Author Topic: ESRT- Empire State Realty Trust  (Read 7407 times)

CorpRaider

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Re: ESRT- Empire State Realty Trust
« Reply #10 on: April 28, 2020, 06:32:42 PM »
Yeah, i pegged it class B, and I don't like the "greater metro" exposure that much; but then again I don't love the debt and preferreds SLG so much, though I get why they do it.


Mephistopheles

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Re: ESRT- Empire State Realty Trust
« Reply #11 on: April 30, 2020, 01:16:13 PM »
My friend works in the Empire State building. The company originally had 6 floors and happened to cut to 3 prior to COVID. Right before the stay at home measures, it was her first day at her new desk. The reason for the cut is because the company found that on average half the people are not in the office on any given day. So now they're doing shared work space. You don't get your own desk, you just get a designated desk for the day, and a drawer to keep your stuff in.

Don't really have any input. Wanted to share that anecdote. I know there is a separate thread on WFH trends, so I will look there.

I really do like the Observatory asset and agree that it makes this a potentially interesting play.

ugadawg_98

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Re: ESRT- Empire State Realty Trust
« Reply #12 on: May 03, 2020, 11:57:54 AM »
Gregmal,

Could you (or anyone) else describe the OP issues? Should they be thought of like preferreds?

Do you own them or are you playing this straight common?

Gregmal

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Re: ESRT- Empire State Realty Trust
« Reply #13 on: May 03, 2020, 02:07:01 PM »
They lack voting rights and require a k1, so I immediately wrote them off. I just own the common.

Mephistopheles

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Re: ESRT- Empire State Realty Trust
« Reply #14 on: May 03, 2020, 11:01:56 PM »
Gregmal, thank you for posting this idea. Observatory seems to be the crown jewel and will last regardless of what happens to the rest of the RE portfolio. Thus it probably serves to value it separately.

How would you go about doing that? The company says the market value of the Observatory rent is $82 million /year, that comes out to $1,062/sqft based on 80,000 sqft size. After accounting for the intercompany rent, the pretax earning of the unit is $12.5 m.

So I am thinking to put a cap rate of like 5% on the intercompany rent, however it doesn't include operating expenses namely RE tax.

The 82mn figure is about 12% of total rental revenue. So take 12% of the $115mn RE taxes, and we get $14 mn. So that comes out to (82-14) $68mn approx NOI on the Observatory RE. 5% cap on that is $1.3 billion.

As far as the $12.5 m pretax earnings of the Observatory, we can slap a 16x multiple on there for a $200 million valuation for the operation.

Add $1.3 billion to $200 million and we have $1.5 billion value for the Observatory including the RE.

Company EV is about $3.9 billion, subtract the $1.5 and you get $2.4 billion / 10 mn sq ft of space is $240 / ft for the remaining company.

What do you think of my math or am I missing something?
« Last Edit: May 03, 2020, 11:12:10 PM by Mephistopheles »

realassetsvalue

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Re: ESRT- Empire State Realty Trust
« Reply #15 on: May 04, 2020, 05:57:42 AM »
What do you think the impact will be of the opening of SL Green's One Vanderbilt Observatory (another 1,000 ft+ location in Midtown) in Q4 2021?

Slides 97 - 102 (yeah its a 250 slide deck) of the linked presentation may be of interest to see what assumptions SL Green are making and how they are underwriting their Observatory: https://slgreen.gcs-web.com/static-files/f187c1df-7350-408e-b73b-083d37850dea

Gregmal

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Re: ESRT- Empire State Realty Trust
« Reply #16 on: May 04, 2020, 04:25:24 PM »
As to the above two posts:


On valuation, its tough because of where we currently are with the CRE market. My assumptions I try to leave generalized. If I can tell the man is fat, thats good enough here given the circumstances. The entire company per the stock market was worth $14 per share/~$5.75B EV pre-COVID. We know for certain it IS NOT worth that now. So then the question is, how much less? I wasn't an investor at $14 and wouldn't be now. I am a believer in the asset and think much of this is just time arbitrage. If push comes to shove I just needed to get comfortable with 2 things. 1) That the value of what a buyer is willing to pay TODAY, would be much more than the current EV. 2) Things will normalize in 3-5 years and pre COVID valuations will probably need to get bumped because of monetary policy and lower rates. Both those things bode well for me here.

