© The Financial Times Ltd 2014 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
March 15, 2013 2:17 pm
The owner of New York’s Empire State Building has secured nearly three-quarters of the votes it needs to proceed with a controversial $1bn initial public offering, according to a letter sent to investors on Friday.
Malkin Holdings is seeking to create a publicly traded real estate investment trust on the New York Stock Exchange, by bringing together the landmark skyscraper and other New York-area properties in its portfolio.
Almost 60 per cent of the 3,590 investors in the three public entities whose consent is needed have voted in favour of the consolidation. Eighty per cent have to grant approval for the offering to move forward.
Anthony Malkin, chief executive of Malkin Holdings, told the Financial Times: “The very strong support we have received from our participants in such a short period of time . . . is very encouraging.”
“I firmly believe there is an incredible upside for existing investors,” he claimed. “This is, I think, a rare opportunity in US real estate to consolidate a big portfolio with an iconic flagship building in one of the best global markets, New York,” he said.
Approval would end a year of wrangling between Malkin Holdings and dissident investors, who have been reluctant to give up the sentimental value of owning part of the Empire State Building and claimed that the proposal may result in a potential loss of income, rather than the increase they had expected as renovations to the building are finished.
But Mr Malkin said the proposal would give investors liquidity and greater growth opportunities.
The earliest the Malkins could conclude the voting process is by March 25, but some analysts say it will take much longer to garner the remaining votes. An IPO would likely be executed within two months following the approvals, people with knowledge of the matter said.
“Reit conversions”, by which companies become real estate investment trusts, have been fashionable in recent years, mainly driven by the tax benefits offered by the structure.
Reits pay almost no corporate taxes but in return they must pay out at least 90 per cent of their taxable income as dividends, making them reliable higher-yield stocks.
The last two decades have seen a significant migration of private commercial real estate companies into public hands.
“Access to various sources of capital not necessarily available to private owners is one of the benefits of the public company structure,” said Jeff Langbaum, senior Reit analyst at Bloomberg Industries.
“The rapid recovery of the commercial real estate Reit market in 2009-10 proved that the vehicle was a viable structure that works well in challenging times. Public companies had access to equity and debt capital, retained better access to mortgage debt and had large credit facilities to grow portfolios at a time when private landlords had to find a way to refinance.”
Reits that have large high-quality New York office market portfolios have benefited since the downturn as investors sought haven investments. Since 2009, shares in companies such as Brookfield Office Properties and SL Green have risen 126 per cent and 201 per cent respectively, while Boston Properties is up 96 per cent.
The company’s proposed portfolio consists of 12 office properties and six standalone retail properties, of which the Empire State Building is its largest revenue earner.
Since the downturn, institutional investors at home and abroad have sought out New York’s “trophy properties” – typically leased by high-quality office tenants – as a more defensive investment given supply constraints, high barriers to entry and resilient rental rate growth. An IPO would also enable retail investors to get a slice of one of the most famous buildings in the New York skyline.
The Malkin family took over day-to-day management of the 102-floor midtown Manhattan skyscraper – at one time the world’s tallest building – in 2002, and gained full control in 2010.
For decades, the Empire State Building was at the centre of legal battles between the Malkins and others including Helmsley Spear, the management company that ran the building after the death of Harry Helmsley, the New York real estate investor. The estate of his widow, the late Leona Helmsley, is the building’s largest stakeholder.
But the Empire State Building also has 2,800 unit holders who hold 3,300 shares. For the purpose of solicitation, each share is valued at $323,803, according to the prospectus.
Under the terms of the new proposal, investors who fail to consent within 10 days of an 80 per cent majority vote will be bought out at a nominal value – $100 for every $10,000 originally invested.
Richie Edelman, whose grandparents purchased a stake in 1962, says he is leading a cluster of more than 100 opponents to block or alter the proposed offering.
“In a lot of cases the current owners are the children of original owners, these are family heirlooms,” said Mr Edelman. “But well over half of these owners are in their 80s and have no interest in going into something akin to the stock market. About 40 per cent [of Empire State Building investors] are telling us they are voting no.”
“Not sending in a ballot is the same as Voting No. Most No Voters have told us that is how they are expressing their disapproval of the Reit plan.”
Bank of America Merrill Lynch and Goldman Sachs are underwriting the IPO. Proskauer Rose, Clifford Chance, Ernst & Young, and Duff & Phelps are advising Malkin Holdings.
Please don't cut articles from FT.com and redistribute by email or post to the web.