Empire State Realty OP, L.P. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless the context otherwise requires or indicates, references in this section to "we," "our," and "us" refer to Empire 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 of December 31, 2024 and 2023 and for the years ended December 31, 2024, 2023 and 2022 and the notes related thereto which are included in this Annual Report on Form 10-K. FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, 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 “aims," "anticipates," "approximately," "believes," "contemplates," "continues," "estimates," "expects," "forecasts," "hope," "intends," "may," "plans," "seeks," "should," "thinks," "will," "would" or the negative of these words and phrases or similar words or phrases. In particular, statements pertaining to our capital resources, portfolio performance, dividend policy and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our portfolio from operations, acquisitions and anticipated market conditions, demographics and results of operations are forward-looking statements. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). Many important factors could cause actual results, performance, achievements, and future events to differ materially from those set forth, implied, anticipated, expected, projected, assumed or contemplated in the forward-looking statements, including, among other things: (i) economic, market, political and social impact of, and uncertainty relating to, any catastrophic events, including pandemics, epidemics or other outbreaks of disease, climate-related risks such as natural disasters and extreme weather events, terrorism and other armed hostilities, as well as cybersecurity threats and technology disruptions; (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) a decline in Observatory visitors due to changes in domestic or international tourism, including due to health crises, geopolitical events, currency exchange rates, and/or competition from other observatories; (vii) defaults on, early terminations of, or non-renewal of, leases by tenants; (viii) increases in the Company’s borrowing costs as a result of changes in interest rates and other factors; (ix) declining real estate valuations and impairment charges; (x) termination of our ground leases; (xi) limitations on our ability to pay down, refinance, restructure or extend our indebtedness or borrow additional funds; (xii) decreased rental rates or increased vacancy rates; (xiii) difficulties in executing capital projects or development projects successfully or on the anticipated timeline or budget; (xiv) difficulties in identifying and completing acquisitions; (xv) impact of changes in governmental regulations, tax laws and rates and similar matters; (xvi) our failure to qualify as a REIT; (xvii) incurrence of taxable capital gain on disposition of an asset due to failure of compliance with a 1031 exchange program; (xviii) our disclosure controls and internal control over financial reporting, including any material weakness; and (xix) failure to achieve sustainability metrics and goals, including as a result of tenant collaboration, and impact of governmental regulation on our sustainability 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 do not guarantee future performance. Any forward-looking statement speaks only as of the date on which it was made, and we assume no 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 (or to third parties making the forward-looking statements). Overview 2024 Highlights • Net income attributable to the Company of $76.2 million. • Core Funds From Operations ("Core FFO") of $256.2 million attributable to common unitholders. • Signed a total of 1,324,824 rentable square feet of new, renewal and expansion leases. 34 Results of Operations Overview The discussion below relates to the financial condition and results of operations for the years ended December 31, 2024 and 2023. For a discussion of our 2022 financial results as compared to our 2023 financial results, please see our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023 The following table summarizes the historical results of operations: Years Ended December 31, 2024 2023 Change % (amounts in thousands) Real Estate Segment Observatory Segment Total Real Estate Segment Observatory Segment Total Revenues: Rental revenue $ 614,596 $ — $ 614,596 $ 597,319 $ — $ 597,319 $ 17,277 2.9 % Observatory revenue — 136,377 136,377 — 129,366 129,366 7,011 5.4 % Lease termination fees 4,771 — 4,771 — — — 4,771 N/A Third-party management and other fees 1,170 — 1,170 1,351 — 1,351 (181) (13.4) % Other revenues and fees 11,009 — 11,009 11,536 — 11,536 (527) (4.6) % Total revenues 631,546 136,377 767,923 610,206 129,366 739,572 28,351 3.8 % Operating expenses: Property operating expenses 179,175 — 179,175 167,324 — 167,324 (11,851) (7.1) % Ground rent expenses 9,326 — 9,326 9,326 — 9,326 — — % General and administrative expenses 70,234 — 70,234 63,939 — 63,939 (6,295) (9.8) % Observatory expenses — 36,834 36,834 — 35,265 35,265 (1,569) (4.4) % Real estate taxes 128,826 — 128,826 127,101 — 127,101 (1,725) (1.4) % Depreciation and amortization 184,667 151 184,818 189,762 149 189,911 5,093 2.7 % Total operating expenses 572,228 36,985 609,213 557,452 35,414 592,866 (16,347) (2.8) % Operating income 59,318 99,392 158,710 52,754 93,952 146,706 12,004 8.2 % Intercompany rent income (expense) 83,477 (83,477) — 80,514 (80,514) — — — % Other income (expense): Interest income 20,853 445 21,298 14,936 200 15,136 6,162 40.7 % Interest expense (105,239) — (105,239) (101,484) — (101,484) (3,755) (3.7) % Interest expense associated with property in receivership (4,471) — (4,471) — — — (4,471) N/A Loss on early extinguishment of debt (553) — (553) — — — (553) N/A Gain on disposition of properties 13,302 — 13,302 26,764 — 26,764 (13,462) (50.3) % Income before income taxes 66,687 16,360 83,047 73,484 13,638 87,122 (4,075) (4.7) % Income tax expense (413) (2,275) (2,688) (552) (2,163) (2,715) 27 1.0 % Net income 66,274 14,085 80,359 72,932 11,475 84,407 (4,048) (4.8) % Private perpetual preferred unit distributions (4,201) — (4,201) (4,201) — (4,201) — — % Net income attributable to non-controlling interests (4) — (4) (68) — (68) 64 94.1 % Net income attributable to common unit holders $ 62,069 $ 14,085 $ 76,154 $ 68,663 $ 11,475 $ 80,138 $ (3,984) (5.0) % Real Estate Segment Rental Revenue The increase in rental revenue was primarily attributable to higher occupancy and higher operating and real estate tax expense escalations driving a $29.6 million increase during the twelve months ended December 31, 2024 compared to the twelve months ended December 31, 2023. The increases were partially offset by a net $14.2 million decrease in revenue from our recent transaction activity as 35 disclosed in "Financial Statements - Note 3. Acquisitions and Dispositions" in this Annual Report on Form 10-K. Property Operating Expenses The increase in property operating expenses was primarily due to higher repair and maintenance costs, cleaning costs, and payroll costs in 2024 relating to increased building utilization and certain local law compliance costs. Real Estate Taxes The increase in real estate taxes was primarily attributable to a $4.6 million increase in real estate tax expense due to higher assessed values for multiple properties, partially offset by a net $2.9 million decrease from our recent transaction activity as disclosed in "Financial Statements - Note 3. Acquisitions and Dispositions" in this Annual Report on Form 10-K. Depreciation and Amortization Depreciation and amortization is lower for the year ended December 31, 2024 than for the year ended December 31, 2023 primarily due to disposition activity during the comparative period. Interest Income The increase in interest income reflects larger cash balances in the year ended December 31, 2024 compared to the year ended December 31, 2023. Interest Expense The increase in interest expense reflects interest on new debt instruments in the year ended December 31, 2024, partially offset by the interest expense on debt associated with First Stamford Place being recognized separately as interest expense associated with property in receivership. See "Financial Statements — Note 5. Debt" in this Annual Report on Form 10-K. Gain on Sale/Disposition of Property The gain on disposition activity for the year ended December 31, 2024 relates to the derecognition of assets and certain liabilities in connection with the consensual foreclosure of First Stamford Place in Stamford, Connecticut as disclosed in "Financial Statements - Note 3. Acquisitions and Dispositions" in this Annual Report on Form 10-K. The gain on disposition activity for the year ended December 31, 2023 relates to the dispositions of 500 Mamaroneck in Harrison, New York in April 2023 and 69-97 and 103-107 Main Street in Westport, Connecticut in February 2023. Observatory Segment Observatory Revenue Observatory revenues were higher driven by increased revenue per visitor from pricing increases during the year ended December 31, 2024 as compared to the year ended December 31, 2023. Observatory Expenses The increase in O bservatory expenses was driven by increased incremental costs such as labor, marketing and maintenance costs. Liquidity and Capital Resources Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, including lease-up costs, fund our redevelopment and repositioning programs, acquire properties, make distributions to our securityholders and fulfill other general business needs. Based on the historical experience of our management and our business strategy, in the foreseeable future we anticipate we will generate positive cash flows from operations. In order for ESRT to qualify as a REIT, ESRT is required under the Code to distribute to its stockholders, on an annual basis, at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We expect to make quarterly distributions, as required, to our securityholders. 