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, 2023 and 2022 and for the years ended December 31, 2023, 2022 and 2021 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, 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. 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 and future events to differ materially from those set forth 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 use or compliance with a 1031 exchange program; and (xviii) 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 2023 Highlights • Net income attributable to the Company of $80.1 million. • Core FFO of $245.8 million. • Signed a total of 950,746 rentable square feet of new, renewal and expansion leases. • Completed the acquisition of a retail asset located i n Williamsburg, Brooklyn in the third quarter. 35 • Completed the dispositions of retail assets located in Westport, Connecticut in the first quarter, and an office asset located in Harrison, New York in the second quarter. Results of Operations Overview The discussion below relates to the financial condition and results of operations for the years ended December 31, 2023 and 2022. For a discussion of our 2021 financial results as compared to our 2022 financial results, please see our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022 The following table summarizes the historical results of operations for the years ended December 31, 2023 and 2022 (amounts in thousands) : Years Ended December 31, 2023 2022 Change % Real Estate Segment Observatory Segment Total Real Estate Segment Observatory Segment Total Revenues: Rental revenue $ 597,319 $ — $ 597,319 $ 591,048 $ — $ 591,048 $ 6,271 1.1 % Observatory revenue — 129,366 129,366 — 105,978 105,978 23,388 22.1 % Lease termination fees — — — 20,032 — 20,032 (20,032) (100.0) % Third-party management and other fees 1,351 — 1,351 1,361 — 1,361 (10) (0.7) % Other revenues and fees 11,536 — 11,536 8,622 — 8,622 2,914 33.8 % Total revenues 610,206 129,366 739,572 621,063 105,978 727,041 12,531 1.7 % Operating expenses: Property operating expenses 167,324 — 167,324 157,935 — 157,935 (9,389) (5.9) % Ground rent expenses 9,326 — 9,326 9,326 — 9,326 — — % General and administrative expenses 63,939 — 63,939 61,765 — 61,765 (2,174) (3.5) % Observatory expenses — 35,265 35,265 — 31,036 31,036 (4,229) (13.6) % Real estate taxes 127,101 — 127,101 123,057 — 123,057 (4,044) (3.3) % Depreciation and amortization 189,762 149 189,911 216,707 187 216,894 26,983 12.4 % Total operating expenses 557,452 35,414 592,866 568,790 31,223 600,013 7,147 1.2 % Operating income 52,754 93,952 146,706 52,273 74,755 127,028 19,678 15.5 % Intercompany rent income (expense) 80,514 (80,514) — 65,005 (65,005) — — — % Other income (expense): Interest income 14,936 200 15,136 4,901 47 4,948 10,188 205.9 % Interest expense (101,484) — (101,484) (101,206) — (101,206) (278) (0.3) % Gain on sale/disposition of properties 26,764 — 26,764 33,988 — 33,988 (7,224) (21.3) % Income before income taxes 73,484 13,638 87,122 54,961 9,797 64,758 22,364 34.5 % Income tax expense (552) (2,163) (2,715) (584) (962) (1,546) (1,169) (75.6) % Net income 72,932 11,475 84,407 54,377 8,835 63,212 21,195 33.5 % Private perpetual preferred unit distributions (4,201) — (4,201) (4,201) — (4,201) — — % Net (income) loss attributable to non-controlling interests $ (68) $ — (68) $ 243 $ — 243 (311) (128.0) % Net income attributable to common unit holders $ 68,663 $ 11,475 $ 80,138 $ 50,419 $ 8,835 $ 59,254 $ 20,884 35.6 % Real Estate Segment Rental Revenue The increase in rental revenue was primarily attributable to a $13.7 million increase in base rent from new or renewed tenants and higher rents and higher tenant escalations, partially offset by a net $7.4 million decrease in revenue from our recent transaction activity as disclosed in "Financial Statements - Note 3. Acquisitions and Dispositions" in this Annual Report on Form 10-K. 36 Other Revenues and Fees The increase in other revenues and fees relates to prior period real estate tax refunds and abatements, and bad debt recovery income during the year ended December 31, 2023. Property Operating Expenses The increase in property operating expenses was primarily due to higher repair and maintenance costs, higher cleaning costs, and higher payroll costs in 2023 relating to increased building utilization. Real Estate Taxes The increase in real estate taxes was primarily attributable to a $4.5 million increase in real estate tax expense due to higher assessed values for multiple properties, partially offset by a net $0.5 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, 2023 than for the year ended December 31, 2022 because the latter included accelerated depreciation from the disposition of 383 Main Avenue and depreciation expense on properties