# Empire State Realty OP, L.P.: Form 10-Q for the period ended Sep 30, 2022

- Company: [Empire State Realty OP, L.P.](/companies/esba.md) (CIK 1553079)
- Form: 10-Q
- Filed: 2022-11-03
- Accepted by EDGAR: Nov 3, 2022, 11:29 ET
- Period: 2022-09-30
- Accession: 0001628280-22-028041
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1553079/000162828022028041/esrt-20220930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1553079/000162828022028041/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $183.7m | us-gaap:Revenues |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $545.8m | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2022-07-01 to 2022-09-30 | $15.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-01-01 to 2022-09-30 | $45.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | $35.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-09-30 | $88.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-07-01 to 2022-09-30 | $25.5m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-01-01 to 2022-09-30 | $75.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $1.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | $224.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $10.1m | us-gaap:ProfitLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | $41.6m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.03 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | $0.14 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.03 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | $0.14 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 267,121,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 270,966,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | $174.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-07-01 to 2022-09-30 | $18.7m | us-gaap:PaymentsToAcquireProductiveAssets |
| Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $71.1m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2022-01-01 to 2022-09-30 | $32.2m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2022-01-01 to 2022-09-30 | $82.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-09-30 | $387.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2022-09-30 | $4.20bn | us-gaap:Assets |
| Total liabilities | at 2022-09-30 | $2.53bn | us-gaap:Liabilities |

## Management's discussion and analysis

As filed, 43,185 characters.

*Unless the context otherwise requires or indicates, references in this section to “we,” “our,” and “us” refer to our company and its consolidated subsidiaries. The following discussion related to our consolidated financial statements should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2021.*

### FORWARD-LOOKING STATEMENTS

*This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (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 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, the COVID-19 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 COVID-19 pandemic; (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 such as the COVID-19 pandemic, geopolitical events, including global hostilities, currency exchange rates, and/or competition from recently opened observatories in New 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 our Metro 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, see the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and other risks described in documents subsequently filed by the Company from time to time with the Securities and Exchange Commission.*

*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 Quarterly*

*Report on Form 10-Q, 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

Empire State Realty OP, L.P. is the entity through which ESRT, a self-administered and self-managed REIT, conducts all of its business and owns (either directly or through subsidiaries) substantially all of its assets. We own and manage office, retail and multifamily assets in Manhattan and the greater New York metropolitan area. As the owner of the Empire State Building, the World’s Most Famous Building, ESRT also owns and operates its iconic, newly reimagined Observatory Experience.

Highlights for the three months ended September 30, 2022

- Incurred net income attributable to common unitholders of $9.1 million and achieved Core Funds From Operations attributable to common unitholders ("Core FFO") of $56.5 million.
- Total commercial portfolio 88.5% leased, New York City office portfolio 89.4% leased.
- Signed a total of 335,382 rentable square feet of new, renewal, and expansion leases.
- Empire State Building Observatory generated $24.5 million of net operating income for the third quarter 2022.
- ESRT repurchased $20.1 million of its common stock in the third quarter of 2022 and through October 24, 2022.

### Results of Operations

### Overview

The discussion below relates to our financial condition and results of operations for the three months ended September 30, 2022 and 2021, respectively.

### Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021

The following table summarizes our historical results of operations for the three months ended September 30, 2022 and 2021 (amounts in thousands):

