Empire State Realty Trust, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are to fiscal 2022 unless noted. This is an annual filing, not a standalone fourth-quarter report.
Business context
ESRT is a New York City-focused REIT with office, retail, multifamily and Empire State Building Observatory operations. At year-end, its portfolio included approximately 8.6 million rentable square feet of office space, 0.7 million square feet of retail space and 727 residential units. The company reports Real Estate and Observatory segments and owns approximately 60.2% of its operating partnership.
Financial and operating performance
| Metric | 2023 | 2022 | Change / context |
|---|---|---|---|
| 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%; 2.6 million visitors in 2023 |
| Operating income | $146.7 million | $127.0 million | Up 15.5%; operating margin approximately 19.8%, versus 17.5% |
| Net income | $84.4 million | $63.2 million | Up 33.5% |
| Net income attributable to common stockholders | $49.0 million; $0.30 diluted EPS | $36.4 million; $0.22 diluted EPS | Up 35.0% |
| Core FFO | $245.8 million | $243.6 million | Up 0.9%; non-GAAP measure |
| NOI | $399.2 million | $404.3 million | Down 1.3%; non-GAAP measure |
| Cash from operating activities | $232.5 million | $211.2 million | Up $21.3 million |
Cash and cash equivalents were $346.6 million at year-end, with an additional $60.3 million of restricted cash. The company reported $850.0 million available under its unsecured revolving credit facility, with no revolver borrowings outstanding. Principal debt was approximately $2.257 billion; reported debt carrying value, net of financing costs and discounts, was $2.241 billion. Weighted-average interest rate was 3.9% and weighted-average maturity was 5.4 years. Debt maturities were $77.7 million in 2024, $315.0 million in 2025, $225.0 million in 2026 and $319.0 million in 2027, excluding amortization. The company reported compliance with its debt covenants.
Office and retail properties were 86.3% occupied and 90.6% leased, generating $536.0 million of annualized rent. ESRT signed approximately 950,746 square feet of new, renewal and expansion leases; new and renewal rents averaged $65.30 per square foot, 6.6% above the prior leases. Capital expenditures were $55.4 million, and the company expects approximately $101.2 million of tenant improvement and leasing commission costs under signed leases.
Material changes versus 2022
- Observatory revenue rose as visitation and revenue per visitor improved; Observatory operating costs also increased with longer hours, labor, marketing and maintenance.
- Rental revenue increased from new and renewed leases, higher rents and escalations, partly offset by $7.4 million of lower revenue associated with property transactions. Property operating expenses rose 5.9%, and real estate taxes rose 3.3%.
- Net income benefited from higher operating income and interest income, partly offset by lower gains on property dispositions. 2022 included $20.0 million of lease termination fees; none were reported in 2023.
- Operating cash flow increased. Investing cash outflow declined to $77.3 million, largely reflecting $88.9 million of net property disposition proceeds and reduced acquisition activity. Financing cash outflow declined to $62.9 million, principally due to lower share repurchases.
- ESRT sold Westport retail properties for $40.0 million and an office property in Harrison 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.
Outlook, risks and unusual items
- The filing provides no specific earnings, revenue or occupancy guidance. Management expects positive operating cash flow and plans to fund near-term needs through operating cash flow, cash, debt and available revolver capacity; long-term needs may also be met through asset sales and equity issuance.
- Management reported 130 basis points of improvement in Manhattan office occupancy and 250 basis points of improvement in Manhattan leased rate during 2023. It cites tenant demand for quality buildings, but remote-work trends, leasing competition, concessions and upcoming lease expirations remain risks. Approximately 0.9 million square feet of office and retail space was vacant at year-end.
- Revenue is concentrated: three properties generated approximately 53.2% of rental revenue, with the Empire State Building representing 29.6%. The five largest tenants accounted for 15.9% of commercial annualized rent.
- The Observatory remains below its 2019 visitation level of 3.5 million, with 2.6 million visitors in 2023. Tourism, weather, competing attractions and geopolitical or public-health events could affect results.
- New York City Local Law 97 requires emissions reporting beginning in 2025 and may impose penalties. Based on current calculations, management expects no fines for commercial buildings during the 2024–2029 first enforcement period; this is an expectation, not a guarantee.
- Goodwill totaled $491.5 million. The 2023 annual test found Observatory reporting-unit fair value above carrying value, but valuation depends on estimates and assumptions. The auditor identified Observatory goodwill valuation as a critical audit matter.
- A New York State court entered an approximately $1.26 million judgment in an ongoing arbitration-related dispute; respondents appealed. A related claim remains pending. The filing states that other material litigation was not known at year-end.
- Other notable exposures include three ground leases, property and tenant concentration, interest rates and refinancing, environmental liabilities, collective bargaining and multiemployer pension plans, and REIT qualification. The company reported effective internal controls and an unqualified audit opinion.
Important facts for investors to verify
- Whether office occupancy, leasing and effective rents continue to improve, and how vacant space and 2024–2025 expirations are addressed.
- Debt refinancing terms and liquidity needs around the 2024–2027 maturities, including the 2025 credit facility maturities.
- Cash available after required capital spending, signed lease costs, distributions and repurchases; Core FFO and NOI are non-GAAP measures and are not cash flow.
- Observatory visitation, revenue per visitor and the assumptions supporting the goodwill valuation.
- Progress and potential costs under Local Law 97, along with remaining Westport remediation obligations and the appealed litigation judgment.
- Related-party governance and tax-protection restrictions, including the Westport transaction and constraints on certain property sales or debt reductions.