Williamsburg Retail Gambit And Rising Costs Threaten Revenue And Earnings Plummet

Key Takeaways

• Investments in sustainability and modernization may raise operating expenses, potentially impacting near-term net margins.
  
• Tourism reliance for Observatory revenue growth is vulnerable to changes in international travel trends and global economic conditions.
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Catalysts

Empire State Realty Trust, Inc. (NYSE: ESRT) is a NYC-focused REIT that owns and operates a portfolio of modernized, amenitized, and well-located office, retail, and multifamily assets.

• Empire State Realty Trust's focus on acquiring prime retail assets in Williamsburg, Brooklyn, could lead to short-term cash flow dilution due to initial low yield, with the expectation of higher yield growth over time. This may put pressure on near-term revenue growth.
  
• The company’s substantial planned investments in sustainability and modernization initiatives may raise operating expenses, potentially impacting net margins in the near term.
  
• The level of current and future leasing activity and positive rent spreads may not be sustainable long-term, especially if macroeconomic conditions or demand in the New York City office market deteriorate, impacting future revenue growth.
  
• Anticipated increases in leverage to pursue further acquisitions or capitalize on investment opportunities might increase interest expenses and risk exposure, potentially affecting net earnings.
  
• Empire State Realty Trust's reliance on tourism for Observatory revenue growth could be affected by external factors such as fluctuating international travel trends or global economic conditions, influencing earnings from this segment.

Empire State Realty Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Empire State Realty Trust's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.9% today to 1.9% in 3 years time.
• Analysts expect earnings to reach $14.9 million (and earnings per share of $0.05) by about November 2027, down from $45.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 262.7x on those 2027 earnings, up from 39.0x today. This future PE is greater than the current PE for the US REITs industry at 28.6x.
• Analysts expect the number of shares outstanding to grow by 1.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

Empire State Realty Trust Future Earnings Per Share Growth

Risks

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Valuation

• The analysts have a consensus price target of $11.12 for Empire State Realty Trust based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.0, and the most bearish reporting a price target of just $9.6.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $769.4 million, earnings will come to $14.9 million, and it would be trading on a PE ratio of 262.7x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $10.6, the analyst's price target of $11.12 is 4.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.