recourse or non-recourse debt and cross-collateralized debt). Our overall leverage will depend on our mix of investments and the cost of leverage, however, we initially intend to maintain a level of indebtedness consistent with our plan to seek an investment grade credit rating. ESRT's board may from time to time modify our leverage policies in light of the then-current economic conditions, relative costs of debt and equity capital, market values of our properties, general market conditions for debt and equity securities, fluctuations in the market price of ESRT's common stock and our traded OP units, growth and acquisition opportunities and other factors. See ITEM 1A. Risk Factors - Risks Relating to Our Indebtedness and Liquidity in this Annual Report on Form 10-K for more information.
Capital Expenditures
The following tables summarize our tenant improvement costs, leasing commission costs and our capital expenditures for each of the periods presented (dollars in thousands, except per square foot amounts).
Years Ended December 31,
Total New Leases, Expansions, and Renewals 2022 2021 2020
Number of leases signed(2) 130 118 90
Total square feet 1,071,426 983,182 854,068
Leasing commission costs per square foot(3) $ 18.23 $ 20.14 $ 11.67
Tenant improvement costs per square foot(3) 56.72 66.25 38.52
Total leasing commissions and tenant improvement costs per
square foot(3) $ 74.95 $ 86.39 $ 50.19
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Years Ended December 31,
Total New Leases, Expansions, and Renewals 2022 2021 2020
Number of leases signed(2) 14 11 14
Total Square Feet 47,153 22,448 69,311
Leasing commission costs per square foot(3) $ 62.30 $ 57.27 $ 32.31
Tenant improvement costs per square foot(3) 55.13 61.75 109.29
Total leasing commissions and tenant improvement costs per
square foot(3) $ 117.43 $ 119.02 $ 141.60
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(1)Excludes an aggregate of 499,012, 507,276 and 504,284 rentable square feet of
retail space in our Manhattan office properties in 2022, 2021 and 2020,
respectively. Includes the Empire State Building broadcasting licenses and
observatory operations.
(2)Presents a renewed and expansion lease as one lease signed.
(3)Presents all tenant improvement and leasing commission costs as if they were
incurred in the period in which the lease was signed, which may be different
than the period in which they were actually paid.
(4)Includes an aggregate of 499,012, 507,276 and 504,284 rentable square feet of
retail space in our Manhattan office properties in 2022, 2021 and 2020,
respectively. Excludes the Empire State Building broadcasting licenses and
observatory operations.
(5)The tables above exclude three multifamily properties.
Years Ended December 31,
2022 2021 2020
Total Commercial Portfolio
Capital expenditures (1) $ 38,445 $ 24,279 $ 43,022
_______________
(1)Includes all capital expenditures, excluding tenant improvements and leasing commission costs.
As ofDecember 31, 2022 , we expect to incur additional costs relating to obligations under signed new leases of approximately$118.3 million for tenant improvements and leasing commissions. We intend to fund the tenant improvements and leasing commission costs through a combination of operating cash flow, cash on hand, short term investments and borrowings under the unsecured revolving credit and term loan facilities. Capital expenditures are considered part of both our short-term and long-term liquidity requirements. We intend to fund the capital improvements through a combination of operating cash flow, cash on hand, short term investments and borrowings under the unsecured revolving credit and term loan facilities.
Distribution Policy
We intend to distribute our net taxable income to our security holders in a
manner intended to satisfy REIT distribution requirements and to avoid
Before we pay any distribution, whether forU.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and obligations to make payments of principal and interest, if any. However, under some circumstances, we may be required to use cash reserves, incur debt or liquidate assets at rates or times that we regard as unfavorable or make a taxable distribution of our shares in order to satisfy REIT distribution requirements. We declared dividends of$0.035 per share for each quarter of 2022, which equates to an annualized rate of$0.14 per share. The Board of Directors will continue its regular review of its dividend and capital allocation policies at each Board meeting.
