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Empire State Real Estate Trust (NYSE:ESRT) is a real estate investment trust (REIT) that offers investors a unique opportunity to own a piece of New York City’s iconic skyline. Its most iconic property is none other than the world-famous Empire State Building, so it truly stands out in the crowded REIT market.
What is it?
Founded in 2011, Empire State Realty focuses on owning and operating a portfolio of office, retail and multifamily properties in the New York metropolitan area. What sets this REIT apart is its commitment to modernization and sustainability. It has positioned itself as a leader in energy efficiency and indoor environmental quality, which is increasingly important to both tenants and investors.
The company's crown jewel, the Empire State Building, is not only a historic landmark, but also a major revenue generator. The building's observatory has been named the number one attraction in the U.S. for two years running by from Tripadvisor Travelers' Choice Awards. This tourist attraction provides a steady stream of revenue that complements the company's real estate operations, offering a degree of diversification.
The numbers
As of July 2024, the company has a market capitalization of $2.5 billion. Over the past year, the trust has outperformed its sector, returning a healthy 16.1% compared to the US REIT industry average of -6.1%. However, it is worth noting that it has underperformed the broader US market, which returned 24.2% over the same period.
The company's price-to-earnings (P/E) ratio of 31.7 times suggests that investors are willing to pay a premium for a unique portfolio. With a price-to-sales ratio of two times, it's not necessarily cheap, but it's not exorbitantly priced either, especially considering its prime real estate holdings.
Opportunities and risks
The office real estate market faces uncertainties in the post-pandemic world, with the rise of remote work potentially impacting demand for office space. However, Empire State Realty’s prime locations and focus on high-quality, amenity-rich properties could help it weather these challenges better than many of its peers.
Looking ahead, the trust faces both opportunities and challenges. Its focus on improving its properties could make it increasingly attractive to environmentally-conscious tenants and investors. However, profits are forecast to decline by an average of 20.6% per year over the next three years, which I am very concerned about.
It offers a dividend yield of 1.5% and a payout ratio of 11%. This yield is far from the highest in the sector. Although the low payout ratio indicates that the dividend has plenty of room to grow, many investors may choose to look elsewhere for passive income.
A potential winner?
For investors looking for exposure to the New York City real estate market, Empire State Realty appears to be a really interesting option. Its unique portfolio, based on one of the most recognizable buildings in the world, clearly sets it apart from other REITs. While there are many risks to consider, its strategic positioning could make it a valuable addition to a diversified portfolio.
Obviously, the real estate market can be cyclical, and REITs can be sensitive to changes in interest rates. But with so many companies returning to offices, I like the look of this one. Empire State Realty offers a way to own a slice of the Big Apple skyline, so I'll be buying more shares at the next opportunity.