Empire State Realty Trust: Why Is This Office REIT Still Down Almost 50% in 2020?

Empire State Realty Trust (ESRT 0.66%), the REIT owner of the iconic Empire State Building, has been one of the worst-performing real estate stocks on 2020. In this Nov. 5, 2020 Fool Live clip, Fool.com and Millionacres REIT analyst Matt Frankel, CFP and Millionacres editor Deidre Woolard discuss the company's recent results and whether it could be a good time to invest. 

Matt Frankel: First, we'll get into the one that everybody always rolls their eyes when I talk about, which is Empire State Realty Trust. Deidre just rolled her eyes. You couldn't see, the camera didn't get it.

Deidre Woollard: I did a little bit. It was not the best quarter for them.

Matt Frankel: It wasn't. But there were some the things to like. First of all, Tony Malkin, the CEO is one of my favorites to listen to. I saw you tweeted that Ryman (RHP -0.21%) CEO is one of your favorites to listen to. He's also very entertaining and really just insightful person to listen to. What I would say about Empire State is, first of all, office real estate in New York was struggling before the pandemic happened. It was like if you fell on the ground and then somebody kicked you. You were already laid on the ground. That's what's happening here. Empire State, it's still profitable, just to be perfectly clear. They earned enough funds from operations, which is the REIT version of earnings to more than cover their dividend if they were still paying it right now. They've decided to preserve capital and use it for other reasons, the third and fourth quarter this year. But they are still profitable. They didn't cut their dividend because of lack of profitability. Same-store income was actually up nine percent year-over-year, which is impressive for me. In office leases, they often give out a lot of free rent to get somebody to sign a new 10, 15-year lease, whatever. Most of that was because of free rent runoff, not because the business was performing exceptionally well. We'll get to the bad parts in a second. But the other thing to like is that Empire State has a lot of money. They have $373 million in cash right now. They have a $1.1 billion credit line that's untapped. This is a company with a total market cap under $2 billion. That's a lot of access to capital for such a small company. Empire State's only been a publicly traded company for about five years. Has not made a major acquisition in that time and is apparently getting ready to do that. It sees a lot of opportunity in the next few years.

They recently hired a chief investment officer for the first time ever. It also sees good value in it's stock price right now, which is down 60 percent so far in 2020, after a not so great 2019. It spent a $133 million on buybacks this year. Again, this is a company that's total market value is $2 billion. That's a lot of money. That's an aggressive buyback. It collected 94 percent of its rent. Retail rent collection wasn't great, 84 percent. That ends the good stuff. There's stuff to like. It wasn't a terrible quarter. With all that liquidity, this business is not going away anytime soon. They're not in trouble. The observatory on top of the Empire State building, most people listening who have been to New York have probably been up there some point. That's how they make a lot of their money. That's what really differentiates them from other office REITs in good times. The Empire State building, I don't know the exact percentage off the top of my head but it's around a quarter of the company's revenue comes from the observatory. It's a big business and it is a high-margin business. Once you get people up there buying tickets, your expenses really aren't that great. That's a weak spot. It reopened in July. But October attendance was up about six percent of what it normally is. They're getting pretty much locals who want to go up to the top of the Empire State building but normally try to avoid crowds. I used to live in the New York area. The crowds over the top of the Empire State building in normal times can be ridiculous. A lot of locals are just taking advantage of being the only person at the top of the Empire State building right now. One thing that I wanted to ask Deidre about, I don't know if you know this, Governor Cuomo recently made a change to New York city's COVID protocol. It used to be that if you came from a so-called COVID hotspot, like the one I live in, in South Carolina, you had to immediately quarantine for two weeks from when you got into New York. That pretty much made tourism go away. Now they made a change that if you submit to a COVID test before and after you travel, so one before you leave and one before you arrive, you don't have to do that. That to me sounds like it could be a boost to tourism and particularly in our case, Empire States Observatory. What you think about that?

Deidre Woollard: It could be. I think the other thing is we're running into the time of year when people are maybe a little less likely to go to New York and go up into the tower specifically, although there is that little bit of Christmas tourism that happens in New York. Maybe that will be a thing, hopefully. Another thing about New York is their commercial eviction moratorium. They've extended that as well. A lot of states aren't holding up commercial eviction moratoriums. But New York is one of the states that has been pretty great about that. Although that has a repercussion for landlords as well.

Matt Frankel: That's keeping occupancy high, I'd say, but it's not helping rent.

Deidre Woollard: Exactly.

Matt Frankel: When that expires, you're going to see a whole lot of back rent being paid all of a sudden from tenants who don't want to get evicted. Then the other million-dollar question when it comes to Empire State and just office real estate in general, are people going to work from offices after this? I tend to not really buy that offices are going away. I generally work from home and I love going to the office on occasion. I'm at a co-work office right now when I'm on the show. I don't really buy that people don't want to get to office. It's more collaborative, it's more productive. There's value especially early in your career, just having your work be seen. I don't buy the uncertainty that no one's going to work in a New York office anymore. But maybe that's just me and I know a lot of people feel differently.

Deidre Woollard: Right now you've only got, I believe it's between 10 and 20 percent depending on what you look at people going to their offices in New York City. That's a concern because that's lower than other places for the most part.

Matt Frankel: If I were giving their quarter a grade, I would say about a C. I guess overall is what I'd go before we move on with that. But having said that, it's trading at less than half of its net asset value. If you feel like I do that office real estate is going to be just fine in the long run, it could be worth doing.