Sam Zell on Retail Real Estate: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago Conference 2017.  Next up is Sam Zell of Equity Group Investments who gave his thoughts on the retail real estate industry.


Sam Zell's Invest For Kids Chicago Presentation: Retail Real Estate

There have been “bearish overtones” to each of the past five annual gifts that Sam gives to his friends/partners.

Retail real estate – most people agree about a decline here, but online is still only 8.5% of total retail; it is very early in tech’s impact; everyone is trying to catch a falling knife; where’s the bottom and what’s an appropriate cap rate – open questions; best malls are OK because they’re mini downtowns, and on the other side the strip-center convenience-driven stores are OK – everything in between is an oxymoron; USA has 5 square feet per capita more retail real estate than any other nation; a lot of retail could go away and nobody would notice; Sears, Penney created malls as anchors, but now they are the “anchor” dragging everyone down; free rent is still too expensive if there is no traffic; might be 1-2 years left on a lot of bad leases – big changes coming; we’ll always have some retail, but unclear as to what the right price is.

Taubman is selling at a 6.3% (?) cap rate, but look at some of their peers and look at some of the tenants – who will fill empty stores/leases?  The growth of passive investing and indexations and ETFs is very, very dangerous; many real estate companies now have heavy ownership from entities who aren’t real owners; something will precipitate a regulatory change; ISIS = ISIS; ETFs are untested in a downturn; markets should be about capital formation and price discovery, neither of which apply to ETFs

With low rates, the burden of carrying cash is as low as ever – a great option to hold.  Things don’t grow to the sky – we’ll have a correction eventually.  There is a reasonable chance of tax reform getting done.


For more from this event, check out the rest of the presentations from Invest For Kids Chicago 2017.

Sam Zell's Presentation at Invest For Kids Chicago 2016

We're posting up notes from the Invest For Kids 2016 investment conference.  Next up is Sam Zell of Equity Group Investments.  He had a fireside chat to talk real estate.


Sam Zell's Presentation at Invest For Kids Chicago 2016

•    70% of what we do is in assets other than real estate

•    We prefer a monopoly, but we’ll settled for an oligopoly; we look at costs to entry and barriers to entry and replacement cost

•    We’ve done a lot of roll-ups over the years, and each begins with the idea that we don’t necessarily believe in synergies

•    Domestic versus international investments: going outside of the U.S. means sacrificing the rule of law; trading growth for rule of law; tricky to weigh those considerations, but emerging markets are where the growth is; fertility and economic growth create demand; biggest challenge we have today is where the demand will come from:

o    International investments also bring the risk of currency volatility, which requires extra patience
o    Prefer inflation-sensitive asses when currency is an issue
o    Mexico, Brazil, Colombia, India are biggest markets for us; very optimistic about Latin America
o    We like investing in a country when it is on the cusp of reaching investment grade
o    Doesn’t always work; we’ve been fortunate to move in and out at good times; Brazil recently was like handing the car keys to a teenager…sometimes they wreck it
o    European demographics are horrible, and only Japan might be worse; hard to see growing demand

•    Why does negativity abound among the investing class? We’re only wealthier in the past few years in terms of a fiat currency – are we moving from a responsible developed world to one dominated by competitive devaluations? And where is the demand? Our compliance costs have gone up 5x over the past eight years. So productivity is at an all-time low while regulation is at all-time high – unlikely to make historical rates of return in such an environment.

•    Look at the stock market. One could say that given the level of investment and growth it is overpriced. Real estate assets are at an all-time high. Inflation is at all-time lows. The result is not likely to be long-term positive results. More likely to have a recession, a cleansing, a market clearing before U.S. can grow. We can’t pretend and extend our way to growth.

•    On being pessimistic compared to Jon Gray or Barry Sternlicht: “I’m not as optimistic, but then I use my own money.”

o    Not finding ways to deploy capital in CRE today. Happy to sell to Jon and Barry.

•    On the traits of a good leader: it starts with 11th commandment, which is thou shalt not take oneself too seriously. Smile, make fun of yourself. Lead by example, not pontification.

