We Study Billionaires - The Investor’s Podcast Network - TIP552: Mastering the Art of Investing: A Deep Dive w/ Sam Zell

Starting point is 00:00:00 You're listening to TIP. On today's show, we have the honor of interviewing legendary investor and entrepreneur Sam Zell. He's the founder and chairman of Equity Group Investments, a leading private investment firm. Sam began his career in real estate in the 1960s, but over time, Sam has made many bold moves and investments earning him a reputation as a savvy and fearless investor. He did this by founding Equity Office Properties Trust in 1997, which became the largest office in the United States. In 2007, he sold the company for a record-breaking $39 billion, and on today's show, he walks us through how the deal unfolded. And of all the many investment books that I've read,

Starting point is 00:00:41 Sam's book titled, Am I Being Too Subtle, might be at the top of my list. In this episode, we'll dive into Sam's remarkable career and discuss his insights into real estate investing, entrepreneurship, and what it takes to succeed in business. Joining us today as a co-host is David Green, an accomplished real estate investor and host of the Bigger Pockets podcast, which is the number one real estate investing podcast and always a top business podcast as well. If you haven't already done so, I highly encourage you to go check out the Bigger Pockets podcast. David will be joining us in the interview with Sam Zell bringing his expertise and experience to the conversation. So to kick things off, David and I are going to give a quick recap of our conversation with Sam. So without further ado,

Starting point is 00:01:21 let's get to it. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. David's so excited to have you here and especially have both of us getting to ask Sam Zell, all the questions, all the burning questions we've always wanted to ask him. We just got off of the interview with him and we were both, I think, pleasantly surprised at just the amount of wisdom he was providing to us and the generosity is really, I think, the word that was coming to my mind with his time and he just seemed comfortable and giving and open and transparent as he usually is. But curious to get your initial feedback on how it went. It was so rare to hear

Starting point is 00:02:17 a perspective like what Sam shared with us. I'm known for analogies on my podcast and I was thinking as he was talking most real estate podcasts, interviews that you hear involve a specialist in one area of something like the human body. They zoom in on a microscope and they tell you about this fingernail or how this kneecap works. And Sam zoomed out and showed us the entire human body and how all the pieces fit together. And that is one of the ways that he avoids risk or he sees angles that other people miss. Like we all learn when it's too late once the market is crashed or once the opportunity is gone or once you've lost. And Sam shared so much wisdom on how to foresee these things coming. And if you understand these basic fundamentals or these principles, you won't get caught off guard. And as he

Starting point is 00:03:00 was talking, I just thought you never hear this. This is so valuable to be able to hear and it was an awesome interview. What did you think, Trey? You know, what stood out for me was his balance between drive and ego, right? Because it takes an incredible amount of drive to achieve what he did. And yet, it seems like every deal, every step of the way, his decisions were never made by ego. It was always sort of removing himself, looking at it objectively, looking at the numbers, either the risk reward or the sale price or what have you and being able to override any sort of sense of, well, this is going to change who I am or this is going to, you know, personalizing it in any way just to be able to remove himself like that, but also have an insane amount of drive, right?

Starting point is 00:03:47 Those two things, I just feel like you don't often find completely separate like that or he just didn't seem to have much of an ego at all. No. And he also shared some really specific details. of how he managed a huge sale with Blackstone, like literal negotiation strategies. I thought that was brilliant that he found sort of a backdoor that other people might have missed and how he leveraged that same door several times to increase the purchase price. And he also had a phenomenally insightful point when we were talking about supply and demand,

Starting point is 00:04:19 and you and I had the perspective of assets that we pursue. And he talked about the actual supply and demand of capital factoring into the way that real estate values have changed and certain asset classes have seen rises while others have seen falls. And so make sure you listen all the way to that because that's a perspective I haven't heard anyone's share before. All right. So without further ado, here's Sam Zell. Sam, did you do your hair like that today just for me? Spend an hour cool, yes. Sam, even though you're often referred to as a real estate investor, I know that you're actually an industry agnostic investor and entrepreneur, but you've really built a massive fortune in real estate and people, you know, referenced that

Starting point is 00:05:00 quite a bit. And you also pioneered the real estate investment trust industry and you predicted its growth to over a trillion dollars, which it's now done. And we don't often cover REITs on this show, David might on his, but in your opinion, I'm curious, have REITs fully achieved what they set out to in the form of liquidity and transparency? And if not, what would you do to improve the industry from here. The REIT concept was enacted as part of the last thing that President Eisenhower did in 1958. There was something called the cigar bill, and they added the REIT clause to the cigar bill, and that's how REITs got created. Between 1958 and 1991, the reet industry grew from zero to about $7 billion.