Distribution to Equity Holders
Distributions and dividends have been made to equity holders in 2020, 2021 and 2022 as follows (amounts in thousands):
Year ended December 31, 2020 65,047
Year ended December 31, 2021 32,764
Year ended December 31, 2022 42,786
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Stock and Publicly Traded Operating Partnership Unit Repurchase Program
ESRT's Board of Directors authorized the repurchase of up to$500 million of our Class A common stock and theOperating Partnership's Series ES, Series 250 and Series 60 operating partnership units throughDecember 31, 2023 . Under the program, ESRT may purchase its Class A common stock and our Series ES, Series 250 and Series 60 operating partnership units in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will be subject to stock price, availability, trading volume and general market conditions. The authorization does not obligate us to acquire any particular amount of securities, and the program may be suspended or discontinued at our discretion without prior notice. The following table summarizes our purchases of equity securities for the year endedDecember 31, 2022 : Maximum Approximate Total Number of Dollar Value Shares Purchased as Available for Total Number of Shares
Average Price Paid Part of Publicly Future Purchase
Period Purchased per Share Announced Plan (in thousands)
Year ended December 31, 2022 11,571,133 $ 7.79 11,571,133 $ 409,824
Cash Flows
Comparison of Year Ended
Net cash. Cash and cash equivalents and restricted cash were$314.7 million and$474.6 million as ofDecember 31, 2022 and 2021, respectively. The decrease was primarily due to the acquisition of298 Mulberry Street inDecember 2022 , higher repurchases of common shares in 2022, higher spending for capital expenditures and higher distributions paid in 2022. Operating activities. Net cash provided by operating activities decreased by$1.3 million to$211.2 million . Investing activities. Net cash used in investing activities increased by$18.2 million to$230.9 million due to higher capital expenditures, partially offset by net proceeds from the disposition of real estate. Net cash used in the acquisition of multifamily assets during the years endedDecember 31, 2022 and 2021 was$115.6 million and$117.5 million , respectively. Financing activities. Net cash used in financing activities increased by$47.2 million to$140.2 million primarily due to higher repurchases of common shares and higher dividends and distributions paid.
Net Operating Income
Our financial reports include a discussion of property net operating income,
or NOI. NOI is a non-GAAP financial measure of performance. NOI is used by our
management to evaluate and compare the performance of our properties and to
determine trends in earnings and to compute the fair value of our properties as
it is not affected by: (i) the cost of funds of the property owner, (ii) the
impact of depreciation and amortization expenses as well as gains or losses from
the sale of operating real estate assets that are included in net income
computed in accordance with GAAP, (iii) acquisition expenses, loss on early
extinguishment of debt and loss from derivative financial instruments, or (iv)
general and administrative expenses and other gains and losses that are specific
to the property owner. The cost of funds is eliminated from NOI because it is
specific to the particular financing capabilities and constraints of the owner
and because it is dependent on historical interest rates and other costs of
capital as well as past decisions made by us regarding the appropriate mix of
capital which may have changed or may change in the future. Depreciation and
amortization expenses as well as gains or losses from the sale of operating real
estate assets are eliminated because they may not accurately represent the
actual change in value in our office or retail properties that result from use
of the properties or changes in market conditions. While certain aspects of real
property do decline in value over time in a manner that is reasonably captured
by depreciation and amortization, the value of the properties as a whole have
historically increased or decreased as a result of changes in overall economic
conditions instead of from actual use of the property or the passage of time.
Gains and losses from the sale of real property vary from property to property
and are affected by market conditions at the time of sale which will usually
change from period to period. These gains and losses can create distortions when
comparing one period to another or when comparing our operating results to the
operating results of other real estate companies that have not made
similarly-timed purchases or sales. We believe that eliminating these costs from
net income is useful because the resulting measure captures the actual revenue,
generated and actual expenses incurred in operating our properties as well as
trends in occupancy rates, rental rates and operating costs.
However, the usefulness of NOI is limited because it excludes general and
administrative costs, interest expense, depreciation and amortization expense
and gains or losses from the sale of properties, and other gains and losses as
stipulated by GAAP, the level of capital expenditures and leasing costs
necessary to maintain the operating performance of our properties, all of which
are significant economic costs.
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--------------------------------------------------------------------------------NOI may fail to capture significant trends in these components of net income which further limits its usefulness.
