Empire State Realty Trust shares rise in market debut

NEW YORK Wed Oct 2, 2013 4:58pm EDT

1 of 3. Chairman, CEO and President Anthony Malkin (4th L) and Chairman Emeritus Peter Malkin (3rd L) of Empire State Realty Trust, the company that owns the Empire State Building, ring the opening bell to celebrate the company's initial public offering (IPO) at the New York Stock Exchange, October 2, 2013.

Credit: Reuters/Brendan McDermid

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NEW YORK (Reuters) - Shares of Empire State Realty Trust Inc (ESRT.N), owner of the Empire State Building, rose in their first day of trading on Wednesday as investors bet the marquee property will be able to attract more tenants as New York's technology sector grows.

The shares, which were initially sold late Tuesday at $13 apiece, rose as high as $13.49 before easing back to close at $13.10, up 0.8 percent, on the New York Stock Exchange. The broader market fell.

With the company's nearly $930 million offering, investors are valuing the company at about $3.2 billion.

Empire State Realty Trust owns the skyscraper it is named for and 18 other properties in New York and Connecticut. The portfolio's office space is 17 percent vacant, but some investors believe its vacancy rate could drift lower, boosting the real estate investment trust's leasing income, said Michael Knott, analyst at real estate research and trading firm Green Street Advisors.

"It's definitely a bet on an improving Manhattan office market," Knott said.

A key source of demand for New York office space is the technology sector, analysts said. Office rents in the New York metro area rose an average of 0.8 percent in the third quarter from the prior quarter, the second biggest increase after San Francisco, said real estate research firm Reis. Both cities benefited from growing demand for office space from the technology sector.

Even if the overall market does not improve, the Empire State Building can reduce its vacancy rate, Knott said. As of June, the building was 78 percent occupied, according to a regulatory filing. But office space in the neighborhood adjacent to the building is relatively scarce, with just 8.7 percent of the square footage expected to be up for rent in the next 12 months, according to real estate services company Cassidy Turley.

Since 2006, Malkin Holdings, the Empire State Building's operator, has been renovating and restoring the skyscraper to help lower the vacancy rate. It has moved out hundreds of small tenants, upgraded the building's electric and heating systems, windows, elevators and lobby and consolidated the space to lure larger tenants, who can afford higher rents. The upgrade has cost about $190 million so far, and could cost another $175 million when it is done in 2016.

Its efforts have paid off, attracting tenants including LinkedIn Corp (LNKD.N) and cosmetics company Coty Inc (COTY.N).

The company's shares rose even as those of SL Green Realty Corp (SLG.N), a well-established New York office REIT, slipped 7 cents to close at $90.13. Meanwhile, shares of the benchmark MSCI US REIT Index .RMZ were down 0.08 percent.

Some investors are skeptical of the Empire State Realty Trust, given the sluggish pace of U.S. economic growth overall, particularly as the U.S. government is partly shut down. The company also has a complicated ownership structure that puts off some investors, analysts said. Empire State Realty Trust shares were priced at $13 apiece on Tuesday, the lower end of the company's expected range of $13 to $15.

The shares' debut marks the end of a long road and sometimes tumultuous road to an IPO. The process began in late 2011 and was met by resistance from a small group of investors and by several lawsuits.

BEAUTY AND THE BEAST

The Empire State Building is arguably the most famous building in the world. It opened in 1931 during the Great Depression and, at 102 stories, stood as the world's tallest building until it lost its title in 1972 to the World Trade Center's North Tower. King Kong famously climbed the building in a 1933 movie, and Cary Grant and Deborah Kerr agreed to meet at the skyscraper in the 1957 film "An Affair to Remember."

In 1961, lawyer Lawrence Wien bought the right to lease the property by selling 3,300 units of the building to individuals, creating Empire State Building Associates. Wien and real estate magnate Harry Helmsley sublet the building from the investors for 114 years, essentially giving them and their heirs control of the property.

When their heirs, Lawrence Wien's grandson Anthony Malkin and the estate of Leona Helmsley, decided to take the company public in late 2011, litigation ensued, and a small but vocal group of owners of the 3,300 units sued to block the transaction. at least one case is pending on appeal. They also sought bids from other possible buyers, all of whom offered more than $2 billion for the property or parts of ownership.

The net proceeds of the offering are expected to be about $754.4 million after underwriting expenses and other items, according to the company. Much of the proceeds from the offering will go to the estate of Leona M. Helmsley and other non-profit owners.

The real estate investment trust - a company that essentially pays no income taxes in exchange for paying out nearly all its income as dividends - will have an initial annual dividend of 34 cents a share, according to a filing with the U.S. Securities and Exchange Commission.

At the $13 per share price, the annual dividend yield is about 2.6 percent. The average for U.S. office REITs currently stands at 3.3 percent, according to Green Street.

Bank of America Corp (BAC.N) and Goldman Sachs & Co (GS.N), were lead bankers on the deal.

Among the other real estate companies slated for IPOs in the near term are Blackstone Group LP's (BX.N) Brixmor Property Group Inc, a shopping center REIT, and hotel company Hilton Worldwide Inc.

(Reporting by Ilaina Jonas; Editing by Gerald E. McCormick, Dan Wilchins and Nick Zieminski)

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