Can Investors Bank On The Empire State Building?

| About: Empire State (ESRT)

Last week, the Empire State Realty Trust Inc. (ESB), announced its intentions of going public on the New York Stock Exchange. The company will combine several existing commercial real estate companies into one Real Estate Investment Trust containing one of the most recognizable buildings in the United States, the Empire State Building.

The Empire State Realty Trust is being advised on the IPO by Bank of America Merrill Lynch (NYSE:BAC), and Goldman Sachs (NYSE:GS). No date has been announced for the sale but the company is expected to raise $1 billion. The cash from the IPO will be used to pay current investors for their ownership stakes as the company combines several companies. Cash will also be used to pay down debt and to help towards renovation costs.

The newly formed REIT will have twelve buildings under ownership representing an astonishing 7.7 million square feet. The company's namesake building represents 2.9 million square feet, or roughly 38% of the total area. The key building in the portfolio also was responsible for 41% of the company's revenue for the first nine months of 2011. Seven of the company's buildings are located in New York City. The remaining five are located in the outer New York area considered Westchester and a portion of Connecticut.

The seven buildings in New York (Manhattan) are:

  • Empire State Building
  • One Grand Central Place
  • 250 West 57th Street
  • 501 Seventh Ave.
  • 1333 Broadway
  • 1350 Broadway

Currently this group of the portfolio is only 76.9% leased for the office portion. The retail side of the downtown buildings is 81.3% leased. These numbers are from the S-11 filed as part of the initial price offering. The opportunity is evident in the numbers that the REIT can increase revenue if it can lock in some more tenants for the long haul.

Outside of the downtown area the company owns:

  • First Stamford Place (Stamford, Connecticut)
  • Metro Center (Stamford, Connecticut)
  • 383 Main Ave. (Norwalk, Connecticut)
  • 500 Mamaroneck Ave. (Harrison, New York)
  • 10 Bank St. (White Plains, New York)

This area of the portfolio is 89.59% leased. A slight increase by Empire State Realty Trust could increase revenue for new investors. This area outside of the downtown area has been strong and weathered much of the recession.

Currently, Li&Fung LTD leases close to 589,000 square feet of the Empire State Building and is the largest tenant. Other tenants include Linked In (NYSE:LNKD) and Noven Pharmaceuticals.

Along with skyscrapers, the buildings owned by the future publicly traded REIT includes retail properties that are leased by large publicly traded companies. Among the renters are: AT&T (NYSE:T), Bank of America , Chipotle (NYSE:CMG), JP Morgan (NYSE:JPM), Lowes Theaters, Lulemon (NASDAQ:LULU), Nike (NYSE:NKE), Starbucks (NASDAQ:SBUX), and Walgreen (WAG). The standalone retail properties include:

  • 10 Union Square (New York)
  • 1542 Third Ave. (New York)
  • 1010 Third Ave. (New York)
  • 77 West 55th St. (New York)
  • 69-97 Main Street (Connecticut)
  • 103-107 Main Street (Connecticut)

These properties are 96.8% leased currently. The retail segment has been strong for the company.

Last February, the Empire State Building partnered with The Knot (NYSE:XOXO) for a Valentine's Day contest. The contest allowed fourteen winning couples to have their wedding take place at the famous building on Valentine's Day. This was the only day that weddings were performed at the Empire State Building.

Construction on the Empire State Building was completed in 1931. The Empire State Building was the tallest building in the world until 1972. Despite losing its record in size, the building still attracts millions of tourists from around the world each year.

Along with the twelve buildings under ownership, Empire State Realty has the rights to develop an area of land located in close proximity to the Metro North Railroad. The trust also has options to buy properties at 112 West 34th Street and 1400 Broadway in New York

The initial public offering is coming at the right time for investors. Real estate in New York is showing signs of rebounding, considering the area was one of the hardest hit by the recession. To qualify as a REIT, a company must pay out a portion of their proceeds back to shareholders. Commercial real estate is a risky bet as large stores like Sears (NASDAQ:SHLD) close stores due to economic hardships. What better real estate investment than one of the most famous buildings in the United States to back your investment. Take the time to check out this IPO later this year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.