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  • Should You Buy A Piece Of The Empire State Building (ESB REIT)?

    How would you like to own a piece of one of the most iconic and best known buildings in America? Not only did it have a leading role in the movie, When Harry Met Sally, but who could forget the 1933 movie King Kong where the giant ape climbs up the side of the Empire State Building?

    ESB Trust (ESB) - a real estate investment trust (REIT) that owns the Empire State Building and other properties in New York and Connecticut, announced their initial public offering (IPO) with the intent to raise $1 billion to cover the IPO expenses, pay investors, repay loans, and fund future acquisitions.

    Owning a piece of such a storied landmark is sure to tug at the nostalgic heartstrings of hard core New Yorkers, movie fanatics, and architectural students but what about investors who know that romantic stories don't necessarily mean profits? Is ESB a good place to put your money?


    ESB isn't exactly a stock. ESB is a real estate investment trust or REIT. A REIT enjoys certain tax advantages in exchange for returning 90% of its earning to shareholders in the form of a dividend. These proceeds are generated from the direct operation of the properties primarily in the form of rent payments from tenants. Because of the tax advantages, REITS often generate hefty dividends-sometimes 7%-10% or more.

    Real estate investment trusts are currently a favorite among investors. REITs and REIT ETFs significantly outperformed the S&P 500 in 2011, and this trend shows no sign of slowing given the improving landscape of the commercial real estate market. At the end of 2011, the vacancy rate among New York offices stood at 10.6%, higher than the 2007 average of 6%, but lower than the recent high of 13%.

    Since a REIT is only as good as the performance of the properties it owns, an investor should always evaluate a REIT's holdings. In the case of ESB, not only does it have a very small portfolio of properties compared to other REITs sometimes as much as 20 times ESB's size, ESB's 12 properties are in one geographic area. The small size and relatively non-diversified holdings gives this IPO the potential to be more volatile than other REITs.

    The IPO

    Many investors make it a rule to not invest in IPOs given the heightened volatility that seems to follow early trade. If recent IPOs are any indication, the performance of the issue on the first day comes with a lot of unknowns. Recent IPOs have as much as doubled in value on the first day only to give up most of that ground in the days to come as traders flip the stock for a quick profit.

    REIT IPOs specifically have recently struggled at the opening bell, so investors should not be looking at this IPO for quick gains, but rather as part of a broader long term strategy.

    Closer Look at ESB

    According to SEC filings, the Empire State Building is currently 99% full-up from 69% a few years prior. Indeed, the Financial Times recently noted that trophy properties such as this have shown resilient rental rate growth and New York commercial rentals were up nicely last year. In addition, the building is a tourist mecca, helping drive revenues from entrance fees and other tourist charges.

    But investors looking to dive deeper should also evaluate the track record of management and their ability to weather the ups and downs of the property market. By all accounts, the Malkins - who own the property and who will run ESB with Anthony Malkin at the helm - have a good track record, but when investing in a REIT as non-diversified as ESB, it's a good practice for investors to conduct their own due diligence before committing funds.

    REITs In Your Portfolio

    REITs bring a well-established element of diversification to your portfolio which shouldn't be overlooked. They are non-correlated with the S&P 500 (the leading indicator of large cap US equities) and significantly outperformed the S&P 500 last year. Many experts therefore recommend you hold around 5-7% in your portfolio, but the precise allocation should be driven by your investment goals. Your circumstances may justify a holding of up to 20% real estate. On the other hand, if you already have a big exposure to real estate, perhaps another REIT holding is not for you at all.

    Real estate is a current favorite of long term value investors looking to purchase at firestorm prices and hold for a long period of time, and although REITs may have seen a large appreciation in price over the past year, a long term approach to REITs is the best strategy.

    Finally, because REITs pay out hefty dividends, it is advisable to keep real estate investment trusts in tax advantaged accounts like a traditional IRA where the earned dividends aren't taxed until distributions begin. This allows the income to compound more efficiently than it would if it were taxed in a traditional brokerage account.

