Empire State IPO could be a big deal
Malkin is pushing for the second-largest REIT offering in history.
By Jonathan Heller
In what might be the most heralded IPO since Facebook (FB) went public last May, the push by Malkin Properties to take the Empire State Building public continues.
Malkin acquired what might be one of the most famous buildings in America in 1961 for $57.5 million, and now has a 15.4% stake in what is part of an ownership group of 2889 (as of Dec. 31) known as Empire State Building Associates L.L.C.
In order to proceed with the offering, which would also include several other New York City buildings, the Malkin contingency needs the approval of 80% of the current owners, which it is still pursuing.
There are few buildings more iconic than the Empire State Building, which was completed in 1931 at a reported cost of about $41 million.
Prior to the completion of the World Trade Center in 1972, it was the tallest building in the U.S. The building itself occupies the entire block front between 33rd and 34th street on Fifth Avenue. With 102 floors and 2.248 million square feet, it's an incredibly valuable piece of real estate, with a recent appraised value of $2.53 billion, located in one of the most desirable and expensive real estate markets in the U.S., and perhaps the world.
According to Empire State Building Association SEC filings, the building was 69% occupied by 256 tenants as of year-end 2012. (Empire State Building Associates does not operate the property, but subleases it to Empire State Building Company L.L.C. owned by the estate of Leona Helmsley.) Total 2012 revenue was $34.4 million, with net income of $10.6 million. The building, land and improvements are carried on the books at $149.6 million net of depreciation.
Assuming that the requisite number of partners approve of the IPO plan, the building would be packaged with 17 other New York City and Connecticut properties to form the Empire State Realty Trust, with 8.3 million rentable square feet. While the Empire State Building would be the crown jewel, the other properties have a combined appraised value of $2.705 billion, putting the total appraised value at more than $5.235 billion. Pro-forma financial statements for this massive REIT show 2011 revenue of $488 million, and net income of $52 million.
If the plan moves forward for what would reportedly be the second largest U.S. REIT initial public offering, the interest should be huge. Some investors may clamor to own a piece of the Empire State Building, and trading action could be very interesting.
I'll no doubt be on the sidelines watching the action. As a value investor, I like finding opportunities to own real estate, but it's usually not a centerpiece asset of a particular company, as it would be in this case.
Take Saks (SKS) for instance. Best known for its high-end retail business, the company is real estate rich, in particular owning an incredibly valuable piece of real estate on Fifth Avenue in New York, a fact that was perhaps overlooked as the market pushed the stock below $2 back in early 2009.
I'll wait until the dust settles on this one, if indeed it ever comes to market.
At the time of publication the author held no positions in any of the stocks mentioned.
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