Ackman bets big and high

The billionaire’s splashy One57 purchase is not his only recent industry investment

Bill Ackman
Bill Ackman

With a career marked by big real estate bets, which resulted in both hefty jackpots and big busts, it may not be surprising that William Ackman, who runs the $11 billion Pershing Square Capital Management hedge fund, continues to invest in the sector.

But his latest moves are drawing new attention from the industry.

In recent months, he bought a duplex penthouse at Midtown’s One57 that does not seem to lend itself to the buy-low, sell-high strategy that’s served him so well before.

In addition, Ackman’s decision to take a larger stake in South Street Seaport developer Howard Hughes Corp., a spin-off of the once-bankrupt mall operator General Growth Properties, also seems odd given the still-tenuous national commercial real estate market.

And he continues to be bullish about Fannie Mae and Freddie Mac, snapping up millions of additional shares of the mortgage finance companies over the past few months, despite hints that they may be dissolved.

This all comes as Ackman makes an aggressive bid for Allergan, the drugmaker behind Botox, and wages a high-profile battle against vitamin company Herbalife, which he is trying to sell short.

But many New York observers say that even if his recent investment targets seem unlikely, a counter-intuitive strategy has served Ackman well before.

The penthouse play

In some ways, Ackman picked what seems like an unusual time to get in at One57, the skyscraping condo overlooking Central Park on 57th Street (see related story here). Ackman, along with a group of investors, was identified as a buyer of the duplex penthouse on the 75th and 76th floors known as the “Winter Garden” for its tall, curving glass ceilings.

If it closes at its reported price of more than $90 million, the 14,000-square-foot apartment will set a new record for most expensive home ever sold in New York City. (At the end of last month, the sale had still not closed, according to city documents.)

Indeed, as the 1,004-foot building prepares to open, buoyed by a flurry of marketing and media attention, bargains would seem to be in short supply.

But Ackman — who lives in the Beresford, a prestigious co-op at 211 Central Park West, and who owns homes in Chatham, N.Y., and in Bridgehampton — is likely to have a smart play up his sleeve, analysts say.

The six-bedroom unit could be leased, for rents that could easily top $100,000 per month, said Sotheby’s broker Kevin Brown, who recently sublet a three-bedroom in a nearby condo for $78,000. But Ackman, whose fortune is said to be worth $1.5 billion, may not care so much about that extra change.

What seems more likely is that he will resell the apartment, and corner the very narrow market of buyers shopping in that stratospheric price range, said Jack Nyman, executive director of the Newman Real Estate Institute at Baruch College and a former developer.

“He will control a market that is very narrow and specialized,” said Nyman. “There are only so many condos like it in New York.”

In any event, the fact that Ackman was one of a group of investors in the deal limits his risk.

Though buying a condo as a group is highly unusual, it’s indicative of Ackman’s creative and self-protective investing style, said Michael Ashner, CEO of Winthrop Realty Trust, which teamed up with Ackman in 2010 in a failed attempt to block the bankruptcy proceeding against Manhattan’s troubled Stuyvesant Town and take control of the residential complex. With that deal, the team ponied up just $45 million for the sprawling complex that at one time was valued at roughly $6 billion, Ashner said.

“This is someone who recognizes a small investment, where a big opportunity exists, is one to pursue,” Ashner said. “He loves optionality.”Neither Ackman nor his representatives responded to requests for comment on this story.

Small investment, big opportunity

While his investments involve a range of industries, Ackman, 47, whose family founded the Ackman-Ziff Real Estate Group, is often keen on real estate.

In some cases, what first appeared to be failures have reversed course for him. During the worst of the recession, Ackman invested $60 million in General Growth Properties, which owns five malls in New York and New Jersey among other properties, then pushed for the company to file for bankruptcy in 2009. The company later reorganized, with Ackman at the helm, and spun off some assets under the Howard Hughes Corp., a move which helped it emerge from bankruptcy a year later.

Ultimately, Ackman could not seize the entire company; he was unable to convince General Growth to sell him all of its shares. But his exit was profitable; he liquidated his holdings in recent months for $1.6 billion. And he’s been quoted as saying General Growth was one of the best investments he’s made.

