the audit

What Journalism Should Know About Sam Zell

A Chicago real estate mogul eyes Tribune Co.

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In CJR’s January/February issue, The Audit’s bosses on the other side of the cubicle encouraged Tribune Co. to exit the newspaper business with a tartly worded editorial headlined, “Time to Go.” Now, Tribune appears to be on the brink of doing so. I had no idea we were so influential.

As it happens, the leading bidder for the media giant, according to reports in two Tribune properties, the Chicago Tribune and the Los Angeles Times, is Chicago real-estate titan Sam Zell, though rival bidders are still in it. Still, a question arises: What kind of steward would Zell make for those civic assets, as well as the Baltimore Sun, Hartford Courant and Tribune’s other storied media outlets?

Put it this way: The Audit only wishes Royko and Mencken, former employees of papers now in Trib Co.’s hands, could be around to write about it.

I had the pleasure—and in many ways it was a pleasure—of covering Zell when I worked at the Wall Street Journal covering major real estate investment trusts, including the industry’s flagship company, Equity Office Properties Trust, founded and chaired by Sam Zell. It was in large part due to Zell’s efforts that a scandal-ridden and collapsed real estate securities business could be transformed into today’s transparent, stable, and prosperous REIT industry. Zell was the reformed industry’s public face, a reassuring presence as it reinvented itself and recovered from the catastrophic real estate collapse of the late 1980s and early 1990s.

So, to be clear: The modern REIT industry is a genuine ugly-duckling-to-swan story that has benefited millions of investors, and Zell’s role in that metamorphoses cannot be overstated.

Gruff, salty to the point of crass (he never tired of describing EOP’s position on disclosure as “open kimono”), Zell is invariably described in business stories as “colorful.” If you don’t know that he rides motorcycles, wears cowboy boots, eschews ties, started out selling discounted Playboys, etc., then you are well behind in your Zell studies. This story in Monday’s New York Times manages to recycle every known Zell fact without adding a new one.

The question of whether Zell is a brilliant dealmaker can be answered in the affirmative, though, as we will see, “brilliant” does not mean “infallible.”

As an operator, however—and that’s the issue for reporters, editors, readers and the communities relying on Trib Co.’s media properties—EOP was not a pretty story. Like a Lake Wobegon in reverse, it was always far, far below average. And unlike the placid, fictional Minnesota town, Equity Office was given to spasms of what can only be called managerial chaos.

First, let’s do the numbers. Equity Office lagged its direct competitors by what Wall Street analysts would call, in technical financial terms, “a country mile.” To be fair, nobody went broke investing in EOP or almost any REIT. (To understand why would take a separate column about commercial real estate—hey, let’s not.) The stock returned 192.5 percent from its 1997 IPO until last November 17, the day before EOP announced its sale to Blackstone Group, according to Green Street Advisors Inc., a Newport Beach, California, real estate securities research firm.

But the average office REIT returned 268 percent, according to the National Association of Real Estate Investment Trusts, the industry’s Washington, D.C.-based trade group.

For that matter, even The Audit made money in real estate in the last few years. Who didn’t?

How did a successful operator do? Boston Properties, another national office company, chaired by real estate/media mogul Mortimer Zuckerman, returned (ka-ching!) 575 percent.

The graphic below should provide a rough idea. EOP shareholders who sold before the Blackstone announcement might want to look away.

The basic concept of Zell’s empire—that owning a huge national portfolio of office buildings spread across many cities was better than owning a concentration of buildings in select cities—proved to be just wrong. In fact, buying smart in growing markets and operating well is what works, and always has. Size doesn’t matter.

The idea that big corporate tenants would prefer to deal with a national landlord did not pan out. Successive strategies to “leverage” the “national platform” to boost revenue—selling tenants everything from broadband access to dry-cleaning services—didn’t work. EOP’s command-and-control model—running from Chicago an empire that at one point stretched from Anchorage to Miami -- left the company a step behind. Never was the company so out of touch as when it announced a $7 billion deal to buy a forest of buildings in Silicon Valley—the largest public real estate deal to that point—in February 2001, just as the tech collapse was gaining momentum. The so-called “Spieker deal” became a punch line in northern California real estate circles.

And then things just got worse and worse. EOP, the so-called blue chip of REITs, endured severe turnover in senior management, reaching clown-car proportions with the awkward 2002 exit of CEO Tim Callahan and two senior officials, forcing Zell himself to step in for a time. An exhaustive nationwide search for a new CEO ended in-house with the appointment of Zell’s protégé.

By May 2005, Green Street, in a report on the pros and cons of buying EOP shares, noted that management at the very top had finally settled in and developed an “admirable” strategic plan that was being well-executed, and that morale throughout the company was high.

On the other hand:

Turnover at the senior-management level has continued at a stunning pace. Important dealmakers continue to leave the company. The talented head of the San Jose office left six months ago and has still not been replaced. That office, which accounts for 10% of the portfolio, is being run out of Denver. Two other key markets, New York and Washington, D.C., are run by an executive based in Atlanta.

I’m no real estate expert, but that can’t be good.

And as the going got tough, EOP resorted to a strategy that will sound familiar to newspaper employees: cost cutting. And, one hates to pile on, but even in good times, EOP's culture in relation to the media and contrarian analysts was famously thin-skinned.

Point being, Zell's record as an operator of a national office company can't offer much comfort to Trib Co. constituents. And real estate is something he knows a lot about.

Zell’s defenders, and they are legion, will argue that in the end, he did right by his shareholders in going private. But that’s not what we’re talking about today.

CJR

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