NOI is a measure of the operating performance of our properties but does not
measure our performance as a whole. NOI is therefore not a substitute for net
income as computed in accordance with GAAP. This measure should be analyzed in
conjunction with net income computed in accordance with GAAP and discussions
elsewhere in this Management's Discussion and Analysis of Financial Condition
and Results of Operations regarding the components of net income that are
eliminated in the calculation of NOI. Other companies may use different methods
for calculating NOI or similarly titled measures and, accordingly, our NOI may
not be comparable to similarly titled measures reported by other companies that
do not define the measure exactly as we do.
The following table presents a reconciliation of our net income, the most
directly comparable GAAP measure, to NOI for the periods presented (amounts in
thousands):
Years Ended December 31,
2022 2021 2020
Net income (loss) $ 63,212 $ (13,037) $ (22,889)
Add:
General and administrative expenses 61,765 55,947 62,244
Depreciation and amortization 216,894 201,806 191,006
Interest expense 101,206 94,394 89,907
Loss on early extinguishment of debt - 214 86
Income tax expense (benefit) 1,546 (1,734) (6,971)
Impairment charges - 7,723 5,360
IPO litigation expense - - 1,165
Less:
Gain on sale/disposition of properties (33,988) - -
Interest income (4,948) (704) (2,637)
Third-party management and other fees (1,361) (1,219) (1,225)
Net operating income $ 404,326 $ 343,390 $ 316,046
Other Net Operating Income Data
Straight line rental revenue $ 24,562 $ 5,895 $ 3,627 Amortization of acquired below-market ground leases$ 7,831
Funds from Operations ("FFO")
We present below a discussion of FFO. We compute FFO in accordance with the "White Paper" on FFO published by theNational Association of Real Estate Investment Trusts , or NAREIT, which defines FFO as net income (loss) (determined in accordance with GAAP), excluding impairment writedowns of investments in depreciable real estate and investments in in-substance real estate investments, gains or losses from debt restructurings and sales of depreciable operating properties, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs), less distributions to non-controlling interests and gains/losses from discontinued operations and after adjustments for unconsolidated partnerships and joint ventures. FFO is a widely recognized non-GAAP financial measure for REITs that we believe, when considered with financial statements determined in accordance with GAAP, is useful to investors in understanding financial performance and providing a relevant basis for comparison among REITs. In addition, FFO is useful to investors as it captures features particular to real estate performance by recognizing that real estate has generally appreciated over time or maintains residual value to a much greater extent than do other depreciable assets. Investors should review FFO, along with GAAP net income, when trying to understand an equity REIT's operating performance. We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results of operations, the utility of FFO as a measure of performance is limited. There can be no assurance that FFO presented by us is comparable to similarly titled measures of other REITs. FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income 46 -------------------------------------------------------------------------------- (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. Although FFO is a measure used for comparability in assessing the performance of REITs, as the NAREIT White Paper only provides guidelines for computing FFO, the computation of FFO may vary from one company to another.
Modified Funds From Operations ("Modified FFO")
Modified FFO adds back an adjustment for any above or below-market ground lease amortization to traditionally defined FFO. We consider this a useful supplemental measure in evaluating our operating performance due to the non-cash accounting treatment under GAAP, which stems from the third quarter 2014 acquisition of two option properties following our formation transactions as they carry significantly below market ground leases, the amortization of which is material to our overall results. We present Modified FFO because we consider it an important supplemental measure of our operating performance in that it adds back the non-cash amortization of below-market ground leases. There can be no assurance that Modified FFO presented by us is comparable to similarly titled measures of other REITs. Modified FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Modified FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions.
Core Funds From Operations ("Core FFO")
Core FFO adds back to Modified FFO the following items: IPO litigation expense, severance expenses and loss on early extinguishment of debt. The company presents Core FFO because it considers it an important supplemental measure of its operating performance in that it excludes items associated with its IPO and formation transactions and other non-recurring items. There can be no assurance that Core FFO presented by the company is comparable to similarly titled measures of other REITs. Core FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Core FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. In future periods, we may also exclude other items from Core FFO that we believe may help investors compare our results.
