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Here's My Largest Stock Position -- and Why I'm So Confident

By Matthew Frankel, CFP® and Brian Feroldi - Apr 22, 2021 at 6:17AM

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I have invested heavily in this real estate company, and I'm confident my future self will thank me.

I own quite a few stocks, but there is one that I've invested more of my own money in than any of the others. And it isn't a particularly popular stock -- in fact, many investors have never even heard of it. 

In this Fool Live video clip, recorded on April 15, I explain to my colleague Brian Feroldi why I'm so confident that Empire State Realty Trust (ESRT 2.13%) will be a great investment in my portfolio for decades to come. 

Matt Frankel: OK, perfect. One of the biggest reasons I like Empire State is because of their financial flexibility in a down-market right now. Let me pull up the five-year chart first.

The office real estate market in New York City has been going downhill since before the pandemic. If you remember, when WeWork tried to go public a few years back, then we found out that most of the new office space absorbed in cities was from co-working, that was a really bad sign for the office market, it didn't leave a whole lot more demand out there. You could see the stock's been declining for a little while now. Then as soon as the COVID pandemic hit, boom, everyone was worried that no one was going to work in offices again and it plunged to about five dollars a share from about $20 a couple of years before. Needless to say, that was a bit of an overreaction.

The CEO is a man named Tony Malkin whose family has owned the Empire State building since the 1960s, I believe. He is the second-generation CEO of the company. He reminded everybody, take a step back, this is not our first crisis. If you remember, New York City office space after 9/11, people thought no one was going to want to work in a high rise office building in a city, particularly the Empire State building, which is an icon and was thought to be a target. This is not the first time that people said that no one is going to work in offices anymore, things like that.

We're starting to see news lately that a lot of even the big time tech CEOs are starting to turn the other corner on the future of offices. It's not surprising the companies like Goldman Sachs (GS 0.74%) and JPMorgan Chase (JPM 1.28%) say that their employees are going to work in offices after the pandemic. I don't think that's really coming. I don't see a big surprise look on either of the Brians faces from that one. But what does surprise me is when Reed Hastings from Netflix (NFLX 2.90%) says he sees no added value for remote work. When sales force is accelerating the reopening of their offices in San Francisco, when Bill Mann, who was just on recently interviewed's (WIX 4.06%) Chief Operating Officer, who agreed with Reed Hastings and said that there is more value to in-person work than there is to remote work.

I tend to be in that camp too. I think that there is a big value in the spontaneous collaboration that happens in offices. In my early days at The Motley Fool, a lot of the best assignments I got were a result of me going to the office and talking with people in-person and collaborating with them spontaneously. If you're a believer like me, that office work is here to stay then empire state is one that you want to look at.

The have a ton of liquidity. They went public as a REIT in 2013, I believe, about seven years ago, and since that time, they have not made any acquisitions. Management pretty much recognized that New York's office market was in a temporary decline, decided to pump the breaks. They seem to be turning the corner on that. They hired a chief investment officer recently for the first time ever in the company's history. They freed up a lot of cash and credit. They have $1.6 billion in liquidity, and to put that number in perspective, the company's entire market cap is $3.2 billion, so $1.6 billion of available liquidity including about $600 million of cash to make acquisitions and take advantage of the down office market and opportunities, they see arise.

That's one, they are much less levered than a lot of their peers. You can see the net debt to EBITDA ratio compared to the office REIT views. They just have a lot more financial flexibility to pursue opportunities as they come up, and they will definitely have those. They lease to all kinds of tenants, primarily office. About 10% of their square footage is retail in nature. That's one of the biggest concerns when the pandemic hit, not just the office space, but because if you've ever been to a major city, you know that the first or second floor of most office buildings are retail space. Empire State has had a lot of luck with their retail space recently.

Recently, I don't know if either of you heard, but they signed a lease with Starbucks (SBUX 3.76%) for a giant space in the first floor of the Empire State building, during the pandemic to open one of their famous Starbucks Roasteries. If anyone has been one of those, those are really interesting places. Essentially a 30,000-square-foot coffee shop of high-end products and things like that. That's coming to the Empire State building soon. A lot of recent success, a lot of great renewals, things like that. You can see some of their office tenants here. LinkedIn is a major tenant in the Empire State Building, a bunch of other ones.

Real quick, their office space fits a big niche, right between the high-end, the trophy, what they call it, the class A space and class B space. Class A office space in Manhattan is not affordable, period, the end. You think New York real estate residentially is expensive? Office space is even more so in a lot of cases. Their value proposition to tenants is they offer the class A amenities, but not at the Class A prices. They aim to add value to their tenants and finally, the last thing I wanted to mention was the observatory because I think that's the biggest differentiator of their business.

You can see this is from 2001, right after 9/11, their observatory was bringing in $25 million of revenue a year. From there, they've invested heavily in their observatory. I know both you guys are afraid of heights and haven't been up there, but having said that, they've really transformed it into an attraction, not just a place you stand there and look over the edge, even if you're afraid of heights, you can go up to the observatory without leaving the indoors and still have a great time and learn a lot.

Brian Feroldi: Pass. [laughs]

Frankel: It's essentially a museum up there. You walk through a bunch of different exhibits on the way up, and the observatory is two levels. There's the 86th floor, which is the big observatory that you see in all the postcards and stuff like that, and then there's a small one that you go up to spire to the 102nd floor observatory, that's pretty much floor to ceiling windows that you guys would both hate. It's 102 floors up, and it's the best view in the city, they just finished renovating it. Multi year, over $100 million spent, just finished renovating it right before the pandemic hit.

This revenue growth year growing from $25 million in revenue in 2001 to about $130 million in 2019 isn't even a reflective of the improvements they've made to this space. You can see what the pandemic did to that obviously, New York tourism still pretty much doesn't exist. But in normal times this is a cash cow, high-margin business. It's space that they already own, so they're not paying rent. It's the top of their building and it's an attraction that sells itself.

You guys are the exception. But most people who go to New York City, that's a must-do tourist attraction. They think it's going to take a long time for it to recover. Right now this turned out to be actually a little too optimistic, traffic was about 4% of normal levels. Nobody's going up there right now. They think it's going to take till the end of 2022 to recover. But when it does, that is going to be a huge cash machine.

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Stocks Mentioned

Empire State Realty Trust, Inc. Stock Quote
Empire State Realty Trust, Inc.
$7.18 (2.13%) $0.15
The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
$299.23 (0.74%) $2.21
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
$114.05 (1.28%) $1.44
Netflix, Inc. Stock Quote
Netflix, Inc.
$179.95 (2.90%) $5.08
Starbucks Corporation Stock Quote
Starbucks Corporation
$79.26 (3.76%) $2.87 Stock Quote
$68.21 (4.06%) $2.66

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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