Sam Zell is one of the best real estate investors around. He's become one of the richest real estate investors by founding and growing several real estate investment trusts (REITs), including residential REITs Equity Residential (NYSE: EQR) and Equity LifeStyle Properties (NYSE: ELS). He also famously sold office REIT Equity Office Properties at the peak right before the financial crisis.
His current venture is Equity Commonwealth (NYSE: EQC), an office REIT he took control over in 2014. Zell and his team have worked for years to reposition that REIT to create value for shareholders. They appear to have their sights set on transitioning to the fast-growing industrial real estate sector. That's why now seems like the perfect time to start stocking up on this REIT.
Shrinking to create value
When Zell took over Equity Commonwealth, it was one of the largest commercial office REITs, with 40 million square feet of space across 30 states and Australia. However, he believed its strategy of growing in size wasn't creating value for shareholders, especially given that institutional investors like pension funds were paying top dollar for office properties. That led his team to steadily shrink the portfolio over the years.
Overall, the company has sold $7.6 billion of assets. It used that cash to repay $3.3 billion of debt and returned $1.4 billion to shareholders. Equity Commonwealth currently has no debt and $3 billion in cash.
This strategy has paid off for investors. Equity Commonwealth has outperformed its office REIT peers by more than two times since Zell's team took control.
Getting back to what Zell does best
While Zell's strategy to unlock the value of Equity Commonwealth's assets has proven successful, there's not much left to do. The REIT currently only has four remaining properties, with 1.5 million square feet of space. Zell's team is working to maximize their value by leasing the vacant space and will likely sell these properties in the future.
That's because Zell doesn't believe growing from this base will create the most value for investors. While his team looked for bargains across the sector in recent years, they didn't find any. That means he wants to shift gears and get back to what he does best: base building. His teams have built leading REITs from the ground up in the residential, manufactured housing, and office sectors. Now, he wants to do the same in the industrial real estate sector.
Their first attempt proved unsuccessful, as they didn't get enough support to close the proposed merger with industrial REIT Monmouth Real Estate Investment (NYSE: MNR), due in part to a competing cash bid. However, Zell has made it clear that he's bullish on the industrial real estate sector.
Zell wrote his thesis in an open letter to Monmouth shareholders before they voted against the merger deal, noting: