By Orlando Lee Rodriguez
Finally releasing what analysts had described as a “cash drag”, Steinway Musical Instruments, Inc. (NYSE: LVB) agreed to a $46 million sale of its interest in the W. 57th Street location that has held the company’s flagship store since 1925.
Corcoran broker Maria Manuche represented Steinway on the deal.
The long-awaited sale of the 16-story, 247,000 s/f building at 109 West 57th Street, to an investment group led by JDS Development Group is sure to please investors, some of whom had described Steinway’s continued ownership and performance of property management functions as behaving near-derelict in their duties to shareholders.
“Investors understand we’re about pianos, not about managing commercial real estate,” Steinway spokesperson Julie Theriault said to Bloomberg News. “For us to own an office building doesn’t make a lot of sense for the long-term future of Steinway.”
Steinway’s exit from the Manhattan real estate business gave the stock a slight boost. Shares rose more than 3 percent after the announcement to just under $23 per share at the close of Thursday’s session.
In addition to the building sale, the musical instrument manufacturer will cease paying rent on its land lease upon closing.
“This transaction further strengthens our healthy balance sheet and clears the way for Steinway to focus all of its attention on maximizing the value of the company’s core musical instruments business,” ” said Michael Sweeney, Chairman and CEO of Steinway said in a statement. “The Board is now in a position to begin considering options that are in the best interest of the company’s shareholders for deploying the net cash proceeds harvested from this non-core asset.”
The company says that it expects to “recognize a taxable gain” of $22 million once the sale closes. As a provision of the agreement, Steinway’s showroom will remain in the building rent free for up to 14 months, while it ponders a new Manhattan location.
“Over the next year or so, we will be preparing for the creation of a 21st century Steinway Hall,” Sweeney said. “Our Concert & Artist division is working on designs for a space that meets the needs of today’s artists and customers.”
The new location would be the third New York flagship store for Steinway. The first, located on East 14th Street between Fifth Avenue and University Place was abandoned in the 1920’s for 57th Street. The second and present location, near Carnegie Hall, opened in 1925. It was sold by Steinway in 1958 and the company became a renter in a building that it developed and still bore its name.
In 1999, Steinway decided to buy the building back and paid $62 million to Bear Stearns, Wexford Management and other investors who had purchased it. But they decided against buying back the land.
Dennis Hanson, then CEO of Steinway, speaking to The New York Times at the time, said that the company decided to lease the land underneath – instead of buying it- in order to reduce the purchase price.
Representatives of Cushman & Wakefield, who brokered the 1999 sale, said at the time that re-ownership would be a boon to Steinway’s cash flow. But over the years, it had proved to be a liability.
After putting the building up for sale in the mid-2000’s, the company was reportedly close to a deal before the market collapse in 2008, Theriault told radio station WQXR. Leases began to expire and were not renewed by Steinway – hurting cash flow – much to the dismay of investors.
Sweeney defended the decision to let leases lapse, saying renewed leases would hurt the sale price.
“We have held off on the process of leasing up space in the building,” said Sweeney in January. “If the building is going to be redeveloped more tenants would cause a reduction in value.”
But investors, growing impatient with years of empty units and more than half a decade without a sale, jumped all over upper management during conference calls.
“There is no economic justification other than you tell me it’s going to be worth $100 million,” said investor Ryan Corville. “To say that we should continue to own this building to me is bordering on a breech of fiduciary duty to the shareholders.”
A tentative agreement was reached in November, but fell through. The deal announced last week for the culturally landmarked building, sounds surer to hold.
The long-awaited purchase of Steinway Hall was made by a joint venture investment group consisting of JDS Development Group and the Property Markets Group, the co-developers of the Walker Tower in Chelsea, as well as Atlantic Partners.
The investment group made a deposit of $5.6 million at signing and the $46 million price and is subject to a post-closing upward adjustment. The group said that are expecting to gain $43 million in cash proceeds once the sale closes.
Michael Stern, JDS’ managing partner told the Times that the company “wasn’t sure” of their plans for the building and that negotiations to purchase the land underneath the building from the owner have begun.