36 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, cash generated from our operating activities, debt issuances and unused borrowing capacity under our unsecured revolving credit facility. We expect to meet our short-term liquidity requirements, including distributions, operating expenses, working capital, debt service, and capital expenditures from cash flows from operations, cash on hand, debt issuances, and available borrowing capacity under our unsecured revolving credit facility. The availability of these borrowings is subject to the conditions set forth in the applicable loan agreements. We expect to meet our long-term capital requirements, including acquisitions, redevelopments and capital expenditures through our cash flows from operations, cash on hand, our unsecured revolving credit facility, mortgage financings, debt issuances, common and/or preferred equity issuances and asset sales. Our properties require periodic investments of capital for individual lease related tenant improvements allowances, general capital improvements and costs associated with capital expenditures. Our overall leverage will depend on our mix of investments and the cost of leverage. ESRT's charter does not restrict the amount of leverage that we may use. See ITEM 1A. "Risk Factors — Risks Relating to Our Indebtedness and Liquidity" in this Annual Report on Form 10-K for more information. At December 31, 2024, we had approximately $385.5 million available in cash and cash equivalents and there was $500.0 million available under our unsecured revolving credit facility. At December 31, 2024, we had approximately $2.3 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 4.27% and a weighted average maturity of 5.2 years. As of December 31, 2024, excluding debt amortization, we have a debt maturity of $100.0 million in March 2025, $225.0 million in 2026, $155.0 million in 2027, $146.1 million in 2028, $441.6 million in 2029, and $1.2 billion thereafter. As of December 31, 2024, interest expense obligations and debt amortization from 2025 through 2029 and thereafter amount to $506.0 million and $34.0 million, respectively. In connection with our three ground leases (i.e. long-term leaseholds of the land and the improvements) at 1350 Broadway, 111 West 33rd Street and 1400 Broadway, we also have contractual rent obligations totaling $66.8 million as of December 31, 2024, of which $7.5 million is due within the next five years. Portfolio Transaction Activity Refer to Part I. ITEM 2. "Properties - Portfolio Transaction Activity" for a summary of our portfolio transaction activity . Refer to "Financial Statements - Note 3 Acquisitions and Dispositions" in this Annual Report on Form 10-K. Unsecured Revolving Credit and Term Loan Facilities In March 2024, we closed on a $715.0 million, five-year unsecured credit agreement which consists of a $620.0 million revolver and a $95.0 million term loan facility, each of which mature on March 8, 2029, inclusive of the extension periods. See "Financial Statements — Note 5 Debt" in this Annual Report on Form 10-K for a summary of our unsecured revolving credit and term loan facilities. Financial Covenants As of December 31, 2024 , we were in compliance with the following financial covenants related to our unsecured facilities: Financial Covenant Required December 31, 2024 In Compliance Maximum total leverage < 60% 33.2 % Yes Maximum secured leverage < 40% 11.7 % Yes Minimum fixed charge coverage > 1.50x 2.8x Yes Minimum unencumbered interest coverage > 1.75x 4.6x Yes Maximum unsecured leverage < 60% 25.4 % Yes Mortgage Debt As of December 31, 2024, mortgage notes payable, net, amounted to $692.2 million. We have no mortgage debt maturity until April 2026. 37 In April 2024, we worked with the First Stamford Place mortgage lender to structure a consensual foreclosure. In May 2024, the First Stamford Place property was placed in receivership and accordingly, we reclassified the related debt and applicable accrued interest to debt associated with property under receivership and accrued interest associated with property in receivership, respectively, in our consolidated balance sheet. As of December 31, 2024, this debt consists of a $164.0 million mortgage loan bearing interest at 4.09% and a $11.9 million loan bearing interest at 6.25%. In connection with this we recorded a contract asset which represents the amount of obligation we expect to be released upon the final resolution of the foreclosure process on the First Stamford Place property. Subsequent to year end, in February 2025, title of the property was transferred to the mortgage