The Real Deal New York

IPOs on the horizon

Will 2013 live up to 2012 when it comes to new public offerings?

February 01, 2013
By C. J. Hughes

Tony Malkin, the president of Malkin Holdings, which is looking to issue an IPO for a portfolio that includes the famed Empire State Building

The market for initial public offerings by real estate companies was hot in 2012. Companies like the real estate website Trulia, the private equity firm the Carlyle Group and Realogy — the largest residential brokerage franchiser in the world and the owner of the Corcoran Group and Citi Habitats — all made headlines by issuing blockbuster IPOs.

The Empire State Building is part of a 19-building portfolio that the Malkin family is looking to turn into a REIT.

Indeed, it was a good time to turn to Wall Street to raise money from the public markets, as the above-mentioned companies did, or to continue to reap the rewards of cash infusions as a real estate investment trust, or REIT.

In 2012, REITs alone raised a best-ever $73.3 billion, through both the sale of equity shares and the issuance of debt. That was a hefty 12 percent increase over 2011, when $51.3 billion was collected, according to data from the National Association of Real Estate Investment Trusts.

While this year is not expected to be as sizzling as 2012 — partly because so many firms are already listed on the stock exchange, and partly because firms are having more luck drumming up capital without turning to Wall Street as the cost of debt comes down — observers predict some real estate IPO activity.

Analysts say the real estate industry can expect to see IPOs from less-obvious real estate firms, including storage and outdoor billboard advertising companies.

But the most anticipated real estate IPO of the year, sources say, could be a portfolio that includes Manhattan’s landmark Empire State Building.

The Empire State Realty Trust, whose 19-property portfolio in New York and Connecticut includes the Art Deco landmark, is looking to raise $1 billion, according to the Malkin family, which has controlled the Empire State Building through Malkin Holdings since 2002.

But before that IPO can happen, the Malkins must clear a big hurdle — getting approval from the building’s other investors. That’s because in 1961, when Lawrence Wein (father-in-law to Malkin Holdings’ patriarch, Peter Malkin) and Harry Helmsley purchased the nearly 1,500-foot tower for $65 million, they brought in thousands of small-time investors in a syndicate deal.

The Malkins, which have gradually increased their control in the building over the years, now need approval from investors who own 80 percent of those syndicated shares. According to some sources, many of these investors live off their monthly dividends, and believe that going public will dilute their earnings because it will lump the Empire State Building in with underperforming suburban properties. They also argue that the REIT market is starting to cool, so the stock price of the new public entity could suffer, too.

Last year, a few of those disgruntled investors sued the Malkins to stop the deal; the suit was reportedly settled for  $55 million in the fall, although the deal still requires approval from a judge, according to sources.

“As much as, in the beginning, we thought it was a lousy deal, we have the actual numbers to show an investor will make far more money maintaining the status quo,” said Richard Edelman, who owns 10 shares that his grandfather, Max, an escalator salesman, bought on a tip from a neighbor. (According to an estimate by the Malkins that was cited in a recent Businessweek story, each share is worth roughly $330,000.)

Meanwhile, last month, some investors attempted to block the $55 million settlement, claiming it doesn’t go far enough.

Tony Malkin, the president of Malkin Holdings, declined to comment, citing Securities and Exchange Commission rules mandating a “quiet period” before a possible IPO.  But a spokesperson for Malkin did address the attempt to block the settlement, saying “this motion contains numerous false allegations and misleading statements.”

And, in late December, the SEC gave the Empire State Realty Trust the green light on the IPO, which means it could take place in the next few months.

But for the family, the IPO might be a way to gain greater control of the building and to unwind its complex ownership structure. Indeed, in 2010, the Helmsley Charitable Trust announced that it wanted to sell its stake in the building and, soon after, the Malkins began exploring the REIT idea, which could allow them to buy out the trust.

Several billboard companies with strong presences in New York, including Clear Channel and CBS Outdoors, are gearing up to go public.

Billboards and iron bars

The Malkins aren’t the only ones that will be attempting to create a REIT in 2013.

With the stock market soaring at the beginning of the New Year, REITs, which must hold at least 75 percent of their assets in real estate and draw the same amount from real estate–related sources like rent, are expected to remain popular for new firms.

But the companies looking to become REITs aren’t the typical New York real estate players — such as SL Green Realty, Vornado Realty Trust, Boston Properties and Brookfield Office Properties — that industry pros likely think of when they think of REITs.

For one, a string of outdoor advertising companies that hold their own kind of precious and valuable real estate in New York are gearing up to go public.

To wit: CBS Corp. is planning to spin off its CBS Outdoor billboard unit as a REIT, according to news reports. (Its billboards and other outdoor advertisements plaster the city’s subway entrances, buses and trains.)

Likewise, Lamar Advertising, which has a range of similar products, and whose clients have included McDonald’s and Verizon, has filed paperwork with the IRS to seek REIT status. (The IRS will determine if a billboard qualifies as real estate; a decision is expected this winter.)