| Revenues: | Three Months Ended September 30, 2022 | 2021 | Change% |  |
| --- | ---: | ---: | ---: | ---: |
| Rental revenue | $148,290 | $139,558 | $8,732 | 6.3% |
| Observatory revenue | 33,051 | 12,796 | 20,255 | 158.3% |
| Lease termination fees | — | 11,321 | (11,321) | (100.0)% |
| Third-party management and other fees | 389 | 314 | 75 | 23.9% |
| Other revenues and fees | 1,982 | 1,059 | 923 | 87.2% |
| Total revenues | 183,712 | 165,048 | 18,664 | 11.3% |
| Operating expenses: |  |  |  |  |
| Property operating expenses | 42,798 | 33,357 | (9,441) | (28.3)% |
| Ground rent expenses | 2,331 | 2,331 | — | —% |
| General and administrative expenses | 15,725 | 14,427 | (1,298) | (9.0)% |
| Observatory expenses | 8,516 | 6,370 | (2,146) | (33.7)% |
| Real estate taxes | 31,831 | 29,566 | (2,265) | (7.7)% |
| Depreciation and amortization | 46,984 | 65,794 | 18,810 | 28.6% |
| Total operating expenses | 148,185 | 151,845 | 3,660 | 2.4% |
| Operating income | 35,527 | 13,203 | 22,324 | 169.1% |
| Other income (expense): |  |  |  |  |
| Interest income | 1,564 | 211 | 1,353 | 641.2% |
| Interest expense | (25,516) | (23,577) | (1,939) | (8.2)% |
| Income (loss) before income taxes | 11,575 | (10,163) | 21,738 | 213.9% |
| Income tax (expense) benefit | (1,457) | (20) | (1,437) | (7,185.0)% |
| Net income (loss) | 10,118 | (10,183) | 20,301 | 199.4% |
| Private perpetual preferred unit distributions | (1,050) | (1,050) | — | —% |
| Net loss attributable to non-controlling interests in other partnerships | 49 | — | 49 | 100.0% |
| Net income (loss) attributable to common unitholders | $9,117 | $(11,233) | $20,350 | 181.2% |

### Rental Revenue

The increase in rental revenue reflects the inclusion of revenue from our multifamily properties which were acquired on December 22, 2021.

### Observatory Revenue

Observatory revenues were higher driven by increased visitation.

### Other Revenues and Fees

The increase in other revenues and fees was due to higher food and beverage sales, parking income and bad debt recovery income.

### Property Operating Expenses

The increase in property operating expenses reflects higher payroll, utilities, cleaning and other operating expenses, and the inclusion of operating expenses from our recently acquired multifamily properties.

### General and Administrative Expenses

The increase in general and administrative expenses reflects higher equity compensation and payroll costs, information technology costs and professional fees.

### 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.

### Real Estate Taxes

Higher real estate taxes primarily attributable to the inclusion of real estate taxes from our recently acquired multifamily properties.

### Depreciation and Amortization

The decrease in depreciation and amortization reflects write-offs primarily related to one tenant in the third quarter 2021.

### Interest Income

The increase reflects higher interest rates in the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

### Interest Expense

The increase was primarily attributable to interest expense from our recently acquired multifamily properties, partially offset by the cancellation of debt from 383 Main Avenue, Norwalk CT.

### Income Taxes

The increase in income tax expense was attributable to higher net operating income for the observatory segment.

### Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021

The following table summarizes our historical results of operations for the nine months ended September 30, 2022 and 2021 (dollars in thousands):

| Revenues: | Nine Months Ended September 30, 2022 | 2021 | Change% |  |
| --- | ---: | ---: | ---: | ---: |
| Rental revenue | $445,143 | $420,586 | $24,557 | 5.8% |
| Observatory revenue | 73,660 | 23,758 | 49,902 | 210.0% |
| Lease termination fees | 20,032 | 15,949 | 4,083 | 25.6% |
| Third-party management and other fees | 1,025 | 917 | 108 | 11.8% |
| Other revenues and fees | 5,908 | 2,550 | 3,358 | 131.7% |
| Total revenues | 545,768 | 463,760 | 82,008 | 17.7% |
| Operating expenses: |  |  |  |  |
| Property operating expenses | 118,875 | 92,429 | (26,446) | (28.6)% |
| Ground rent expenses | 6,994 | 6,994 | — | —% |
| General and administrative expenses | 45,287 | 42,369 | (2,918) | (6.9)% |
| Observatory expenses | 22,507 | 16,226 | (6,281) | (38.7)% |
| Real estate taxes | 91,637 | 92,367 | 730 | 0.8% |
| Depreciation and amortization | 172,394 | 155,339 | (17,055) | (11.0)% |
| Total operating expenses | 457,694 | 405,724 | (51,970) | (12.8)% |
| Operating income | 88,074 | 58,036 | 30,038 | 51.8% |
| Other income (expense): |  |  |  |  |
| Interest income | 2,144 | 497 | 1,647 | 331.4% |
| Interest expense | (75,572) | (70,553) | (5,019) | (7.1)% |
| Loss on early extinguishment of debt | — | (214) | 214 | 100.0% |
| Gain on disposition of property | 27,170 | — | 27,170 | 100.0% |
| Income (loss) before income taxes | 41,816 | (12,234) | 54,050 | 441.8% |
| Income tax (expense) benefit | (224) | 3,271 | (3,495) | (106.8)% |
| Net income (loss) | 41,592 | (8,963) | 50,555 | 564.0% |
| Private perpetual preferred unit distributions | (3,151) | (3,151) | — | —% |
| Net loss attributable to non-controlling interests in other partnerships | 271 | — | 271 | 100.0% |
| Net income (loss) attributable to common unitholders | $38,712 | $(12,114) | $50,826 | 419.6% |

### Rental Revenue

The increase in rental revenue reflects the inclusion of revenue from our multifamily properties which were acquired on December 22, 2021.

