Kansas City says Waddell & Reed’s tower will be built. But will they actually move in?
The fate of 1,100 Waddel & Reed employees and a monstrous new headquarters building rising in downtown Kansas City hang in the balance now that the financial services firm has been bought by an Australian company.
Macquarie Asset Management, an arm of Australia’s Macquarie Group, announced Wednesday night it would acquire all of the outstanding shares of Overland Park’s Waddell & Reed for $25 per share in cash in a deal valued at $1.7 billion.
Upon completion of the sale, Macquarie plans to sell off one part of Waddell & Reed’s company. Its wealth management platform will be sold to LPL Financial Holdings Inc., an independent broker-dealer in Boston, for $300 million.
Like any merger, the news raises immediate questions about the future for employees of the local company. But the acquirer also has a giant real estate project to grapple with: construction is well under way on the new $140 million tower downtown designed to be the new headquarters for Waddell & Reed.
City leaders have been assured that construction, originally slated to wrap up in 2022, will continue as planned. But it’s unclear whether Waddell & Reed’s employees will ever move in.
The city’s economic development director, Kerri Tyndall, said the developer is obligated to finish the building through its construction loans and contracts.
“It is too late for them to unwind this deal without serious financial repercussions to the developer itself,” she said.
Waddell & Reed made a big splash last year as it proposed leaving the Kansas suburbs for a shiny new tower that promised to reshape the Kansas City skyline. Plans call for an 18-story tower at 14th Street and Baltimore Avenue that includes a 10-floor, 913-space parking garage and eight floors of office space.
Last December, a divided City Council approved $35 million in local incentives in the form of a six-year, 75% tax abatement followed by nine years at 37.5%, a sales tax exemption on construction materials and a redirection to the company of earnings and utility taxes.
The company also won up to $62 million in incentives from Missouri for relocating jobs to the state. Collectively, those incentives cover more than 70% of the costs of the building.
But the incentives are tied directly to the number of Waddell & Reed employees working at the site. If the company doesn’t move in — or if it doesn’t add the 900-plus jobs it promised — the city and state will claw those funds back.
“Because the City has no upfront cash obligations and incentives are based on tax generation of a completed project, the project is likely to proceed as anticipated with obligations between the developer and Waddell & Reed to be modified in the event their plans change,” Tyndall said.
No word on new tower yet
Waddell & Reed had planned to lease the new 260,000-square-foot tower from its developer. An attorney previously said the firm would pay a rent of at least $40 per square foot — well above the norm for downtown or any part of the metro. That means Waddell & Reed could be on the hook for more than $10 million in annual rent.
The company signed a 15-year lease on its new tower, which is owned by a firm called 1400 Baltimore Owner LLC. Jackson County property records list executives from various companies controlled by Financial Holdings Corp. as being involved with 1400 Baltimore Owner LLC. Financial Holdings is an umbrella firm of companies controlled by the Merriman family, including the Americo Life insurance firm.
Notably, Americo was involved in Burns & McDonnell’s proposal to hold the exclusive right to design, build and privately finance a new terminal at Kansas City International airport, one of the largest infrastructure projects in the city’s history.
Public scrutiny prompted the city to seek competitive bids for the project rather than award it to Burns & McDonnell. Edgemoor Infrastructure & Real Estate won and is building the new terminal.
Kansas City-based Burns & McDonnell was contracted for exterior design and construction of Waddell & Reed’s new tower, with HOK working on interior design. Officials with Burns & McDonnell did not answer The Star’s questions about the status of the project on Thursday. Attempts to reach leaders of Americo were unsuccessful.
On Thursday, several city officials said regardless of whether Waddell & Reed ever occupies the building, the new tower will still be completed and owned by the developer.
But the financing of the building was designed around Waddell & Reed’s expected use of it. Documentation of a $103 million construction loan from JPMorgan Chase to the developer references the lease agreement with Waddell & Reed. And the more than $62 million awarded by the Missouri Department of Economic Development was predicated on the firm bringing at least 1,039 workers to Kansas City at an average total annual compensation of more than $157,000.
So far, the state has not issued any incentive dollars.
“Our support for the project would be subject to our program agreements and performance thresholds currently in place,” department spokeswoman Ashton Kever said. “At this time, we don’t have enough information to determine if this applicant would request or require any amendments.”
The $62 million was believed to be one of the largest ever incentive awards in the years-long economic border war between Kansas and Missouri. Waddell & Reed was among the last employers to benefit from that much criticized practice of using tax incentives to lure jobs back and forth across the state line without actually creating new jobs for the region.
Morgan Said, spokeswoman for Mayor Quinton Lucas said in a statement that the new tower was still expected to be “completed on time and as planned.”
“We expect the developer will hold (Waddell & Reed) to all obligations and the city will hold the developer to the same,” she said.
Asked if the city had been assured Waddell & Reed would still move into the tower, Lucas’ office directed questions to the company.
In a statement, the company said it was still evaluating plans for its future here.