Starting point is 00:05:57 The justification to the creation of REAPS was to let the little old lady from Pasadena have an opportunity to own part of quoting, quote, the vast area called

Starting point is 00:06:12 commercial real estate. Up until that point, there was no way that anybody you could own part of an office building or part of them major shopping center. or a big apartment complex because in effect there was no short pieces of it that were available. And the idea was to create a liquid entity that would provide that kind of an opportunity.

Starting point is 00:06:40 During that, give or take 30-year period, rate of growth of reaps was inept to say the least. And the reason was frankly very obvious, and that is that in terms of the attractiveness of real estate as an investment, the private market was dramatically more attractive than the public market. And the public greets that were created during that period of time were generally staffed by people who frankly couldn't make it in the private market. So you had a lot of guys who retired from insurance companies running REITs. The REITs were very small. The REITs had relatively middle access to capital. And to be honest, even though the goal was to, quote, unquote, create an opportunity for the little lady from Pasadena to own commercial real estate,

Starting point is 00:07:41 the reality was there really wasn't significant demand, and there wasn't significant promotion to create that demand. Then in the 80s came, the Japanese came, the savings and loans went broke, the insurance companies in the late 80s started to go broke, and all of a sudden the accessibility to the capital markets of real estate disappeared. I think in 1989, a guy named Clark became the control of the currency. And he basically went around and asked all the banks, what's your exposure to the R word?

Starting point is 00:08:30 And the R word was real estate. And beyond losing insurance companies and savings and loans, and, by the way, taking advantage of the public to the credit. creation of public limited partnerships, all of which were designed to enrich the promoter and destroy the little guy. All of a sudden, come in 1990 or 1991, there was no source of capital for the real estate industry. And yet you had all these real estate players, people like me, people like Mel Simon, people like Don Bren. And I can go on. And the people who basically, you know, ran the real estate department, a real estate world,

Starting point is 00:09:19 were basically in a position where they had no access to capital. And that led to, as somebody says, you know, convention is, you know, the necessity is the mother of the invention. They had the same kind of situation here where all of a sudden everybody looked around and realized that the only source of capital for the real estate, industry was the public markets. And at the time, there was a guy named Richard Salzman, who was head of real estate for Murrow Lynch. And Richard took it upon himself to create and begin what we call the modern era of real estate, of the REIT business. And all of us, whether it was me or Mao Simon or who or talman or whatever, felt,

Starting point is 00:10:13 that the only option was to access the public markets. I was very lucky in that I had been involved in the public markets really for 10 years at that point. And so I had a perspective. I had an understanding of what I thought it took to succeed during the tour of 1993, the real estate investment industry, or the wreat world,

Starting point is 00:10:45 invited me to New Orleans to give a speech on, quote, the modern reet era. I went to New Orleans. I gave the speech and basically what I said to well, what, at that time,

Starting point is 00:10:59 was 1,500 people in the room. The previous year, I think it was 15 people in the row. And he basically said, you gotta stop screwing the public. You gotta create a product. that the public wants to own that solves the problems that the public has. You've got to create the environment where it can grow.

Starting point is 00:11:24 In that speech, I basically said that if you achieve that, if you create a positive environment, then there's no reason why a Ford Motor Company can be a public company or other, you know, big, asset-heavy industries can be public companies. There isn't any reason why real estate couldn't be the same. And it was little doubt in my mind that there was an enormous demand for cash flow emanating from real estate

Starting point is 00:12:03 if we delivered a product to the public that in effect met the needs and objected. So the public wanted liquidity, the public wanted transparency, the public wanted to be able to differentiate between the reed that worked and the reed that didn't. The analysts wanted to be right. And so you've got to create an environment

Starting point is 00:12:35 where in effect you describe, you deliver enough information so that you can in fact be in a position to make a conclusion. And in that speech, I predicted that in 10 years or 20 years, I remember how long,

Starting point is 00:12:53 that this industry would be, you know, $250 million and ultimately a trillion-dollar industry. And that's, of course, what happened in. So that's kind of a little bit of a, of a, you know, history of how the REIT era began, why it began. And frankly, why it's continued to grow, because there's still a demand for transparency. There's still a demand for cash flow.