lender and we were released of our mortgage obligation. In July 2024, we executed an agreement for the refinance of the mortgage for the Metro Center property that was due to mature in November 2024. Beginning in November 2024, the new loan balance of $71.6 million is interest-only at an interest rate of 3.59%, with a four-year term plus a one-year extension option. See "Financial Statements — Note 5 Debt" in this Annual Report on Form 10-K for more information on mortgage debt. Senior Unsecured Notes On June 17, 2024, we closed on the issuance and sale of an aggregate $225.0 million principal amount of notes, consisting of (a) $155.0 million aggregate principal amount of 7.20% Series I Green Guaranteed Senior Notes due June 17, 2029, (b) $45.0 million aggregate principal amount of 7.32% Series J Green Guaranteed Senior Notes due June 17, 2031 and (c) $25.0 million aggregate principal amount of 7.41% Series K Green Guaranteed Senior Notes due June 17, 2034. See "Financial Statements — Note 5 Debt" in this Annual Report on Form 10-K for more information on 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. In the evaluation of our level of indebtedness, ESRT's Board of Directors will consider a number of factors including the mix of recourse or non-recourse debt and cross-collateralized debt, mix of fixed or floating rate debt, and cost of leverage. 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. ESRT's overall leverage will depend on our mix of investments and the cost of leverage. ESRT's Board of Directors may from time to time modify our leverage policies in light of the then-current economic conditions, access to and 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). Office Properties (1)(2) Years Ended December 31, Total New Leases, Expansions, and Renewals (3) 2024 2023 2022 Number of leases signed (4) 102 85 133 Total square feet 1,300,584 960,192 1,176,172 Weighted average annualized cash rent per square foot for new and renewal leases executed during the year $ 70.07 $ 63.45 $ 58.06 Weighted average annualized cash rent per square foot for previous leases 66.44 57.95 55.43 Increase in mark-to-market rent $ 3.63 $ 5.50 $ 2.63 Leasing commission costs per square foot (5) $ 19.46 $ 19.51 $ 18.49 Tenant improvement costs per square foot (5) 55.98 79.30 51.92 Total leasing commissions and tenant improvement costs per square foot (5) $ 75.44 $ 98.81 $ 70.41 38 Retail Properties (2)(6) Years Ended December 31, Total New Leases, Expansions, and Renewals (3) 2024 2023 2022 Number of leases signed (4) 9 8 14 Total square feet 24,240 21,715 47,153 Weighted average annualized cash rent per square foot for new and renewal leases executed during the year $ 181.95 $ 148.89 $ 139.75 Weighted average annualized cash rent per square foot for previous leases 241.65 209.88 158.89 Decrease in mark-to-market rent $ (59.70) $ (60.99) $ (19.14) Leasing commission costs per square foot (5) $ 74.29 $ 54.62 $ 62.30 Tenant improvement costs per square foot (5) 35.87 38.57 55.13 Total leasing commissions and tenant improvement costs per square foot (5) $ 110.16 $ 93.19 $ 117.43 _______________ (1) Excludes an aggregate of 475,744, 498,682, and 499,012 rentable square feet of retail space in our Manhattan office properties in 2024, 2023 and 2022, respectively. (2) The tables above exclude our multifamily properties. (3) Beginning in 2024, the number of leases signed include "Early Renewals" which are leases signed over two years prior to the lease expiration. Amounts for number of leases signed, total square feet, leasing commission costs per square foot and tenant improvement costs per square foot have been adjusted to include the impact of early renewals for the twelve months ended December 31, 2023 and 2022. (4) Presents a renewed and expansion lease as one lease signed. (5) 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. (6) Includes an aggregate of 475,744, 498,682, and 499,012 rentable square feet of retail space in our Manhattan office properties in 2024, 2023 and 2022, respectively. (amounts in thousands) Years Ended December 31, Total Commercial Portfolio 2024 2023 2022 Capital expenditures (1) $ 72,899 $ 55,385 $ 38,445 _______________ (1) Includes all capital expenditures, excluding tenant improvements and leasing commission costs. As of December 31, 2024, we expect to incur additional costs relating to obligations under signed new leases of approximately $130.8 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 and other borrowings. 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 and borrowings. Distribution Policy We intend to distribute our net taxable income to our securityholders in a manner intended to satisfy REIT distribution requirements and to avoid U.S. federal income tax liability. Before we pay any distribution, whether for U.