•    The definition of a schmuck is someone who has reached his goals.


Be sure to check out the rest of the presentations from Invest For Kids 2016.

Sam Zell & Andrew Litt on Real Estate: Invest For Kids Chicago

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.

Sam Zell's Talk at Invest For Kids Chicago

We're posting up notes from Invest For Kids Chicago 2014.  Next up is the fireside chat that Michael Sacks had with Sam Zell of Equity Group Investments.


Sam Zell's Talk at Invest For Kids Chicago

•    Comment on the election (Zell): I don’t know if America is better but there is a God.
•    Zell thinks yesterday was a big day. Big day from a number of different perspectives. (1) if results different, serious risks that the President legislates his way through edicts; (2) creates an opportunity for Obama to compromise and get something done through mutual agreement.
•    Everyone is excited that the stock market is at an all-time high. Experience is that USA can’t do well if Japan/Europe/Russia in trouble.
•    “Best looking gal in the whore house – it’s still a whorehouse” On USA and the rest of the countries
•    America needs growth. Whatever happens, need to refocus on growing company, which will begin to solve the trouble of inequality.
•    Where is Zell finding opportunities today to deploy capital? Some markets outside of the USA which are interesting - #1 country is Colombia. Major benefactor of the free trade agreement. Because of the reduction of FARC, Colombia production of oil increased due to access. Investing significantly in Colombia.
•    Optimistic on India. Difficult environment to operate in, many burned. Modi is doing good things.
 •    Real estate is where it was a couple years back, very attractive from a price point.
•    Always opportunities, look at individual situations. That is what they do.
•    Any common investment principles? They have always been industry agnostic. You get business or you don’t.
•    In the 80’s consolidated rail cars. No one liked it, but loadings where flat and they scrapped 65% of the cars – lots of money was made when those lines crossed.
•    Up until the 80s only did real estate, pivoted to opportunity.
•    When you commoditize trust, you dramatically increase risk.
•    If Zell was in his twenties to thirties what would he do? His response was the generations often thought the older generation had it easier. Zell and Lure’s success tied to the fact they didn’t know what they couldn’t do.
•    Current environment smells a lot like the dotcom boom in regards to valuations. Amazon is one example.
•    On philanthropy, approach from the perspective that anyone can put their name on the building by just giving money. They don’t want to do that. They support topics across colleges such as entrepreneurship and creative writing.
•    Talked energy briefly – noted cost of production in Saudi Arabia is cheaper than the USA and that the market went bananas on US oil for a bit.


Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Sam Zell's Real Estate Thoughts at Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago 2013 is Sam Zell of Equity Group Investments and he gave his thoughts about real estate.


Sam Zell's Presentation at Invest For Kids Chicago

•    Business card is a book call “Quotations from the Chairman”
o    “Be a risk taker yet define risk in your own terms”
•    Perspective on US real estate in commercial sector
•    Flavor of the month – obsession of buying single family homes
•    Zell turned down the offers to operate a platform – Zell operates largest
o    Average of 400 units per location
o    Yet lower number of HVAC systems
o    Don’t see how it equates to a public company
•    How would you get credit in the stock market when the market doesn’t get one-time gains – not likely to be a very good public company going forward
•    Yet multifamily is probably the strongest sector in real estate
•    Deferral of marriage – times were different “there was no pill”
•    5 years ago Motorola rented prices in the city bc they couldn’t attract smart people to the suburbs
•    Society becoming more and more urbanized
•    The further out of a city you get the more you are affected by weakness
•    Demand for multi-family housing and optionality is changing supply / demand characteristics going forward
•    Retail is Darwinian scenario – major malls are taking market share 
•    Becoming “downtowns” of the past and Zell is positive on their future
•    Significant obsolescence in many non-core malls
•    Economics of strip centers – anchors cover interest payments and guys in middle make your profit yet these companies are hit the hardest
•    Retain under a huge threat of e-commerce which will continue to grow
•    Office market not as hot as 2007
•    Use of office space is changing
•    Existing tenants are redoing leases with less square footage than before
•    Not seeing construction which leads to oversupply
•    Hospitality (Chinese in the US is driving hospitality)
•    Expect significant number of tourists from Asia pacific (China especially)
•    Supply is in measure “under constraint”
•    Biggest issue is debt creation at historically low rate – low at 4% being refinanced at 7% - what does that mean?
•    One of the rules of the game is getting as long of a term as possible
•    Pubic market cheap but not significantly – “sharp shooter market” 


Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Sam Zell: Invest Some Capital in Black Swan Scenarios

Next up in our notes from Invest For Kids Chicago is Sam Zell of Equity Group Investments.  He gave a sobering talk and recommended putting some money in 'black swan scenarios.'

•    Zell was the most active real estate investor in US in 1974 through 1976 
•    Zell is just glad he “didn’t have to mark to market” 
•    Wrote an article in which he described his activities as a "grave dancer" (GrizzlyRock Note: Thus earning him one of the better moniker’s in the business!) 

•    How does Zell get the confidence or optimism to go forward in face of uncertainty?  
o    What he found was that he had the confidence because it was embedded in the belief that he was buying things inexpensively 

•    Same sort of situation in 1990 and 1991.  Zell was buying office buildings at less than replacement costs with no value being ascribed to the land

•    What does the world look like circa 2012? 
o    Europe with disintegrating currency and cross winds between parties, 
o    Demographic death spiral, attempt to create austerity 
o    Europe going into recession and maybe more than a recession 
o    Emerging markets growth slowing (China, India, etc) 

•    "Why are stocks so high?  Why are re prices sky high?" 
 •    Would seem to Zell that things would be cheaper that they are given the environment 
•    Middle market debt inefficiently priced and thus interesting 
•    There are "sand dunes of uncertainty" in the US. 
•    Solving uncertainty is better than flooding the world with dollars" 


Zell's Idea: Black Swan Scenarios

•    Zell's idea was to invest some capital in true black swan scenarios 
•    Long run certainty is lacking and a fundamental problem in the US.

This is interesting when you consider that Tiger Management's Julian Robertson (who has seeded tons of hedge funds) was recently interviewed where he said many hedge funds are overly hedged and poised for doomsday scenarios.  Robertson also cited this as a reason as to why hedge funds are underperforming.  Zell obviously agrees with those managers as he advocates some tail risk hedges.


For the rest of the hedge fund presentations from the event, head to notes from Invest For Kids Chicago.

Sam Zell on Brazil's Investment Opportunity ~ Invest For Kids Chicago Notes

At Invest For Kids Chicago yesterday, Sam Zell of Equity Group Investments gave a presentation on Brazil as a unique investment opportunity.

Be sure to check out all notes from Invest For Kids Chicago where numerous high profile hedge fund managers shared their latest investment ideas.


Brazil as a Compelling Investment

Zell focused on how globalization has been a part of everyone's vocabulary and that GDP in emerging markets is closing the gap. The demographics in Japan, Eastern Europe, Russia and Italy are poor. Brazil on the other hand has 25% middle class rising to 2/3rds middle class. The country has 180 million people with growth of 5 to 6%. They're self-sufficient in food, energy, water and has the scale to grow further.

Brazil also has an educated workforce and "free agent managements." The country has pent up demand as they're expanding housing and helping people enter the middle class. $60 billion of foreign capital went into Brazil, a "drop of water." Consequently, there's inflation and interest rates are high. People seek high returns with a willingness to pay. Zell says it "feels like the US in the 1950's."

Zell concludes that Brazil is full of unique investment opportunities with a focus on service and an aspirational and growing middle class. While Zell did not specifically mention it, we thought we'd point out the exchange traded fund many choose to invest in Brazil is via EWZ. Earlier this year, we highlighted how Xerion Fund's Dan Arbess had been investing in oil companies in Brazil.

You can view full notes from Invest For Kids Chicago here.