market folly

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Sam Zell (Equity Group) and Andrew Litt (Land & Buildings) who talked about real estate.


Sam Zell & Andrew Litt at Invest For Kids Chicago 2015

•    Andrew met Sam 22 years ago while on the road show for Manufactured Home Communities. He was employed on the sell-side at that time.
•    Equity Residential recently sold $5B of real estate/apartments to Barry Sternlicht of Starwood.
•    Is Sam calling a top of the RE market?
•    Always been very disciplined and sold Equity Office before the last downturn as he thought someone offered him more than what they were worth. In case of apartments – different story.
•    Went public in 1993 - $800MM EV garden apartments.
•    Garden apartment – expressway visibility – “selling them shit”
•    Sam thinks the future was in high rise versus low rise, changing the company and upgrading portfolio. Suburbs sold, focus on 7 core markets. Envisioned selling it over 3 years, but had an opportunity to do it all at once at an attractive price and so he did it.
•    “Barry bought well maintained well occupied good assets which should be 75% leveraged versus 30%”.
•    Thinks it’s a win win for both.
•    Zell’s perspective concentrates them on where they want to be and return capital on a pro-rata basis.
•    On Equity Commonwealth – didn’t want to join activist campaign but said if they win, would take it over and finish it the last mile and got an option to purchase third of the activist’s position.
•    Didn’t buy/identify those assets and did analysis of opportunity – unusual situation as they could liquidate huge amounts of the portfolio without generating gains.
•    EQR had to distribute the proceeds, in Commonwealth’s case, liquidate assets pile up cash and keep control.
•    Purchased 10/15 years ago sold with no profits so that’s an indictment of the externally managed process (i.e. RMR’s management were terrible). Every day not buying their selling.
•    Didn’t have a hard time concluding that they should liquidate some of the assets.
•    Baseball adage – in the 8th inning on commercial real estate.
•    Once you get to the 9th inning – value dramatically dictated by quality of assets. High quality assets minor alterations but the marginal items in historical pricing is where you will see an impact in value.
•    US doing great today but the rest of the world isn’t. Starting to see the impact.
•    The disparity between B/A asset will increase.
•    Thoughts of activism? Thinks activism in most cases is another word for ownership. Biggest fallacy in capital markets is that companies are not “owned”.
•    Companies will be better out of activism. There are some good guys and some bad guys.
•    Not many viable opportunities as there is cash piling up.
•    Sending back $5.4B at EQR as they don’t think the cash can be invested at attractive returns. That is an ownership decision.
•    Where are you seeing opportunities? Difficult to broadly identify where there is significant demand.
•    Always steals/opportunities but don’t remember a signal period in his career where broad generalizations where irrelevant.
•    Investing in western Mexico – manufacturing is going there, other parts is weak.
•    Enormous amounts of liquidity and financing at attractive rates = lots of competition which is destructive.
•    Any place to use his grave dancer status? Energy sector. Haven’t seen all of the ramifications. Banks are just starting to redo their lines, and twill see the security they had wasn’t their anymore.
•    Most attractive at the moment.
•    You have to assume oil prices aren’t going to zero but you don’t need to bet that they go $70, don’t need that to win.
•    Looking for forced sellers – keep drilling or jettison midstream assets? Might find the midstream assets attractive (PARR)
•    Brazil? Went into Brazil early created a couple significant companies sold all buy one at higher prices. Brazil 180MM people, still growing although slowing.
•    PBR/scandals and political situation is the elephant in the room.
•    Less competition there now.
•    Institutions there are prepared to take discounts to clear the market.
•    Single bank hasn’t taken a single voluntary write off.
•    Thinks rates too low for too long.


Check out the rest of the presentations from Invest For Kids Chicago 2015.