Do you remember this famous marketing tagline?
When E.F. Hutton talks, people listen.
In the ‘70s and ‘80s, broker E.F. Hutton ran several well-known commercials. In them, two professionals often spoke about stocks. When one told the other that (s)he works with Hutton, everyone in the room stops to listen to the broker’s advice.
In investing, it’s important to find folks whose ideas you trust. I call them gurus.
One guru I follow in the real estate world is Sam Zell. Zell is a self-made billionaire.
His nickname is “The Grave Dancer.” That title was on full display during the commercial real estate market of 1973. Despite doubt from his peers, he stopped buying assets, raised cash and created a firm that focused on distressed assets.
The market crashed one year later. And Zell bought assets at 50 cents on the dollar.
He repeated this in the 1990s. And, most famously, just before the real estate bubble burst in 2007. The $39 billion sale of his real estate company to New York’s Blackstone Group was then the largest leveraged buyout in history.
Here’s why this matters today…
How We’ll Make Money Following Zell
Following Zell’s actions today could lead us to 50%-plus gains over the next two years … or sooner if he has his way.
Zell is the chairman of Equity Commonwealth (NYSE: EQC). His firm buys and sells commercial real estate.
Recently, though, it has been doing more selling than buying.
Since Zell and his group took over in 2014, EQC has trimmed its office portfolio by 90%. In the most recent conference call, the firm’s CEO said: “Our plan is to continue to sell assets at prices in excess of the value implied for our trading price.” That means they’re making money on every asset they sell.
Lawrence Yun, chief economist of the National Association of Realtors, notes commercial property prices rose 90% in the last seven years. The market is paying sellers … and EQC is obliging.
EQC’s selling makes sense. Yun also said: “Commercial prices will plateau and may fall in large markets.”
It may have already started. Real estate analysts at Green Street Advisors say commercial property values fell 1% in the U.S. last year.
Once its current deals close, EQC will only have four properties (of its 16 total) in the primary markets Yun mentions.
Buying Real Estate at a Discount
The next thing I expect will happen is an example of how Zell has excelled for a long time. EQC is looking to do a big acquisition(s).
It’s well-positioned to do so. At the end of the third quarter, it had more than $20 per share in cash (versus its current $30 share price) and the least debt it has had in more than 20 years.
It has sold more assets since then, so the company has more cash. As one of the biggest names in the game, it can also access a lot of credit.
EQC is ready to do deals. The board recently adopted a strategy to buy attractive properties at a discount. And this is the right team to do them. They’ve proved it before.
EQC’s shares have moved higher since the current ownership thanked and excused former management.
There’s one more reason to think the company is a value at current levels. We can look to the actions of the Grave Dancer himself. This past November, Zell made his first purchase of EQC shares in more than a year and a half. He controls more than 2% of company shares.
Shares have been flat since then, but it’s a good bet they will move higher soon.
And in the worst-case scenario, investors will be OK. You see, if Zell can’t find a suitable place to invest, he will unwind the company in a way that maximizes value for investors. After all, he’s an owner, too.
The Grave Dancer has spoken. Like E.F. Hutton, ignoring him in the past was the wrong decision.
Good investing,
Brian Christopher
Senior Analyst, Banyan Hill Publishing
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