Empire State Realty Trust (ESRT) offered an IPO on October 2nd of 2013 that experienced a lukewarm reception. The lead managers of the offering were Goldman Sachs and BofA Merrill Lynch and the co-managers included nine other prestigious firms. The quiet period is set to end in late October. See prior article on the ESRT IPO.
ESRT is real estate investment trust that includes a number of New York City office properties, including the iconic Empire State Building. The REIT has had an interesting road to IPO, and the stock's future in the marketplace is dependent on a number of variables that currently exist.
The IPO was priced at $13 with 71.5 share offered. The stock traded at a 16 percent discount to the value of its buildings, which was a considerable drop from comparable REITs. The trust intends to use the funds to buy out the estate of Harry Helmsley, which still has a majority stake in the main property's sublease. They also intend to use proceeds to pay down debt.
Nationally, office space properties have not had a stellar time during the recession, and ESRT has particular issues that have dogged them throughout the IPO process.
The Empire State Building constitutes one-third of the trust's rents. Under most circumstances, this would be a considerable risk. Add to this problem, the age of the building and increased costs of maintenance for older buildings. The opening of the new 1 World Trade Center Observatory in 2015 as competition is another concern. However, the prestige of the name of this New York City institution guarantees it a certain status that other structures can only envy. Unfortunately, that very status makes it also a target for potential terrorism.
The question becomes can a REIT that depends so heavily on its banner real estate name, The Empire State Building, use the national and international reputation to create a broader base for future profits. Many people are betting the positive because of the signature structure's historical importance to the city and the stable leaseholders on the properties. We believe a play in office space in this part of the Big Apple has good prospects for the longer term. The lowered price that may occur before the quiet period expiration date may offer just the motivation that investors need.
Empire's IPO lead underwriters included a top Buffett (BRK.B) holding, Goldman Sachs (GS) and BofA Merrill Lynch. Also, Barclays, Citi, Deutsche Bank, Wells Fargo, Capital One, HSBC , KeyBank, PNC, and RBS underwrote this IPO and I am expecting them to release favorable research reports at the end of the quiet period in late October.
Academic studies and our work over the past two years have shown a positive correlation between the number and visibility of IPO underwriters and the increase in share price leading up to the end of the underwriter quiet period, so ESRT's potent roster of underwriters is a highly encouraging sign.
The price typically begins to increase in the days approaching the end of the quiet period in anticipation of research reports being released, which savvy investors realize will be inevitably positive because underwriters would have no interest in releasing negative information about a firm that they just underwrote.