The problem with using cap rates for a hard figure is that you dont have sufficient post COVID data. Many properties in various parts of the CRE market are still no bid. Its by and large getting better. But the only thing that is moving and at least comparable to preCOVID is some of the net lease stuff. What is appropriate for run of the mill NY office today? No clue. Again, less than pre COVID. By how much? I highly doubt 30-50% less. Their "other" properties are nothing special. Not bad, not good, just kind of a revenue streamer that insulates the trophy property.

The figures you use are fine as a framework. But I'd also mention that with one of a kind stuff, the figures are rarely right and often not optimistic enough. One racist tirade and the LA Clippers estimated value increased 5x. There is likely no shortage of suitors for the Empire State Building. Model it out conservatively, sure, but I would expect to be surprised positively if and when that ever plays out, which for the record, I dont think will be anytime soon.

The Observatory I would definitely think is a sub 5 cap, maybe even sub 4. SL Greens knockoff to me is irrelevant. The moat is the asset. The Empire State Building is The Empire State Building. Its a clever use of space and attempt at additional revenue for SL Green, but theres no shortages of cool buildings or things to do/experience/spend money on in NYC. Over and over, its even touched on in the ESRT presentation, people come to NY with the Observatory on their check list of things to do. The Yankees were such a great idea they followed with the Mets. But the Mets are still the Mets which just arent nor will they ever be The Yankees...if that analogy makes sense.

The main takeaways I would have here is that

1) no I am not "thrilled" with this operationally or in terms of overall quality of the non ES assets. Its not the best investment ever or a top tier ship firing on all cylinders. Its just an incredibly timely investment with very remarkable upside in a bunch of rather conservative scenarios.
2) Simplicity is your friend here with things like this or pupils mention of PGRE. Go look at what VNO just dropped today(or SPG when they release). I dont want to deal with that shit if I am making an investment in any size(I own both but ESRT > VNO+SPG for me)...Just soooooo many different moving pieces and things that can shift. Give me a top tier trophy property and a handful of OK ones any day over that.
3) management is very conservative and will allocate capital responsibly. There is upside with that.
4)This is basically just a very high quality, event driven, discount to NAV play.

realassetsvalue

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Re: ESRT- Empire State Realty Trust
« Reply #17 on: May 06, 2020, 09:35:06 AM »
Jon Litt's Land & Buildings is short ESRT and put out a press release with their negative view on NYC office RE.

I am still absorbing their view and what that should mean for NYC Office RE but given the discussion around ESRT, VNO, ALX and PGRE (full disclosure I own ALX and PGRE) I thought useful to bring the negative case to the forefront.

https://landandbuildings.com/wp-content/uploads/2020/05/LandB-NYC-Office-Facing-Existential-Hurricane-1.pdf

Additional info that I think is useful is this CBRE piece - it doesn't draw any conclusions but has useful case studies of early 2000s and GFC Manhattan office rents on page 21, down ~25% and ~30% over 4 years and 3 years respectively.

https://f.tlcollect.com/fr2/520/33500/VP_Covid_19_impact_on_Manhattan_Office_-_040120A.pdf

Will this downturn have a similar or different impact on the Manhattan office market? Do the prices of NYC office REITs today compensate for this kind of downturn? This is what I am trying to figure out.


Gregmal

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Re: ESRT- Empire State Realty Trust
« Reply #18 on: May 06, 2020, 10:22:16 AM »
He may very well be right, but his short thesis isn't very well laid out; other than to state the obvious, Observatory revenue will be bad for a bit, and their buildings are old. If I had to guess this sounds more like a pair/hedge or basket short rather than ESRT is fucked.

The CBRE report looks interesting, thanks.

Gregmal

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Re: ESRT- Empire State Realty Trust
« Reply #19 on: May 06, 2020, 11:15:42 AM »
I would also add, any scenario where the Vandy Observatory "outcompetes" the Empire State Building, is going to be predicated on outrageously positive implications for NYC real estate assets. So I think that theres a major flaw in the thesis that all NYC RE is done for but One Vandy will be a bigger draw/take business from The Observatory...