03/28/2014 | By Allen Kenney
Published March/April 2014
The Empire State Building is the architectural marvel that defines the skyline of the world’s most famous city, an iconic building that has been inextricably linked in popular culture to New York.
And now a REIT has the landmark property as the cornerstone of its Big Apple-centric portfolio.
Anthony E. Malkin led a consolidation of separately owned assets through a three-and-a-half-year process to form Empire State Realty Trust (NYSE: ESRT) and put the building and the rest of the company’s office and retail assets throughout the New York metropolitan area into the hands of public ownership. The grinding process eventually culminated in an initial public offering in 2013 that netted more than $880 million. However, Malkin, the company’s chairman, president and CEO, downplays the suggestion that the launch of the publicly traded REIT represents a personal victory.
“We are thrilled to have delivered the result for which thousands and thousands of investors voted overwhelmingly,” Malkin says when asked if he ever considered ending the bid to go public. “There were many interesting turns in our process. The REIT path was really chosen initially and maintained after careful consideration of all alternatives, both before and during the process. Over a long period of time in which they could have changed their minds, our investors chose to become a REIT.”
In an interview with REIT magazine, Malkin discussed his entrance into the real estate world, his vision for the company now that it has gone public and one of the Empire State Building’s more notable visitors.
REIT: Your family has a well-known history in the real estate industry. Growing up, some people in that kind of situation can’t wait to take part in the family business; others might hesitate to take that on. Which one were you?
ANTHONY E. MALKIN: While business was discussed around the dinner table and at family gatherings, real estate was not my first focus. I went into private equity out of college, so I definitely hesitated. Ours was a different sort of family business. While we had a significant interest in all our deals, our family business was a business of working on behalf of other investors.
It wasn’t the same as just “joining up with one of the real estate families.”
In the end, I did not join up with the family business until just after my grandfather died in 1988, which happened to be the great real estate downturn of 1989 through 1993. It was an interesting time—sort of birth by fire. I was more drafted than a destiny chosen by me, but I’ve had a good run while I’ve been here.
REIT: What is it that you find attractive about the real estate industry now?
MALKIN: I view real estate as an area of investing and one of the few left with information asymmetry, which creates opportunities for expert practitioners to add value uniquely. I think one of the interesting things as an expert practitioner in real estate is having the ability to do things differently because there is differentiation in the marketplace as far as who knows what and who can do what.
It’s not a commodity, at least not the way we practice it. I find that to be the most attractive component of it.
REIT: Empire State Realty Trust went public last year, but getting the company to that point was a protracted process with some hurdles that had to be cleared along the way. At any point did you consider taking the company off that path? What kept you so steadfast in the belief that the firm was best off as a publicly traded REIT?
MALKIN: As Sam Zell has said—and I agree—public ownership of real estate is a fantastic format and a great opportunity for investors. Illiquid private ownership, frankly, has a lot of downsides and disadvantages for investors.
Remember that we were working on behalf of investors, even in our private business before we went public. There were many interesting turns in our process. The REIT path was really chosen initially and maintained after careful consideration of all alternatives, both before and during the process.
The key for us was listening to those thousands and thousands of investors who overwhelmingly in the end declared their desire to have a path to all of the options and benefits afforded by the REIT structure, including liquidity on an efficient public market. We worked very hard to deliver what investors wanted after listening to investors’ own voices over a period of years. When confronted with a lot of different information, investors really became very informed not by just what we put out there, but from folks who had other views as to whether or not this deal should go forward. Investors overwhelmingly chose—and remained committed to—this public REIT course. We feel very good that we delivered it for them.
It was long. It was challenging. But we gave people what they wanted.
REIT: Your company specializes in both the office and retail sectors. Does the fact that Empire State Realty Trust isn’t a pure-play make managing the business more difficult?
MALKIN: We’re very straightforward: We’re in one market with two asset types.
Our balance sheet is one of the lowest levered in the industry. We have tremendous built-in growth in bringing our assets to market. Our ownership structure is far simpler now than what we had when we were private.