Starting point is 00:13:24 There's still a demand for participation in an area of the U.S. economy that's, I don't know whether it's 20% or something like that, but it's a very significant part of the economy that wasn't really available on the public markets until the modern reed era. And there's a demand for yield. I'm wondering with all this talk with commercial real estate, if there's sort of a ticking time bomb in a lot of these reeds that maybe a lot of people are just passively owning. I'd be curious, Sam, if you could weigh in on the risks maybe involved and how that might affect the reed market currently. Well, first of all, you know, real estate is a business. It's a business like any other business, you know, and businesses go through cycles. We're sitting today in the situation where parts of the real estate business are in, you know, in big trouble.

Starting point is 00:14:23 I mean, I've sold the equity office in February of 1907, I've left 2007. I was the largest owner of office space in the world. Boy, I wouldn't like to be the largest owner of office space in the world today for when you're confronted with a whole bunch of challenges. First of all, prior to entering the pandemic, we had a very unusual situation. And by the way, everything, whether it's real estate or automobiles or whatever you want to talk about, everything.

Starting point is 00:15:01 comes down to supply and demand. When supply and demand is in balance, the investor gets a return. When supplying demand are out of balance, somebody gets hurt. In the period prior to the pandemic, we had a very unusual situation where companies like we work and other providers of workspace, were taking down huge amounts of office space in anticipation of demand coming five and seven years forward. So we began the pre-pandemic period

Starting point is 00:15:49 with office space being in oversupply. But nobody or not enough people understood it, that we were dealing with a class of an asset class where oversupply already existed. But since these companies took down the space, the statistics said that there was no oversupply. Then, in fact, there was a shortage. When there's a shortage, you know, it's, you know, developers will build buildings. So in the pre-pandemic period, we all of a sudden saw significant growth in the amount of space available

Starting point is 00:16:38 because the perception was that everything was full. But in fact, because of WeWork and other workspace businesses, the reality was just the opposite. And that there was a significant oversupply, but the other workplace businesses, the reality was just the opposite. but the oversupply was being eaten by these companies as opposed to being eaten by the market. So when you then went into the pandemic period, you had all these new office buildings going up, whether it's Hudson Yards in New York. You know, we ended, I think, six a million plus square foot office buildings in Chicago, in almost every market in the country,

Starting point is 00:17:24 because the statistics said the markets were full and therefore needed new supply. So new supply was added to a market that was already over supply, and the results were obviously predictable. Now, it was then hit by the pandemic. The pandemic created this work from home that I don't endorse, that I don't think is any kind of a long-term thesis, nor do I think 10 years from now will be irrelevant in terms of the definition of office space use.

Starting point is 00:18:08 But during the pandemic, work from home became the way in which companies addressed the issue. And that, of course, made Rofus Space a lot of us value. If you were a student of office space or an investor in office space, you would have recognized what was going on and would have avoided being in any way, shape, or form part of the problem. Unfortunately, a lot of people didn't play attention. I mean, we own one office boat. We used to own a couple of hundred of them that went on. building is our home office.

Starting point is 00:18:55 And we only for different reasons and just yield and appreciation. For us, it was a relatively simple analysis. Understanding the supply and demand, understanding what was going on, understanding that the Fed has created a scenario of free money, that skewed people's understanding of what opportunity was. I mean, we took over a reed called Equity Commonwealth in, I think 13, and it had 145 assets, $7,8 billion worth of assets, most of them, office buildings.

Starting point is 00:19:43 Between then and now, we sold every worth, except the two we needed to maintain our read status. I can't remember a time in my life where I've sold 140 some odd assets and don't rule one transaction. Don't rule and say, God, I wish we hadn't sold that one. I was thrilled and delighted at everyone we sold.