And Clear Channel — a media company whose billboards, posters and bus-

shelter signs are also ubiquitous in New York — could also take its outdoor division public, according to news reports.

Of a much different stripe is the GEO Group, a Florida-based company that owns roughly 100 detention centers and prisons globally, including a prison on 150th Avenue in Jamaica, Queens. In January, the company, which rents out the facility to local and federal governments, received IRS approval to go public as a REIT, though doing so will require it to break apart the company and group its non-

real-estate–related health-care assets into a separate business. Company officials have said that REIT status will lower the costs of capital for expansion and streamline the firm’s operating structure.

Analysts say that, in many cases, in addition to raising money from investors, companies are often prompted to become REITs because the business structure offers something of a tax sanctuary. That type of thinking might be increasingly prevalent because many firms believe their tax loads will spike with the new Congress in Washington, sources said. (REITs benefit from major tax breaks, but have to distribute most of their annual profits to investors; while other public companies are required to pay corporate income taxes, though they get to pocket their returns.)

However, there is resistance in some industry circles to becoming a public REIT because it requires pulling back the curtain on details that have been long kept under wraps. Once a company is public, for example, it has to open its financial books and reveal its strategic plan for buying and selling assets.

“You might have to reveal the secret sauce,” said Kevin Imboden, a senior analyst at Real Capital Analytics, the research firm.

 

A slower pipeline

Robert Toll, the head of luxury homebuilder Toll Brothers. Last month, the company’s stock matched its five-year peak.

Though the REIT business structure was created in the 1960s, it didn’t take off in popularity until the 1990s, when federal tax laws changed.

Among the first out of the gate was the Kimco Realty Corporation, a national strip mall operator, in 1991. Today, it controls 10 properties in New York City, including four in Brooklyn — the Mill Basin Plaza mall among them — five in Staten Island and one in Queens. In that era, private financing was in short supply, and the real estate market was sluggish, prompting interest in REITs from an array of players, analysts say. In fact, some of the usual suspects in New York went public soon after, including Vornado (1993), Simon Property Group (1993) and Boston Properties (1997).

For all the apparent newfound appeal in REITs, the recent years have been comparatively lean.

In 2004, for example, there were 29 REIT offerings, versus eight in 2011 and the same number in 2012, NAREIT data shows. Until recently, one of the most highly anticipated real estate IPOs for 2013 was the expected $3.5 billion splashdown of Archstone Partnerships, a landlord of rental buildings nationwide.

But in November, before Archstone could go public, the tag team of Equity Residential and AvalonBay Communities — both REITs themselves — swooped in and bought Archstone’s portfolio from the now-defunct investment bank Lehman Brothers for $16 billion in cash and debt.

In New York, Equity ended up with Archstone’s residential buildings at 250 West 50th Street, 500 West 53rd Street and 377 East 33rd Street, while AvalonBay took five other properties: four in Manhattan and one on Long Island.

Analysts say the fact that the IPO got scuttled may point to a shift in the rental market — even though in New York rents have taken a breather from their dramatic increases (see related Q&A, “Renter fatigue?”)

REITs, sources say, are like canaries in a coal mine, anticipating changes in market fundamentals before they fully come to fruition.

“This was sort of a come-back-to-Earth year for multi-family, [nationally and locally],” said Jason Lail, a senior analyst with SNL Financial, a research firm. “If there are more people looking to buy homes, then obviously those people aren’t renting.”

Indeed, AvalonBay, which owns complexes on East Houston and East First streets, saw its stock dip last month — to $138 — since hitting a five-year high of $151 in July. In 2011, the company also abandoned five-year-old plans to build a 700-unit complex in Midtown between 11th and 12th avenues.

However, not all public real estate companies are created equally.

Analysts note that the market creates advantages (and disadvantages) for companies depending on their focus. For example, while homebuilding companies got pummeled during the recession, they are now experiencing a resurgence.

Toll Brothers, a publicly traded homebuilder (though not a REIT), is a case in point. Late last month, its stock price matched its high from September 2011, at $36, which marked a five-year peak.

The historically suburban luxury homebuilder, has, of course, pushed aggressively into New York City in recent years. Its latest project is the Touraine, a 22-unit Upper East Side condo; three of 22 units have sold, according to listings website StreetEasy. This winter, Toll — which is headed by Bob Toll nationally and David Von Spreckelsen in New York — also bought two development sites, one at First Avenue and East 52nd Street and one on King Street in Soho. In the end, the success of a real estate company in the public markets, whether it’s already there or eying an entrance in 2013, will likely come down to the nuts and bolts of its portfolio, said John Stewart, a senior analyst with Green Street Advisors, a real estate research firm.

“If there is an interesting enough story, REIT investors will listen,” he said, “but it has to be very compelling to have a successful deal.”

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