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If someone offers you a piece of the Empire State Building, think it over. It's a legitimate IPO.
Empire State Realty Trust Inc., the company that controls the iconic Manhattan skyscraper, certainly one of the most recognizable office buildings in the world, is taking that property and several others public in an initial public offering expected to raise as much as $1 billion.
The company is converting into a real estate investment trust [REIT] whose shares will trade on the New York Stock Exchange under the ticker symbol “ESB.” Bank of America (NYSE:BAC) Merrill Lynch and Goldman Sachs (NYSE:GS) are listed as lead underwriters on the offering. The REIT’s registration papers with the Securities and Exchange Commission did not list the number of shares to be sold nor a price range for the stock.
While the deal will hardly rival that of Facebook, the social media giant that’s also planning an IPO for later this year, an offering that includes a stake in one of the great American landmarks of the 20th Century is sure to generate buzz.
For nearly four decades, from its completion in 1931 to 1970 when it was supplanted by the World Trade Center’s Twin Towers in Lower Manhattan, the Empire State Building was the tallest building in America. Since Sept. 11, 2001, it has regained its status as New York’s tallest building.
Who can forget the image of an enraged King Kong perched atop the structure in the original 1933 film?
“It’s become an icon that transcends the city,” said John Tauranac, author of The Empire State Building: The Making of a Landmark. “It represents the United States right up there with the Statue of Liberty and the Washington Monument.”
But don’t expect the shares to soar like an Internet stock. Shares of REITs don’t jump out of the gate and double in value in a week or two. They’re viewed as long-term investments that pay out in quarterly or annual dividends rather than quick returns via a meteoric run-up in the stock price.
“It’s not as though there’s going to be any pop. You’re not going to double your money in a couple of weeks. What REIT investors are looking for are well-located properties with long-term leases,” said Lawrence Longua, director of the REIT Center at New York University’s Schack Institute of Real Estate.
Longua said the offering will likely be sold primarily to institutional investors who will view the REIT in the same vein as a consistent, dividend-paying utility stock -- but one that just happens to include an iconic architectural landmark.
Including the 102-story Empire State Building located in the heart of Manhattan, the company going public owns 12 office properties totaling 7.7 million square feet of office space of which 80% was leased as of Sept. 30, 2011, according to the SEC filing.
"The deal doesn’t deserve a premium just because the company’s called Empire State."
Seven of those properties are located in or near midtown Manhattan and they include more than 400,000 rentable square feet of retail space on their ground floors or lower levels. The five remaining office properties are located in Fairfield County, CT, and Westchester County, NY, described in the REIT’s filing as “densely populated metropolitan communities with immediate access to mass transportation.”
The company behind the REIT is Malkin Holdings LLC, led by father/son team Peter and Anthony Malkin. Malkin Holdings has owned the Empire State Building for most of the past decade as part of a complex partnership with the estate of legendary New York City real estate family the Helmsleys.
Under the Malkins the Empire State Building has undergone a much-needed facelift at a cost that could eventually run to $500 million, an effort to more competitively position the building against newer, state-of-the-art skyscrapers that have risen in and around New York City in recent decades.
Notably, the renovations have included tearing out walls to create bigger office spaces for larger tenants and more lucrative leases. The renovations have also included extensive energy saving measures now standard in newer office buildings. In addition, the building’s once well-appointed lobby got a much-needed makeover after falling into disrepair. The lobby serves as an entrance for the Empire State’s observation deck, one of New York City’s most popular tourist destinations.
According to the filing, the REIT will need an additional $55 million to $65 million to complete the renovations at its flagship property, hopefully by 2016.
Longua praised the Malkin group’s renovation efforts: “They turned it into a Class A building and they’ve attracted some good tenants. They had to do something radical and they did. And I think it’s worked,” he said.
Potential investors should be aware that the Malkin group intends to retain control of the REIT through ownership of Class B shares that won’t be sold to the public in the IPO and which entitle holders to 50 votes per share on matters affecting the company. The Class A shares to be sold in the IPO will entitle holders to just one vote per share.
Josef Schuster, founder of Chicago-based research firm IPOX Schuster LLC, said if an element of sentimental retail investors exists who want nothing more than to own a share of the Empire State Building it will likely be small and limited to New Yorkers.
“For New Yorkers there might be some sentimental value to this. For Chicagoans we don’t care. The deal doesn’t deserve a premium just because the company’s called Empire State,” he said.