ESRT- Empire State Realty Trust

[CorpRaider]

"dilute using Operating Partnership Units to pursue acquisitions: 'ability to offer operating partnership units in tax deferred acquisition transactions should give us significant flexibility in structuring and consummating acquisitions.'

 

I'm wondering if they will dilute by printing operating partnership units for acquisitions given the statement above in the annual report, and indications in webcasts that they are looking to acquire?  Would love to hear your thoughts."

 

You didn't ask for my thoughts (so, sorry to butt in) but I'm pretty sure that particular (quoted) provision just informs us that they can complete "upreit" transactions (and perhaps other in-kind, tax-deferred acquisitions).  Basically. like paying in stonk/units, versus cash, so the seller can convert their economic interest in the acquired entity (and the real estate it likely owns) into the REIT without having a taxable realization event.

[thepupil]

Agree with corpraider. All REITs should issue when it makes sense to do so. Obviously it doesn’t make sense to issue now. This is a tool that may make sense to use when the stock is more fairly valued. I wouldn’t base any expectations of management based on that language.

 

I’d focus more on what they are actually doing (didnt they buy back a fair bit of stock recently?)

 

I think it’s hard to think about now when stock issuance is the boogeyman because some REITs are so depressed, but accretive issuance is a big reason why REITs are a superior form of real estate ownership over time. It still exists in spicier parts of the market (GRIF has traded higher since they issued stock for example)

[Gregmal]

Lazily right now, without checking, IIRC they bought back maybe $50M in Q2 and $120M YTD as of July are the buybacks. Of most curiosity to me is whether they continue. They cut the payment of dividends til year end, but made no mention of the buyback which I believe has a $500M authorization. Given the outlook most folks have for NYC, IE, the worst is yet to come...I am of the opinion the safest bet here is just to buyback your own shares. Will certainly be interesting to see what they do.

 

Re: compensation. I was not a holder pre COVID and have a loosely estimated 3 year -ish expectation for investment here. Either way, if I am right, what they are getting paid, over the period of time I intend to be a shareholder....should not matter. If I am wrong, well I get what I deserve anyway. Oh the markets are beautiful in that sense.

[Gregmal]

https://www.prnewswire.com/news-releases/empire-state-realty-trust-signs-63-000-square-feet-lease-in-stamford-ct-301131701.html

 

Dead...

[Gregmal]

Not sure how I feel about this, and yes, overlooking certain algorithm produced results are necessary. But really? Ad campaigns for flex space?

 

https://www.esrtturnkeysuites.com/info?utm_source=Nypost.com&utm_medium=Turnkey_Banner_Ads

 

I've leased multiple NYC and NJ offices over the past decade so yea I'm probably the type they are targeting for this stuff...but I find it an interesting read through. Must be tough if you're using Seeking Alpha, IBD, NY Post, etc to run spam ads for office space.

[bizaro86]

Not sure how I feel about this, and yes, overlooking certain algorithm produced results are necessary. But really? Ad campaigns for flex space?

 

https://www.esrtturnkeysuites.com/info?utm_source=Nypost.com&utm_medium=Turnkey_Banner_Ads

 

I've leased multiple NYC and NJ offices over the past decade so yea I'm probably the type they are targeting for this stuff...but I find it an interesting read through. Must be tough if you're using Seeking Alpha, IBD, NY Post, etc to run spam ads for office space.

 

I wonder if small tenants that find it hard to move might be a way of getting more market power.

 

Where I live, office real estate has been in a nuclear winter for a number of years. But my lawyer renewed his lease in an average suburban building at flat rent last year. He's probably paying $25/soft, and he could easily get a similar five year sublease just for op costs. But he doesnt want to move, doesn't have the tech skills to get set up again easily etc.

 

Full service moves with in-house tech supply probably appeal the most to clients who are least capable of moving again in the future.

[fareastwarriors]

Centric Brands downsizes at the Empire State Building

 

Tommy Hilfiger’s parent company takes 200K sf at Midtown skyscraper, down from 300K sf

 

...

