The real estate investment trust sold 71.5 million shares for $13 each, the low end of the projected range of $13 to $15, according to a statement yesterday by the New York-based company. The stock climbed 2.5 percent to $13.33 at 10:05 a.m. in New York.
The sale culminates an almost two-year quest by the Empire State Building’s supervisors, Peter Malkin and his son Anthony Malkin, to take Manhattan’s signature skyscraper and 20 other New York-area properties public, a process marked by battles with some of the tower’s longtime investors. While rising interest rates are now tempering demand for real estate, office companies have performed better than U.S. REITs in general.
“The climate isn’t ideal, but if you’re going to do a REIT IPO, being in the office space is probably a better place to be than apartments or health care, based on where those stocks have moved of late,” Jeffrey Langbaum, a Bloomberg Industries analyst, said in an interview before the pricing. “And if you’re going to be in the office space, New York is a better place to be than the broader market.”
The Bloomberg REIT Index dropped 14 percent through yesterday from a peak on May 21, while a narrower gauge of office-property trusts lost 9.7 percent.
The IPO was the second-biggest for a U.S. REIT, excluding an overallotment. Douglas Emmett Inc. raised almost $1.4 billion in 2006, according to data compiled by Bloomberg.
Empire State Realty joins such competitors as SL Green Realty Corp., Vornado Realty Trust and Boston Properties Inc. as REITs with large Manhattan office portfolios. It has 5.9 million square feet (548,000 square meters) in New York, making it the smallest of the city’s publicly traded office landlords, according to data compiled by Bloomberg. The company also controls six retail properties in Manhattan and Westport, Connecticut, and five office buildings north of the city.
At the midpoint of the range set last month, the stock would trade at about a 12 percent discount to value of its buildings excluding debt, Green Street Advisors Inc. said in a report. Office REITs on average are trading at about 2 percent less than the value of their assets, while Boston Properties is at about a 2 percent premium, according to the research firm. Empire State Realty’s discount is similar to that of Edison, New Jersey-based Mack-Cali Realty Corp., which specializes in suburban offices in the U.S. Northeast.
Investors aren’t sure how to value the cash flow from the Empire State Building’s observatory, a tourist magnet, and how much they should pay for potential leasing gains among the office buildings, Michael Knott, an analyst with Newport Beach, California-based Green Street, said in an interview before the pricing.
The company’s offices are about 84 percent leased, compared with New York-area occupancy rates of 92 percent for SL Green, 96 percent for Vornado and 95 percent for Boston Properties, according to Green Street.
“If you believe that they can fill that up, that’s a source of growth that doesn’t exist with these other portfolios,” Knott said.
Revenue has more than doubled on space that has been renovated in the 82-year-old Empire State Building, a cause for optimism among investors, he said.
Hugh Burns, a spokesman for the Malkins with Sard Verbinnen & Co., declined to comment on Green Street’s analysis.
Anthony Malkin is Empire State Realty’s president, chairman and chief executive officer. Most of the funds raised in the IPO would go toward buying out the estate of Harry Helmsley, which still has a majority stake in the tower’s sublease, according to the prospectus. Proceeds also would be used to cover transaction costs and pay debt.
A minority of the skyscraper’s roughly 2,800 unitholders challenged the REIT proposal, favoring to keep a steady income stream and the bragging rights that come with owning a piece of such an iconic property. In May, the Malkins received the necessary approvals from investors to proceed with the IPO.
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