    Bottom Line

    Much like Coca-Cola, Disney, and other popular companies, the Empire state Building IPO is sure to generate interest from those who want to own a piece of one of the most famous buildings in the world but investors looking to generate impressive gains should tread carefully due to the small size and potential volatility of such a non-diversified REIT.

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

    Additional disclosure: This article first appeared on Feb 24, 2012 on the Jemstep blog

    Tags: ESRT
    Feb 28 1:01 PM | Link | Comment!
  • Should You Buy Facebook?

    At a time when the IPO market is rippling from the recent wave of high-flying technology companies like Zynga and LinkedIn, Facebook's eagerly anticipated initial public offering is by far the largest and most hyped yet. It hopes to raise $5 billion, more than any other U.S. tech company since Google.

    And why not? Long before its plans to become a publicly-traded company, Facebook was a household name. The company, which got its start in a Harvard dorm room eight years ago, today has a staggering 845 million users worldwide, with more than half of its users logging on every day, according to company reports. Financially, this translated into $1 billion profit for the company last year.

    With the hype leading up to the IPO filing, we've read about how Peter Thiel's early investment of $500k is now worth in excess of $2 billion. LinkedIn founder Reid Hoffman reportedly invested $40,000 as an angel investor. His investment's current worth? About $350 million. Even if these reports are a little inaccurate, the wealth creation for early investors, founders and employees alike is astounding.

    Every investor dreams of getting in on the meteoric rise of a hot stock like Facebook. But even if they wanted to, few individual investors have had the opportunity to acquire Facebook stock in the private market. Now, that changes with Facebook's IPO. So the question is: will Facebook turn out to be the next big thing for ordinary investors-or the next disappointing bust?

    On the surface, investing in an enormously popular company like Facebook may seem like a sure bet, and the temptation is to join the gold rush by snapping up shares as the opening bell rings. But as the stock market has taught us over and over again, nothing is guaranteed and what happens next is anyone's guess.

    Seeing beyond the hype: Lessons Learned

    After debuting last May, shares of LinkedIn skyrocketed 138% on their first day of trading, rising from $45 to $122. But over the course of a few days, the stock plunged to $60 before again rising to more than $100. Six months later, shares sunk to a new low of $55. The stock is now trading at around $79.

    Zynga and Pandora both saw their stocks fall on debut. In fact, Zynga opened below its issue price of $10. The stock has now recovered and is trading in the $12 range.

    In July 2011, Zillow opened on the NASDAQ with a whopping $60 share price, but fell quickly to $34. It's currently trading at $31. No investor wants to be on the wrong side of timing these volatile swings.

    While not always the case, many highly publicized stock market entrants have also underperformed over longer periods. Data compiled by Bloomberg reveals that, as a whole, all 333 IPOs that hit the market over the two-year period are collectively trading at a miserable minus 11 percent-actually losing money since their offering. And there's plenty of other evidence on poor IPO performance dating back to the late-80s.

    An Alternative Way to Play

    So, is there any way ordinary investors can potentially benefit from one of the biggest Internet IPOs? The answer is yes, but don't think of it as a quick, big payday.

    Many investors may already indirectly own a small piece of Facebook without having to acquire shares on the market. According to a recent MarketWatch article, roughly 50 mutual funds and ETFs own stakes in the social media company (as of the end of 2011, 19 funds managed by T. Rowe Price held over $400 million Class A shares of Facebook). More funds will pick up shares in the future.

    These holdings are relatively small though, and shouldn't be relied upon to suddenly boost performance of the funds in question.

    Thinking Long Term

    A better approach than seeking a quick gain is to focus on your long term investment goals. The dot-com bust and Great Recession have strengthened the case for sensible long-term investing like never before.

    Diversification-not putting all your investment eggs in one basket-is essential to reduce overexposure to a single stock and to keep assets safe through bull and bear cycles. How an investor determines the right portfolio mix depends on individual objectives and appetite for risk as part of a sound investing plan, preferably for the long term.

