By Dr. Steve Sjuggerud | 9 October 2007
Sam Zell— known as "The Grave Dancer" in the investment world— recently told a private audience what he's doing with his own money. One of my colleagues, Sean Goldsmith, was in the room.
Sam, if you don't know, built the largest collection of privately owned real estate in America (Equity Office Properties). He recently sold it... at the very peak of the commercial real estate market.
He built the empire through his willingness to buy assets when everyone else hates them. So naturally, he was willing to sell assets when folks were paying any price for real estate. While his name isn't as well known as Donald Trump's, Zell trumps Trump's net worth by billions of dollars.
What do you do with your capital after you've cashed in almost all of your U.S. real estate? Zell told the audience that he's invested money all over the world.
He told the story of a 100,000-square-foot warehouse in Laredo, Texas. The tenant, Nokia, offered a 7% cap rate (the percentage of your initial investment after expenses are paid). He then found another 100,000-square-foot warehouse in Monterrey, Mexico— 100 miles away— also occupied by Nokia. That warehouse had a 14% cap rate. So, now he's the biggest warehouse/distribution property owner in Mexico.
By making moves like these, Zell calls himself a "professional opportunist."
Currently, Zell sees opportunity in big emerging markets. So he's producing low-income housing in Mexico, China, and Egypt. The locals are lining up to buy these $10,000 houses, and Zell is racking up 25% margins. Zell reported that the sales office for his Mexico operation, Homex, is open 24/7. It literally sells homes at 3 a.m. Zell says his career has been all about supply and demand, Right now, in Mexico, it's all demand.
Zell was peppered with questions and had spicy answers...
When asked for his thoughts on gold, Zell said coolly, "All I know is that gold has a depletion effect on my balance sheet due to my wife's activities."
When asked about the credit crisis, he said it's not that bad. He recently told a Michigan audience, "We're not really in a credit crunch. I think we're in a confidence crunch." He said investors were "flippant" in recent years, and that has changed. But he didn't seem concerned.
So what else is Zell buying? He's about as contrarian as it gets. He bought real estate when it was down and out in the 1970s... and he's buying newspapers today. Many of the nation's largest newspaper publishers are down more than 50% from their highs.
I think Zell is right about staying international with his real estate holdings... as two of my favorite real estate buys right now are in China and Japan. You can check out my favorite opportunity here.
As a final note... while Sam Zell is known as the Grave Dancer for his investment savvy, he'll quickly remind you that "he who dances closest to the graves always has to be careful he doesn't fall in."
Steve's note: With all the volatility in real estate stocks, it's time to go back to basics. Sam Zell is known as the Godfather of modern real estate investing. Today we learn how he amassed his fortune... and what to look for when it's finally time to buy real estate again...
The Story Of The Grave Dancer
By Steve Bergsman | July 28, 2007
- Until the 1980s, real estate had been a highly fragmented, locally based industry financed for the most part by savings and loans, banks, and, to a lesser extent (for bigger projects), insurance companies. Wall Street or some other investment banking entity would occasionally also step in to raise capital for a major development.
When the United States entered into a severe real estate depression, induced partly by the elimination of key tax incentives to the industry, highly leveraged borrowers could no longer repay loans. Defaults collapsed numerous financial institutions, most notably the thrifts.
Zell borrowed heavily and bought up scores of properties at bargain prices. He very quickly became one of the largest investors in real estate during the downturn in the late 1980s and early 1990s, adds Rod Petrik, a managing director with Legg Mason Wood Walker. "There was blood on the streets and Zell was one of the first and certainly one of the largest investors in buying real estate in that down cycle."
As the steam began to leak out of the booming 1980s real estate cycle, Zell astutely visualized the continuum of events that was beginning to unfold. The excessive leveraging of properties could not continue, he surmised. Lenders would be forced to foreclose, and then they would need to unload these distressed properties to reduce their real estate loan exposure.
To amass a war chest for such deals, Zell joined forces with Wall Street and formed Zell-Merrill I, a pioneering opportunity fund that raised what seemed at the time to be a huge amount of capital— $409 million.
As the decade of the 1990s rolled in, lenders were foreclosing on properties at a frantic pace. Finally, the federal government stepped in, accumulating vast pools of nonperforming real estate loans in the foreclosure of insolvent financial institutions via the Resolution Trust Corporation. Zell-Merrill-I was often the only potential buyer for the RTC's high-quality properties.
When Realtor magazine listed the most influential people in real estate in 2000, it said of Zell, "With key partners, Zell cobbled together huge investment funds in the 1980s that enabled him to control one of the largest office and apartment portfolios in the country." And he did it in the way that other investors dream about: by taking undervalued properties off the hands of financially distressed owners— in other words, by buying low.
Born in 1942 and raised in Chicago, Zell became interested in real estate at an early age. The story he likes to tell is about when he was at the University of Michigan and managed an Ann Arbor apartment complex for students. In exchange for rent, it was his job to fill the apartment building. He did this job so admirably, the owners gave him another complex to manage and started paying him as well. The management business, he used to say, was a good way to meet girls.
It was at the University of Michigan that he met his business partner, Bob Lurie, when they both pledged the same fraternity. In the mid-1960s, the two eventually assembled a mini-empire of apartment buildings in Ann Arbor.