 

The company, which previously occupied 300,000 square feet on three floors, signed a lease for 212,000 square feet, Commercial Observer reported. The company inked a 10-year lease directly with the Empire State Realty Trust, in lieu of its previous sublease agreement from Global Brands Group. The asking rent per square foot was in the low to mid $70s.

 

 

https://therealdeal.com/2020/10/16/centric-brands-downsizes-at-the-empire-state-building/

 

 

 

[Gregmal]

Third Quarter and Recent Highlights

 

Net loss attributable to the Company was $0.05 per fully diluted share.

After a $0.02 per share reserve against tenant receivables and non-cash reduction in straight-line rent balances, Core Funds From Operations (“Core FFO”) was $0.12 per fully diluted share.

Same-Store Property Cash NOI excluding lease termination fees was up 9.3% from the third quarter of 2019 primarily driven by lower property operating expenses and free rent burn-off, partially offset by lower revenue.

Strong liquidity position of $1.5 billion as of September 30, 2020, which consists of $373.0 million of cash plus an additional $1.1 billion available under the Company’s revolving credit facility. Moreover, the Company has no debt maturity until 2024.

In the third quarter and through October 27, 2020, the Company repurchased $18.4 million of its common stock at a weighted average price of $6.36 per share, which brings the year-to-date total to $132.9 million at a weighted average price of $8.33 per share.

For the total portfolio in the third quarter, we signed 18 new, renewal, and expansion leases, representing 247,449 rentable square feet.

Collected 94% of third quarter 2020 total billings with 96% for office tenants and 84% for retail tenants. Through October 23, 2020, collected 92% of October total billings, with 93% for office tenants and 84% for retail tenants.

On-track with previously communicated 2020 G&A run rate of $60 million, excluding one-time severance charges, which reflects an $8 million reduction year-to-date.

Year-to-date through September 30th, the Company reduced property operating expenses by $26 million compared to the prior year period, driven by reduced tenant utilization and the Company’s cost reduction initiatives. The Company also expects $4 million on an annualized basis of permanent cost reductions from 2021 onwards.

On July 13, 2020, the Company announced the appointment of R. Paige Hood to its Board of Directors, effective August 1, 2020, and the departure of William H. Berkman, effective July 31, 2020.

 

 

 

Not too many are repurchasing stock right now. These guys are, granted a slower pace than previous quarters but down here, money well spent.

[Gregmal]

I'm lazy so find your own official link, but they just pulled a $180M 10 yr I/O mortgage for 2.8% on one of the shitty B buildings...

[thepupil]

https://seekingalpha.com/pr/18084508-empire-state-realty-trust-completes-180-million-mortgage-financing

https://s23.q4cdn.com/783625937/files/doc_financials/2020/q3/ESRT-3Q-2020-Supplement-FINAL.pdf

 

well just because I'm paranoid about the state of NYC office finance market....

 

$180mm loan on 250 West 57th. Here's what she looks like:

 

https://www.empirestaterealtytrust.com/properties/office/250-west-57th-street1/availabilities/

 

$180mm on a 0.5mm sf building, $333 debt / foot. the office portion is 70% occupied in the low $60's foot. the retail is 100% occupied at $152 / foot. the building is doing about $31mm of annualized rent ($20mm office, $10mm retail).

 

the retail here is super solid. it's mostly a TJ Maxx (47K / 67K)

https://therealdeal.com/2018/02/26/t-j-maxx-expands-by-19k-sq-ft-at-columbus-circle-location/

 

 

 

 

[Gregmal]

Just wanted to update here from a personal positioning perspective.

 

Ive recently reduced this to a more reasonable sized position. I have often found that when there are large blowups, the recovery cycle tends to be 1) everything(what we just got), and then from there, 2) a stabilization, and then finally 3) things separate themselves out based on more fundamental prospects. Similar to GFC with bank rebounds from 2009-2010, consolidation and flush out into late 2011, and then from there the wide variety of courses taken by all the players involved. Some of which is still playing out today.

