Sam Zell, the real estate investor captain, has a fortune for the cycle, the shape of its industry. In those days, he believes that the current turbulence in financial markets is more of an emotional reaction to yet another period of more than a real credit collapse.
In a wide-ranging speech at the Wharton Real Estate moderated by Professor Peter Linneman, the Chicago-based investor said markets are being spooked by problems with U.S. subprime lending. But they do not have capital, unlike other real estate busts in the financing could not be arranged at any price.
"We are not really a quote 'credit squeeze." I think what we in a 'trust matters,' "said Zell, donors of the Samuel Zell and Robert Lurie Real Estate Center at Wharton." I would argue that the excess liquidity, which are eight weeks today. It has a different risk premium on, but the actual amount of liquidity has not changed. "
Zell said the burglary should come as no surprise: "In the last three years were frivolous. You have what they wanted and were proud that they do not diligence. I think they were all annoyed and scared out of their minds. "
'The Godfather offer "
After Zell, private equity firms with a capital flooded were in a position to benefit from "grotesque" leverage and offer premium prices of publicly held real estate companies. Zell, said he believes that an agreement as a "Godfather," because not publicly held accountable could be disposed of. Indeed, in February, Zell sold his flagship, Equity Office Products (EOP), and its portfolio of 540 prime office buildings to the Blackstone Group for $ 39 billion. At that time it was the largest private equity is always completed. Cell predicted that the market will soon stabilize, although they more risk averse and less leveraged than in the past few years. "Today we would never be able to replicate the Blackstone deal."
After the sale of EOP, Zell turned his attention to another transaction. It has become a major investor in the Tribune Company, which publishes the Chicago Tribune and Los Angeles Times and other media properties. The company is privately: The shareholders recently adopted an ESOP (employee ownership). If the transaction ends ESOP will be 100% of the company. Zell is itself an arrest warrant to buy 40% of the company may exercise that at a later date over the next 10 years. ESOP remains the majority owner of the company. The Tribune transaction is under regulatory review and is expected to close by the end of the year.
Zell not discuss that directly, but referred to his reputation as a contrarian investor. He recalled the first time he saw the market turn. In the early 1970s, the real estate industry has been infused with optimism and rapidly. Zell not see how it would be enough demand to fill the real estate market in development. So he stopped doing new deals and structured a company to focus on distressed real estate. "Everyone else said, 'Sam, you do not understand." I have heard that my entire career. Even if I buy newspapers in the year 2007 everyone says, 'If you do not understand until now really not understand "."
Zell is chairman of Equity Group Investments, a mix of private and public enterprises, establishments, including Equity Residential, a leading owner of the apartment; Equity Lifestyle Properties, which owns 300 holiday and manufactured housing communities, and Capital Trust, a commercial real estate finance. He said the Wharton audience that he had never recovered from his first course in economics, when he learned about supply and demand. "I would say that no matter what I did -- real estate, barges, cars -- it's all about supply and demand."
While still a basic study, and later a law student at the University of Michigan in the mid-1960s, cell began to buy property in Ann Arbor. Later, he and his fraternity brother, Robert Lurie, and together they built a real estate empire before Lurie died of cancer in 1990 at the age of the 48th
Following the market crash in 1973, cell spent the next three years the purchase of $ 3 billion in real estate assets, much of it for $ 1 He built the portfolio by selecting the lenders, and offers the future operating losses on their hands in return for equity. Zell was to the properties long enough for them to come to -- and exceed -- reviews. "It turns out that we have a lucky," he said. In the 1980s, the real estate industry was again marked by aggressive lending, sparked a development boom. "The idea was to build it and buy someone, and that the Japanese people", recalls cell.
Edifice Complex
If Linneman asked Zell why he has never been a developer, the bearded, gravelly voiced mogul replied that the development is too risky for his taste. "In this business, it is helpful to have a complex entity," said Zell. "At least half the yield comes from the psychological benefits you see the building go. I have never suffered from that particular disaster."
Again concerned that the market is not sustainable, the prices that investors were paying, Zell and Lurie spent much of the 1980s, the diversification of their holdings in other companies. Their strategy would be the same as it was in real estate -- the search for ways in places where others have been ignoring the rules of supply and demand. "We thought that if we are good guys properties, then we are good business people," said Zell.
While brokers have excellent transactional capabilities, he added, they often lack the foresight to plot. "When it comes to delegate the negotiation of a transaction, I would always choose a real estate guy on a corporate guy," said Zell. On the other hand, real estate people did not have the ability "to the corner. For them, the tree is always in the sky grow. Therefore, we have enormous and very volatile cycles, which continue to this day."
In the early 1990s most of the nation commercial properties concentrated in the hands of about 50 or 60 large private investors. Even the cycle himself and the company in a severe credit squeeze marked by massive foreclosures and the nation's savings and loan debacle. The way cell was declared to the public markets, was previously a little-known financing vehicle, the Real Estate Investment Trust (REIT). REITs continue to be the driving force in commercial real estate until the last year or so, when private equity acquisitions, such as his own Blackstone transaction, the number of farms in private hands, according to Zell.
He described his strategy during the three weeks bids for EOP war broke out between Blackstone and Vornado Realty Trust, the nation's second-largest REIT, a combination of cash and stock for cell of the company. The key to the deal was structured a $ 720 million fee resolution, Zell said, and added that the stock itself would have taken months to conclude, in retrospect, might have serious problems after the market jitters, develops in August.
Beschleunigten housing demand
Today, Linneman noted, cell operations are divided between real estate and other businesses. One example is Anixter International, which dominates the market for Ethernet cable. When it comes to real estate, Zell said he focuses on the development in the emerging markets by a company called Equity Group International.
In 1999, Zell decided that the REIT concept had worked so well in the United States could be in other parts of the World. He now controls large homebuilders in Mexico and Brazil is also branching, in India, China and Egypt. He said that the Guadalajara office of the Mexican companies, Homex, 24 hours a day, seven days a week, to meet the needs of the Mexican homebuyers. "The beauty of all these places, there is unlimited demand," said Zell. "If you back to Econ 101, these countries have huge backlog in housing demand.'s Population is increasing and housing is not."
Cell acknowledged that it is not always true. He tells the story of how the Carter Hawley Hale Stores in California 1992. His company has an analysis and found that the 79-store chain would be worth at least 80% of the purchase price, if there was a fire, in the sale. Soon thereafter, cell faced with a sharp recession, and a major earthquake in Southern California. In 1995 he decided to salvage and sell the chain to its rival, Federated Department Stores. The price? Even if he lost money on the cell Comfort noted that his company properly calculated the downside. Federated paid 80% of what Zell has done. "The investment was a mistake, but the process was a success. We have a risk we were prepared, and we have it."
Linneman noted that cell is known by the nickname "the grave dancer." After Zell, the term is from the headline of the article he wrote describing his strategy to benefit from distressed real estate bubble inevitable after the investment enthusiasm. Zell, said the article shows, like "I was dancing on the skeletons from the mistakes of other people."
Zell, but also pointed out that the last sentence of the article reads: "Who is dancing next to the graves has always ensure that they do not fall Customs"
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