ESRT’s ho-hum debut exposes investor jitters

The Empire State Building share price hovered around $13
The Empire State Building share price hovered around $13

Empire State Realty Trust’s lukewarm debut as a public company — its share price closed at $13.10, up 0.77 percent over the initial offering — has provided little in the way of consensus on whether the factious plan to create the real estate investment trust was the wisest move.

The REIT, which famously counts the Empire State Building (as well as 18 other properties) in its portfolio, began trading today on the New York Stock Exchange under the ticker symbol ESRT. The launch officially ended a multi-pronged attempt to thwart the IPO, which involved lawsuits from dissident shareholders and a series of unsolicited offers to buy the Empire State Building.

In the end, the share price barely strayed from the original $13 price, which was already on the low end of a $13 to $15 estimate. Of course, the stock is in its infancy, and just as Facebook’s shares tanked then recovered, ESRT’s value could rise or fall.

Yet, to some, the early performance confirmed fears that Malkin Holdings, the majority owner of the Empire State Building, had led investors astray by championing an IPO, rather than taking up a bid for a fee position in the Midtown tower. Malkin Holdings declined to comment.

According to one real estate broker, the $13.10 price was less than what investors would have received from such a sale.

Jed Reagan, an analyst at real estate research firm Green Street Advisors, attributed the low price to investors’ concerns over Malkin Holdings’ management, as well as the valuation of the observatory atop the skyscraper.

“There were mixed reviews for their roadshow,” Reagan said, referring to the presentation to hype the stock ahead of the IPO. “[The Malkins do] not have public market experience and the public market is a different animal.”

But “as far as pricing, we feel [about $13 per share] is an attractive valuation for investors,” Reagan added.

And some local real estate players want to dive in.

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“I know it was at the lower end of the range, but [the Empire State Building] is an absolutely iconic structure and a spectacular asset. It is slowly being buffed into a jewel,” said Eric Anton, a managing partner at Brookfield Financial. “I have not reviewed the numbers, but if it’s a reasonable story and a reasonable return, I would invest in it.”

That said, Anton was surprised by the sudden launch of the IPO, having expected the dissident shareholders to put up more of a fight.

One longtime critic of the IPO is registering his dissent the only way he can: Richard Edelman, an investor in Empire State Building Associates, the company that owns the tower, said he would not increase his stake.

“Seeing the REIT shares price at $13, which is about 35 percent less than what ESBA investors were told to expect by Malkin Holdings, is like a bad movie than never ends,” he said.

Jason Meister, a vice president at commercial brokerage Avison Young who represented Rubin Schron and Joseph Sitt in separate offers to buy the building (which expired in August and September, respectively), said the thousands of investors in the property were wondering if they were better or worse off.

“What does this mean? There were [some] 2,800 investors with 3,300 units. What are units worth?” he said.

The last offer from Sitt would have valued each ESBA participation unit at $281,018 or $327,575, depending on how debt is accounted for, Meister said. By contrast, at $13 per share, each unit has a value of $223,000, according to Meister, who relied on figures from Malkin Holdings’ IPO agent, MacKenzie Partners. (MacKenzie was not immediately available for comment.)

Larry Longua, who is on the advisory board of the REIT Center at New York University’s Schack Institute of Real Estate, compared the IPO unfavorably with SL Green Realty’s in 1997. At the time, SL Green was concentrated in Manhattan Class B office stock.

“I would not buy this stuff frankly,” Longua said. “I am not all that positive about New York buildings.”