    In these uncertain times, it makes sense to evaluate Facebook (and any other IPOs, for that matter) within the context of your investment plan. Does your plan call for more exposure to the tech sector? Is your portfolio underweight in domestic growth stocks? Are there sound long-term fundamentals underlying the hype?

    For prudent investors, these are the better questions to ask rather than wondering whether Facebook stock will rise or fall in the hours or days after IPO. That is akin to calling black or red on the roulette table.

    Investing may be inherently risky, but it shouldn't be a speculative gamble, especially not if your financial future is at stake.

    This article first appeared on

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

    Feb 24 12:16 PM | Link | 4 Comments
  • Amidst the turmoil, is it time for a move into commodities?

    The big story of the year so far has been the astounding developments taking place in the countries of the Middle East. It is fair to say that a larger percentage of humans can now point to the location of Tunisia on a map than would have been the case three months ago. And we watched with riveted eyes as popular demonstrations brought down the thirty year reign of Hosni Mubarak in Egypt. Amidst these heady developments –with a mix of promise and peril for the citizens of these nations – are some concerns for the global economy. Foremost among these, perhaps, is that fears of oil supply disruptions will spill over into widespread commodities price inflation, which in turn could threaten the nascent economic growth we have been witnessing in the past few months. If inflation is going to be a factor to deal with in 2011 then history tells us that real assets – commodities like oil, agricultural products and base & precious metals – could help to hedge against weakness in other risk asset valuations. Investors should be aware of the different ways to add commodities exposure to a diversified portfolio.

     Over long periods of time commodities exhibit similar levels of volatility to equities. The trick is that these two asset classes tend to perform in different ways for the same given period of time. In the language of investments we refer to this as low correlation – a desirable property for portfolios because it hedges the risk of something going really sour for any one exposure. Inflation can be a very souring influence on equities. Rising prices put pressure on businesses by increasing the costs of the materials they need to produce. They can either eat the higher costs and see their profits fall – which Wall Street never likes – or try to pass the cost increases onto consumers. But if consumers are feeling the pinch themselves they will likely respond to higher prices by buying less – in turn decreasing sellers’ sales and profits – and thus putting downward pressure on share prices.

     Over time one would expect this kind of scenario to come back and hit commodities. Businesses facing lower sales will probably decrease production, demanding fewer commodity inputs and thus causing the prices of those inputs to fall. Logical enough. But that can take time to play out. And that is exactly why equities and commodities tend to do well at different times. Commodities prices will tend to be high when share prices are getting battered by poor sales or low profit margins, and by the time reduced demand has caused commodities prices to fall, businesses have probably stabilized and started to pick up again.

     There are different ways to obtain commodities exposure through simple registered mutual funds or exchange traded funds. Funds may offer direct exposure to the underlying assets – like crude oil, copper or wheat – via managed  commodities futures. An example of a fund that takes this approach is Pimco Commodity Real Return (PCRRX). On the other hand, it is possible to obtain exposure via proxy by buying into shares of the companies that benefit from higher commodities prices – diversified energy, mining, agribusiness and equipment producers. An example of this would be Ivy Energy IEYAX. In this case you are actually buying equities, not commodities, but you would expect this sector to outperform in a period of high inflation because they get their revenues from the products that are costs to downstream businesses.

    Exchange traded funds are another way to invest in commodities. PowerShares offers an ETF giving exposure to oil commodities futures (DBO) and another for agricultural products (DBA), while iShares operates an ETF for gold futures (IAU).

    Bear in mind that commodities can be extremely volatile and trends can reverse on a dime. In the middle of 2008 crude oil prices seemed to be headed into the stratosphere, then plummeted in the fall when the economy went into a nosedive. And it is true that in the wake of the crisis commodities and equities have not been as lowly correlated as their historical norms have been. High inflation may not come to pass, the Middle Eastern oil supply may not be noticeably disrupted, and droughts may not ravage corn and wheat harvests this year the way they did last summer. But there is certainly a plausible case to make for the usefulness of commodities as a portfolio addition in the current climate.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Feb 25 7:16 PM | Link | Comment!
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