Zell, Zuckerman Spar on Recession, TALF

[IMGCAP(1)]NEW YORK CITY-”We’ve all had an enormous challenge over the last year,” understated Sam Zell at a general session with Mort Zuckerman at NAREIT’s REITWeek in the Waldorf-Astoria hotel.

Sam Zell and Mort Zuckerman sat down to wax economic on a range of issues from TALF to government intervention with BRE Properties president and CEO Constance Moore–NAREIT chair–as the moderator. Asked how the future looked, Zell warned against extreme prognostications saying, “You should not take a short period of time and make long-term judgments.” Zuckerman echoed Zell’s warning with a note of history, “Nobody can be totally confidant of their predictions” because the current economic situation is unique. He added, “Nobody saw this coming because it is unprecedented.”

The two moguls approached the recession with positivity moderated by a dash of caution. Both men felt there was a necessary correction that occurred, as the downturn weeded out many non-major players in the real estate market. The correction was a needed change for the over-saturated market that cropped up from the late-90s and early 2000s. But with the positive aspects of a corrective economy, so come the bad.

“I don’t see any transactions on the horizon,” predicted Zell. He pointed out that owners of overleveraged properties have no equity. The simple fact is that most of them can hold onto those properties for a while, as Zell noted, “why sell unless your backs are literally up against the wall?” The real estate-cum-media investor joked, “I think it was Confucius that said ‘Banks don’t recognize securities’.”

Zuckerman could not recall Confucius ever bestowing such advice on him and countered that there were two situations companies might face in which they may be inclined to sell. Parting ways with his fellow panelist, he felt companies would consider selling assets under two circumstances: The question of when the loan comes due and when larger leases in those buildings come due. Zuckerman focused on the practicality of size, making a point that although some companies could hang onto their properties, others were not in a strong position to do so and may find it in their better interests to sell.

[IMGCAP(2)]Looking at Zuckerman’s questions, if a company found itself with a quickly maturing loan on a property and/or a large tenant lease coming up–of which, in this market, the tenant has the advantage–it would be in the better interest of that company to sell the property to a stronger firm, rather than lose money in the long-run on these assets. Zuckerman added that not everyone is going to hold, “If the horizon of the buyer is longer than the horizon of the holder, there will be some transactions.”

Zell looked to 1990, when he asserted that the “traditional lenders” left the market, leading to a series of equitization in the public market. His point was simple: There is opportunity for a lot of private commercial real estate companies to go public. “If the private investor can take the dilution” then these companies could go this route. The issue is broader, however, as many of the private investors are “backed by institutions” he said, and can stay overleveraged. There is an incentive for the private investor to take the 15% to 20% “hit” on their profit by going public, but not necessarily for the institutional investor whose timeline is much longer.

Zell positively assessed the viability of REITs in the market right now. “A REIT is nothing more than a stock,” he shrugged it off. “And stocks go up and stocks go down.” He felt this was a good lesson for those in the industry that didn’t know, expounding, “The name of the game was liquidity. Liquidity is value.” Looking at REITs, Zell saw them in a great position. “And you may not like the price that it’s liquid at, but it’s liquid.”

Zuckerman agreed heartily, pointing to the need for cash in the market, “A lot of REITs have a lot of cash.” Zuckerman mitigated his optimism, saying, “I’m not sure there will be IPOs,” but he saw some good opportunities for REITs in the short-term. Zell resounded the lesson, “the market has told you that large scale company’s can raise capital without” a lot of dilution.

As another positive, Zuckerman looked beyond 2009 and focused on the trends of the real estate industry currently and historically. “Real estate is an entrepreneurial industry,” he explained, continuing, that when the entrepreneurial element diminishes in some companies, there is an opportunity for other companies to merge and see growth. Zell agreed, predicting a future showing either a few untenable companies out of touch or 20 to 30 major players that represent the true market.

While Zell held the business line of a non-governmental intervention into industry, Zuckerman added a few caveats to his displeasure on DC’s interference, which Zuckerman felt was necessary albeit at times ungainly and clumsy. Zuckerman noted that banks in particular have a lot of exposure and may want to protect against another downturn. This was an unknown in the marketplace, Zuckerman explained, as banks were uncertain themselves of some of their own loan portfolios, which will result in stringent credit markets for a little while. With that in mind, Zuckerman feels the infusion of cash from the government was the right thing to do and that many of the poorer measures that the government has enacted–Henry Paulson’s lack of over site on the $700-billion bailout and slabs of pork hung onto the stimulus package–were political faults of the US, not necessarily indicative of a bad economic policy of bailing out certain companies. Although, it is safe to say that Zuckerman, an editor by trade, dislikes their verbiage, “Bailout, could you imagine a worse term?”

Zell, still contended that the government should keep its nose out of business, likening their involvement to a eventual evolution to the French economy. Zuckerman, however, saw it differently and politically, explaining that it is “impossible politically” to not stay involved. Zuckerman pointed to Europe as a case in point, where lack of involvement has caused a deepening of the economic harm and will cause that continent much more strife getting out of this mess, whereas the US is already seeing positive results from their early involvement, however faulted some aspects of it may be.

Zuckerman harped on the speed of the crisis–how quickly things began to sink as soon as Lehman Brothers was allowed to fail–it was unpredictable the rapidity of the failing markets. The government’s action, he asserted, saved the financial system. Everyone’s government is going to be involved in some way, he expressed as a fact of our current situation, “We don’t live in an earlier era.”