1 Dividend Stock That Looks Like a Bargain Right Now

To be sure, there are some big question marks surrounding the timing and extent of the gradual return to office work as the omicron wave of the COVID-19 pandemic starts to cool off. However, office real estate company Empire State Realty Trust (ESRT 0.99%) could still be a great stock to buy. In this Fool Live video clip, recorded on Jan. 14, Fool.com contributors Matt Frankel and Jason Hall explain why they think Empire State could have a very bright future. 

Matt Frankel: I like Empire State Realty Trust.

Jason Hall: Dang it.

Frankel: I said what Jason is going to talk about too.

Hall: Of course, it is.

Frankel: Awesome. This is a New York Real Estate Investment Trust. They own a portfolio of office buildings in and around the New York City area, and there's a few reasons I really like this right now. One, because they've just diversified into residential. I don't know if you saw that. They spent over $300 million buying two high-rise apartment buildings in Manhattan. It's diversifying a little bit away from offices. It's pretty much spending money wherever it sees the best return possibility, whatever type of real estate that may be, and No. 2, they have that observatory. I don't know if you've ever been up there, Jason, but it's pretty much a must-do in the New York tourism.

Hall: Yeah, it's amazing.

Frankel: Two little stats I wanted to show on this one. Here is the chart of the observatory revenue over time. In pre-pandemic times, if you look at the 2019 bar, that was roughly one-fourth of the company's revenue from 3% of their square footage, and it's high-margin revenue. This is a cash cow in normal times. It fell off a cliff, as you can see in 2020 and 2021, but they just underwent a big renovation. They finished it in late 2019, which the timing couldn't have been worse on that, but look how great they're doing it upselling their customers on different experiences and features.

This is growth and observatory revenue per capita over time, stretching all the way to the 3rd quarter of 2021, and you can see that's actually gone up significantly since the pandemic. They're doing a great job of monetizing. In the 4th quarter, observatory traffic is 40% of normal. They expect it to pretty much normalize by the end of 2022. So, as it does, I think this could be a big winner, Jason.

Hall: Yeah, I think so too. I think it's somewhere in between a value play and a turnaround, probably more on the turnaround side if you think about where the stock price trades now, but I think it is important to highlight that it does have a pretty large debt burden against its earnings, but on a debt-to-assets basis, it's still not necessarily as leveraged as you might think. I think it's a hybrid turnaround value play.

If they get the turnaround right and we see the recovery in traffic and tourism in New York like we expect, I don't think pretty close to a double just in the stock price is not unreasonable. Then you think about the yield on the cost if you buy today and fast forward 3-5 years out, a normalized business generating the cash flows that we've seen in the past. Plus, the residential real estate cash flows, it could really work out well.

Frankel: I don't see any scenario where the Empire State Building is a ghost town.

Hall: No, not at all. I think the risk though is what is the capital stack of Empire State Realty when that happens.

Frankel: Their balance sheet is fantastic.

Hall: It's pretty good, it really is.

Frankel: They have over $1 billion in liquidity. For a pretty small REIT, they're a small-cap. They have a lot of money to spend when they see opportunities, and if the office sector gets hit, they can get some bargains.