The following table presents a reconciliation of net income, the most directly comparable GAAP measure, to FFO, Modified FFO and Core FFO for the periods presented (amounts in thousands):
Years Ended December 31,
2022 2021 2020
Net income (loss) $ 63,212 $ (13,037) $ (22,889)
Non-controlling interests in other partnerships 243 - -
Private perpetual preferred unit distributions (4,201) (4,201) (4,197)
Real estate depreciation and amortization 210,522 196,360 184,245
Impairment charges - 7,723 5,360
Gain on sale/disposition of properties (33,988) - -
Funds from operations attributable to common
stockholders and non-controlled interests 235,788 186,845 162,519
Amortization of below-market ground leases 7,831 7,831 7,831
Modified funds from operations attributable to common stockholders and non-controlled interests
243,619 194,676 170,350
Loss on early extinguishment of debt - 214 86
Severance expenses - - 3,813
IPO litigation expense - - 1,165
Core funds from operations attributable to common
stockholders and non-controlled interests $ 243,619 $
194,890
Weighted average shares andOperating Partnership units Basic 268,337 277,420 283,826 Diluted 269,948 277,420 283,837
Factors That May Influence Future Results of Operations
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--------------------------------------------------------------------------------Rental Revenue
We derive revenues primarily from rents, rent escalations, expense reimbursements and other income received from tenants under existing leases at each of our properties. "Escalations and expense reimbursements" consist of payments made by tenants to us under contractual lease obligations to reimburse a portion of the property operating expenses and real estate taxes incurred at each property. We believe that the average rental rates for in-place leases at our properties are generally below the current market rates, although individual leases at particular properties presently may be leased above, at or below the current market rates within its particular submarket. The amount of net rental income and reimbursements that we receive depends principally on our ability to lease currently available space, re-lease space to new tenants upon the scheduled or unscheduled termination of leases or renew expiring leases and to maintain or increase our rental rates. Factors that could affect our rental incomes include, but are not limited to: local, regional or national economic conditions; an oversupply of, or a reduction in demand for, office or retail space; changes in market rental rates; our ability to provide adequate services and maintenance at our properties; and fluctuations in interest rates, all of which could adversely affect our rental income in future periods. Future economic or regional downturns affecting our submarkets, or downturns in our tenants' industries, could impair our ability to lease vacant space and renew or re-lease space as well as the ability of our tenants to fulfill their lease commitments, and could adversely affect our ability to maintain or increase the occupancy at our properties. See ITEM 1A. Risk Factors - Risks Relating to the Real Estate Market in this Annual Report on Form 10-K for more information on factors that that may influence future rental revenue.
Tenant Credit Risk
The economic condition of our tenants may also deteriorate, which could negatively impact their ability to fulfill their lease commitments and in turn adversely affect our ability to maintain or increase the occupancy level and/or rental rates of our properties. Potential tenants may look to consolidate, reduce overhead and preserve operating capital and may also defer strategic decisions, including entering into new, long-term leases at properties.
