Empire State of Mind: Tony Malkin on Empire State Realty Trust
Last year, the Empire State Realty Trust, a real estate investment trust that counts the Empire State Building among its assets, went public. Under the symbol ESRT, shares in the REIT have traded up over 14 percent since the initial public offering early last October. The road to the New York Stock Exchange was a somewhat rocky one for the REIT, with a small, yet vocal group of investors rallying against the initial public offering. Undeterred, Tony Malkin, the chairman, chief executive and president of ESRT, pushed forward, confident that the consolidation and public offering of the portfolio formerly known as Malkin Holdings was the best route for investors. Nearly six months since the NYSE’s bell tolled for ERST, Mr. Malkin’s confidence is paying dividends. Having just signed LinkedIn to a 160,000-square-foot lease at the Empire State Building, ESRT is committed to redeveloping both its globally beloved 34 Street asset and other properties in the portfolio. Mr. Malkin spoke to Commercial Observer last week about ESRT’s road to its IPO and what’s planned for the future.
Commercial Observer: How would you judge the REITs performance since the initial public offering?
Mr. Malkin: We’re very excited as a team to be moving forward as Empire State Realty Trust. There’s no question that I think the biggest accomplishment we had through the whole process was continuing to execute a high level of redevelopment activity. Since we’ve gone public, we haven’t lost track of executing on our redevelopment activities and, in addition, things have become simpler for us as a public company.
Can you elaborate on how things have simplified?
Prior to going public, we had more than 23 individual reporting entities, three of which were public registrants. We were putting out K’s and Q’s for three registrants. The big change for us is our ability to operate centrally with one balance sheet, with one group of objectives for our unified management team. Those are the biggest points of simplification.
The ESRT IPO experienced resistance from a minority group of investors and litigation continues today. In your opinion, why won’t this group back down?
This was an overwhelmingly endorsed proposal by many thousands of investors. You were correct to say a minority group, because that is what it is. When you look at any multibillion dollar deal, there is a branch of the law practiced by what we call the plaintiffs’ bar, which creates a lawsuit. They create a lawsuit and find someone who has a stake and try to convert that into a class action. These law firms are like factories.
This dissident group has lost, and we look at their claims and say they are wholly without merit and we deal with them in court and the court process is transparent. Keep in mind it is the plaintiffs’ bar industry that manufactures these cases and pursues these cases. The dissident group has no stake in this unless the plaintiffs’ lawyers can concoct something.
If you do a billion-dollar deal, these attorneys are like ants at a picnic.
Are you confident you will resolve the disputes?
As I said, they are wholly without merit and we respond to them in court. I won’t make any other comments on that.
Did you feel a sense of accomplishment once ESRT began trading?
We had a vote. By an overwhelming super majority, people voted in favor of consolidation and IPO. First and foremost, we feel strongly about giving to our shareholders what they voted for.
My personal pathology is not one prone to celebration. It was clear to me that this is what our investors wanted and this was what was going to get done. Once the bell rung, it was a case of closing one chapter and moving forward.
I found the entire process incredibly interesting. It was intellectually challenging, and physically—stamina-wise—it was a challenge. But at no point, ever, was this process a burden. There was never a moment of dread or a moment of fear. It was the putting together of what we thought was a sound proposition for the benefit of all investors and they agreed.
The trophy property in the REIT’s portfolio, the Empire State Building, received a number of unsolicited offers in the lead-up to the IPO. How seriously did you consider those offers?
The No. 1 objective was to do every component of this transaction correctly. We treated it very seriously.
When we got these unsolicited offers, since we had such support, we didn’t want to screw it up by not handling these indications of interest correctly. We took them very seriously and reviewed them. We had Lazard review them. After careful consideration, we chose to move forward with consolidation and the IPO. We understood exactly what our fiduciary duties were and went out of our way to fulfill them.
