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Bram de Haas
Bram de Haas
Articles (427)  | Author's Website |

What Sam Zell Is Doing in an Overvalued Market

Zell is following an unusual strategy at the Equity Commonwealth REIT

May 01, 2018 | About:

Sam Zell is a legendary real estate investor and the author of "Am I Being Too Subtle?" Zell chairs and owns substantial interests in publicly traded companies like Equity Residential (EQR), Equity LifeStyle Properties (ELS), Equity Commonwealth (NYSE:EQC) and Covanta Holding Corp. (CVA) and Anixter (AXE).

He just appeared on Bloomberg discussing the state of the markets. He's been very gloomy for a while and continues to be.

He started off the conversation by illustrating how he thinks about the market by talking about Equity Commonwealth, a REIT he took over after it had been mismanaged.

He has been doing nothing but selling and today is sitting on $2.3 billion in cash waiting for the world to come to him.

I researched Equity Commonwealth and it is trading around $31 per share.

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The REIT trades only slightly above book value. According to New York University data the average for REITs is above 2x book value. Although the data is per january and the industry has been under pressure lately. GuruFocus tracks the Shiller P/E and P/E by industry, and the real estate space does look really expensive on Shiller P/E especially:

Sector Number of Stocks Shiller P/E Regular P/E
Energy 31 20.40 33.50
Communication Services 8 20.60 7.40
Consumer Defensive 38 20.70 19.60
Utilities 28 24.80 22.40
Industrials 72 26.00 22.30
Financial Services 74 26.30 18.00
Healthcare 61 29.00 29.30
Consumer Cyclical 81 31.30 29.00
Basic Materials 21 32.40 23.80
Technology 62 35.80 32.60
Real Estate 29 46.60 29.70
S&P 500 500 31.5 24.3

You don't have to worry much about the book value being written off, as it consists of $26 to $27 per share in cash.

Zell admitted it is very hard not to spend the money:

"It's very hard not to pull the trigger," he said. "The guys that don’t pull the trigger are around when it works."

His sentiment seems to echo that of so many value investors whose letters I read or whose actions in the market speak for themselves. He is just more aggressively building cash compared to most. But may that is because, according to Zell, real estate is particularly overvalued, something I can imagine being a bad combination with a Fed that is on a rate hike path.

Asked about the particular things in real estate he views as priced to perfection, he mentions:

  1. Apartments and hotels overpriced.
  2. Inudstrial warehouses.
  3. Office space.

We are building too much industrial space (warehouses) because of the Amazons (AMZN), he said. Originally this space was mostly served by insurance companies. According to Zell, it requires the least amount of skill. Likely the reason is that non-specialists with cheap money could come in and do it. Zell thinks there is just too much of this space and is not sure if there will be enough tenants.

The same thing is true for office space. There are enormous amounts of space being added. Just look at Hudson Yards in New York.

I'm not from New York myself, so I looked it up. According to Wikipedia:

"Hudson Yards is to consist of 16 skyscrapers containing more than 12,700,000 square feet (1,180,000 m2) of new office, residential, and retail space. Among its components will be six million square feet (560,000 m2) of commercial office space, a 750,000-square-foot (70,000 m2) retail center with two levels of restaurants, cafes, markets and bars, a hotel, a cultural space, about 5,000 residences, a 750-seat school, and 14 acres (5.7 ha) of public open space."

Exterior-Glass-Floor-no-Tilt_ObDeck_786xPicture: Hudson Yards website

"There is too much supply and lots of stuff under construction. When that fiishes we will find out who has tenants and who doesn't ... That will drain the swamp," Zell said.

You can bet on Zell putting the billions in Equity Commonwealth to work if and when it happens. It's tempting to pick up some shares in his REIT while the money just sits there and the REIT is valued so modestly because there is almost no income.

Disclosure: No positions.

About the author:

Bram de Haas
Bram de Haas is managing editor of The Special Situations Report and Founder of Starshot Capital B.V.

Visit Bram de Haas's Website


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