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Real Estate Investor Sam Zell Runs Into Rough Spot (Update5)
By Robert Burgess
Chicago, April 29 (Bloomberg) -- Chicago billionaire Sam Zell built a fortune acquiring properties from financially distressed sellers and turning them around. Now, the self-described ``grave dancer'' is in a tough spot of his own.
His Equity Office Properties Trust is the worst performer in the 21-member Bloomberg Office REIT Index. A dollar invested in the largest office building owner at the start of the year has shrunk 4.08 percent, while the index has returned 3.72 percent.
The lagging performance follows an $11.8 billion West Coast expansion in 2000 and 2001, as the office-property market was peaking. Equity Office has since lost a key tenant at its largest development, Zell's chief executive quit this month, and the chief financial officer's spot has gone unfilled for six months.
Zell, the company's 60-year-old chairman, hosted a conference call today to discuss first-quarter earnings and tried to reassure investors he can still turn around a bad situation. The priority, he said, is to insulate the company from further declines in its markets and hire a chief executive whose skills lie more in managing businesses than acquiring property.
``To his credit, Zell clearly laid out the company's objectives, but those objectives are formidable hurdles,'' said Joe Smith, who helps manage more than $1 billion, including shares of Equity Office, at Clarion CRA Securities LP.
Equity Office's shares fell 4 cents to $28.38 on the New York Stock Exchange.
Earnings
The company's funds from operations -- a measure of cash flow used by REITs -- rose to $410.6 million, or 87 cents a share, from $272.6 million, or 78 cents, a year earlier. Results include a fee of $40 million, or 8 cents a share, paid by Sun Microsystems Inc. for not moving into a building at Equity Office's $223 million Foundry Square project in San Francisco.
``I was out there on the West Coast this month, and what I saw was worse than I expected,'' said James Sullivan, a REIT analyst at Prudential Financial who cut his rating on Equity Office this month to ``hold'' from ``buy.'' ``High-tech markets appear to be facing a protracted period of high vacancy.''
Zell has a lot at stake. He controls a 4.5 percent of Equity Office, a holding valued at about $378 million. Although he draws no salary, his stake collects about $26.5 million a year in dividends.
``I can assure you we have a talented management team in place,'' Zell said on the call. ``As I have said before, it's going to be a tough year but by the end of the year you're going to see significant positive news'' on the economy and real estate markets.
Chicago-based Equity Office owns 768 buildings across the U.S., including New York's Worldwide Plaza, the tower that houses Chicago's Mercantile Exchange, and Rowe's Wharf in Boston. It owns more than 125 million square feet of office space, more than twice as much as its nearest competitor, Toronto-based TrizecHahn Corp., whose stockholders this month approved its conversion to a U.S.- based REIT.
Zell built his reputation buying real estate in the late 1980s and early 1990s, when foreclosures were rising. The bet turned out right when the real estate market recovered faster than expected and vacancy rates hit all-time lows in 1999.
`We Pulled Back'
The executive, who leads a group of friends who refer to themselves as ``Zell's Angels'' on motorcycle junkets around the world, strayed from his bottom-fishing investment style last year. Equity Office bought developer Ned Spieker's Menlo Park, California-based Spieker Properties for $7.2 billion.
The purchase, about a year after Zell paid $4.6 billion for another REIT with a West Coast focus, Cornerstone Properties Inc., came when vacancy rates were at all-time lows of less than 3 percent in such places as San Francisco, San Jose and Seattle.
``Ned Spieker knows the West Coast better than anyone, and when he sold out to Zell, we pulled back on our Equity Office holdings,'' said Richard Imperiale, who helps manage about $1.4 billion for Forward Funds Inc.
Since the purchase, vacancy rates in San Francisco, Boston, San Jose and Seattle, which account for 45 percent of Equity Office's net operating income, have risen to more than 14 percent, and rents are down more than 20 percent, according to Torto Wheaton Research, a real-estate research firm.
`Legendary Investor'
Job growth in Equity Office's top four markets, after exceeding the national average through the 1990s, is expected to perform in line with the rest of the country in the next four years, according to Property and Portfolio Research.
``There's going to be some continued questions on the timing of the Spieker acquisition,'' said Clarion's Smith.
It is critical for Zell to prove he can manage as well as acquire properties, analysts said. Because of Equity Office's large size, a $1 billion acquisition would add just 4 cents a share to annual earnings, according to Sullivan.
``Zell is a legendary investor and a great dealmaker, but he's not known as a great operator,'' he said.
Making Zell's job tougher is the resignation on April 19 of Timothy Callahan, who had been president and chief executive of Equity Office since it went public in 1997, for ``personal reasons.'' The company has been searching for a chief financial officer for six months after promoting Richard Kincaid to chief operating officer.
In an interview on the day of Callahan's resignation, Zell declined to elaborate on Callahan's reasons for leaving, though he said it had nothing to do with the performance of the company. A new chief executive may be named by November, Sell said today. |
