ESRT: office portfolio ~95% leased with rents up 20 quarters, trades at six times cash from operations; but observatory revenue fell ~30% last quarter and net operating income nearly halved on weaker international tourism and new competing decks; debt-to-EBITDA 6.6 and limited visibility. He holds for now.

He says, you own the Empire State Realty Trust, and its symbol is ESRT, just like me . It would be an understatement to say the performance was terrible. What is the main reason behind the poor results and would you classify it as a buy, hold, or sell at its current price?

Yes, well, first and foremost, this is a real estate investment trust that owns the Empire State Building and a portfolio that mostly consists of office properties in New York City.

They have some residential properties, but the majority are offices.

The short answer is that the main difference between this fund and other office real estate investment trusts is the observation deck atop the Empire State Building. They don't rent them out; they own them and make money from them.

The overall decline in international tourism has severely impacted the monitoring platform. There is also an increase in competition. Several new observation platforms have been opened in high-rise buildings over the past two years.

Therefore, the monitoring platform's revenue decreased by approximately 30% in the last quarter, and net operating income decreased by almost half. This is their main source of profit.

This is the most profitable part of their business.

So, the office work part is going well. When I bought it, my thesis was the exact opposite . My thesis was that the office market might remain weak due to hybrid and remote work , but the monitoring platform, into which they had just invested a lot of money, would provide high-margin cash flow and give it an edge over other office funds.

Therefore, the office portfolio is approximately 95% leased . This is up from approximately 93% a year ago. The company has achieved higher rental rates in new leases for 20 consecutive quarters.

Then, of course, there is the factor of interest rates. If you look at almost any real estate investment trust , you'll find it's been below par lately. Well, this was typical for a large part of the sector, between interest rates, debt difficulties, and all that stuff.

Should we buy, sell, or hold Empire State Realty Trust shares at today's prices? Yes, I am holding onto the stock . We don't offer personal advice, but I'm keeping it to myself for the time being at least.

The stock trades at six times the money generated from operations, which is the real estate version of earnings. Even after adjusting based on the monitoring platform's forecasts , the stock is still very profitable.

There are no debt maturities until 2028. It is a cyclical problem related to international tourism.

There are some caveats, such as the high debt ratio , where the debt-to-EBITDA ratio is 6.6. This is a very high percentage for a real estate investment fund. The administration specifically stated that it has limited visibility into the observatory's future revenues.

So, I will monitor that as we go forward , but I will hold onto my shares for the time being.

To be honest, it's hard for me to find this convincing. If the stock fell by 50% during the past year. If this is how the stock reacts when—in Matt's words—the primary office sector is doing well , then it's hard for me to consider it a consistently long-term market outperformer.

With a dividend yield of less than three percent, you need a lot of growth. I will refrain from doing that.