that were sold prior to December 31, 2023. Interest Income The increase in interest income reflects higher interest rates on larger cash balances in the year ended December 31, 2023 compared to the year ended December 31, 2022. Gain on Sale/Disposition of Property 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. The gain on disposition activity for the year ended December 31, 2022 relates to the dispositions of 10 Bank Street in White Plains, New York in December 2022 and 383 Main Avenue in Norwalk, Connecticut in April 2022. Observatory Segment Observatory Revenue Observatory revenues were higher driven by increased visitation and revenue per visitor during the year ended December 31, 2023 as compared to the year ended December 31, 2022. Observatory Expenses The increase in O bservatory expenses was driven by increased operating hours, which increased variable costs such as marketing, labor and maintenance costs. Income Taxes The increase in income tax expense was attributable to higher taxable income for the Observatory segment for the year ended December 31, 2023. 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, 37 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. 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, 2023, we had approximately $346.6 million available in cash and cash equivalents and there was $850.0 million available under our unsecured revolving credit facility. At December 31, 2023, we had approximately $2.2 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 3.9% and a weighted average maturity of 5.4 years. As of December 31, 2023, excluding debt amortization, we have a debt maturity of $77.7 million in November 2024, $315.0 million in 2025, $225.0 million in 2026, $319.0 million in 2027 and $1.3 billion thereafter. As of December 31, 2023, interest expense obligations and debt amortization from 2024 through 2028 and thereafter amount to $487.4 million and $51.6 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 $68.3 million as of December 31, 2023, of which $7.5 million is due within the next five years. Portfolio Transaction Activity On February 1, 2023, we closed on the sale of 69-97 and 103-107 Main Street in Westport, Connecticut at a gross asset valuation of $40.0 million. Refer to "Financial Statements - Note 11 Related Party Transactions" in this Annual Report on Form 10-K. On April 5, 2023, we closed on the sale of 500 Mamaroneck Avenue in Harrison, New York at a gross asset valuation of $53.0 million. On September 14, 2023, we closed on the acquisition of a Williamsburg retail property located on the corner of North 6 th Street and Wythe Avenue in Brooklyn, New York, for a purchase price of $26.4 million. Refer to "Financial Statements - Note 3 Acquisitions and Dispositions" in this Annual Report on Form 10-K. Unsecured Revolving Credit and Term Loan Facilities 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, 2023, we were in compliance with the following financial covenants related to our unsecured facilities: 38 Financial Covenant Required December 31, 2023 In Compliance Maximum total leverage < 60% 31.5 % Yes Maximum secured leverage < 40% 12.3 % Yes Minimum fixed charge coverage > 1.50x 3.3x Yes Minimum unencumbered interest coverage > 1.75x 5.7x Yes Maximum unsecured leverage < 60% 23.4 % Yes Mortgage Debt As of December 31, 2023, mortgage notes payable, net, amounted to $877.4 million. The next mortgage debt maturity is November 2024. See "Financial Statements - Note 5 Debt" in this Annual Report on Form 10-K for more information on mortgage debt. Senior Unsecured Notes The terms of the senior unsecured notes include customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. The 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 of December 31, 2023, 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 of Directors has not adopted a policy that limits the total amount of indebtedness that we may incur, we anticipate that ESRT's Board of Directors 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. ESRT's Board of Directors 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). Office Properties (1)(5) Years Ended December 31, Total New Leases, Expansions, and Renewals 2023 2022 2021 Number of leases signed (2) 82 130 118 Total square feet 929,031 1,071,426 983,182 Leasing commission costs per square foot (3) $ 19.80 $ 18.23 $ 20.14 Tenant improvement costs per square foot (3) 81.86 56.72 66.25 Total leasing commissions and tenant improvement costs per square foot (3) $ 101.66 $ 74.95 $ 86.39 Retail Properties (4)(5) 39 Years Ended December 31, Total New Leases, Expansions, and Renewals 2023 2022 2021 Number of leases signed (2) 8 14 11 Total Square Feet 21,715 47,153 22,448 Leasing commission costs per square foot (3) $ 54.62 $ 62.30 $ 57.27 Tenant improvement