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 2024, 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 2022, 2023 and 2024 as follows (amounts in thousands): Year ended December 31, 2022 42,786 Year ended December 31, 2023 41,323 Year ended December 31, 2024 42,490 39 Stock and Publicly Traded Operating Partnership Unit Repurchase Program ESRT's Board of Directors authorized the repurchase of up to $500.0 million of ESRT Class A common stock and our Series ES, Series 250 and Series 60 operating partnership units from January 1, 2024 through December 31, 2025. Under the program, ESRT may purchase ESRT Class A common stock and we may purchase our Series ES, Series 250 and Series 60 operating partnership units in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by ESRT and us at our discretion and will be subject to stock price, availability, trading volume, general market conditions, and applicable securities laws. The authorization does not obligate ESRT or us to acquire any particular amount of securities, and the program may be suspended or discontinued at ESRT's and our discretion without prior notice. As of December 31, 2024, ESRT had $500.0 million remaining of the authorized repurchase amount. There were no repurchases of equity securities during the twelve months ended December 31, 2024. The following table summarizes our purchases of equity securities for the year ended December 31, 2024. Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plan Maximum Approximate Dollar Value Available for Future Purchase Year ended December 31, 2024 — $ — — $ 500,000,000 Cash Flows Comparison of Year Ended December 31, 2024 to the Year Ended December 31, 2023 Net cash . Cash and cash equivalents and restricted cash were $429.3 million and $407.0 million as of December 31, 2024 and 2023, respectively. The increase was primarily due to new financings in 2024 and changes in working capital less the cash used for the acquisition of a portfolio of retail assets on North 6th Street in Williamsburg, Brooklyn. Operating activities . Net cash provided by operating activities increased by $28.4 million to $260.9 million due to increased Observatory operating income, increased rental revenues in excess of property operating expenses and changes in working capital. Investing activities . Net cash used in investing activities increased by $319.8 million to $397.1 million primarily due to the acquisition of a portfolio of retail assets on North 6th Street in Williamsburg, Brooklyn and capital expenditures. Financing activities . Net cash provided by financing activities increased by $221.4 million to $158.6 million primarily due to the funding of senior unsecured notes during the year. Net Operating Income 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, impairment charges 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. The cost of funds is eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital which may have changed or may change in the future. Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our office or retail properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale which will usually change from period to period. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly-timed purchases or sales. We believe that eliminating these costs from net income is useful to investors because the resulting measure captures the actual revenue generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs. 40 However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, depreciation and amortization expense and gains or losses from the sale of properties, and other gains and losses as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net income which further limits its usefulness. NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income computed in accordance with GAAP and discussions elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations regarding 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: Years Ended December 31, (amounts in thousands) 2024 2023 2022 Net income $ 80,359 $ 84,407 $ 63,212 Add: General and administrative expenses 70,234 63,939 61,765 Depreciation and amortization 184,818 189,911 216,894 Interest expense 105,239 101,484 101,206 Interest expense associated with property in receivership 4,471 — — Loss on early extinguishment of debt 553 — — Income tax expense 2,688 2,715 1,546 Less: Gain on sale/disposition of properties (13,302) (26,764) (33,988) Third-party management and other fees (1,170) (1,351) (1,361) Interest income (21,298) (15,136) (4,948) Net operating income $ 412,592 $ 399,205 $ 404,326 Other Net Operating Income Data Straight-line rental revenue $ 11,283 $ 19,563 $ 24,562 Net increase in rental revenue from the amortization of above- and below-market lease assets and liabilities $ 2,177 $ 2,416 $ 4,758 Amortization of acquired below-market ground leases $ 7,831 $ 7,831 $ 7,831 Funds From Operations We present