Empire State Realty 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. With its flagship property being none other than the world-famous Empire State Building, this one really 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 modernisation and sustainability. It has positioned itself as a leader in energy efficiency and indoor environmental quality, which is increasingly important to tenants and investors alike.
The company’s crown jewel, the Empire State Building, isn’t just a historic landmark—it’s a major revenue generator. The building’s Observatory has been named the #1 attraction in the US for two consecutive years by Tripadvisor’s Travelers’ Choice Awards. This tourist hotspot provides a steady stream of income that complements the company’s real estate operations, offering a degree of diversification.
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The numbers
As of July 2024, the company boasts a market capitalization of $2.5bn. Over the past year, the trust has outperformed its sector, delivering a healthy 16.1% return compared to the US REITs industry average of -6.1%. However, it’s worth noting that it has underperformed the broader US market, which returned 24.2% over the same period.
The company’s price-to-earnings ratio (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 isn’t 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, there are both opportunities and challenges for the trust. Its focus on upgrading its properties could make it increasingly attractive to environmentally conscious tenants and investors. However, earnings are forecast to decline by an average of 20.6% per year for the next three years, which is a big concern for me.
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 for growth, many investors may choose to look elsewhere for passive income.
A potential winner?
For investors seeking exposure to the New York City real estate market, Empire State Realty looks to be a really interesting pick. Its unique portfolio, anchored by one of the world’s most recognisable buildings, 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, real estate can be cyclical, and REITs can be sensitive to interest rate changes. But with so many companies returning to the office again, I like the look of this one. Empire State Realty offers a way to own a slice of the Big Apple’s skyline, so I’ll be buying more shares at the next opportunity.
