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, 2022 .
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, any pandemic; (ii) a failure of conditions or performance regarding any event or transaction described herein, (iii) resolution of legal proceedings involving the Company; (iv) reduced demand for office, multifamily or retail space, including as a result of the changes in the use of office space and remote work; (v) changes in our business strategy; (vi) changes in technology and market competition that affect utilization of our office, retail, observatory, broadcast or other facilities; (vii) changes in domestic or international tourism, including due to health crises and pandemics, geopolitical events, including global hostilities, currency exchange rates, and/or competition from other 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 phasing out of LIBOR; (x) declining real estate valuations and impairment charges; (xi) termination of our ground leases; (xii) changes in our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due and potential limitations on our ability to borrow additional funds in compliance with drawdown conditions and financial covenants; (xiii) decreased rental rates or increased vacancy rates; (xiv) our failure to execute any newly planned capital project successfully or on the anticipated timeline or budget; (xv) difficulties in identifying and completing acquisitions; (xvi) risks related to any development project (including ourMetro Tower potential development site); (xvii) impact of changes in governmental regulations, tax laws and rates and similar matters; (xviii) our failure to qualify as a REIT; (xix) environmental uncertainties and risks related to climate change, adverse weather conditions, rising sea levels and natural disasters; (xx) incurrence of taxable capital gain on disposition of an asset due to failure of use or compliance with a 1031 exchange program; and (xxi) accuracy of our methodologies and estimates regarding ESG metrics and goals, tenant willingness and ability to collaborate in reporting ESG metrics and meeting ESG goals, and impact of governmental regulation on our ESG efforts. For a further discussion of these and other factors that could impact the Company's future results, performance or transactions, see the section entitled "Risk Factors" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 , 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. 26 --------------------------------------------------------------------------------
Overview
Highlights for the three months ended
•Net income attributable to common unitholders of$10.7 million . •Core Funds From Operations attributable to common unitholders ("Core FFO") of$43.0 million . •Commercial portfolio 89.4% leased,Manhattan office portfolio 90.7% leased.
•Signed a total of 202,057 rentable square feet of new, renewal, and expansion leases.
•Empire State
•ESRT repurchased
Results of Operations
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
27
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Three Months Ended March 31,
2023 2022 Change %
Real Estate Observatory Real Estate Observatory
Revenues: Segment Segment Total Segment Segment Total
Rental revenue $ 140,091 $ - $ 140,091 $ 147,514 $ - $ 147,514 $ (7,423) (5.0) %
Observatory revenue - 22,154 22,154 - 13,241 13,241 8,913 67.3
Lease termination fees - - - 1,173 - 1,173 (1,173) (100.0)
Third-party management and other
fees 427 - 427 310 - 310 117 37.7
Other revenues and fees 1,950 - 1,950 1,796 - 1,796 154 8.6
Total revenues 142,468 22,154 164,622 150,793 13,241 164,034 588 0.4
Operating expenses:
Property operating expenses 42,044 - 42,044 38,644 - 38,644 (3,400) (8.8)
Ground rent expenses 2,331 - 2,331 2,331 - 2,331 - -
General and administrative
expenses 15,708 - 15,708 13,686 - 13,686 (2,022) (14.8)
Observatory expenses - 7,855 7,855 - 6,215 6,215 (1,640) (26.4)
Real estate taxes 31,788 - 31,788 30,004 - 30,004 (1,784) (5.9)
Depreciation and amortization 47,364 44 47,408 67,071 35 67,106 19,698 29.4
Total operating expenses 139,235 7,899 147,134 151,736 6,250 157,986 10,852 6.9
Operating income 3,233 14,255 17,488 (943) 6,991 6,048 11,440 189.2
Intercompany rent revenue
(expense) 15,914 (15,914) - 10,620 (10,620) -
Other income (expense):
Interest income 2,558 37 2,595 149 - 149 2,446 1,641.6
Interest expense (25,304) - (25,304) (25,014) - (25,014) (290) (1.2)
Gain on sale of property 15,696 - 15,696 - - - 15,696 -
Income (loss) before income taxes 12,097 (1,622) 10,475 (15,188) (3,629) (18,817) 29,292 155.7
Income tax (expense) benefit (198) 1,417 1,219 (144) 1,740 1,596 (377) 23.6
Net income (loss) 11,899 (205) 11,694 (15,332) (1,889) (17,221) 28,915 167.9
Private perpetual preferred unit
distributions (1,050) - (1,050) (1,050) - (1,050) - -
Net loss attributable to
non-controlling interests in
other partnerships 43 - 43 63 - 63 (20) (31.7)
Net income (loss) attributable to
common unitholders $ 10,892 $ (205) $ 10,687 $ (16,319) $ (1,889) $ (18,208) $ 28,895 158.7 %
Real Estate Segment
Rental Revenue
The decrease in rental revenue was primarily attributable to reserves recorded on straight-line rent receivables related to a one-time reserve tied to Signature Bank entering receivership. See "Financial Statements - Note 8. Leases" for more information.