 

So with ESRT, at peak position sizing this was around 7% for me while adding before the vaccine. The stock has nearly doubled from those lows. I think we got much of the easy recovery money, and now the focus will be much more on the overall state of the NY market which, while I think there is too much doom and gloom, I also believe will take a while to shakeout and fully recover. My initial assessment here was a 3 year timeline and roughly a $12 target. In that context, 6 months and ~$10(including dividends) is pretty reasonable. Given rates and several other developments, I do think $12 is very much on the conservative side...management has also earned their stripes during this period of time, kudos to them. However in terms of being overweigh recovery plays, I think the situation has evolved to a degree and we are much more now at a show me stage. With this said I have begun seeking to express this in more targeted ways. ESRT was as pure play NYC office as it gets. I still want NYC exposure, just not as much. I absolutely think there are other areas that will boom bigger and recover stronger, in shorter duration. My MSGE kind of covers some of the NY will be back angle, but to diversify out, I have swung a good chunk of my ESRT in HHC and to a lesser extent, BAM.

 

HHC I think has derisked quite a bit, solidified the balance sheet, and still remains diversified in very attractive markets in terms of both office and retail, but also residential.

 

Just wanted to update for everyone as I've been asked through email and DM a lot regarding these names.

 

Returns from writeup date on 4/27, rebound from subsequent pre vaccine lows:

 

ESRT $8.00, ~24%, 88%

VNO $40.09 ~1%, 34%

PGRE $8.73 ~11%, 72%

ALX $296 ~(-7%), 18%

 

 

[thepupil]

well done! and props on the relative outperformance of ESRT!

 

I agree with you in reducing NYC office and have been as well.

 

[Gregmal]

Thanks. And yea, I've been looking at the performance because I think there's some takeaways from it. Perhaps not totally meaningfully but definitely some read throughs. PGRE/ESRT we early on both kind of highlighted as smaller and simpler. But why was VNO SUCH a turd? ALX surprises me too. Ultimately not much better or worse than FRP which was debated at the time, but literally no recovery from ALX is bizarre to me. Meanwhile HHC is riding the Ackman train. I guess all in all, ESRT/PGRE did what we expected, but geez, what to make of ALX and VNO. SLG for instance has outperformed every name here minus maybe HHC. I do think there's still opportunity, but I also think its time to take a breather into year end and perhaps re-assess some the puzzle pieces.

[thepupil]

I actually think it's pretty simple why ALX/FRPH haven't had a big vaccine bump. they are low leverage/not geared to recovery and are not liquid. they aren't owned by anyone except for long-term fundamental value guys and have no short interest (short squeeze/value rotation was a big part of office moves last month; it's not like these guys have reported good fundamentals).

 

ALX has seen nothing but fundamental deterioration (Century 21 BK, Home Depot moving out) and its most important asset has no beta until past 2029. there's nothing to bet on, which is what makes it so safe as it falls, but also far less upside. I've made money on ALX this year being extremely price sensitive. and having a different opinion with as little as 20% change in market cap, the math really changes quickly. ALX never got nearly as cheap as the others on a discount to NAV basis, because a big chunk of NAV is fixed and it didn't fall as hard.

 

ALX is only down 18% YTD for this very reason. Likewise FRPH is down only 9% YTD. the cash and the fact that these are illiquid controlled companies suppresses the fundamental and stock px volatility.

 

Whereas something like SLG is very levered to an office recovery, has a lot of short interest, it's liquid, scalable, ETF-able, short-able, ya it's outperformed in a recovery, but its also down 30% YTD.

 

VNO on the other hand is another story. it is kind of in between the two extremes of ALX and SLG. It has a better balance sheet than SLG (though this isn't obvious) and in my view has done as well as they could execution wise (not repurchasing in the years heading into this, building up $4B of liquidity, signing 15 yr deal with FB, and a 25 yr deal with NYU, which are 2 top 5 post covid leases i believe), selling vast majority of 220CPS when other luxury developments are a failure.