Leasing
We signed 1.1 million, 1.0 million, and 0.9 million rentable square feet of new leases, expansions and lease renewals, for the years endedDecember 31, 2022 , 2021 and 2020, respectively. Due to the relatively small number of leases that are signed in any particular quarter, one or more larger leases may have a disproportionately positive or negative impact on average rent, tenant improvement and leasing commission costs for that period. As a result, we believe it is more appropriate when analyzing trends in average rent and tenant improvement and leasing commission costs to review activity over multiple quarters or years. Tenant improvement costs include expenditures for general improvements occurring concurrently with, but that are not directly related to, the cost of installing a new tenant. Leasing commission costs are similarly subject to significant fluctuations depending upon the length of leases being signed and the mix of tenants from quarter to quarter. As ofDecember 31, 2022 , there were approximately 1.1 million rentable square feet of space in our commercial portfolio available to lease (excluding leases signed but not yet commenced) representing 11.4% of the net rentable square footage of the properties in our commercial portfolio. In addition, leases representing 5.1% and 6.6% of net rentable square footage of the properties in our commercial portfolio will expire in 2023 and in 2024, respectively. These leases are expected to represent approximately 5.7% and 7.2%, respectively, of our annualized rent for such periods. Our revenues and results of operations can be impacted by expiring leases that are not renewed or re-leased or that are renewed or re-leased at base rental rates equal to, above or below the current average base rental rates. Further, our revenues and results of operations can also be affected by the costs we incur to re-lease available space, including payment of leasing commissions, redevelopments and build-to-suit remodeling that may not be borne by the tenant. See ITEM 1A. Risk Factors - Risks Relating to the Real Estate Market in this Annual Report on Form 10-K for additional factors for more information. Market Conditions The properties in our commercial portfolio are located inManhattan and the greaterNew York metropolitan area, which includesFairfield County, Connecticut andWestchester County, New York . Positive or negative changes in conditions in these markets, such as business hirings or layoffs or downsizing, industry growth or slowdowns, relocations of businesses, increases or decreases in real estate and other taxes, costs of complying with governmental regulations or changed regulation, can impact our overall performance. See ITEM 1A. Risk Factors - Risks Relating to our Portfolio Concentration in this Annual Report on Form 10-K for additional factors that that may influence market conditions. 48 --------------------------------------------------------------------------------
Observatory Operations
For the year endedDecember 31, 2022 , the observatory hosted 2,189,000 visitors, compared to 827,000 visitors for the same period in 2021, an increase of 164.7%. Our return of attendance to pre-pandemic levels is closely tied to national and international travel trends, our new reservations-only model of operation, and our desire to provide a better experience with fewer crowds to visitors from whom we receive higher revenues per person. Observatory revenue for the year endedDecember 31, 2022 was$106.0 million , a 155.4% increase from$41.5 million for the year endedDecember 31, 2021 . The observatory revenue increase was driven by higher visitation levels in 2022. Observatory revenue and admissions are dependent upon the following: (i) the number of tourists (domestic and international) that come toNew York City and visit the observatory, as well as any related tourism trends; (ii) the prices per admission that can be charged; (iii) seasonal trends affecting the number of visitors to the observatory; (iv) competition, in particular from other new and existing observatories; and (v) weather trends. See ITEM 1A. Risk Factors - Risks Related to Our Non-Real Estate Operations in this Annual Report on Form 10-K for additional factors that may influence our observatory operations.
Operating Expenses
Our operating expenses generally consist of depreciation and amortization, real estate taxes, ground lease expenses, repairs and maintenance, security, utilities, property-related payroll, and insurance. Factors that may affect our ability to control these operating costs include: increases in insurance premiums, tax rates, the cost of periodic repair, redevelopment costs and the cost of re-leasing space, the cost of compliance with governmental regulation, including zoning and tax laws, the potential for liability under applicable laws and interest rate levels. If our operating costs increase as a result of any of the foregoing factors, our future cash flow and results of operations may be adversely affected. The expenses of owning and operating a property are not necessarily reduced when circumstances, such as market factors and competition, cause a reduction in income from the property. If revenues drop, we may not be able to reduce our expenses accordingly. Costs associated with real estate investments, such as real estate taxes and maintenance generally, will not be materially reduced even if a property is not fully occupied or other circumstances cause our revenues to decrease. As a result, if revenues decrease in the future, static operating costs may adversely affect our future cash flow and results of operations. If similar economic conditions exist in the future, we may experience future losses. See ITEM 1A. Risk Factors - Risks Related to Our Properties in this Annual Report on Form 10-K for additional factors that may influence our operating expenses.
Cost of Funds and Interest Rates
As ofDecember 31, 2022 , 100% of our debt was fixed rate debt with the inclusion of existing interest rate swap agreements. We may incur variable rate debt to the extent we use available borrowing capacity from our unsecured credit facility.