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 and repairs and maintenance due to increased building utilization at our office properties.
General and Administrative Expenses
The increase in general and administrative expenses primarily reflects higher payroll costs and equity compensation.
28
--------------------------------------------------------------------------------Real Estate Taxes
Higher real estate taxes primarily attributable to higher assessed values for multiple properties and the inclusion of real estate taxes from our recently acquired multifamily property.
Depreciation and Amortization
The decrease in depreciation and amortization reflects accelerated depreciation
at one property recorded in the three months ended
Interest Income
The increase reflects higher interest rates in the three months ended
Interest Expense
Interest expense was consistent with prior year.
Gain on Sale of Property
Reflects the gain on sale of 69-97 and
Observatory Segment Observatory Revenue
Observatory revenues were higher driven by increased visitation as compared to
the three months ended
Observatory Expenses
The increase in observatory expenses was driven by increased operating hours, which increased variable costs such as labor, union, security, cleaning and maintenance costs.
Income Taxes
The decrease in income tax benefit was attributable to lower taxable loss for
the observatory segment for the three months ended
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
29
--------------------------------------------------------------------------------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 ofMarch 31, 2023 , 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 6.2 years. As ofMarch 31, 2023 , excluding principal amortization, we have no outstanding debt maturing untilNovember 2024 .
Portfolio Transaction Activity
On
In
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 ofMarch 31, 2023 , our consolidated mortgage notes payable amounted to$898.5 million . The first maturity is inNovember 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 ofMarch 31, 2023 , we were in compliance with the covenants under the outstanding senior unsecured notes.
Financial Covenants
As ofMarch 31, 2023 , we were in compliance with the following financial covenants: Financial covenant Required March 31, 2023 In Compliance Maximum total leverage < 60% 36.9 % Yes Maximum secured leverage < 40% 14.5 % Yes Minimum fixed charge coverage > 1.50x 2.8x
Yes
Minimum unencumbered interest coverage > 1.75x 5.0x Yes
Maximum unsecured leverage < 60% 27.0 % 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.
30
--------------------------------------------------------------------------------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).
Three months ended March 31,
Total New Leases, Expansions, and Renewals 2023 2022
Number of leases signed(2) 18 42
Total square feet 201,145 317,633
Leasing commission costs per square foot(3) $ 20.99 $ 19.70
Tenant improvement costs per square foot(3) 83.39 66.26
Total leasing commissions and tenant improvement costs per
square foot(3) $ 104.38 $ 85.96
Retail Properties(4)
Three months ended March 31,
Total New Leases, Expansions, and Renewals 2023 2022
Number of leases signed(2) 1 2
Total square feet 912 1,013
Leasing commission costs per square foot(3) $ - $ 35.54
Tenant improvement costs per square foot(3) - -
Total leasing commissions and tenant improvement costs per
square foot(3) $ - $ 35.54
_______________
(1)Excludes an aggregate of 498,196 and 504,953 rentable square feet of retail
space in our Manhattan office properties in 2023 and 2022, respectively.
Includes the Empire State Building broadcasting licenses and observatory
operations.
(2)Presents a renewed and expansion lease as one lease signed.