Sign Up for the undefined Newsletter

By signing up, you agree to TheRealDeal Terms of Use and acknowledge the data practices in our Privacy Policy.

In addition, he recently upped his investment in Howard Hughes to 5.5 million shares to control about 13 percent of the company’s common stock. He also serves as chairman of the board, and since he arrived, the Dallas-based company has been peppering its board with top New York real estate executives. For example, CBRE Group broker Mary Ann Tighe joined in 2011.

Howard Hughes is actively expanding in the city. It recently started a major redevelopment of South Street Seaport. The company also plans to buy the adjacent 80 South Street, where the city recently approved a 300,000-square-foot mixed-use tower.

By some measures, Ackman’s interest in Howard Hughes might seem misplaced. Nationally, the commercial market is taking far longer to recover than the housing market, and analysts say the company’s portfolio, which is heavy on large shopping centers, could hold risks.

Then again, having more control of the company gives Ackman the keys to a brand name and to a seasoned management team, Nyman said. “It’s not that easy to go and buy a huge stake in a Westfield or Simon Property Group,” he said, referring to the well-known retail developers. “He has very strategically positioned himself in the market space to become a player.”

In the past, Ackman has moved to tap the potential of the far-flung real estate holdings of other major Pershing investments, including fast food chains McDonald’s and Wendy’s. About 10 years ago, for instance, he pressed McDonald’s into selling about 1,500 restaurants to unlock shareholder value, after he took a major stake in the chain.

Counting on Congress

In the first three months of the year, Ackman also made another key real estate investment, boosting his ownership stake in Fannie Mae and Freddie Mac at a time when their existence is threatened. The government-sponsored companies are responsible for backing 60 percent of the country’s home loans, including billions of dollars worth of loans in New York.

In a series of purchases, Ackman increased his stake in Fannie Mae, formally the Federal National Mortgage Association, to more than 11 percent this spring. Ackman upped his slice of Freddie Mac, or the Federal Home Loan Mortgage Corp., by a similar percentage.

All told, last month, Pershing’s investment in the two were worth about $500 million.

The federal government owns about 80 percent of both Fannie and Freddie, which have both been under government control since they were bailed out in 2008.

While Ackman’s investment is tiny relative to Pershing’s $11 billion in assets under management, it’s also laced with risk, analysts told The Real Deal.

For starters, Ackman owns common stock, whose holders are usually the last to get paid when a company goes under.

And going under may be a real concern. At press time, the Senate was slated to vote on a bi-partisan bill that would essentially dissolve Fannie and Freddie and replace them with a single entity.

That’s despite the fact that Fannie and Freddie have turned around their fortunes in recent years and have been posting huge profits — a record $84 billion and $48.7 billion in 2013, respectively.

But their bailout agreements require them to send all their profits to the U.S. Treasury, an arrangement that shareholders have challenged in federal court. Together, they have paid about $203 billion to the government, exceeding their bailouts by more than $10 billion.

Analysts say Ackman seems convinced that Congress will ultimately realize Fannie and Freddie will continue to be cash cows as long as the housing market rebounds, and thus won’t do away with them.

And even if they dissolve them, Ackman could be in a strong position to roll at least part of his investment into their replacement.

That may be why Ackman said at a recent investment conference that his $500 million investment could be worth more than 10 times that much in several years, according to news reports.

The ace up his sleeve is courtesy of ongoing shareholder lawsuits. Milwaukee-based hedge fund Perry Capital and the Miami-based Fairholme Funds are suing the government to keep a share of the profits and not have them diverted to the Treasury Department. At the conference, Ackman reportedly predicted the Supreme Court would side with the plaintiffs if the suits go that far.

Even if those suits just get settled, Ackman stands to recoup some of his investment, said Lawrence White, a professor at New York University’s Stern School of Business who also co-authored “Guaranteed to Fail,” a 2011 book critical of Fannie and Freddie.

“The shareholders are there, and I think they’ve got a pretty good story to tell, about why they should be entitled to a share of the profits,” White said. “The shareholders will end up with something.”