### Observatory Revenue

Observatory revenues were higher driven by increased visitation.

### 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.

### Property Operating Expenses

The increase in property operating expenses reflects higher payroll, utilities, repairs and maintenance costs, cleaning and other operating expenses, and the inclusion of operating expenses from our recently acquired multifamily properties.

### General and Administrative Expenses

The increase in general and administrative expenses reflects higher equity compensation and payroll costs, information technology costs and professional fees.

### 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.

### 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 recently acquired multifamily properties.

### Interest Income

The increase reflects higher interest rates in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

### Interest Expense

The increase was primarily attributable to interest expense from our recently acquired multifamily properties, partially offset by the cancellation of debt from 383 Main Avenue, Norwalk CT.

### Income Taxes

The increase in income tax expense was attributable to higher net operating income for the observatory segment.

### Gain on disposition of property

Represents a gain on the transfer of 383 Main Avenue, Norwalk CT, which was encumbered by a $30.0 million mortgage, back to the lender in a consensual foreclosure.

### 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 Internal Revenue Code of 1986 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.

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 and 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.

At September 30, 2022, we had $387.2 million available in cash and cash equivalents, and $850 million available under our unsecured revolving credit facility.

As of September 30, 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 6.7 years. As of September 30, 2022, excluding principal amortization, we have no outstanding debt maturing until November 2024.

### 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.

### Mortgage Debt

As of September 30, 2022, our consolidated mortgage notes payable amounted to $933.1 million. The first maturity is in November 2024. See "Financial Statements - Note 5. Debt" 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. It also requires 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 agreements also contain 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 September 30, 2022, we were in compliance with the covenants under the outstanding senior unsecured notes.

### Financial Covenants

As of September 30, 2022, we were in compliance with the following financial covenants:

| Financial covenant | Required | September 30, 2022 | In Compliance |
| --- | --- | ---: | --- |
| Maximum total leverage | \< 60% | 39.0% | Yes |
| Maximum secured leverage | \< 40% | 15.6% | Yes |
| Minimum fixed charge coverage | \> 1.50x | 2.6x | Yes |
| Minimum unencumbered interest coverage | \> 1.75x | 4.7x | Yes |
| Maximum unsecured leverage | \< 60% | 28.5% | Yes |

### 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.

### Capital Expenditures

The following tables summarize our leasing commission costs, tenant improvement costs and our capital expenditures for each of the periods presented (dollars in thousands, except per square foot amounts).

### Office Properties(1)

| Total New Leases, Expansions, and Renewals | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Number of leases signed(2) | 103 | 88 |
| Total square feet | 928,598 | 614,328 |
| Leasing commission costs per square foot(3) | $19.14 | $17.10 |
| Tenant improvement costs per square foot(3) | 59.20 | 59.80 |
| Total leasing commissions and tenant improvement costs per square foot(3) | $78.34 | $76.90 |

### Retail Properties(4)

| Total New Leases, Expansions, and Renewals | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Number of leases signed(2) | 12 | 7 |
| Total square feet | 45,655 | 16,382 |
| Leasing commission costs per square foot(3) | $59.85 | $42.88 |
| Tenant improvement costs per square foot(3) | 53.97 | 36.18 |
| Total leasing commissions and tenant improvement costs per square foot(3) | $113.82 | $79.06 |

(1) Excludes an aggregate of 497,235 and 504,284 rentable square feet of retail space in our Manhattan office properties in 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 497,235 and 504,284 rentable square feet of retail space in our Manhattan office properties in 2022 and 2021, respectively. Excludes the Empire State Building broadcasting licenses and observatory operations.

| Total Portfolio | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Capital expenditures (1) | $28,823 | $15,552 |

(1) Excludes tenant improvements and leasing commission costs.

As of September 30, 2022, we expect to incur additional costs relating to obligations under existing lease agreements of approximately $117.9 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, additional property level mortgage financings and borrowings under the unsecured revolving credit facility.