We’ve been working with these assets for decades. To us, it could not be more straightforward. We have centralized management, which is a big difference from how we were before. We know our market intimately. To us, it’s very simple and straightforward.
REIT: How do the retail and office sectors complement each other?
MALKIN: A great deal of the value that we create is in the retail of our office buildings. Remember our retail is not grocery-anchored centers in the suburbs; this is in the central business district, the bases of buildings or individual stores on main streets.
We think they’re entirely complementary. One muscle exercises the other, so to speak.
REIT: Empire State Realty Trust is inextricably tied to one of the most iconic buildings in the world. From a brand standpoint, do you think the market as a whole has a firm grasp on the fact that the company is more than just one architectural wonder?
MALKIN: Let’s be clear: We’re not upset about having the world’s most famous building and the international icon of the greatest city in the world as the trophy of our portfolio. There was a time when the Empire State Building was not under our control and, frankly, was not a well-regarded property. We’re thrilled to have it as our centerpiece and we’re thrilled to have the work that we are doing to turn it around recognized.
There are two markets out there. There are the capital markets where people determine whether or not they want to own our stock. Then there’s the market on which we focus most, which is the market filled with tenants and brokers on whom we rely to do business. We know tenants and brokers are well aware that the greatest majority of our portfolio out there is not tied to the Empire State Building.
As far as investors are concerned, we’re confident that people will figure us out a bit better with the passage of time. From the perspective of investors, it’s understandable since we have spent so much of our time rebuilding the brand as well as the building itself that it should dominate the view. But tenants and brokers understand the rest of our properties and regularly put tenants in them and regularly sign leases in them.
When people get to know us better, I think the capital markets will broaden their understanding and comprehension of who we are and what we do.
REIT: The global financial crisis and ensuing economic downturn created concerns for the office sector that it has struggled to shake. Are you seeing any evidence that the cloud is lifting?
MALKIN: It’s kind of a tale of two worlds. That may have some roots in some very broad trends out there, but we’re in New York City, which is the international financial and creative center of the world.
We think our New York City market, frankly, is unique. We like our product, we like our market and we like our competitive position for our product within our market.
I’m really not in a position to comment on super-broad trends in office properties in other markets where we are not present, but I feel good about the trends and direction in office in Manhattan and the greater New York metropolitan area, and I like our position within it.
REIT: Within Empire State Realty’s target market of the greater New York metropolitan area, are there any submarkets that stand out to you as intriguing candidates for expansion?
MALKIN: In general, a very broad view is that we feel very comfortable with our current presence, and we really look at the Manhattan market as the greatest opportunity for growth.
When we look at the greater New York market in general, the properties that we have outside of New York— both office and retail—we like very much. We like our position within those markets. They are consistent outperformers: best-in-class, midtown Manhattan-quality assets within those markets. They perform better because they are differentiated, and I think that differentiation limits the opportunity for expansion for us outside of Manhattan.
Within Manhattan, it’s a giant market, and given our size and given our balance sheet, we don’t have to do a lot to be transformational for our company. We want to deliver the internal growth that we’ve got, bringing our properties’occupancies and rents to market. As for the future, we only have to conclude a couple of transactions over a period of years to be very transformational to Empire State Realty Trust without needing to go into other markets in what might be marginal situations.
REIT: Looking ahead, what’s the top objective for your company this year?
MALKIN: Empire State Realty’s top goal for the next year and beyond is to complete the redevelopment of the Empire State Building and to complete the repositioning of our entire Manhattan portfolio, bringing our rents and occupancy to market. That’s going to deliver material growth to our top and bottom lines.
Of course, we will continue to drive traffic and margin in our observatory operation at the Empire State Building. Beyond that, we will look for opportunities where they exist to apply our asymmetric knowledge and our unique skills as property redevelopers if opportunities present themselves.
But today the clear objective is to bring our rents and occupancy to market levels. We have spaces to develop at the Empire State Building. And we have demonstrated, we believe, the ability over time to do this. We intend to complete that work, and that’s going to occupy our time for the foreseeable future.
REIT: If King Kong comes to you and wants to climb the Empire State Building again, what do you say?
MALKIN: Welcome back, Big Boy.