When the COVID-19 pandemic started, Empire State Realty Trust (NYSE: ESRT) plunged, and that was after a few years of subpar stock performance. New York City commercial real estate was struggling a bit before the pandemic, and the transition to remote work certainly didn't help the bull case for office real estate in the area.
What's more, Empire State Realty Trust isn't just an office REIT, or real estate investment trust -- before the pandemic, a substantial portion of its revenue came from the Empire State Building Observatory. Not only did the pandemic shut down the NYC tourism industry, but the company had just completed a $100 million renovation of the space. The timing couldn't have been much worse.
How is Empire State's business doing?
First, the bad. Empire State's occupancy has declined a bit. The total percentage of the portfolio leased declined from 89.6% a year ago to 88.2% at the end of the second quarter. And leasing activity continues to be well below pre-pandemic levels. In the second quarter of 2021, observatory attendance was certainly better than the same quarter a year ago (when it was closed) but was about 17% of comparable 2019 levels.
That said, it's important for investors to keep a few things in mind:
- Empire State Realty Trust has $1.4 billion in total liquidity, including $541 million in cash, so not only is the balance sheet solid, but the company has tons of capital to pursue any attractive opportunities that arise.
- A 88.2% leasing rate in the portfolio is still quite strong and is not a cause for concern. Given the disruption in the NYC office market in the past year and a half, this is actually quite impressive.
- Empire State Realty Trust is profitable. Even with the depressed attendance in the observatory, Empire State generated $0.18 per share in core FFO, which is actually $0.04 higher than it was a year ago. On an annualized basis, this implies that Empire State trades for about 14 times FFO, a pretty cheap valuation.
Outlook for offices and tourism in NYC
It's not a surprise that Empire State's business hasn't rebounded to pre-pandemic levels, given the ongoing nature of the pandemic. But the million-dollar question is "what happens next?" Will companies transition to remote work permanently?
Fortunately, it seems like the opposite is true. While the delta surge has certainly caused many businesses to delay the return to the office, many major corporations have made clear that they want their employees back in the office. Empire State focuses on tenants that have room to grow their businesses, which could help fill vacant square footage over time as well.
On the tourism side, it will take some time, but Empire State's management expects the Observatory to return to pre-pandemic attendance eventually. In a nutshell, the Empire State Building Observatory has been a must-do tourist attraction for generations, and that's unlikely to change. The company foresees attendance reaching 50% of pre-pandemic levels in the fourth quarter and gradually rebounding to 100% by the end of 2022.
The Millionacres bottom line
While there are certainly some lingering unanswered questions surrounding the future of Empire State Realty Trust's business, I wouldn't exactly call the stock a risky investment. This is a profitable company with tons of cash on its balance sheet, a portfolio that is almost 90% leased, and one of the most iconic tourist attractions in New York City that just underwent a major refresh. If anything, the stock looks like it could be a long-term bargain for patient investors at the current level.