The 83-year-old Art Deco-style Empire State Building is an
iconic part of Manhattan's skyline, a major tourist attraction
immortalized in films and, for a fledgling New York-based public
real estate investment trust, the centerpiece of a growing
commercial-property portfolio that generates millions of dollars
More than 200 tenants occupy 83% of the storied skyscraper's
2.8 million square feet of office space. It's the flagship
property forEmpire State Realty Trust (
), a REIT that went public in October on the New York Stock
Exchange at an initial public offering price of 13 a share.
The company sold 82.2 million shares in its IPO. Including an
underwriters' overallotment option, ESRT raised about $884.1
million net of offering costs, it said in a quarterly report. The
stock now trades near 17, up 29% from the IPO price.
ESRT's portfolio includes 8.4 million square feet of office
and retail space, mostly in Manhattan, the New York metro area,
nearby Fairfield County, Conn., and Westchester County, N.Y.
A record 4.3 million visitors spent $101.8 million last year
taking in panoramic views of New York's boroughs and five states
from the Empire State Building's observatory. A decade ago, the
annual revenue was $40 million.
The observatory is a "cash cow," said Michael Knott, managing
director for real estate research firm Green Street Advisors, but
a new observatory being built at One World Trade Center could
siphon as much as 20% of that revenue, beginning in 2016.
Towers And Turnarounds
Analysts and ESRT senior managers say competition is among the
challenges ahead for ESRT, which is redeveloping and
repositioning office and retail properties to attract better
credit-quality tenants so as to lower vacancy rates and boost
Four office properties -- the Empire State Building, One Grand
Central Place, First Stamford Place and 250 W. 57th St. --
accounted for 62% of the REIT's annualized rent last year. The
Empire State Building accounted for a third of it.
"The Empire State Building used to be our poorest-performing
asset," said ESRT CEO Anthony Malkin.
Now the landmark property is experiencing a major
ESRT has moved out hundreds of small tenants and consolidated
the space to attract larger tenants with better credit for longer
terms. It has improved the building's energy efficiency,
elevators and lobby, provided access to fiber-based broadband and
The building is evolving into the "ultimate urban campus,"
Malkin said, a small neighborhood of sorts with tenants-only
fitness and conference centers, five different dining concepts,
banking, a cellular-phone store and more.
"You name it, it's here," he said.
Among the many tenants is professional-networking website
), which recently added 43,401 square feet of space.
The Empire State Building benefits from four income streams:
office, retail, broadcasting and the observatory, providing
diversity and resilience, Malkin says.
Tenants are grabbing up renovated floors, rent per square foot
has jumped 20%, and revenue has more than doubled, analysts say.
At the end of 2013, tenants occupied 86% of ESRT's total
portfolio space, generating $345.7 million a year in rent.
"We still have approximately 1.7 million square feet of space
left to redevelop within the Manhattan portfolio," Malkin
"We vacate and consolidate spaces, scrape them to the bone and
re-tenant them with better-quality tenants at what to date has
been positive rental-rate spreads," he added. "We also have
earlier leases done at the earlier stage of overall portfolio
turnaround, so we think we have built in another level of rental
increases which are unique to our portfolio."
ESRT is among many REITs that have fared well over the past
year, said Brad Case, senior vice president of research and
industry information for the National Association of Real Estate
Investment Trusts (NAREIT).
During the first four months of 2014, all sectors of the U.S.
REIT market delivered double-digit returns, including office, at
13.6%, and retail, at 12.6%, Case said. That marks a switch from
last year, when REIT returns were weak.
With a market cap near $1.6 billion, ESRT amounts to one of
the smaller companies in IBD's Finance-Property REIT industry
group, dominated in size by mall ownerSimon Property Group (
), which has a $51.8 billion market cap.
Big office REITs in the group includeBoston Properties (
), with a market cap around $18.4 billion, as well asBrookfield
Office Properties (
) andSL Green Realty (SLG), each of which weighs in with a market
cap over $10 billion. The group currently ranks No. 35 in
performance among 197 that IBD tracks.
In May, ESRT paid $734 million to acquire the ground and
operating leases at 112 W. 34th Street in Manhattan and the
ground lease at 1400 Broadway, both sizable Times Square South
office buildings. The acquisitions expand ESRT's portfolio by
Malkin said that ESRT tends to focus on attracting more mature
businesses with steady profits, strong credit profiles, proven
business models and long-term prospects for success.
The IPO gave ESRT a "strong balance sheet" to fund its capital
program and future investments, Malkin said, giving ESRT one of
the lowest leverage ratios in the office sector relative to
publicly traded peer REITs, with total outstanding debt of $1.2
billion. He says running this business became much simpler when
ESRT went public.
"We had 23 individual reporting entities, including three
public registrants, with no central balance sheet," he said. "Now
we are centrally managed with one unified, modestly levered
balance sheet, which gives us the ability to compete when we see
Since the IPO was completed on Oct. 7, and for the period
through Dec. 31, core funds from operations (core FFO) reached
$41.4 million, or 0.17 per fully diluted share, ESRT reported.
Core FFO excludes the impact of acquisition costs, severance
costs, retirement-equity compensation costs and gains on the
consolidation of non-controlled entities.
FFO, which includes those factors, was $220.8 million, or
$0.90 per fully diluted share. Net income was $75.2 million, or
$0.79 per fully diluted share. In May, the ESRT board of
directors declared a Q2 dividend of $0.085 per share.
In the first quarter, on a fully diluted basis, FFO totaled 17
cents per share and net income 5 cents per share.
Improvements are helping to bring the Empire State Building
full circle, analysts say.
What's A View Worth?
For its first year, after opening in 1931 during the
Depression, the observation deck took in about $2 million, as
much as owners earned in rent. A dearth of renters led some New
Yorkers to dub it the "Empty State Building," and the property
didn't turn a profit until 1950.
The Empire State Building's most recent repositioning really
began in 2006, Knott said, when ESRT's management finally gained
operating control and "had a massive mess to clean up from the
prior managers," from personnel and operations to leasing
"The building had become unleasable in the minds of many
tenants and brokers," he said. "That mindset is gone, and the
$550 million repositioning appears to be working. There is plenty
of upside left."