Empire State Realty OP, L.P. — 2023 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2023; this is not a standalone fourth-quarter report. The operating partnership owns and operates a New York City-focused portfolio, with Empire State Realty Trust, Inc. (ESRT) as its general partner and approximately 60.2% owner at year-end. The business has two reportable segments: real estate and the Empire State Building Observatory.
At year-end, the portfolio comprised approximately 8.6 million rentable square feet of office space, 0.7 million square feet of retail space, and 727 residential units. Office and retail occupancy was 86.3% and leased rate was 90.6%; annualized rent was approximately $536.0 million. The Observatory had approximately 2.6 million visitors in 2023.
Financial results and liquidity
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenue | $739.6 million | $727.0 million | Up 1.7% |
| Rental revenue | $597.3 million | $591.0 million | Up 1.1% |
| Observatory revenue | $129.4 million | $106.0 million | Up 22.1% |
| Operating income | $146.7 million | $127.0 million | Up 15.5% |
| Net income | $84.4 million | $63.2 million | Up 33.5% |
| Net income attributable to common unitholders | $80.1 million | $59.3 million | Up 35.6% |
| Basic and diluted earnings per unit | $0.30 | $0.22 | Up $0.08 |
| Core FFO (non-GAAP) | $245.8 million | $243.6 million | Up 0.9% |
| NOI (non-GAAP) | $399.2 million | $404.3 million | Down 1.3% |
Operating income rose despite modest revenue growth, with lower depreciation and amortization and stronger Observatory results among the reported drivers. GAAP operating margin was approximately 19.8%, versus 17.5% in 2022; net margin was approximately 11.4%, versus 8.7%. These margins are calculated from reported totals.
Operating cash flow was $232.5 million, up from $211.2 million. Investing activities used $77.3 million, compared with $230.9 million in 2022; financing activities used $62.9 million, compared with $140.2 million. Cash and cash equivalents were $346.6 million and restricted cash was $60.3 million at year-end. The company also reported $850.0 million available under its unsecured revolver.
Total debt principal was approximately $2.257 billion, with a weighted-average interest rate of 3.9% and weighted-average maturity of 5.4 years. Mortgage debt was approximately $892.0 million principal (reported net of costs at $877.4 million); there were no revolver borrowings. Debt maturities include $77.7 million in 2024, $315.0 million in 2025, $225.0 million in 2026, and $319.0 million in 2027. All reported financial covenants were met at year-end.
Material changes and notable items
- Rental revenue increased $6.3 million, primarily from new and renewed leases, higher rents, and tenant escalations; transaction activity reduced revenue by a net $7.4 million.
- Observatory revenue increased $23.4 million as visitor volumes and revenue per visitor improved. Observatory operating expenses also increased, mainly due to longer operating hours and higher labor, marketing, and maintenance costs.
- Property operating expenses rose 5.9% to $167.3 million, reflecting higher repairs, cleaning, and payroll; real estate taxes increased 3.3% to $127.1 million.
- Signed 950,746 square feet of new, renewal, and expansion leases, compared with 1,118,579 square feet in 2022. Cash rent on 2023 leases averaged $65.30 per square foot versus $61.25 on prior leases, a 6.6% mark-to-market increase.
- Sold Westport retail properties for $40.0 million and the Harrison office property for $53.0 million, and acquired a Williamsburg, Brooklyn retail property for $26.4 million. The Westport sale was to an entity affiliated with the CEO; the filing says it followed a marketed sale process and received independent committee review.
- Capital expenditures were $55.4 million, excluding tenant improvements and leasing commissions. The company estimated another $101.2 million of tenant improvement and leasing commission commitments under signed leases.
- Declared quarterly distributions of $0.035 per unit in 2023, or $0.14 annualized. Distributions are discretionary and depend on results, cash needs, and REIT requirements.
Outlook, risks, and contingencies
Management expects positive operating cash flow and anticipates meeting near-term needs with operating cash, cash on hand, borrowings, and the revolving facility. Long-term capital needs may be funded through those sources as well as debt, equity, and asset sales. The filing provides no specific earnings, revenue, occupancy, or distribution guidance.
- Management cited leasing momentum and tenant demand for high-quality buildings. However, remote-work patterns, competition, vacancies, concessions, and lease expirations could pressure office demand, occupancy, and rents. Approximately 0.9 million square feet of office and retail space was vacant; leases covering 5.4% and 6.4% of commercial portfolio area expire in 2024 and 2025, respectively.
- Revenue is concentrated: the Empire State Building represented 29.6% of 2023 rental revenue, and three properties together represented approximately 53.2%. Observatory revenue remains exposed to tourism, weather, travel disruption, and competing attractions; visitor volume remained below 2019’s 3.5 million.
- Interest-rate and refinancing exposure remains relevant, particularly for variable-rate facilities and upcoming debt maturities. The company had $573.2 million of interest-rate swaps and caps outstanding in aggregate notional value.
- Local Law 97 establishes emissions limits and penalties; management expects no fines for commercial buildings during the first 2024–2029 enforcement period, based on its current calculations. Compliance outcomes and future costs are uncertain.
- Environmental exposures include asbestos-containing materials and potential contamination. Post-sale Westport remediation obligations were expected to be immaterial; the filing also notes environmental conditions at the former Harrison property, with obligations transferred to the buyer.
- A long-running arbitration-related matter resulted in a state-court judgment of approximately $1.26 million, including interest, entered in January 2024. Respondents appealed; one claimant’s confirmation petition remained pending. The company says it believes related claims are without merit.
- Goodwill totaled $491.5 million, including $227.5 million allocated to the Observatory. Annual impairment testing found the Observatory reporting unit’s estimated fair value exceeded its carrying value, but valuation depends on judgmental projections and assumptions.
- Other material risks include ground leases expiring between 2050 and 2077, REIT and partnership tax status, tax-protection agreements that may constrain dispositions or debt actions, labor relations, cybersecurity, and climate and disaster risk.
Most important facts for investors to verify
- Whether leasing, occupancy, and rent growth continue, and how vacant space and 2024–2025 expirations are addressed.
- Whether Observatory visitor trends and profitability sustain their recovery, given tourism sensitivity and competition.
- Debt refinancing plans and costs for 2024–2027 maturities, including the effect of interest rates on floating-rate borrowing.
- Cash requirements for the $101.2 million of lease-related commitments, ongoing capital expenditures, and distributions.
- Developments in the arbitration appeal, Westport remediation obligations, Local Law 97 compliance, and Observatory goodwill valuation.
- That non-GAAP NOI and Core FFO are supplemental measures, not substitutes for GAAP earnings or operating cash flow; the filing notes they do not represent cash available for distributions.