Capital expenditures are considered part of both our short-term and long-term liquidity requirements. We intend to fund capital improvements through a combination of operating cash flow, cash on hand and borrowings under the unsecured revolving credit facility.

### Off-Balance Sheet Arrangements

As of September 30, 2022, we did not have any off-balance sheet arrangements.

### 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 U.S. federal income tax liability on our income.

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.

### Distribution to Equity Holders

Distributions and dividends amounting to $32.2 million and $22.6 million have been made to equity holders for the nine months ended September 30, 2022 and 2021, respectively.

### Stock and Publicly Traded Operating Partnership Unit Repurchase Program

ESRT's Board of Directors authorized the repurchase of up to $500 million of ESRT Class A common stock and the Operating Partnership’s Series ES, Series 250 and Series 60 operating partnership units through December 31, 2023. 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 and general market conditions. 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 and our discretion without prior notice. See "Financial Statements - Note 10. Capital" for a summary of ESRT's purchases of equity securities in each of the three months ended September 30, 2022.

### Cash Flows

### Comparison of Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021

*Net cash*. Cash and cash equivalents and restricted cash were $439.8 million and $621.0 million, respectively, as of September 30, 2022 and 2021. The decrease was primarily due to the acquisition of real estate property at the end of 2021 and higher spending for capital expenditures, higher repurchases of common shares and higher dividends paid in 2022.

*Operating activities*. Net cash provided by operating activities increased by $7.0 million to $174.0 million.

*Investing activities*. Net cash used in investing activities increased by $18.3 million to $89.1 million due to higher capital expenditures.

*Financing activities*. Net cash used in financing activities increased by $76.5 million to $119.7 million primarily due to higher repurchases of common shares and higher dividends and distributions.

### Net Operating Income ("NOI")

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 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 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):

*(unaudited)*

*(unaudited)*

|  | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $10,118 | $(10,183) | $41,592 | $(8,963) |
| Add: |  |  |  |  |
| General and administrative expenses | 15,725 | 14,427 | 45,287 | 42,369 |
| Depreciation and amortization | 46,984 | 65,794 | 172,394 | 155,339 |
| Interest expense | 25,516 | 23,577 | 75,572 | 70,553 |
| Loss on early extinguishment of debt | — | — | — | 214 |
| Income tax expense (benefit) | 1,457 | 20 | 224 | (3,271) |
| Less: |  |  |  |  |
| Gain on disposition of property | — | — | (27,170) | — |
| Third-party management and other fees | (389) | (314) | (1,025) | (917) |
| Interest income | (1,564) | (211) | (2,144) | (497) |
| **Net operating income** | $97,847 | $93,110 | $304,730 | $254,827 |
| **Other Net Operating Income Data** |  |  |  |  |
| Straight-line rental revenue | $7,341 | $3,087 | $18,533 | $13,197 |
| Net increase in rental revenue from the amortization of above-and below-market lease assets and liabilities | $677 | $4,244 | $4,136 | $5,615 |
| Amortization of acquired below-market ground leases | $1,957 | $1,957 | $5,873 | $5,873 |

### 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 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 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: IPO litigation expense, severance expenses and loss on early extinguishment of debt. The company believes Core FFO is an important supplemental measure of its operating performance because 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 our net income, the most directly comparable GAAP measure, to FFO, Modified FFO and Core FFO for the periods presented (amounts in thousands):

*(unaudited)*

*(unaudited)*

|  | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $10,118 | $(10,183) | $41,592 | $(8,963) |
| Noncontrolling interests in other partnerships | 49 | — | 271 | — |
| Private perpetual preferred unit distributions | (1,050) | (1,050) | (3,151) | (3,151) |
| Real estate depreciation and amortization | 45,461 | 64,565 | 167,446 | 151,149 |
| Gain on disposition of property | — | — | (27,170) | — |
| **FFO attributable to common unitholders** | 54,578 | 53,332 | 178,988 | 139,035 |
| Amortization of below-market ground leases | 1,957 | 1,957 | 5,873 | 5,873 |
| **Modified FFO attributable to common unitholders** | 56,535 | 55,289 | 184,861 | 144,908 |
| Loss on early extinguishment of debt | — | — | — | 214 |
| **Core FFO attributable to common unitholders** | $56,535 | $55,289 | $184,861 | $145,122 |
| **Weighted average Operating Partnership units** |  |  |  |  |
| Basic | 266,035 | 277,716 | 269,880 | 277,829 |
| Diluted | 267,121 | 277,716 | 270,966 | 277,829 |

### Factors That May Influence Future Results of Operations

### Portfolio Transaction Activity

Subsequent to September 30, 2022, we entered into agreements to sell 500 Mamaroneck Avenue in Harrison, NY and 10 Bank Street in White Plains, NY at a gross asset valuation of $95.0 million. These transactions are expected to close in the first quarter of 2023, subject to customary closing conditions.