Competition
The leasing of real estate is highly competitive inManhattan and the greaterNew York metropolitan market in which we operate. We compete with numerous acquirers, developers, owners and operators of commercial real estate, many of which own or may seek to acquire or develop properties similar to ours in the same markets in which our properties are located. The principal means of competition are rent charged, location, services provided and the nature and condition of the facility to be leased. In addition, we face competition from other real estate companies including other REITs, private real estate funds, domestic and foreign financial institutions, life insurance companies, pension trusts, partnerships, individual investors and others that may have greater financial resources or access to capital than we do or that are willing to acquire properties in transactions which are more highly leveraged or are less attractive from a financial viewpoint than we are willing to pursue. In addition, competition from new and existing observatories and/or broadcasting operations could have a negative impact on revenues from our observatory and/or broadcasting operations. Adverse impacts on domestic travel and changes in foreign currency exchange rates may also decrease demand in the future, which could have a material adverse effect on our results of operations. If our competitors offer space at rental rates below current market rates, below the rental rates we currently charge our tenants, in better locations within our markets or in higher quality facilities, we may lose potential tenants and may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when our tenants' leases expire.
See ITEM 1A. Risk Factors in this Annual Report on Form 10-K for additional factors that that may influence future results of operations.
Critical Accounting Estimates
Basis of Presentation and Principles of Consolidation
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The accompanying consolidated financial statements have been prepared in
conformity with GAAP and with the rules and regulations of the
We consolidate entities in which we have a controlling financial interest. In
determining whether we have a controlling financial interest in a partially
owned entity and the requirement to consolidate the accounts of that entity, we
consider factors such as ownership interest, board representation, management
representation, authority to make decisions, and contractual and substantive
participating rights of the partners/members as well as whether the entity is a
variable interest entity ("VIE") and we are the primary beneficiary. The primary
beneficiary of a VIE is the entity that has (i) the power to direct the
activities that most significantly impact the entity's economic performance and
(ii) the obligation to absorb losses of the VIE or the right to receive benefits
from the VIE that could be significant to the VIE. The primary beneficiary is
required to consolidate the VIE.
We will assess the accounting treatment for each investment we may have in the
future. This assessment will include a review of each entity's organizational
agreement to determine which party has what rights and whether those rights are
protective or participating. For all VIEs, we will review such agreements in
order to determine which party has the power to direct the activities that most
significantly impact the entity's economic performance and benefit. In
situations where we or our partner could approve, among other things, the annual
budget, or leases that cover more than a nominal amount of space relative to the
total rentable space at each property, we would not consolidate the investment
as we consider these to be substantive participation rights that result in
shared power of the activities that would most significantly impact the
performance and benefit of such joint venture investment.
A non-controlling interest in a consolidated subsidiary is defined as the
portion of the equity (net assets) in a subsidiary not attributable, directly or
indirectly, to a parent. Non-controlling interests are required to be presented
as a separate component of equity in the consolidated balance sheets and in the
consolidated statements of income by requiring earnings and other comprehensive
income to be attributed to controlling and non-controlling interests.
Goodwill is tested annually for impairment and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount, including goodwill, exceeds the reporting unit's fair value and the implied fair value of goodwill is less than the carrying amount of that goodwill. Non-amortizing intangible assets, such as trade names and trademarks, are subject to an annual impairment test based on fair value and amortizing intangible assets are tested whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. From the quarter endedJune 30, 2020 and for each subsequent quarter through our annual goodwill testing onOctober 1, 2022 , we bypassed the optional qualitative goodwill impairment assessment and proceeded directly to a quantitative assessment of the observatory reportable segment and engaged a third-party valuation consulting firm to perform the valuation process. This was done in response to the closure of the observatory onMarch 16, 2020 , due to the COVID-19 pandemic, which was subsequently fully reopened onAugust 24, 2020 . The quantitative analysis used a combination of the discounted cash flow method (a form of the income approach) utilizing Level 3 unobservable inputs and the guideline company method (a form of the market approach). Significant assumptions under the former included revenue and cost projections, weighted average cost of capital, long-term growth rate and income tax considerations while the latter included guideline company enterprise values, revenue multiples and control