Smart & Smarter

Probably the most astute property guy in the world - Sam Zell, main owner of Equity Office Properties Trust. Sam's parents escaped Poland weeks before Nazi invasion; Sam born in Chicago 4 months after family's arrival in America. Built real estate empire with frat brother Robert Lurie; bought up cheap real estate throughout U.S. from distressed owners, kept buying when values recovered and boomed. EOPT's first fund scored with Mexican homebuilder Homex up 1,200%. Second fund targeted Brazil. The deal of the decade, Sam sold EOPT to Blackstone Group in February this year. Details below.

Bloomberg / NYT - American REITs are now forecast to suffer their worst decline in almost ten years and could drop up to 20% within the next year, according to Bloomberg. Economists cited by the New York Times estimate that problems in the mortgage markets could ultimately cost financial firms and investors up to US$400 billion. REIT stocks have outperformed the S&P 500 every year since 2000, but are expected to suffer as higher borrowing costs put the brakes on takeovers and slash property values. "REITs are overvalued by 25-40% relative to stocks and bonds, and cash flow yields are too low," said University of California economist Kenneth Rosen. Investors are steering clear of bonds backed by subprime and commercial mortgages, and their reluctance to lend is affecting the value of trusts that own commercial properties, apartment complexes, hotels, shopping centers and mortgages. The Bloomberg REIT Index has fallen 16.5% since the Blackstone Group bought EOPT for US$39 billion including debt. Bloomberg notes that the last time the Index sank more than 10% was in 1998, when investors were pouring money into Internet stocks. The only segment of the Index not to lose value this year is warehouse and industrial, which rose 11.5%. Public storage REITs suffered most with a 19% decline. "

Blackstone Group, which completed its purchase of Equity Office in February this year, has sold so much of its office property portfolio in recent months that it has covered 70% of the deal's US$39 billion cost.
Blackstone, riding a booming U.S. commercial real-estate market, has shed at least 62 million square feet out of about 102 million square feet of office space once held by Equity Office. It even managed to sell several properties at record prices. Still Blackstone is left with quite a bit of property on their books, but at least they have a decent buffer. However, the correction over the last three months would have wiped a lot of smiles from Blackstone staffers. So, who is smarter? It would have been very difficult to dispose the entire EOPT by Sam himself. He also needed to have the foresight and guts to sell at the right time. It probably was very difficult for Sam to disassociate himself from EOPT, after having build the company up so successfully. Well, Mr. Zell took the cash and can take his time now to start rebuilding a new REIT with his cash.

Sam Zell was worth US$4.5bn as at end 2006. Following the deal he is now worth US$6bn.