### Leasing

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 of September 30, 2022, there were approximately 1.1 million rentable square feet of space in our portfolio available to lease (excluding leases signed but not yet commenced) representing 11.5% of the net rentable square footage of the properties in our portfolio. In addition, leases representing 1.4% and 5.5% of net rentable square footage of the properties in our portfolio will expire in 2022 and in 2023, respectively. These leases are expected to represent approximately 1.6% and 6.4%, 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.

Despite the challenge of the uncertain near-term environment, we continue to believe that as we have largely completed the redevelopment and repositioning of our properties we will, over the long-term, experience increased occupancy levels and rental revenues. Over the short-term, as we renovate and reposition our properties, including aggregating smaller spaces to offer large blocks of space, we may experience lower occupancy levels as a result of having to relocate tenants to alternative space and the strategic expiration of existing leases. We believe that despite the short-term lower occupancy levels we may experience, we will continue to obtain better quality tenants, whom have higher likelihood for growth within the portfolio, following the redevelopment and repositioning of our properties.

### Observatory Operations

For the three months ended September 30, 2022, the observatory hosted 687,000 visitors, compared to 255,000 visitors for the same period in 2021. Our return of attendance to pre-COVID-19 levels is closely tied to national and international travel trends and these remain adversely impacted by developments around the COVID-19 pandemic.

Observatory revenue for the three months ended September 30, 2022 was $33.1 million, compared to $12.8 million for the three months ended September 30, 2021. Observatory revenues and admissions are dependent upon the following: (i) the number of tourists (domestic and international) who come to New 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.

### Critical Accounting Estimates

Refer to our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of our critical accounting estimates. There were no material changes to our critical accounting estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

## Market risk

As filed, 2,292 characters.

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. We are exposed to interest rate changes primarily on our unsecured revolving credit facility and debt refinancings. In order to mitigate our interest rate risk, we may borrow at fixed rates or may enter into derivative financial instruments such as interest rate swaps or caps on floating rate financial instruments. We are not subject to foreign currency risk and we do not enter into derivative or interest rate transactions for speculative purposes.

As of September 30, 2022, we have interest rate LIBOR swap and cap agreements and SOFR swap agreements with an aggregate notional value of $576.3 million and which mature between October 1, 2024 and November 1, 2033. These "variable to fixed" interest rate swaps have been designated as cash flow hedges and are deemed highly effective with fair values of $18.5 million which is included in prepaid assets and other expenses on the condensed consolidated balance sheet as of September 30, 2022. Given the phasing out of LIBOR, we have entered into SOFR swap agreements to begin the replacement of our LIBOR swap agreements. We will continue to work with our lenders and counterparties to replace or modify, as appropriate, the interest rate provisions in our other LIBOR swap and cap agreements.

As of September 30, 2022, the weighted average interest rate on the $2.3 billion of fixed-rate indebtedness outstanding was 3.9% per annum, with maturities at various dates through March 17, 2035.

As of September 30, 2022, the fair value of our outstanding debt was approximately $2.1 billion, which was approximately $215.0 million less than the book value as of such date. Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

## Controls and procedures

As filed, 2,332 characters.

### Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations and that such information is accumulated and communicated to management, including ESRT's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of September 30, 2022, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of ESRT management, including ESRT's Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures at the end of the period covered by this report. Based on the foregoing, ESRT's Chief Executive Officer and Chief Financial Officer concluded, as of that time, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including ESRT's Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

No changes to our internal control over financial reporting were identified in connection with the evaluation referenced above that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 175 characters.

There have been no material changes to the risk factors included in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.

Filed Nov 3, 2022.
Source: SEC EDGAR, the filing index for accession 0001628280-22-028041. Last ingested by Listed: Nov 2, 2026, 20:18 ET. No prices; not investment advice.