When asked, years later, if he was a long-term player, Zell responded, <"I graduated from law school in 1966, I bought an apartment complex in Toledo, Ohio, in 1966. I paid off that mortgage in 25 years. I own it. There aren't many people who can say that."
Always a bit ambitious, Zell concluded that Ann Arbor was not a big enough arena. "I was basically arrogant, and wanted to see what I could do in the real world," Zell said. "So, I sold the business to Lurie and said, ‘When you get through screwing around and want to play with the big boys, call me.' " With that, Zell moved to Chicago. Lurie eventually saw the light and joined Zell in the Windy City two years later.
When Lurie arrived in Chicago, Zell had already put in motion his plan to syndicate real estate. After starting out as a minority partner, Lurie eventually became a full partner as the business grew.
During the 1970s, Zell and Lurie bought ailing Midwest and Sunbelt properties, eventually selling for big gains. What Zell recognized then was that real estate was still an inefficient market and that he and Lurie could do it better.
"Zell is one of the greatest forces in the institutionalization of real estate. He is the godfather of modern institutional real estate," says Barden Gale, managing director of the real estate unit for ABP Investments U.S. The Netherland-based ABP Investments ranks as one of the five largest pension funds in the world and is an active investor in U.S. real estate markets.
"People think there is nothing to operating real estate, you just own a bunch of bricks and people pay rent," Gale adds. "But Equity Residential and Equity Office are as good as it gets in modern real estate operating companies."
Although Zell might relish the appellation "grave dancer," what that actually means is that he is an extraordinary contrarian, gutsy investor, and one tough negotiator.
Excerpted from Maverick Real Estate Investing. Copyright (c) 2004 by Steve Bergsman.
The Greatest Growth Story on the Planet
By Dr. Steve Sjuggerud | May 7, 2007
"The customer in Las Vegas comes into the casino to be entertained... The Chinese customer walks into the casino to face destiny. They are here to do battle— and strike it rich."
— local Macau casino manager, on the Chinese love of gambling.
It happened in the 1990s in Macau.
At the time, organized crime groups— called triads— controlled the tiny Chinese peninsula.
A stock market analyst bumped the wrong guy's girlfriend at a ritzy party... and the AK-47 automatic rifles came out.
The party was at the Mandarin, the only decent hotel in Macau at the time. The Americans were rightfully scared... nobody wanted to leave the hotel.
Macau has always been a big gambling center. And in the 1990s, it was seedy and grimy, all about sex and violence.
Since then, the place has completely transformed. It has become unrecognizable from just five years ago. The reality is, Macau is now the greatest growth story on the planet...
Macau has become the Asian Las Vegas. Gambling revenues drive the place. And the new, cleaned-up Macau is an extraordinary opportunity for investors, as I'll show you in a moment.
Macau's economy grew 20.1% in the fourth quarter of 2006, topping the third quarter's growth rate of 18.8%. Growth rates in the teens have been the norm for the last five years. And the growth should continue...
PricewaterhouseCoopers recently predicted that Macau's casino-gambling revenues would increase at 16% a year, reaching $12 billion in 2010.
The story of Macau's extraordinary rise in the last five years is simple. I can sum it up in one line:
It is illegal to gamble in China... except in Macau.
You see, the Chinese are legendary gamblers. Through a quirk in the laws, the Chinese are now able to gamble legally— but only in Macau.
Thanks to gambling, tiny Macau has grown so fast that it actually overtook Las Vegas in 2006 to become the world's biggest gambling destination. Yes, more money is bet in Macau than anywhere else in the world, including Las Vegas. And 2007 is off to such a rocking start that Las Vegas has already been left in the dust. Naturally, investments there are performing incredibly well...• Sands Macau's owner, Las Vegas Sands, has seen its stock more than triple since its December 2004 initial public offering.
• Wynn Macau's owner, Wynn Resorts, has seen its stock shoot up sevenfold since 2002.
• Melco International, controlled by gambling mogul Stanley Ho, has gone up 18-fold since December 2003.
• Hong Kong-listed Shun Tak Holdings, a Macau-focused conglomerate, has more than quadrupled since December 2003.
So why is Macau so much better than Vegas?
Well, for starters, the Chinese have a legendary love of gambling. And those flocking to Macau bet big money... much more than Americans. They prefer table games like baccarat to the cheaper slot machines so popular in Vegas.
As I looked for the right way to play what's going on there, I found the opportunity couldn't be more obvious. It's Macau real estate. People are pouring in. But there is no land. (If Macau were shaped like a square, it'd be three miles long by three miles wide.) And during the seedy 1990s, there was hardly any decent residential construction. Heavy demand and no supply... that means prices can only go one way.
The government estimates as many as 100,000 new construction jobs are under way in Macau. In the next year, 17,000 foreign workers are expected to move to the tiny city because of the gaming industry. Where will they live?
There is nowhere close to enough living space in Macau to meet the demand in the coming years. The numbers and the story make the profit potential here obvious.
Gambling in Macau has been the greatest growth story on the planet. That makes Macau real estate a one-way bet for the foreseeable future.
Normxxx
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