The COVID-19 outbreak has had an outsized impact on major gateway cities, like New York City. The virus ravished that metro area this spring, forcing state and local governments to impose strict lockdowns. While they've since eased some of the restrictions, the city has been slow to bounce back because the pandemic has increased remote work while reducing leisure travel.
Both of those issues are having a major impact on leading New York City landlords Brookfield Property (NASDAQ: BPY)(NASDAQ: BPYU) and Empire State Realty Trust (NYSE: ESRT). That's one reason why their stock prices are down sharply this year. However, both believe the city -- and demand for office space -- will bounce back. Because of that, they could be great buys for contrarian investors. Here's a look at the case for and against buying either one right now.
The bull and bear case for buying Brookfield Property
Brookfield Property is one of the largest commercial property owners in New York City. From the iconic Brookfield Place -- formerly the World Financial Center -- to the emerging city within a city at Manhattan West, Brookfield owns some of New York's top office properties. Because of that, it has been hard hit by the pandemic, driven by fears that work-from-home will crush office demand in the city.
However, Brookfield is optimistic about the future of the office in New York City and elsewhere, which bodes well for its global office portfolio. Because of that, the company believes investors have significantly undervalued its properties. In its view, its core office portfolio is worth $13.40 per share alone. Meanwhile, the company also owns a high-quality portfolio of U.S. malls and has investments in several private real estate funds that span the entire property universe. Add up these holdings and subtract its corporate liabilities, and Brookfield pegs its net asset value at $27.01 per share. With the stock currently trading at less than $15, it's selling at a 44.5% discount to Brookfield's estimate, leading it to buy back shares. Add in its nearly 9%-yielding dividend, and Brookfield could generate some significant total returns for investors if the real estate market recovers.
While Brookfield believes the market has significantly undervalued its portfolio, it faces several headwinds that investors aren't sure will reverse anytime soon. For example, FFO at its office properties was under some pressure during the third quarter due to reduced contributions from the parking and retail operations at its office buildings. Meanwhile, its mall portfolio is struggling because many tenants aren't able to pay their rent. Finally, its investments in funds that own hospitality properties have been under some pressure due to the impact of COVID-19. If these earnings streams don't recover, Brookfield's portfolio might not be worth as much as it estimates.
The bull and bear case for buying Empire State Realty Trust
Empire State Realty Trust owns 14 office properties in the New York City Area, including its namesake, the Empire State Building. It leases this space to office tenants as well as some retailers. Further, it makes money by selling tickets to the Observatory in the Empire State building.
All three revenue sources have been under some pressure because of the pandemic. For example, its office rental collection rate was only 86% during the second quarter, while retail collections were 78%. While both have improved over the past few months, they remain well below 100%. In addition to that, Observatory revenue has been light due to low visitation levels.
However, Empire State Realty has a strong, cash-rich balance sheet that it's enhancing by suspending its dividend through the end of the year. That's giving it the flexibility to repurchase more of its beaten-down shares. It has already repurchased $132.9 million of stock through the end of October and had $370 million of cash at the end of the third quarter, which is a sizable amount for a company with a $2.3 billion market cap.
Both have big-time bounce-back potential
Brookfield Property and Empire State Realty Trust own some of the most iconic office buildings in New York City. While the pandemic has put some pressure on those properties, both companies believe they'll eventually recover. That's why they're buying back shares at what they believe to be attractive values.
However, Brookfield compliments its NYC holdings with high-quality office properties in several other major cities, a top-notch U.S. mall portfolio, and investments in several private real estate funds. On top of that, it has maintained its high-yielding dividend. Because of those factors, it stands out as a better buy right now between the two since it complements its upside potential with income and greater diversity.