costs per square foot (3) 38.57 55.13 61.75 Total leasing commissions and tenant improvement costs per square foot (3) $ 93.19 $ 117.43 $ 119.02 _______________ (1) Excludes an aggregate of 498,682, 499,012 and 507,276 rentable square feet of retail space in our Manhattan office properties in 2023, 2022 and 2021, 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 498,682, 499,012 and 507,276 rentable square feet of retail space in our Manhattan office properties in 2023, 2022 and 2021, respectively. Excludes the Empire State Building broadcasting licenses and Observatory operations. (5) The tables above exclude our multifamily properties. Years Ended December 31, 2023 2022 2021 Total Commercial Portfolio Capital expenditures (1) $ 55,385 $ 38,445 $ 24,279 _______________ (1) Includes all capital expenditures, excluding tenant improvements and leasing commission costs. As of December 31, 2023, we expect to incur additional costs relating to obligations under signed new leases of approximately $101.2 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 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. Off-Balance Sheet Arrangements As of December 31, 2023, we did not have any off-balance sheet arrangements. 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 2023, 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 2021, 2022 and 2023 as follows (amounts in thousands): Year ended December 31, 2021 32,764 Year ended December 31, 2022 42,786 Year ended December 31, 2023 41,323 40 Stock and Publicly Traded Operating Partnership Unit Repurchase Program ESRT's Board of Directors authorized the repurchase of up to $500 million of ESRT's Class A common stock and our Series ES, Series 250 and Series 60 operating partnership units during the period from January 1, 2022 through December 31, 2023. Upon expiration of this program, ESRT's Board of Directors authorized the repurchase of up to $500 million of ESRT's Class A common stock and our Series ES, Series 250 and Series 60 operating partnership units during the period from January 1, 2024 through December 31, 2025. Under the program, ESRT may purchase its 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. At December 31, 2023, ESRT had used approximately $103.3 million of the authorized repurchase amount for the 2022-2023 period. The following table summarizes our purchases of equity securities for the year ended December 31, 2023 under the previous repurchase program. 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, 2023 2,150,857 $ 6.09 2,150,857 $500,000,000 (a) (a) Represents the new board authorization for the January 1, 2024 - December 31, 2025 period. As of the date of this filing, we have used $0 of such $500 million authorization. Cash Flows Comparison of Year Ended December 31, 2023 to the Year Ended December 31, 2022 Net cash . Cash and cash equivalents and restricted cash were $407.0 million and $314.7 million as of December 31, 2023 and 2022, respectively. The increase was primarily due to net proceeds from the disposition of 500 Mamaroneck in April 2023 and 69-97 and 103-107 Main Street in February 2023 and from less share repurchase activity during the year ended December 31, 2023. We also had less acquisition activity in the year ended December 31, 2023 as compared with the year ended December 31, 2022. Operating activities . Net cash provided by operating activities increased by $21.3 million to $232.5 million due to increased Observatory operating income and changes in working capital. Investing activities . Net cash used in investing activities decreased by $153.6 million to $77.3 million primarily due to the net proceeds from the disposition of 500 Mamaroneck in April 2023 and 69-97 and 103-107 Main Street in February 2023. We also had less acquisition activity in the year ended December 31, 2023 as compared with the year ended December 31, 2022. Financing activities . Net cash used in financing activities decreased by $80.9 million to $62.9 million primarily due to lower repurchases of common shares in 2023. Net Operating Income 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 41 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. 