Including my retirement accounts, standard brokerage account, and custodial accounts I maintain for my kids, I own about 50 stocks altogether. And when earnings season arrives, I'll be eager read the latest results for every single one of them.
However, there are some stocks in my portfolio that I have big unanswered questions about, and I'm hoping to get some clarity this earnings season. Two in particular I'll be watching very closely are real estate special-purpose acquisition company IPO Latch (LTCH), and office real estate investment trust (REIT) Empire State Realty Trust (ESRT -0.05%). Here's what I hope to see and hear from their management teams, and what it could mean to my investment thesis.
Can Latch get its cash burn under control?
Latch has not only been the worst-performing stock in my portfolio during the recent downturn, but I'm also having serious doubts about whether it will survive much longer.
In simple terms, the tech company has been burning through cash way too quickly. Latch produced a net loss of $44.2 million in the first quarter of 2022 while generating just $13.7 million in revenue. To be sure, growth had been impressive – that's a 106% year-over-year revenue growth rate. But losses like this aren't sustainable forever. The $335 million in cash and securities on Latch's balance sheet buy it some time, but this is a bad environment in which to need to raise capital.
Latch has started to take some steps to get the problem under control and adapt. In late May, Latch reduced its workforce by 28%, which is expected to save about $40 million annually. And quite a bit has happened since late May in the economy, so I'm concerned this might not be enough all by itself. Clearly I'm not the only one concerned. Latch has cash and securities of $335 million on its balance sheet and has a market capitalization of less than $200 million. In other words, the market is assigning a negative value to Latch's actual business.
Several questions about my largest investment
Empire State Realty Trust is my single largest stock investment and has been for quite some time. If you aren't familiar with the business, Empire State is a REIT that owns the iconic Empire State building, as well as a portfolio of office and residential properties in the New York City area.
The most obvious question is "what will happen with offices as pandemic restrictions decline?" But that's not my biggest concern. Empire State owns some of the most desirable office properties in the world, and I'm confident this part of the business will be just fine. In fact, the Manhattan office portion of the portfolio is nearly 89% leased, which is actually up since the beginning of 2022.
My biggest question mark is the observatory that sits atop the Empire State Building and was recently named Tripadvisor Travelers' number one attraction in the United States. In pre-COVID times, the observatory accounted for roughly one-fourth of the company's revenue, even though it occupies just a tiny fraction of its square footage. And in the first quarter, the observatory saw traffic that was just 45% of pre-pandemic levels. However, it's important to keep in mind that the omicron surge was going on in January, and mask and social distancing measures were in effect in New York City for much of the first quarter. The second quarter was the least plagued by pandemic restrictions in two years, and I think the company's projection of 60% of pre-pandemic traffic might prove to be very conservative.
What's more, with Empire State's stock price down by 43% over the past year and management's willingness to get aggressive with buybacks during the initial COVID-19 market crash, I'll be curious to see if Empire State put any of the $430 million in cash it has on its balance sheet to work in this way.
Will this earnings season trigger any moves in my portfolio?
Empire State Realty Trust is likely to remain a top holding in my portfolio for years to come, but I would certainly become more bullish on adding new capital if its cash-cow observatory business is rebounding and management is being opportunistic with buybacks. However, in Latch's case I have serious concerns about whether the stock will be a viable business in the future, so unless the company can show me some good news this quarter, it may be time to cut my losses and move on to more promising opportunities.