Author Topic: ESRT- Empire State Realty Trust  (Read 7349 times)

Gregmal

  • Hero Member
  • *****
  • Posts: 3855
ESRT- Empire State Realty Trust
« on: April 27, 2020, 05:52:21 PM »
Read Pupils Paramount write up, and was inspired to put this one out there.

Refer to the company overview and investor presentation for references:
http://investors.empirestaterealtytrust.com/Cache/IRCache/abcb17e3-e55e-b7f8-7448-2cc6369d513f.PDF?O=PDF&T=&Y=&D=&FID=abcb17e3-e55e-b7f8-7448-2cc6369d513f&iid=4313470

http://investors.empirestaterealtytrust.com/Presentations

Check out most recent 4/22/20 presentation

But this one is somewhat simple and the timing is really the driver as all these things from VNO down have been "reset".

Headlined by legendary NYC RE investor Peter Malkin, this one was long fought in terms of even getting to be public as the convoluted ownership group feared wild fluctuations in the stock market(and thus their holdings) like we have just recently seen. So, to the new investor, here is your chance.
https://dealbook.nytimes.com/2013/05/29/i-p-o-for-empire-state-building-gets-shareholder-backing/

You've got a healthy balance sheet, currently net debt to EV is ~35%, more importantly average maturity is more than 7 years out and 80% of the portfolio unencumbered

A few preferred/OP issues out there.

A month or so ago there was a thread asking "who is buying back stock right now"/ these guys were, and big time, acquiring north of 4% outstanding at an average price below $10.

Tenant roster is robust, highlighted by EY, Legg Mason, LinkedIn, IPG, and PartnerRE

Rent collected for April was about 70%, surprisingly strong for a city that was shut

What I am attracted to here is yes the namesake trophy asset, but further, The Observatory, which may single handedly be one of the greatest income generating assets of all time. Its  the commercial equivalent to letting people pay you to walk around your attic and then on the way out charging them $25 for a shitty $3 ceramic mug. There is again a simplicity with the assets here, something I tend to favor over gargantuans with so many properties and moving parts that it becomes impossible to stay on top of the day to day.

Other notable assets include locations at Herald's Sq, Grand Central Terminal, and a slew of other mid town assets along with a few properties in Westchester and CT


The company is well managed and has a track record that allows me to feel comforted that they are not a liability here. You really dont need geniuses to do well in these types of assets, you just need to avoid hucksters who will rob you.

I was very impressed with the conservative nature of the COVID impact assumptions and timelines they gave on normalization. Despite this, the company continues to pay its regular dividends, repurchase shares, and explore value enhancing redevelopment opportunities. Much of this is linked above and was touched on with the most recent call, I am just lazy and highlighting right now.

I have long tracked this asset but never felt the desire to own it at the $15-$20 price range its traded at since coming public. But here, provided you think that things eventually normalize over the next 2-3 years, it's a simple, conservative shot at 50-100% upside not including dividends and repurchases made along the way. I find it difficult to envision losing money on ESRT @ $8 per share.



« Last Edit: April 27, 2020, 06:01:06 PM by Gregmal »


CorpRaider

  • Hero Member
  • *****
  • Posts: 2396
    • The Corpraider
Re: ESRT- Empire State Realty Trust
« Reply #1 on: April 27, 2020, 06:05:26 PM »
I've looked at it for a diversification/basket type play.  Thanks for the background on the management.  I didn't know that.  I think I saw the Quataris owned like 30 million shares/biggest slug.  I've liked several of their presentations. 

Did they count deposits forfeited in that collection figure?  Just curious.  SLG collected 86% but one of the analysts asked if they included deposits in that because some other peer did and Marc Holiday was like "C'mon you kidding' me? Cash rent."  I am wondering who it was. {edit, I think it was them/ESRT.  They provided both figures tho with forfeited deposits and without, so it's not like it was sketchy, but with the deposits it was very close to SLG's figures so I can see why the analyst asked}

« Last Edit: April 27, 2020, 06:54:54 PM by CorpRaider »

SI2020

  • Newbie
  • *
  • Posts: 4
Re: ESRT- Empire State Realty Trust
« Reply #2 on: April 27, 2020, 07:23:30 PM »
This looks really interesting, but why is free cash flow so low? What is normalized capex?

Gregmal

  • Hero Member
  • *****
  • Posts: 3855
Re: ESRT- Empire State Realty Trust
« Reply #3 on: April 27, 2020, 08:23:33 PM »
I believe the number of April rents if including deposits was mentioned to be ~85%.

As to the cash flows, there has been some redevelopment cost as well as a deliberate effort in some cases to run off congregants of smaller tenants hoping to then release to a single larger one. This can naturally cause somewhat extended drags on the occupancy rates and NOI, but will result in a higher quality lease. There's currently about 500k sf of which 30% is in the ES for development. I think part of the upside is the $40M or so free rent burn off and commencement thru YE 21. Over the past several years, as they've made some improvements, you've had the double whack of TI(cost) and free rent period, and in some cases, reimbursements but I haven't gotten an idea yet the degree to which those would be consistent or one off. You also have existing tenant expansion and improvements which can mask some of the future figure. The LinkedIn expansion is a good example of this. Typically, their lease spreads have been decent.