“Waddell & Reed Financial and Macquarie are mindful of the building project in downtown Kansas City and completely appreciate the potential impacts the transaction may have on the community,” the statement said. “We will be working with all the appropriate parties and reviewing plans closely, carefully and collaboratively and will provide updates over the coming weeks and months.”
Second guessing the city’s approach
On Wednesday, Councilwoman Katheryn Shields, whose 4th District includes downtown, was notified of the sale by development attorney Dave Frantze, who represented Waddell & Reed in negotiations with the city.
She supported the project because she wanted to see Waddell & Reed move more than 900 highly-paid employees downtown.
“If that doesn’t come about, then obviously that’s disappointing, but I think the main thing...to understand is again, the incentives that were committed by the city and by the state of Missouri will not go into effect unless Waddell & Reed and their new owners...fulfill their commitments,” Shields said.
Aside from criticism over the sheer amount of incentives, the building’s design was opposed by downtown residents, who said it lacked street-level appeal with only a small lobby and limited retail space. Members of the Downtown Neighborhood Association also criticized plans to add 900 more parking spaces to an area that already had an oversupply of parking.
The building site sits one block from a streetcar stop.
Asked if it was a good thing for the city that the building will go up regardless of Waddell & Reed’s position and given its unpopularity, Shields said it was too early to know what would happen.
“I think that having additional class A office space in downtown Kansas City is a good thing,” Shields said. “I think it’s too early to speculate on what is or isn’t going to happen with the project or what the benefits will ultimately be.”
On Thursday, Josh Boehm, vice president of planning and design for the neighborhood association, said he was “a bit dismayed by the news of Waddell & Reed’s acquisition.”
“Even though several of us had many unanswered concerns about the design and financing of the project, nobody is wanting it to fail,” he said. “I hope the project can be salvaged and that we do have an influx of downtown workers, one way or another.
“That being said, this seems like an all too familiar story and a painful lesson where the City has agreed to subsidize a project that may result in low returns for the community. City Council actions on things like Waddell & Reed have generational consequences for the neighborhood, climate and equity.”
Kansas City Public Schools originally opposed the city’s incentive deal with Waddell & Reed, but reluctantly agreed to go along as the package was modestly reduced. Asked about the news on Thursday, Superintendent Mark Bedell said in a statement that the city needs to reform its incentive programs. Legislation to do that has been in front of the City Council since the summer.
He said that was “non-negotiable if we are going to grow sustainably while supporting the world-class school system that this community needs and deserves.”
“If the pandemic has taught us anything, it’s that the need to properly support and fund our public schools and social service providers is always essential to keeping our community strong,” Bedell said.
A changing financial market
Waddell & Reed was founded in 1937 by Chauncey Waddell and Cameron Reed and went public on the New York Stock Exchange in 1998. More than 1,000 employees work in Overland Park.
In recent years, the company has shed employees amid a wider industry shift.
The financial services sector has experienced huge changes as many investors have signed onto free or low-cost online trading platforms. Waddell & Reed’s own disclosures have pointed to “increasingly fee sensitive” clients who choose low-fee, passive products like Exchange Traded Funds, or ETFs, over more expensive and actively managed products like mutual funds.
Waddell & Reed in 2016 offered a voluntary separation program to employees but turned to layoffs to reach a 10 percent reduction in full-time employees. In July of last year, the company informed Kansas regulators of plans to cut 158 jobs.
Assets under management — a key metric for a firm like Waddell & Reed — dropped from $123.6 billion in 2014 to about $70 billion in 2019. That’s close to the $69.8 billion the company managed in 2009, amid the Great Recession, and does not reflect the record growth of the stock market in recent years.
By comparison, Macquarie Asset Management will have more than $465 billion in assets under management once the deal with Waddell & Reed closes.
Waddell & Reed’s stock traded at just more than $17 a share on Wednesday, down from $72 a share in 2014, its highest point in the last 20 years.
Days before the city approved the project, a former Waddell & Reed executive wrote to some Council members warning them against entering into a long-term deal with the company, saying it “may have been something in the past that it is NOT now.”
Yet as the industry changed, Waddell & Reed threw off millions of dollars in annual profits, provided dividends to shareholders and touted a healthy cash reserve on its balance sheets. In 2019, the company’s adjusted net income, or profit, was $137 million, or $1.87 per share, according to an annual report.
Waddell & Reed’s board of directors has approved the sale, which is expected to close in the middle of 2021, pending regulatory approvals.
In an email to advisers on Wednesday, Waddell & Reed president Shawn Mihal acknowledged that the latest developments represented “a shift from the corporate strategy and vision” that had been shared with employees over the last year, which he said laid the foundation for the company’s long-term strategic growth.
“Over the past few years, we have been focused on leveraging our strong heritage as the foundation for transforming our firm into a more diversified and growth-oriented financial services enterprise,” said Waddell & Reed chief executive Philip Sanders in a statement. “The long-term partnership between Macquarie and LPL as part of this transaction accelerates that transformation and ultimately will benefit our clients and independent financial advisers while delivering significant value to our stockholders.”
This story was originally published December 3, 2020 at 5:36 PM.