below a discussion of Funds From Operations ("FFO"). We compute FFO in accordance with the “White Paper” on FFO published by the National Association of Real Estate Investment Trusts, or NAREIT, which defines FFO as net income (loss) (determined in accordance with GAAP), excluding impairment write-off of investments in depreciable real estate and investments in in-substance real estate investments, gains or losses from debt restructurings and sales of depreciable operating properties, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs), less distributions to non-controlling interests and gains/losses from discontinued operations and after adjustments for unconsolidated partnerships and joint ventures. FFO is a widely recognized non-GAAP financial measure for REITs that we believe, when considered with financial statements determined in accordance with GAAP, is useful to investors in understanding financial performance and providing a relevant basis for comparison among REITs. In addition, we believe FFO is useful to investors as it captures features particular to real estate performance by recognizing that real estate has generally appreciated over time or maintains residual value to a much greater extent than do other depreciable assets. Investors should review FFO, along with GAAP net income, when trying to understand an equity REIT’s operating performance. We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results of operations, the utility of FFO as a measure of performance is limited. There can be no assurance that FFO presented by us is comparable to similarly titled measures of other REITs. FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. Although FFO is a measure used for 41 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 Funds From Operations ("Modified FFO") adds back an adjustment for any below-market ground lease amortization to traditionally defined FFO. We believe this is a useful supplemental measure in evaluating our operating performance due to the non-cash accounting treatment under GAAP, which stems from the third quarter 2014 acquisition of two option properties following our formation transactions as they carry significantly below market ground leases, the amortization of which is material to our overall results. We present Modified FFO because we believe it is an important supplemental measure of our operating performance in that it adds back the non-cash amortization of below-market ground leases. There can be no assurance that Modified FFO presented by us is comparable to similarly titled measures of other REITs. Modified FFO does not represent 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 adds back to Modified FFO the following items: Interest expense associated with property in receivership and loss on early extinguishment of debt. The Company believes Core FFO is an important supplemental measure of its operating performance because it excludes 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 our net income, the most directly comparable GAAP measure, to FFO, Modified FFO and Core FFO: Years Ended December 31, (amounts in thousands) 2024 2023 2022 Net income $ 80,359 $ 84,407 $ 63,212 Non-controlling interests in other partnerships (4) (68) 243 Private perpetual preferred unit distributions (4,201) (4,201) (4,201) Real estate depreciation and amortization 180,513 184,633 210,522 Gain on sale/disposition of properties (13,302) (26,764) (33,988) Funds from operations attributable to common stockholders and non-controlled interests 243,365 238,007 235,788 Amortization of below-market ground leases 7,831 7,831 7,831 Modified funds from operations attributable to common stockholders and non-controlled interests 251,196 245,838 243,619 Interest expense associated with property in receivership 4,471 — — Loss on early extinguishment of debt 553 — — Core funds from operations attributable to common stockholders and non-controlled interests $ 256,220 $ 245,838 $ 243,619 Weighted average shares and Operating Partnership units Basic 264,706 263,226 268,337 Diluted 269,019 265,633 269,948 Critical Accounting Estimates Goodwill Goodwill is tested annually for impairment and 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 42 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. We performed our annual goodwill testing in October 2024, where 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. 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, EBITDA 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. The quantitative analysis performed concluded the fair value of the 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. 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 the requisite 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" in this Annual Report on Form 10-K for information about recently issued and recently adopted accounting standards. 43