On October 20, 2021, I met a living legend.

To call Sam Zell a real estate expert would be like describing Walt Disney as a mere entrepreneur. Zell was hardly the first man to make a mint off commercial real estate (“CRE”) just like Disney didn’t invent entertainment.

But, boy, did they both leave marks on their respective industries.

Zell definitely left an impression on me, both before I met him and these three-and-a-half years later. That’s why I once wrote that, while it would be difficult to name the top 10 inspirational people I’ve met…

There’s no question about my top choice. It’s Sam Zell all the way, one of my all-time investing heroes.

When he died in May 2023, PBS aptly described him as “a Chicago real estate magnate who earned a multibillion-dollar fortune and a reputation as ‘the grave dancer’ for his ability to revive moribund properties.” It went on with this:

Bearded and blunt-spoken, Zell reveled in bucking traditional wisdom. He had a golden touch with real estate and got his start managing apartment buildings as a college student. By the team he reached his 70s, he had amassed a fortune estimated at $3.8 billion.

Zell sold Equity Office, the office-tower company he spent three decades building, to Blackstone Group for $39 billion in 2007. It was the largest private equity transaction in history, and Zell personally netted $1 billion.

I’m going to come back to that last part shortly, but hopefully, those descriptions help you understand why I was so excited to meet Zell.

By then, he had already endorsed my book, The Intelligent REIT Investor, writing that “Thomas’ book helps break down [real estate investment trusts (“REITs”)] for the average person, making REITs more understandable and therefore more accessible to everyone.”

But when I landed a one-on-one with him a few months later, it still felt unreal.

Source: Brad Thomas

Nonetheless, it happened. And, as shown above, I’ve got the picture to prove it.

The Sam Zell Way of Doing Business

Sam Zell had a three-part recipe for success. I remember reading about it long before I met him, but he confirmed this standard approach when we met:

  1. Buy distressed assets.

  2. Buy quality assets.

  3. Buy tax-efficient assets.

That all showed when he made one of his many legendary moves in purchasing Archstone’s Manhattan apartment properties.

First off, those luxury assets had already gone bankrupt and were owned by a collection of banks. In fact, Zell ended up paying $6 billion less for the collection than it last sold for five years earlier.

Secondly, the Archstone apartments were still fully functioning, with one-bedroom rentals costing up to $4,000 per month. And last but certainly not least, Zell used his Equity Residential REIT to make the purchase.

For those of you who don’t know, REITs don’t pay corporate income taxes as long as they distribute 90% or more of their taxable income to shareholders through dividends. So the Archstone deal was a win-win-win for him, checking off every one of his boxes.

Who wouldn’t want to emulate that kind of success story?

But here’s something else every fanboy or girl needs to know: Zell only danced on graves. He very rarely fell in them.

Now, critics will quickly point to 2007, when he purchased the newspaper owner Tribune Company. And yes, that was a mistake. An enormous one even. The “deal” ended in bankruptcy after years of misery – proving that nobody’s perfect, even Sam Zell.

But overall, the Grave Dancer’s legacy is one we can all “model to build our wealth, even in the trying times,” as I wrote in my 2023 tribute to him. And since we’re coming out of one era of difficulties and quite possibly facing a recession in the next 18 months (no, I haven’t forgotten about that prediction)…

Now could be the perfect time to start looking at “graves.”

Sam Zell, Homer Hoyt, and the Profitability of Timing

Speaking of perfect timing, Sam Zell didn’t just search out quality assets selling at distressed prices with tax-payer advantages. He also knew a thing or two about market cycles and how to work within them.

That’s why he was able to sell Equity Office Property Trust to Blackstone for $39 billion, as I mentioned before. Remember that was in 2007… right before the housing market collapsed, taking commercial real estate prices right with it.

Studying Zell taught me a lot about market cycles and how to play them. Mind you, this isn’t “market timing,” where you hop in and out of investments based on daily, weekly, or even monthly data.

It means recognizing the inevitable: how markets get oversaturated and have to correct themselves and how the resulting corrections also end up changing course as well. In other words, bulls and bears both stop running at some point.

Nothing lasts forever, and there are usually signs that precede these switches. Sam Zell simply knew how to see them and act accordingly.

Homer Hoyt did, too. He was a 20th-century land economist who figured out that typical business cycles and real estate cycles differed. Both follow the same pattern of growing, peaking, receding, and bottoming out. But while most markets tend to cycle through all four stages every five-and-a-half years, real estate tends to follow an 18-year model.

I covered his findings in more detail back in January, and you can read the full piece here. But suffice it to say that, according to Homer Hoyt – and current economic factors such as not-really-tamed inflation – “we’re a bit overdue for a [mild] real estate recession.”

If that’s the case, we can take a page out of Sam Zell’s playbook and capitalize on quality companies trading at reduced prices. Start looking at stocks that are trading too high today, and make a wish list.

They might be REITs, which benefit from lower taxation, allowing them to offer you higher dividend yields. Or they might not be. There are, after all, plenty of other worthwhile opportunities to consider as well.

But regardless of what exact asset you choose, remember you want to focus on quality. Then sit back, bide your time…

And get ready to dance.

Regards,

Brad Thomas
Editor, Wide Moat Daily

P.S. I actually have one company on my “grave dancing” radar right now that I’m going to share with my valued readers next week. It’s a solid “wide moat” company with so much potential, but Mr. Market doesn’t see the love.

It’s a company I’ve been keeping a close watch on for years now, and my dancing shoes are already on. I simply need to make sure the tune is just right before I officially ask it to take a turn around the floor.

MAILBAG

Who are some investors that you have followed throughout your journey? Write us at [email protected].