The one thing I dont care for is that they of course pay themselves quite handsomely. But whatever. At $8 per share you live with that.

Below was a great snippet from the recent earnings call


For years I have said repeatedly, that we would maintain the balance sheet to execute our strategy and provide for future growth. During that period, we have been criticized for too much cash on our balance sheet too low leverage failure to repurchase stock. And failure to buy at what we have repeatedly said we thought was a market top.

We have avoided exposure to FADs like co-working and short-term leases. As of the quarter end we held over $1 billion in cash on hand. Commenced in early March and through April 22 we purchased 8.5 million shares at a weighted average price of $9.37 per share totaling $79.8 million in aggregate.


thepupil

  • Hero Member
  • *****
  • Posts: 1684
Re: ESRT- Empire State Realty Trust
« Reply #4 on: April 28, 2020, 10:33:52 AM »
89% occupied, $58 / foot rents, concentration near Penn Station where VNO is about to dump $2 billion of re-development making their buildings shinier and more competitive, largest tenant is Global Brands Group which is a rinky dink hong kong listed company that trades for $0.2.

I recognize that they have been renovated substantially, but this portfolio is basically 100 years old. while that is a testament to the durability of hard assets (something along the lines of "they don't make them like they used to" is perhaps appropriate), it means that this is commodity office and not trophy office. In ESRT's presentations own words, it is "Class B". That's not to say it's worse or better, but wouldn't this be higher beta? if shit hits the fan, won't the newer nicer buildings lower their rents and attract all the tenants to that are slumming it in a 1925 building to move to a 1975 building? Hudson Yards and One Vandy own all the $150 / foot tenants which are few in number, then the SLG's (non-One Vandy), PGRE's  and VNO's of the world are lower (VNO is $76), then these guys are another step down.

aren't these the employees/divisions who might get re-located to the hinterlands in an NYC exodus?

I want a big gleaming 1960's or newer brutalist structure that screams at the CMBS buyers of the world "lend to me at 3.0% interest only you little yield pig". I want CEO vanity projects like 61 Ninth Avenue  (aetna built this ridiculous building for shits and gigs then subleased it to Yext when they got bought out)
https://www.vno.com/office/property/61-ninth-avenue/3312727/landing

this is a different trade. willing to hear why you think it's a better trade, but I'm not so sure. 

111 West 33rd:              1954
501 7th Ave:                  1923
1350 Broadway:             1928
1400 Broadway:             1930
One Grand Central Place: 1929
250 W 57th                     1927
1333 Broadway               1926
1359 Broadway               1924
Empire State Building      1930


Also, does the CEO own a unit at 220 CPS? Or did he develop it? Didn't think so. This is a pre-requisite for investing in NYC office.

Your CEO must be in the cool kid crowd and own at least one unit at 220CPS. if you don't own a unit at 220CPS, you might as well live an outer borough. 
« Last Edit: April 28, 2020, 10:47:59 AM by thepupil »

Gregmal

  • Hero Member
  • *****
  • Posts: 3855
Re: ESRT- Empire State Realty Trust
« Reply #5 on: April 28, 2020, 11:29:37 AM »
Agreed there are "better", "shinier" and more "desirable" locations out there. The buildings are for the most part on the older side. I like one of a kind assets, and there's only one Empire State Building. The other buildings while older to me are interchangeable with a lot else of what I own or have looked at.

I also think the capital allocation here is stellar. How many guys, cool kids or not, get on an analyst call and basically say "see you dumb fuck this is why I had all that cash when you criticized me, and now we're buying hand over first while everyone else is caught with their pants down"...

Buybacks, plus dividends, plus an unequivocal discount to NAV is one of my favorite formulas. I like SPG, I like VNO, HHC, the PGRE idea is a good one as well. To a degree they are all tied to the same recovery. Some in different ways than others. VNO has the best assets, they also have the most. The advantage to me with this much of a discount and a smaller company, is this. How do you ultimately solve the discount to NAV? By monetizing assets. VNO and SPG will have to sell a lot more assets to move the needle, and even then, if they are sellers who is the buyer? Whereas these little old smallco's(ESRT, PGRE, FRPH, HHC) are small and simple enough that they can pull an asset out of their ass and immediately rerate. At $8 a share, I dont think you need anything other than Father Time to make money here as things normalize. This goes for all the NYC RE names. But having another way to win works for me as well. Its similar to why I own MSGN vs SBGI. Sure I like RSN's. They are both "cheap". But if I am wrong monetizing one or two assets its a much easier bailout scenario than running some long arduous process for dozens of them. Provided you dont buy at a premium to NAV or see significant mismanagement, you should do OK. Capital allocation is huge and I like what these guys have done. Much better than a company like HHC which, despite having massively superior assets, has destroyed a lot of value the past year; not even factoring in the coronavirus issues.

thepupil

  • Hero Member
  • *****
  • Posts: 1684
Re: ESRT- Empire State Realty Trust
« Reply #6 on: April 28, 2020, 11:52:17 AM »
Agreed there are "better", "shinier" and more "desirable" locations out there. The buildings are for the most part on the older side. I like one of a kind assets, and there's only one Empire State Building. The other buildings while older to me are interchangeable with a lot else of what I own or have looked at.

