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 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.

Morgan Creek Capital Asks: Is China A Real Estate Bubble?

Michael Hennessy, Managing Director at Morgan Creek Capital Management, has penned an interesting piece entitled, "China: A Real Estate Bubble, Or No Trouble?"

In it, he dives into the hot debate and notes that China's situation is different than the US in that it was fueled by public development whereas the US was fueled by private development.

In the end, Hennessy concludes that, "it is clear that China's economy is slowing; however, this seems to be fully discounted in valuations, and rather severely at that."

Kynikos Associates' Jim Chanos has been an outspoken bear on China (and in particular their property market). We've also posted up the hedge fund bear thesis on China.

Below are Hennessy's thoughts on whether or not China is a real estate bubble:




Hat tip to Zach for digging this up.

Howard Marks on His Current Favorite Idea & Investment Strategy

We've long posted commentary from Oaktree Capital's Howard Marks (see his recent letter here) due to the amount of wisdom he often shares.  Warren Buffett has even said Marks' letters are the first thing he reads when they come in.  So today we wanted to highlight a longer conversation with Marks on Bloomberg recently.


His Current Favorite Idea: "We think the current combination of good opportunities and good quantity of dealflow is in real estate and real estate related debt"  (both in the US and abroad, but but the US looks a bit better currently).

He thinks there's more of an aversion to real estate today than other areas.  Marks has bet on single family rental properties, believing that there will be a comeback in housing.  The key is to have patient capital, he says.  Numerous other prominent investors also liked this idea at this week's Delivering Alpha conference real estate panel.


On Investment Strategy:  "In order to get above average results, you have to think different and better.  It doesn't always work to do the opposite of what the herd is doing.  You have to know what they're doing, know why they're doing it, know what's wrong with it, and then do the opposite."

He says that everyone is looking at the macro and it's very hard to make calls like that.  He points to great investors like Warren Buffett not making macro calls and instead focusing on specific company fundamentals.


On Opportunities:  He says opportunities usually exist because the sellers are making a mistake (because they're forced to sell, or panicking or they get a margin call).  He penned his entire last memo on mistakes.


On Europe:  "It's a complex area, very murky, very uncertain."

Embedded below is the video of Marks' appearance on Bloomberg:



For more from the Oaktree manager, we've posted an excerpt from his book on contrarianism.

John Paulson Starting Real Estate Recovery Fund

Fresh off of our unofficial 'John Paulson' day on the blog yesterday, we're back again to highlight that Paulson will be going forwards with his Real Estate Recovery fund that will be aimed on investing in distressed assets. Just yesterday we examined Paulson's equity holdings, and now it looks like he's getting ready to make a splash in other asset classes. The fund will manage a few hundred million in its initial capacity (though no cap has been set) and will be managed by Mike Barr. Mike was previously at Lehman Brothers where he has experience in real estate and private equity. Paulson's initial goal is to run the fund for 7 years, investing in both residential and commercial properties. This news comes fresh off the new mortgage-market proposal by Paulson's colleague and ex-portfolio manager, Paolo Pellegrini. The two of them undoubtedly have compelling ideas on how to solve the crisis.

This fund isn't really new news, as we had heard of his proposal a while ago. However, we're finally getting concrete details and the 'green light' that it is ready to go. With his front-row seat to the mortgage and housing crisis, Paulson's timing call might prove to be very prudent. He has played the market perfectly thus far and has already gotten constructive on the sector by buying up the types of assets he was previously shorting (mortgage backed securities). Now, however, he is taking his constructiveness to a new level: by buying outright real estate. Obviously, he has a longer-term time frame in mind and will take his time sorting and sifting through the right deals. But, the fact that he is getting constructive in this arena cannot be ignored.

At the same time, it is also interesting to note his large purchase of gold which we just detailed. The hedge fund firm has said it is merely a hedge for them, as they have a share class denominated in gold. However, his large stakes in both gold and numerous gold miners is intriguing. Paulson may be getting constructive in the real estate arena, but he must still be overall cautious on the economy, the US dollar, or something of the sort. After all, why buy so much gold and so many miners? Either way, it's always interesting to note his major moves and this new fund certainly is classified as such.

Paulson's hedge fund has generated massive returns over the past two years, as he bet against financials and all things subprime. One of his funds was even up 589%. Check out his recent portfolio movements.

Delinquencies Still Rising

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I'll let the picture do the talking here. Taken from Calculated Risk, we see continued rising delinquencies across the board in Residential Real Estate, Commercial Real Estate, and Consumer Credit cards.

How to play it:
- Short Commercial Real Estate (short CBG, short GGP, long SRS)
- Short Credit Card Companies (short COF, short DFS)
- Short banks with lots of leverage, lots of derivative exposure, and lots of residential/commercial real estate exposure (short HBC, WM)

One caveat with all those picks: You've got to monitor your positions like a hawk. The slightest bit of positive news can send these things skyrocketing due to short covering. Use stops, use your brain, and be swift.

Full disclosure: At the time of publication, MarketFolly was short COF, CBG, WM, GGP, HBC via puts

Farm Real Estate and Cropland Values Soar

In a complete 180 from my post yesterday about the anticipated rise in foreclosures, I want to highlight a real estate market that is actually bullish: farmland. We all knew the agriculture boom was affecting all aspects of the business. But, with charts from Mark J. Perry's blog, we can see just how big of a boom farmers are experiencing. I'll let the pictures do the talking.

Average Farm Real Estate Value

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