Seeking Alpha • Jul 22
Equity Commonwealth Charges You Nothing For Sam Zell
EQC is still looking for that big deal, but with real estate market giving up gains, possibilities look better for Sam Zell to place capital.
Currently the company trades at book value and is mostly cash, charging you nothing for Sam Zell's expertise.
While scope to develop assets is harangued by supply side issues, there are many good ways this can go over the next couple of years thanks to market troubles.
Equity Commonwealth (EQC) is a real estate investment trust ("REIT") vehicle whose trustees are led by the legendary real estate investor Sam Zell that currently trades at book value. It has been sitting almost entirely in cash for a couple of years after some exits pre-COVID as it looked for serious real estate investments that could add numbers to Sam's legendary returns. Now with rates rising, that cash could find better uses in Sam Zell's hands when real-estate markets have become better priced.
Due to the value you get by getting Sam Zell's expertise without a premium on his vehicle, where something like that for Bill Ackman or Warren Buffett would be impossible, we think EQC could be attractive for investors.
Real Estate Challenges
It's been good to have been out of the markets for a while. Major commercial real estate categories carries some risks. Office real estate is still quite uncertain due to the permanence of hybrid working, and there is a real risk that the current footprint constitutes an oversupply. Higher rates are creating an environment where investors are looking for bargains while sellers hang on to the hope of pre-scare valuations. Falling liquidity is creating uncertainty on the buyside with exit prices harder to determine.
The real estate market has slowed down to the detriment of savvy buyers like EQC for the time being, but once the new regime becomes accepted, in particular as higher CPI rates continue to create a basis for greater than expected rate hikes, the landscape is becoming fallow ground for Sam Zell and Co. to splash the EQC cash that they've been sitting on for years. Cap rates are going to have to rise at some point as lenders and buyers together crimp the market on uncertainties, and a high conviction investment will be able to create value in the current environment.
Opportunities are beginning to grow in retail, which has been working through its oversupply for a decade now. Industrial real estate, which has been difficult to develop on supply chain issues, might constitute an interesting opportunity as well on the basis that geopolitical tension is requiring shoring of inventory and government support of local production in a spiraling response to growing mercantilism. Multi-family might be the most attractive of all, with the housing shortage a secular concern, and latent demographic trends supporting demand for multi-family living. With security of rent-growth being a major factor for opening up financing options, things look really good.
Sam Zell and EQC
Sam Zell has an aggressive investment philosophy focusing on contrarianism but also defense against capital impairment, which any successful investor must do. He made his fortune investing in abandoned developments in the '70s. The market may not be quite at that point now with a deleveraging rather unlikely, but with cap rates rising and more tightness on the financing side, markets have become more ripe for EQC to capitalize on. In a more ebullient market environment, the risk with EQC is that it is dead capital, and that it would get eroded away by opportunity cost and now inflation. With more possibility of a major allocation these risks have diminished, and the key question of value comes into play.