I also think the capital allocation here is stellar. How many guys, cool kids or not, get on an analyst call and basically say "see you dumb fuck this is why I had all that cash when you criticized me, and now we're buying hand over first while everyone else is caught with their pants down"...

Buybacks, plus dividends, plus an unequivocal discount to NAV is one of my favorite formulas. I like SPG, I like VNO, HHC, the PGRE idea is a good one as well. To a degree they are all tied to the same recovery. Some in different ways than others. VNO has the best assets, they also have the most. The advantage to me with this much of a discount and a smaller company, is this. How do you ultimately solve the discount to NAV? By monetizing assets. VNO and SPG will have to sell a lot more assets to move the needle, and even then, if they are sellers who is the buyer? Whereas these little old smallco's(ESRT, PGRE, FRPH, HHC) are small and simple enough that they can pull an asset out of their ass and immediately rerate. At $8 a share, I dont think you need anything other than Father Time to make money here as things normalize. This goes for all the NYC RE names. But having another way to win works for me as well. Its similar to why I own MSGN vs SBGI. Sure I like RSN's. They are both "cheap". But if I am wrong monetizing one or two assets its a much easier bailout scenario than running some long arduous process for dozens of them. Provided you dont buy at a premium to NAV or see significant mismanagement, you should do OK. Capital allocation is huge and I like what these guys have done. Much better than a company like HHC which, despite having massively superior assets, has destroyed a lot of value the past year; not even factoring in the coronavirus issues.

very fair point and I agree with you about the small factor, generally. PGRE sold 1/10 of  the equity in its biggest building and generated 5% of its market cap in cash. VNO has sold a lot of 220 CPS units, including $150mm post covid, but that's not the same when its on a $7 billion market cap.

my big insight for the day is that $2 billion is less than $7 billion.

the flip side of that, and this thinking is admittedly soooo 2014, but there is an argument for "platform value"/scale/shiny-ness advantage to being big. relationships with bankers/PE firms/sovereign wealth funds. There's a reason Norges owns 9% of VNO and PGRE and not ESRT**. Norwegians want to stash their oil money abroad in big shiny buildings, they can't buy enough on the private market to move the needle, so their only choice is VNO/PGRE whatever. Likewise, VNO JV'd their flagship upper 5th / times square retail to the qataris at a steamy valuation. no one is going to pay a 4 cap during retailpocalypse for ESRT's retail, but they did with VNO because they can put 100's of millions to work in times square signage and vanity retail. Now someone could pony up an uneconomic price to buy THE Empire State Building and The Observatory. So I'll agree with that.

agree to disagree here and it's all kind of splitting hairs as they kind of have the same drivers, but I think VNO/PGRE are lower risk even if they are more levered.

Neverhteless,  I think you are highly likely to make money on this.

**to be fair Norges does own a little ESRT but they also own like 2-3% of the world's stocks. And the Qatari's own a slug of ESRT so I guess they like ESRT too.
« Last Edit: April 28, 2020, 01:05:54 PM by thepupil »

Gregmal

  • Hero Member
  • *****
  • Posts: 3855
Re: ESRT- Empire State Realty Trust
« Reply #7 on: April 28, 2020, 12:10:37 PM »
True dat.

Its funny. Some are still debating whether March was really throw darts at a board territory or not. Newsflash, with some of these NYRE plays, you are still in throw darts at a board territory. There's only nothing to invest in right now if you arent willing to invest in things worth investing in. Thats my big insight for the day.


bizaro86

  • Hero Member
  • *****
  • Posts: 1326
Re: ESRT- Empire State Realty Trust
« Reply #8 on: April 28, 2020, 01:45:12 PM »
Any thoughts on management comp here and how much to take off the valuation for it? I was surprised at the level of G&A, and then read the transcript and noted that they are hiring 2 new C level execs, one of whom they expect to build out a team around them. And that's a CIO, so I'm sure the team members wont be making a measly $200k...

Edited to add: I really like this. I'd like it more if was just the empire state building, and even more if it was just the observatory. That's a great asset.

Gregmal

  • Hero Member
  • *****
  • Posts: 3855
Re: ESRT- Empire State Realty Trust
« Reply #9 on: April 28, 2020, 01:53:15 PM »
I hate the exec comp here. Nothing more to really add there. They are overpaid. Its hard to find reasonably comped RE executives in the public universe. My biggest gripe about investing there. Theyre all overpaid.

On the additional execs, they did mention on the call we will have a lot more clarity there shortly. If this were 50-100% higher, it would be a bigger issue for me. At least right now, I can tell myself they may have earned they pay(paid for by shareholders who owned this at twice the current price) by sticking to their guns and keeping the company in tip top financial shape. How many companies were aggressively buying back mid single digit %s of their stock between 3/1-4/20?