The Empire State Building IPO

esbIt is arguably the best known piece of modern property in the world and undoubtedly the star of the NYC skyline. Its height and art-deco style makes it stand out even in a city like New York.
Behind all the lights, tourists and viewing gallery, is a piece of commercial property that at 2.7 million square feet is the second largest office complex (after the Pentagon) in the United States.

As the real estate markets heat up again, especially in tier-A cities for Class A buildings, the owners of the holding company decided to hold an IPO for the stock in 2012, but lawsuits delayed it for more than a year. The stock was finally priced fixed last evening (Tuesday, October 1st) at $13, which was the lower end of the price band. Empire State Realty Trust (NYSE: ESRT) has raised $929.5 million by pricing 71.5 million shares and is expected to start trading from today. Along with the eponymous building, ESRT also owns eighteen other properties in and around Manhattan – which together can get to a value of $1.07 billion if the underwriters options are exercised. This is the largest REIT IPO since Douglas Emmett (NYSE: DEI) in 2006, soon after which the real estate markets crashed.

The building and its aura did not fully translate to valuation. Given its trophy property status, the Malkin Family and their bankers lead: Goldman Sachs (NYSE: GS); with Bank of America Merrill Lynch (NYSE: BAC) must have hoped to price offering at the top of the band, but the response to the IPO was tepid, according to the Wall Street Journal, made clear from pricing at the bottom of the band. The estimated yield (cap rate in real estate parlance, calculated by dividing the Net Operating Income of the Property with its value) is at the expected 5% to 5.5% range, which is at market rate for Class A, NYC Midtown Office properties.

We expect the stock to remain flat in the coming months as it is priced according to its underlying Net Asset Value. However, we expect that to change if effective interests keep moving further up. If interest rates move up, cap rates (yield expectations) from the market also moves up, leading to a fall in valuation. With the recent surge in mortgage rates we believe the stock can come under pressure based on the real estate fundamentals.

*Picture of Empire State Building from Wikimedia Commons, licensed under Creative Commons. Author: Jiuguang Wang

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