 

But SLG has also executed really really well, navigating capital markets better than VNO. They've grossed down their dreaded debt and preferred equity book, JV'd and significantly de-risked their development pipeline, sold a few trophy assets, and repaired their balance sheet/liquidity really quickly and better than i would have expected and they keep announcing share repurchases.

 

Ultimately VNO having a lot of retail and hospitality in disguise (theMart trade show and a lot of revenue but not profit from Hotel Penn) AND taking a lot of sf out of service for redevelopment have made VNO's fundamental performance look worse than SLG or PGRE. Long term I think VNO's assets are much better positioned than most of PGRE's for example, but all that noise has taken its toll. VNO is also just worse at IR than SLG, which is a fundamental negative when you're in the capital raising/deploying business.

[Gregmal]

https://seekingalpha.com/pr/18121208-empire-state-realty-trust-announces-new-repurchase-authorization-and-continued-dividend

 

 

Interesting, and frankly, a lot of different ways one can go with this depending upon how you read the tea leaves.

[Gregmal]

No longer own this, but I continue to amazed by the strength and incredible outperformance here vs NYC peers. 

[thepupil]

On 4/28/2020 at 2:52 PM, thepupil said:

 

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.

 

 

good thing I hedged with the old non-committal "i like this but don't like it" 

 

agreed. I am also surprised by ESRT's performance. ESRT's office occupancy has declined the most and was the least full to begin with. But it was by far the cheapest on a per foot basis depending on how aggressive you want to get with the observatory. 

 

first and foremost, you were right to like this over the others, at least in the 14 months after, though SLG did outperform all of them! 

 

EDIT: just realized i pretty much repeated below what i said a few posts up. 

 

as it relates to all the NYC 

 

I'm not really surprised that ALX has been a stinker. ALX never really got cheap. For example, just using April 28th 2020 as a marker, ALX declined by 7% from the beginning of 2020 to then, whereas ESRT/PGRE/VNO/SLG all declined by 35-45%. ALX's cash richness and stability was pretty much recognized by the market. It is flat whereas the others are up 29-75%. 

 

SLG's strategy of being leverage neutral, selling assets, and buying back shares, along with the massively successful to 90% leased leaseup of One Vandy has made it the best of the bunch. The debt/pref book didn't blow up and they tonned it. credit where due. S

 

I think PGRE kind of deserves to be where it is. 

 

VNO looks cheap to SLG/ESRT for its quality and balance sheet, but I don't think any of them are super interesting at this time (and recently sold the last of my PGRE. I own a good bit of ALX but it's more safe than cheap. 

Edited June 9, 2021 by thepupil

[Gregmal]

Haha yea I have basically been watching SLG in slow-mo, both in awe and also dismay. I want to own it but the whole time their strategy, especially with the buybacks has been a little too aggressive, only because of the NYC centric nature. I thought part of the allure of ESRT was the balance sheet strength. SLG if it were focused anywhere else I'd probably have pulled the trigger. It was really just a subjective assessment that while ESRT was lower quality on the asset and fundamentals side, the balance sheet strength would be a difference maker. Ultimately though, maybe for good reason, or no reason, its interesting to see the guys running buybacks, ESRT, SLG, significantly outperformed the guys who didnt. 

 

My only other NYC type investment outside of the MSG entities is CLPR. And I despite thinking NYC is a problem area, its just so cheap I cant ignore it. However even there....its simple. Headwind vs tailwind. Theres money in both, but why bother moving against friction?

 

[CorpRaider]

Yeah I just dumped my AIRC and flipped into CLPR last week.  Still got the SLG, I'm thinking about selling but I guess I can just let it ride.  I do think it's very unusual/counter to institutional imperatives for a REIT to actually meaningfully shrink the float.  Maybe due to merchant banker CEO versus a RE developer guy.  I always theoretically liked that preferred/mezz business, just being a former commercial banker (on a whole different/smaller scale...but you would see sweet deals/info but can't do anything about it within the confines of the relationship).   

 

I never did get any ESRT.  I should probably dump EQR too.

 

Edited June 9, 2021 by CorpRaider