EMPIRE STATE REALTY OP, L.P. 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 endedDecember 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 inNew York City , any or all of which may cause a decline in Observatory visitors; (viii) defaults on, early terminations of, or non-renewal of, leases by tenants; (ix) increases in the Company's borrowing costs as a result of changes in interest rates and other factors, including the current phasing out of LIBOR; (x) declining real estate valuations and impairment charges; (xi) termination of our ground leases; (xii) changes in our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due and potential limitations on our ability to borrow additional funds in compliance with drawdown conditions and financial covenants; (xiii) decreased rental rates or increased vacancy rates; (xiv) our failure to execute any newly planned capital project successfully or on the anticipated timeline or budget; (xv) difficulties in identifying and completing acquisitions; (xvi) risks related to any development project (including ourMetro Tower potential development site); (xvii) impact of changes in governmental regulations, tax laws and rates and similar matters; (xviii) our failure to qualify as a REIT; (xix) environmental uncertainties and risks related to climate change, adverse weather conditions, rising sea levels and natural disasters; (xx) incurrence of taxable capital gain on disposition of an asset due to failure of use or compliance with a 1031 exchange program; and (xxi) accuracy of our methodologies and estimates regarding ESG metrics and goals, tenant willingness and ability to collaborate in reporting ESG metrics and meeting ESG goals, and impact of governmental regulation on our ESG efforts. For a further discussion of these and other factors that could impact the Company's future results, see the section entitled "Risk Factors" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , and other risks described in documents subsequently filed by the Company from time to time with theSecurities 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. 28 --------------------------------------------------------------------------------
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 inManhattan and the greaterNew York metropolitan area. As the owner of theEmpire State Building , theWorld's Most Famous Building , ESRT also owns and operates its iconic, newly reimagined Observatory Experience.
Highlights for the three months ended
•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
•ESRT repurchased
Results of Operations
Overview
The discussion below relates to our financial condition and results of
operations for the three months ended
Three Months Ended
The following table summarizes our historical results of operations for the
three months ended
29
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Three Months Ended September 30,
2022 2021 Change %
Revenues:
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
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.
30
--------------------------------------------------------------------------------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
Interest Expense
The increase was primarily attributable to interest expense from our recently acquired multifamily properties, partially offset by the cancellation of debt from383 Main Avenue ,Norwalk CT .
Income Taxes The increase in income tax expense was attributable to higher net operating income for the observatory segment.
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Nine Months Ended
The following table summarizes our historical results of operations for the nine
months ended
Nine Months Ended September 30,
2022 2021 Change %
Revenues:
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
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.
32
--------------------------------------------------------------------------------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
Interest Expense
The increase was primarily attributable to interest expense from our recently acquired multifamily properties, partially offset by the cancellation of debt from383 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
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
33
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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
As ofSeptember 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 ofSeptember 30, 2022 , excluding principal amortization, we have no outstanding debt maturing untilNovember 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
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 ofSeptember 30, 2022 , we were in compliance with the covenants under the outstanding senior unsecured notes.
Financial Covenants
As ofSeptember 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. 34 --------------------------------------------------------------------------------
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) Nine Months Ended September 30, Total New Leases, Expansions, and Renewals 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) Nine Months Ended September 30, Total New Leases, Expansions, and Renewals 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 ourManhattan office properties in 2022 and 2021, respectively. Includes theEmpire 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 ourManhattan office properties in 2022 and 2021, respectively. Excludes theEmpire State Building broadcasting licenses and observatory operations. Nine Months Ended September 30, 2022 2021 Total Portfolio Capital expenditures (1) $ 28,823$ 15,552 _______________
(1)Excludes tenant improvements and leasing commission costs.
As ofSeptember 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
35
--------------------------------------------------------------------------------Distribution Policy
We intend to distribute our net taxable income to our security holders in a
manner intended to satisfy REIT distribution requirements and to avoid
Before we pay any distribution, whether forU.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and obligations to make payments of principal and interest, if any. However, under some circumstances, we may be required to use cash reserves, incur debt or liquidate assets at rates or times that we regard as unfavorable or make a taxable distribution of our shares in order to satisfy REIT distribution requirements.
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 endedSeptember 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 theOperating Partnership's Series ES, Series 250 and Series 60 operating partnership units throughDecember 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 endedSeptember 30, 2022 .
Cash Flows
Comparison of Nine Months Ended
Net cash. Cash and cash equivalents and restricted cash were$439.8 million and$621.0 million , respectively, as ofSeptember 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
Investing activities. Net cash used in investing activities increased by
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
36
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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):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(unaudited) (unaudited)
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
37
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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):
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Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 2022 2021
(unaudited) (unaudited)
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
Weighted averageOperating 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 toSeptember 30, 2022 , we entered into agreements to sell500 Mamaroneck Avenue inHarrison, NY and10 Bank Street inWhite 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 ofSeptember 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. 39 --------------------------------------------------------------------------------
Observatory Operations
For the three months endedSeptember 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 endedSeptember 30, 2022 was$33.1 million , compared to$12.8 million for the three months endedSeptember 30, 2021 . Observatory revenues and admissions are dependent upon the following: (i) the number of tourists (domestic and international) who come toNew York City and visit the observatory, as well as any related tourism trends; (ii) the prices per admission that can be charged; (iii) seasonal trends affecting the number of visitors to the observatory; (iv) competition, in particular from other new and existing observatories; and (v) weather trends.
Critical Accounting Estimates
Refer to our Annual Report on Form 10-K for the year endedDecember 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 endedDecember 31, 2021 . 40
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