In your fourth-quarter earnings remarks, you mentioned that ESRT is in process to take up its option to purchase properties at 1400 Broadway and 112 West 34th Street. Can you elaborate on that process?
The REIT is operating under the option as set forth in the disclosure documents. In those documents, 112 West 34th Street and 1400 Broadway were both optioned to the REIT because they were in litigation with the fee owner Charles Cohen. We couldn’t include them in the roll-up.
There is a period of time during which valuations need to be done, then a decision needs to be made by our management and board based on those valuations. When I wrote the exercise agreements, I recused myself from the process. We have a special committee from the board, which has been appointed to review the valuations. From my perspective, I’ll find out when they decide whether or not to buy. The process should be concluded by the end of the fourth quarter.
LinkedIn recently expanded to 160,000 square feet at the Empire State Building, which represents significant growth from its 6,000-square-foot sublease signed five years ago. Do you consider it a coup to have such a prominent social media tenant in the building, which some may deem outside Midtown South?
We are a critical component of Midtown South. We aren’t outside of Midtown South at all. The Empire State Building is not outside Silicon Alley; it’s actually at the center. We have LinkedIn and Shutterstock, two of the most profitable tech startups in the last 10 years, and we’re personally proud that Shutterstock is the most successful and profitable New York-based tech startup.
At some point, companies need to get away from the picnic tables and unreliable elevators. What I call the ‘charm of the startup.’ The Empire State Building is the premier urban campus within a building in New York City. Our 15,000-square-foot, tenants-only fitness center will open in the second quarter.
This is an environment in which these knowledge businesses can flourish and thrive without having to go out on the street. The energy efficiency work we did at the Empire State Building has been a huge lure. People are moving to the Empire State Building because they see it as a way to attract and retain employees.
Much of ESRT’s Midtown portfolio has been redeveloped to include a pre-build program. Have you noticed an increased level of interest from tenants for those spaces?
Our full-floor spaces and pre-builds cater to all tenants. When we look at the tenants with whom we are signing space, it isn’t just a bunch of startups. We are very, very deliberate in our review of tenant credit quality. Yes, we have leased to LinkedIn and Shutterstock, to Ebay and Ipreo. But we’ve also leased to 3i, one of the largest private equity groups, and Allianz Real Estate. What we’re doing is creating an environment for the best quality tenants at a price point below new but above what other buildings of our vintage receive.
How would you evaluate the strength of the Midtown market overall?
In the market that brokers are calling Times Square South, we see tremendous demand from businesses looking for proximity to transportation. We see people looking for high-quality buildings. People are looking for power, service, Internet connectivity and landlords that run the building efficiently.
What are you seeing in other areas of the market?
Downtown Manhattan is very interesting. New York City and New York State have pumped billions of dollars down there. I would expect that all of those billions would have an effect.
If you look at new development both at Hudson Yards and downtown, they offer a certain type of product. But from our perspective we don’t compete with them at all. Our price point is $20 to $30 per square foot less. We like our market position geographically and what we offer.
So, you wouldn’t branch out?
Our No. 1 focus right now is determining if we are going to be buying the optioned properties at 1400 Broadway and 112 West 34th Street. I have no say in whether that gets done or not, but I do have to pay attention to whether or not they choose to buy. We’ll see what happens there.
We have 1.9 million square feet in our portfolio left to redevelop. For the time being, we will judge ourselves on redeveloping and re-tenanting that space.
As far as new acquisitions, we are always going to be looking, but prices are fairly full. We are working with our new portfolio on how we can solve people’s problems going forward. That is going to be a focus for us.
Are you working on any other new initiatives?
We are looking at a variety of things, but the No. 1 focus for us is leasing, redeveloping, leasing, redeveloping and leasing. We are so focused. That is our mandate and that is what we are focused on.
We are going to move forward intelligently and look forward to where we are going to make money. We are not going to grow for growth’s sake; that isn’t our model. I am personally one of the largest shareholders in the company. I didn’t position us this way to make unintelligent decisions.