The financial world lost a big figure this month.
Sam Zell, a self-made billionaire, just died at age 81.
Zell was infamous as a real estate man.
He got dubbed the ‘grave dancer’ early on in his career after he bought up distressed properties in the 1970s. That’s how he made his first killing.
Oddly enough, I just gave Sam Zell’s memoir to my brother to read as he recuperates from an operation.
Dead men tell no tales, but their wisdom can live on if we learn from them.
And I reckon we can channel a bit of Sam Zell wisdom right now!
Let’s dig into why I’m saying that (and putting my money where my mouth is!).
Sam Zell was a short dude, but he had big balls. You have to give him that.
It’s easy to say platitudes like ‘buy low, and sell high’, ‘buy when there’s blood in the streets’, and all the rest of those kind of market cliches.
But to risk your money or, even more risky, borrow money, when the world or industry looks grim….that takes guts!
Sam Zell pulled that kind of move many times over.
Let’s channel his spirit into the asset class he helped create…
Real Estate Investment Trusts (REITs).
Have you heard of these? Probably.
But just in case you haven’t…
REITs hold commercial property in different subsectors of the market.
Think childcare centres, offices, logistics, shopping malls, pubs…you name it, you can usually access it in some way via a publicly listed trust.
These have not been a happy place for investors over the last 18 months.
We don’t need to look far to work out why.
You don’t need me to tell you about how interest rates have gone lately…
Straight up!
It’s been a rate hiking cycle like no other.
This sent REIT shares into a tizz in 2022 because they’re very interest rate-sensitive businesses.
They use borrowed money to buy and hold property assets and capture the potential upside of rent and capital appreciation.
But rising and uncertain interest rate rises make it very difficult for investors to judge their outlook.
One problem is their cash flow takes a hit from higher debt repayments.
And rising rates have the potential to hit occupancy and tenant demand.
2022 was something else, I tell you.
A couple of years ago, I went back and looked at how REITS had done in the previous hiking cycle between 2003 and 2007.
They rose alongside the market in a steady upward march.
History didn’t rhyme at all in 2022.
The XPJ — the property trust index on the ASX — got cut down around 30% between January and September 2022.
That was because the speed of rate hikes was so much faster than 2003–07.
However, what does the life of Sam Zell teach us if not anything?
From crisis comes opportunity!
Let’s look around us now…
We have a bunch of property trusts cut down from the interest rate drama of 2022 and the acute fear around a global recession in 2023.
However, the reality on the ground is different.
We have a perception versus reality mismatch.
Oh man, I just love these.
You get the depressed prices because of the fear, but the upside as the market catches on that it’s become too negative.
Aussie REITs are not as highly leveraged as they were in 2007 when they got smashed by the GFC.
Today, most have debt limits of around 30–40% to their equity.
Also, many have ‘hedged’ their interest rate exposure. That means they pay a fixed level regardless of where rates go.
And, again, growing rents. Scentre Group [ASX:SGP] owns the Westfield chain of shopping centres.
The company told the market back in May that its retailers had seen record sales!
Now, consider that the Scentre share price is still well below its former high before COVID came along.
Why does this discount exist?
One reason is that, probably anyway, most people still think online shopping is coming to demolish physical stores.
But then check this out from The Wall Street Journal recently:
‘After years of shunning bricks-and-mortar in favor of e-commerce, even companies that started online have been signing leases.
‘Helping drive the move, retailers said, is the fact that rising digital-advertising costs are making it more difficult and expensive to attract new customers online.’
This notion is further endorsed via one of Australia’s richest and most successful families.
The Frieds are behind the Spotlight group.
They said a few years ago that all their research told them people want online and physical stores.
They bought the foundering Harris Scarfe chain in part for that reason.
Now, this is just one example. All I’m saying here is the perception doesn’t square with what’s happening on the ground.
Everyone thinks the office is dead.
But what’s this?
‘Commonwealth Bank chief executive Matt Comyn is the latest to join the growing push to call workers back into the office, telling the bank’s 49,000 staff they will be required to come into the office for at least 50 per cent of their working time.
‘The mandate, signed off by Mr Comyn and his executive team, was communicated to bank leaders late on Monday and has begun to be sent out to the broader workforce.’
How about that?
Right now, you can buy Abacus Property Group [ASX:ABP], for example.
It has a rough 50/50 split between offices and self-storage.
The market is putting zero value on its commercial property portfolio…all $2 billion worth.
Abacus also owns a chunk of fellow ASX self-storage play National Storage REIT.
I call the current valuation crazy. I bought some for my SMSF in March. Ask me in three years if that was a good idea or not.
I expect takeovers to start happening here because of these discounts.
I put my top idea on this in my ‘Top Five Bargains’ report too.
Check it out here…and potentially pull a Sam Zell-like move of your own!
Best wishes,
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Callum Newman,
Editor, Money Morning
