Uncertainty in NYC could be an opportunity
Empire State Realty Trust is an office REIT that owns the Empire State Building and a portfolio of other office properties in the greater New York City area. As the pandemic has surged once again, it has dramatically increased uncertainty surrounding NYC offices. We've seen several major companies delay their planned return to office work in recent weeks, especially in cities.
In addition, a major source of Empire State's revenue (prior to the pandemic, at least) is the observatory atop its iconic flagship property. In the second quarter, observatory volume was at just 17% of comparable 2019 levels but had spiked to 30% in July, giving investors optimism for the second half of the year. Now, all signs point toward a major slowdown.
While these are certainly short-term headwinds, the long-term investment thesis hasn't changed. Employers want their employees to return to the office for the most part, as soon as it's safe to do so. And New York City will remain a massive tourist destination for years to come, while a stop at the Empire State Building Observatory will continue to be a must-do as it has been for generations.
The ultimate reopening REIT?
There were few REITs as hard-hit as EPR Properties when the COVID-19 pandemic started. The company operates a portfolio of movie theaters, water parks, golf attractions, ski resorts, and other experiential assets that were generally forced to close or operate at very limited capacity for most of 2020. And with nearly half its rental income from movie theaters, there were big concerns about the long-term viability of the business.
The worst is certainly over. Virtually all the company's properties are open, and it's clear that there's tremendous pent-up demand for experiences. And thanks to the "meme stock" boom, top tenant AMC Entertainment (NYSE: AMC) was able to raise fresh capital and dramatically improve its financial condition.
In fact, EPR's business has rebounded so strongly that the company recently reinstated its dividend earlier than expected (yield is about 6%) and is anticipating a return to growth mode very soon. With more than $1.5 billion in liquidity and an estimated $100 billion addressable market of properties in its wheelhouse, the next couple of years could be very exciting for EPR.
A unique real estate stock with tremendous long-term potential
Last but certainly not least, Howard Hughes Corp. is one of the most unique real estate stocks in the market. The company develops large-scale master-planned communities and uses a long-tailed value creation model.
Here's the basic idea: Howard Hughes starts with a massive plot of land -- think 10,000 acres or more. The company sells a small chunk to a residential developer who builds homes. These homes create the need for commercial assets, like a shopping center or office building. The presence of these assets makes the surrounding land more valuable, so Howard Hughes sells a little more to builders. This cycle can repeat for decades and can create massive value.
The main reason why the stock is down is that Howard Hughes is focused on somewhat vulnerable markets right now. Its flagship community (The Woodlands) is in the Houston area, and Texas is one of the harder-hit states by the delta surge. HHC also has a massive presence in Las Vegas, whose economy could be devastated if further shutdowns are needed. Hawaii and New York City are two other focus areas.
The Millionacres bottom line
The key takeaway is that all three of these stocks are certainly down for a reason, but that’s due to short-term uncertainties, not because of anything that changes the long-term investment case. Patient investors might want to add them to their radar in September, as they look like compelling opportunities after their recent pullbacks.