premium rates. Our methodology to review goodwill impairment, which included a significant amount of judgment and estimates, provided a reasonable basis to determine whether impairment had occurred. Each quantitative analysis performed concluded the fair value of the standalone observatory reporting unit exceeds its carrying value. Many of the factors employed in determining whether or not goodwill is impaired are outside of our control, and it is reasonably likely that assumptions and estimates will change in future periods. We will continue to assess the impairment of the observatory reporting unit goodwill going forward. Income Taxes We are generally not subject to federal and state income taxes as our taxable income or loss is reportable by our partners. Accordingly, no provision has been made for federal and state income taxes. ESRT elected, together withESRT Observatory TRS, L.L.C. , our subsidiary that holds our observatory operations, to treatESRT Observatory TRS, L.L.C. as a taxable REIT subsidiary ("TRS"), and ESRT has elected, together withESRT Holdings TRS, L.L.C. , our subsidiary that holds our third party management, restaurant, cafeteria, health clubs and certain cleaning operations, to treatESRT Holdings TRS, L.L.C. as a TRS. TRSs may participate in non-real estate activities and/or perform non-customary services for tenants and their operations are generally subject to regular corporate income taxes. Each of our TRSs account for their income taxes in accordance with GAAP, which includes an estimate of the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. The calculation of the TRSs tax provisions may require interpreting tax laws and regulations and could result in the use of judgments or estimates which could cause its recorded tax liability to differ from the actual amount due. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income 50 -------------------------------------------------------------------------------- tax purposes. The TRSs periodically assess the realizability of deferred tax assets and the adequacy of deferred tax liabilities, including the results of local, state, or federal tax audits or estimates and judgments used. As ofDecember 31, 2022 , our parent and general partner,Empire State Realty Trust, Inc. , had$99.8 million of net operating loss (" NOL") carryforwards that may be used in the future to reduce the amount otherwise required to be distributed by ESRT to meet REIT requirements. However, for federal income tax purposes, the NOL will not be able to offset more than 80% of ESRT's REIT taxable income and, therefore, may not be able to reduce the amount required to be distributed by ESRT to meet REIT requirements to zero. The federal NOL may be carried forward indefinitely. Other limitations may apply to ESRT's ability to use its NOL to offset taxable income. As ofDecember 31, 2022 , the Observatory TRS had a federal income tax receivable of$2.5 million . This receivable reflects an anticipated refund resulting from the carryback of 2020 NOL to previous tax years. The Observatory TRS has$10.2 million NOL carryforwards that may be used to offset future taxable income, if any. The federal NOL may be carried forward indefinitely and the state and local NOL can be carried forward for up to 20 years. We apply provisions for measuring and recognizing tax benefits associated with uncertain income tax positions. Penalties and interest, if incurred, would be recorded as a component of income tax expense. As ofDecember 31, 2022 and 2021, we do not have a liability for uncertain tax positions. As ofDecember 31, 2022 , the tax years endedDecember 31, 2019 throughDecember 31, 2022 remain open for an audit by the Internal Revenue Service, state or local authorities.
Share-Based Compensation
Share-based compensation for time-based equity awards is measured at the fair value of the award on the date of grant and recognized as an expense on a straight-line basis over the shorter of (i) the stated vesting period, which is generally three, four or five years, or (ii) the period from the date of grant to the date the employee becomes retirement eligible, which may occur upon grant. An employee is retirement eligible when the employee attains the (i) age of 65 for awards granted in 2020 and after and age of 60 for awards granted before 2020 and (ii) the date on which the employee has first completed ten years of continuous service with us or our affiliates. Share-based compensation for market-based equity awards and performance-based equity awards is measured at the fair value of the award on the date of grant and recognized as an expense on a straight-line basis over three or four years. Additionally, for the performance-based equity awards, we assess, at each reporting period, whether it is probable that the performance conditions will be satisfied. We recognize expense respective to the number of awards we expect to vest at the conclusion of the measurement period. Changes in estimate are accounted for in the period of change through a cumulative catch-up adjustment. Any forfeitures of share-based compensation awards are recognized as they occur. The determination of fair value of these awards is subjective and involves significant estimates and assumptions including expected volatility of ESRT stock, expected dividend yield, expected term, and assumptions of whether these awards will achieve parity with other operating partnership units or achieve performance thresholds. We believe that the assumptions and estimates utilized are appropriate based on the information available to management at the time of grant.
Accounting Standards Update
See "Financial Statements - Note 2 Summary of Significant Accounting Policies" for information about recently issued and recently adopted accounting standards.
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