Have you ever wanted to own a piece of one of the most iconic buildings (and more than 18 other properties) in the world? Well, your dream has (almost) arrived. After decades of complicated, court-frequenting structuring and restructuring, New York's Empire State Building is officially on the path to IPO in the form of a real estate investment trust. It couldn't come at a better time, as many REITs have enjoyed substantial gains on the back of a recovering commercial and residential real estate scene. How is the deal structured, and should it appeal to income-seeking investors? Let's take a closer look and find out.
The Empire State Building, the tallest building in the world for 40 years, was chopped up into 3,300 pieces for the then not-so-measly price of $10,000 each in the 1960s. It was a relatively new practice at the time -- allowing people who didn't have the last name of Vanderbilt to buy into major real estate deals while giving building owners access to new sources of cash.
At the end of 2012, there were 2,824 unit owners in the building. Reuters reports that each of those original 3,300 could be worth $320,000 today.
The current and longtime owners of the building, the Malkin family, have been pushing for an IPO since the middle of 2011. The move keeps the Malkins as the major owners of the building, but it allows smaller investors who would like to move on to get their cash and go. Of course, it hasn't been exactly smooth sailing.
Investors have argued in court that the deal is undervaluing their units. Those suits have failed, though, as Malkin reports that 80% of the investors have now voted in favor of an IPO, of which a date has yet to be set. Under a ridiculous forced-buyout provision upheld in the New York courts, investors can either go with the IPO or sell their units back to Malkin for $100. It should be no surprise that most are willing to go through with the IPO.
A good deal?
More details need to emerge, such as IPO pricing, before we can really determine whether this is an attractive play for income-seeking investors. REITs in general have gotten pricey as investors rushed in over the past 12 months to ride the housing recovery and the comeback of commercial real estate. The Green Street Commercial Property Pricing Index shows prices one point ahead of their pre-recession highs.
Admittedly without too much supporting data, I am hesitant to advocate for investors to rush into this deal without taking a very close look. The Malkin family will be greatly enriched by the deal, netting more than $700 million in paper gains once the IPO makes its debut. Out of the $1 billion the offering is set to raise, $672 million in cash would go to the Leona Helmsley estate.
The Empire State Building currently sits at under 70% occupancy and is in the midst of renovations to boost growth. Under a REIT structure, the building would be part of a more favorable structure, with tax benefits and public governance. For the long-term viability of the building and the others included, forming a REIT does make sense.
But it's the way this has been accomplished that tempts me to believe that this is a cash-raising ceremony for the major longtime holders, and a way to rid smaller shareholders of their stakes at discounted prices, who otherwise have a choice to take a check for $100.
Investors are better off looking at some other, more intriguing REIT opportunities. Recently, I wrote about CyrusOne (NASDAQ: CONE ) , a colocated data-center REIT that is growing fast and trading at a favorable valuation. The industry is set to grow well into the triple digits in the coming years, and CyrusOne's adjusted funds from operations have shown similar trends.
Another place to look, if a bit sinister, is The GEO Group (NYSE: GEO ) . Recently restructured as a REIT, this prison contractor has a tremendous real estate portfolio and helps build, manage, and support prisons across the United States. The stock is up more than 60% in 12 months and pays an attractive 5.5% yield.
Let some more details emerge regarding the Empire State Realty Trust, and make sure you aren't just aiding some already very wealthy landowners to tack on a few more zeroes to their net worth.