(Updates with comments from real estate attorney in last four paragraphs.)
Feb. 13 (Bloomberg) -- The company that controls the Empire State Building plans to raise as much as $1 billion in an initial public offering, giving investors the opportunity to own a piece of the landmark 102-story Manhattan skyscraper.
Empire State Realty Trust Inc. plans to become a real estate investment trust and list shares on the New York Stock Exchange under the ticker symbol “ESB,” the company said in a U.S. Securities and Exchange Commission filing today. A group of closely held companies will be consolidated to form the REIT as part of the IPO, according to a separate filing.
The offering would give investors ownership of one of the world’s most famous buildings and other Midtown properties as New York’s real estate values rebound after the recession. Midtown Manhattan office values have gained 87 percent since a mid-2009 trough, according to Green Street Advisors Inc., a REIT research firm in Newport Beach, California.
“Because it’s got an iconic building as a centerpiece, I expect it will be successful anyway, but you’re going to have more or less a higher percentage” of individual investors, said Lawrence Longua, director of the REIT Center at New York University’s Schack Institute of Real Estate. For institutional investors, the owners “are very recognized names in the industry, so I suspect all in all, it’ll do well,” he said.
Malkin Holdings LLC, supervisor of the company that holds the title to the tower, said in November that it had “embarked on a course of action” that might result in it becoming part of a new REIT. Malkin Holdings supervises property partnerships led by Peter Malkin and his son Anthony Malkin. It owns the 2.9 million-square-foot (269,000-square-meter) Empire State Building in conjunction with the estate of Leona Helmsley.
The REIT would consolidate Manhattan and New York area properties owned by companies including Empire State Building Associates LLC, 60 East 42nd St. Associates LLC and 250 West 57th St. Associates LLC. Participants can opt to receive cash instead of shares for as much as 15 percent of the value.
Bank of America Merrill Lynch and Goldman Sachs Group Inc. will advise on the IPO. No price or number of shares was given in the filing.
The companies that would make up Empire State Realty owned 12 buildings totaling about 7.7 million square feet of rentable offices as of Sept. 30, according to the filing. Seven properties, including the Empire State Building, are in Midtown, totaling 5.8 million square feet. The other five are in New York’s Westchester and Connecticut’s Fairfield counties.
Chain of Ownership
The REIT would also hold rights to develop land near the Metro North railroad station in Stamford, Connecticut, plus four standalone retail properties in Manhattan and two in Westport, Connecticut.
For years, the Empire State Building underperformed because of friction and litigation between parties in a complex chain of ownership. The landlord, Donald Trump’s organization for a time, leased the entire building to a venture controlled by Peter Malkin and Lawrence Wien, which then subleased it to a Helmsley partnership.
The Malkins bought out the Trump Organization in 2002 and settled litigation with Leona Helmsley in 2006, giving them management rights to the tower. They began renovations, making larger office suites to attract higher-paying tenants, at a cost that may exceed $500 million by the end of 2013, according to the filing.
The improvements included retrofitting the tower to reduce its energy consumption and carbon emissions, in part by replacing all 6,500 windows. The $20 million makeover, on which former President Bill Clinton’s foundation was a partner, won the building the second-highest rating in September from the U.S. Green Building Council.
In 2010 and 2011, Li & Fung Ltd., a Hong Kong-based consumer products marketing company, signed leases for 588,944 square feet in the tower.
The Empire State Building -- the tallest in the world from its completion in 1931 until the World Trade Center’s north tower was finished in 1972 -- accounted for 41 percent of Empire Realty’s revenue in the nine months through September, the company said in the filing. The tower’s observatory, one of New York’s most popular tourist attractions, provided 17 percent of the company’s revenue during that period.
Some proceeds from the public offering will be used as payment to investors who choose to receive cash for their equity in existing Malkin entities, according to the filing. Other proceeds will be used to pay fees in connection with debt, and possibly for future acquisitions.
Competition for Assets
Funds the Malkins raise in the public markets should strengthen their hand in the competition to acquire assets, according to Stuart Saft, chairman of the global real estate practice at law firm Dewey & LeBoeuf LLP in New York.
The offering is “well-timed because the market is looking for investment vehicles,” Saft said in a telephone interview. “It frees up equity in their properties, enables them to invest in other ways, and it gives them interest in the IPO that they can use to trade for additional properties.”
The money also will help defray the renovation costs, he said. The company needs $55 million to $65 million more to complete the work, according to the filing.
“From the Malkins’ point of view, the only risk is all the public exposure they’re going to have to give when they file their quarterly reports,” Saft said. “The problem with going public is the fact that you’re public.”
--With assistance from Zijing Wu in London and Lee Spears in New York. Editors: Christine Maurus, Daniel Taub
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