Empire State, Great Building but Expensive Investment ($ESRT)
The Empire State Building (ESB), along with some other less noteworthy real estate all in the North East were packaged up and put out in an IPO a few weeks ago. The iconic building was owned by a small group of investors in a partnership. They were bought out by the majority owners who organized the IPO, but not without incident. After all said and done, there was a settlement that enabled the building to be sold as part of the IPO. There is a good story here about the history of the ESB as an investment. Let’s also take a look at this REIT that was just IPOed to determine if it’s a worthy investment.
There is a lot of history with the Empire State Building, both for investors, tourists and corporate tenants. The ESB was owned by a limited set of investors, about 2,800 in total.
The Empire State building was built during the depression in the 1930s. It was a marvel in how quickly it was built, its art-deco craftsmanship and its sheer size. If you are not familiar with NYC, the original ‘city’ was downtown, that’s where you typically find all the skyscrapers. The Empire State Building changed that because it was built uptown and was the tallest building in the world for a time.
In 1961, the public was offered an opportunity to buy into the Empire State building through a public partnership. Along with other partners who organized the sale, the ESB was bought for a total price of $65M. Until recently, the building was owned by a small number of investors who owned units. There are many stories of ESB units being handed down through families who have held the units since the beginning. And with good reason, it has been a solid investment if you could have afforded to buy units.
To buy a single unit in the partnership in 1961, you needed to invest $10K. That doesn’t sound like a lot of money, but in 1961 $10K was a lot of money. The average yearly income for workers in 1960 was about $4K. Today, if you earn $50K, that’s like coming up with $125K to invest in a single unit. It’s possible, but for most people, that would be a big chunk of their investment money.
At $10K, there were only about 3,900 units available. Judging by the number of unit holders, there were are a lot of small investors in this building who owned one or just a few units. I don’t think this was formalized, but I did find statements that implied that these units were further subdivided over the years in pieces to further divide ownership.
ESB Investment History
The ESB was a similar investment to a REIT. As a unit holder, you earned a portion of the rental income that the building generated each year that was sent to you. The building has always been an attractive corporate rental and the observation deck has consistently generated an ever increasing amount of revenue. Compared to 50 years ago, tourism is a much larger component of commerce in NYC which has greatly increased revenue for the building.
What about the returns?
The exact interest earned over the years was not available, but the current year income estimate I was able to find.
Per Unit Financial Information:
Estimated Value: $340,000
Estimated 2013 Income: $14,683
Estimated 50 year Investment Return: 7.5%/year.
Income Yield (2013): 4.3%
When you add it all up, this investment has likely earned 10-12%/year over the 50 years. Pretty good, but certainly not the best investment you could have made over that time frame (this is roughly on par with a large cap index fund during the same time frame). It would have been cool though to own some units because unlike other types of financial investments, you can see and touch this one.
The ESB is the anchor investment of $ESRT and where the REIT gets its name. How does this compare to other REITs and to the old ESB partnership? Here’s a rundown of some numbers for $ESRT
Per Share Financial Information:
Value: $14.00 (IPO price: $13)
Estimated 2014 FFO: $0.52/share
Estimated Annual Dividend: $0.34/share
Income Yield (2014): 2.4%
At a price to Funds From Operations (FFO) of 25X, this REIT is quite expensive. For comparison, here are a few other high quality REITS that are publicly traded and how their valuation stacks up now:
Realty Income (O): 17X
Vornado (VNO): 19X
Simon Property Group: 20X
As much as it is enticing to own a part of the ESB, you don’t want to pay too much. The share price is low, but the valuation right now is expensive.