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 for the periods presented (amounts in thousands): Years Ended December 31, 2023 2022 2021 Net income (loss) $ 84,407 $ 63,212 $ (13,037) Add: General and administrative expenses 63,939 61,765 55,947 Depreciation and amortization 189,911 216,894 201,806 Interest expense 101,484 101,206 94,394 Loss on early extinguishment of debt — — 214 Income tax expense (benefit) 2,715 1,546 (1,734) Impairment charges — — 7,723 Less: Gain on sale/disposition of properties (26,764) (33,988) — Interest income (15,136) (4,948) (704) Third-party management and other fees (1,351) (1,361) (1,219) Net operating income $ 399,205 $ 404,326 $ 343,390 Other Net Operating Income Data Straight line rental revenue $ 19,563 $ 24,562 $ 21,078 Net increase in rental revenue from the amortization of above and below-market lease assets and liabilities $ 2,416 $ 4,758 $ 5,895 Amortization of acquired below-market ground leases $ 7,831 $ 7,831 $ 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 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 42 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 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 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") Core FFO adds back to Modified FFO the following item: 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 (loss), the most directly comparable GAAP measure, to FFO, Modified FFO and Core FFO for the periods presented (amounts in thousands): Years Ended December 31, 2023 2022 2021 Net income (loss) $ 84,407 $ 63,212 $ (13,037) Non-controlling interests in other partnerships (68) 243 — Private perpetual preferred unit distributions (4,201) (4,201) (4,201) Real estate depreciation and amortization 184,633 210,522 196,360 Impairment charges — — 7,723 Gain on sale/disposition of properties (26,764) (33,988) — Funds from operations attributable to common stockholders and non-controlled interests 238,007 235,788 186,845 Amortization of below-market ground leases 7,831 7,831 7,831 Modified funds from operations attributable to common stockholders and non-controlled interests 245,838 243,619 194,676 Loss on early extinguishment of debt — — 214 Core funds from operations attributable to common stockholders and non-controlled interests $ 245,838 $ 243,619 $ 194,890 Weighted average shares and Operating Partnership units Basic 263,226 268,337 277,420 Diluted 265,633 269,948 277,420 43 Critical Accounting Estimates Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements, have been prepared in conformity with GAAP and with the rules and regulations of the Securities and Exchange Commission (the "SEC"), represent our assets and liabilities and operating results. The consolidated financial statements include our accounts and our partially owned and wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. We consolidate entities in which we have a controlling financial interest. In determining whether we have a controlling financial interest in a partially owned entity and the requirement to consolidate the accounts of that entity, we consider factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members. For variable interest entities ("VIE"), we consolidate the entity if we are deemed to have a variable interest in the entity and through that interest we are deemed the primary beneficiary. The primary beneficiary of a VIE is the entity that has (i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. The primary beneficiary is required to consolidate the VIE. At December 31, 2022, we were the primary beneficiary of a variable interest in the intermediary entity which held title to 298 Mulberry Street, the multifamily asset acquired in December 2022. The intermediary entity was utilized to execute a like-kind exchange and subsequent to March 31, 2023, the like-kind exchange was completed and we took title to 298 Mulberry Street. Therefore, we had no VIEs at December 31, 2023. 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 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 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 2023, 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. 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 with ESRT Observatory TRS, L.L.C., our subsidiary that holds our Observatory operations, to treat ESRT Observatory TRS, L.L.C. as a taxable REIT subsidiary, and ESRT has elected, together with ESRT Holdings TRS, L.L.C., our subsidiary that holds our third-party management, restaurant, cafeterias, health clubs and certain 44 cleaning operations, to treat ESRT 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 consolidated 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 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 of December 31, 2023, ESRT had $103.0 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 of December 31, 2023, 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 $1.5 million of federal NOL carryforward that may be used to offset future taxable income, if any. The federal NOL may be carried forward indefinitely. 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 of December 31, 2023 and 2022, we do not have a liability for uncertain tax positions. As of December 31, 2023, the tax years ended December 31, 2020 through December 31, 2023 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 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. 45