(3)Presents all tenant improvement and leasing commission costs as if they were
incurred in the period in which the lease was signed, which may be different
than the period in which they were actually paid.
(4)Includes an aggregate of 498,196 and 504,953 rentable square feet of retail
space in our Manhattan office properties in 2023 and 2022, respectively.
Excludes the Empire State Building broadcasting licenses and observatory
operations.
Three months ended March 31,
2023 2022
Total Portfolio
Capital expenditures (1) $ 12,945 $ 10,138
_______________
(1)Excludes tenant improvements and leasing commission costs.
As ofMarch 31, 2023 , we expect to incur additional costs relating to obligations under existing lease agreements of approximately$107.9 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
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
31
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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$9.7 million and$10.8 million have been made to equity holders for the three months endedMarch 31, 2023 and 2022, 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 fromJanuary 1,2022 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 endedMarch 31, 2023 .
Cash Flows
Comparison of Three Months Ended
Net cash. Cash and cash equivalents and restricted cash were$380.8 million and$482.7 million , respectively, as ofMarch 31, 2023 and 2022. The decrease was primarily due to the acquisition of real estate property inDecember 2022 and higher spending for capital expenditures, partially offset by net proceeds from the sale of property inFebruary 2023 and lower repurchases of common shares.
Operating activities. Net cash provided by operating activities increased by
Investing activities. Net cash used in investing activities decreased by$32.4 million to$2.6 million primarily due to net proceeds from the sale of 69-97 and103-107 Main Street inWestport, Connecticut onFebruary 1, 2023 .
Financing activities. Net cash used in financing activities decreased by
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.
32
--------------------------------------------------------------------------------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 March 31,
2023 2022
(unaudited)
Net income (loss) $ 11,694 $ (17,221)
Add:
General and administrative expenses 15,708 13,686
Depreciation and amortization 47,408 67,106
Interest expense 25,304 25,014
Income tax benefit (1,219) (1,596)
Less:
Gain on sale of property (15,696) -
Third-party management and other fees (427) (310)
Interest income (2,595) (149)
Net operating income $ 80,177 $ 86,530
Other Net Operating Income Data
Straight-line rental revenue $
556
$ 703 $ 1,784
Amortization of acquired below-market ground leases $ 1,958 $ 1,958
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
33
--------------------------------------------------------------------------------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):
Three Months Ended
2023 2022
(unaudited)
Net income (loss) $ 11,694 $ (17,221)
Noncontrolling interests in other partnerships 43 63
Private perpetual preferred unit distributions (1,050) (1,050)
Real estate depreciation and amortization 46,024 65,414
Gain on sale of property (15,696) -
FFO attributable to common unitholders 41,015 47,206
Amortization of below-market ground leases 1,958 1,958
Modified FFO attributable to common unitholders 42,973 49,164
Loss on early extinguishment of debt - -
Core FFO attributable to common unitholders $
42,973
Weighted averageOperating Partnership units Basic 264,493 273,759 Diluted 265,197 273,759
Factors That May Influence Future Results of Operations
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,
34
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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 March 31, 2023 , there were approximately 1.0 million rentable square
feet of space in our portfolio available to lease (excluding leases signed but
not yet commenced) representing 10.6% of the net rentable square footage of the
properties in our portfolio. In addition, leases representing 4.6% and 6.7% of
net rentable square footage of the properties in our portfolio will expire in
2023 and in 2024, respectively. These leases are expected to represent
approximately 5.1% and 7.2%, respectively, of our annualized rent for such
periods. Our revenues and results of operations can be impacted by expiring
leases that are not renewed or re-leased or that are renewed or re-leased at
base rental rates equal to, above or below the current average base rental
rates. Further, our revenues and results of operations can also be affected by
downtime after space is vacated and 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.
Observatory Operations
For the three months endedMarch 31, 2023 , the observatory hosted 443,000 visitors, compared to 269,000 visitors for the same period in 2022. Our return of attendance to pre-pandemic levels is closely tied to national and international travel trends, our new reservations-only model of operation, and our desire to provide a better experience with fewer crowds to visitors from whom we receive higher revenues per person.
Observatory revenue for the three months ended
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, 2022 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, 2022 . 35
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