Starting point is 00:20:14 Frankly, I'm not very sympathetic to the people. who water them because they were drinking the Kool-Aid. And unfortunately, they're going to end up paying a pretty heavy price for being overly optimistic and not doing their homework during that period of time. But from our perspective, I mean, this is a perfect example of doing your homework and make decisions accordingly. Retail sales on the Internet are another example. I mean, if you looked at what was going on,

Starting point is 00:20:50 then I remember watching sports programming in the early, you know, 19, whatever, 2008 or 9, and companies with, you know, list WTCW or what their URL number was. And I'm looking at it and saying, Jesus, this is. It's going to take the commodity side of retail out of the picture. He took a while and took a while for people to get adjusted, but the entry was obvious.

Starting point is 00:21:31 You know, maybe he wanted to buy a fancy dress. He wanted to go feel it and touch it, and that's fine. but the vast majority of retail sales are not fancy dresses. There are socks and underwear and shoes and all kinds of stuff that could easily be bought over the internet. And as a result, you know, you go from Madison Avenue, New York,

Starting point is 00:21:57 at 56th Street to 87th Street, which used to be the prime retail in America and all you got are vacant stores. He got 28% of Michigan Avenue in Chicago vacant. Union Square in San Francisco. I mean, these were the citadles of retail sales. These led and set the tone to the entire retail industry. And the owners of my real estate, owned a lot of vacant real estate.

Starting point is 00:22:35 And he said to yourself, well, didn't be. see this? Apparently not. Because they continue trading these kinds of properties with relatively short-term leases left to go at prices

Starting point is 00:22:52 that reflected the, you know, the jacking the beanstalk. You know, the lean sock is just going to keep growing. And instead, they're saddled with, you know, dramatic losses. So those are two examples

Starting point is 00:23:08 I've did your homework if you really understood spline demand if you really maintain a level of fear. And by the way, you know, I think that maintaining the level of fear is an incredible element in the creation of wealth. Anybody you ain't afraid, you're going to end up pulling the bag. Let's take a quick break and hear from day sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the

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Starting point is 00:27:23 today with the industry's best business partner, Shopify, and start hearing Sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. You mentioned earlier this dynamic of supply and demand and understanding that will reveal the angle that you're looking at. I thought that was very insightful as well as simplifying.

Starting point is 00:27:59 of this overall cost. The people that bought these bad assets that you said you could see coming from changes in the industry, do you feel that that's a reflection of a monkey see-e monkey-do approach to real estate investing or business in general where people listen to podcasts or read blog and say, oh, this person did it so then I should go do it as well. Well, number one, all of the above, all of the above. But number two, the words, you know, supply and demand also reflects supply and demand of capital. This all occurred not in a period of a shortage of capital, not in a period of difficulty in getting a bank loans,

Starting point is 00:28:44 not in a period of difficulty of getting a mortgage, just the opposite. It was as easy as possible. And the result was that we flooded the market with money We kept lowering the cost of the money. You know, so until we in the United States almost got to negative interest rates in a lot of parts of the world, we got to literally negative interest rates. You know, and all of a sudden everybody says, well, what do I do? You know, what do I do with the money?

Starting point is 00:29:17 All of a sudden, I've got more money than, you know, than I ever passed. I got access to all kinds of capital. I've got to find ways to use it. We had institutions that were hiling up money, looking for places to invest, and, you know, we're all subject to, you know, changing flows. I mean, when I first in 1989, it was the first time that I, quote, unquote, tapped into the institutional market to raise money for real estate.

Starting point is 00:29:54 Imagine how shocked at that. was to find out that 80% of the institutions that I called upon did not have an allocation for real estate. They didn't have an allocation for stocks, bonds, municipal bonds. Real estate wasn't a quote-unquote investable class. Fast forward 20 years, you couldn't find anybody who didn't have a real estate allocation. So they then had a real estate allocation, and the question is, how do they fulfill that allocation, buy more real estate?

Starting point is 00:30:37 And they did. And I'm afraid you're going to be sorry. So on that note, in this current environment of high inflation with low unemployment, how is that impacting or informing your current investing approach? Well, I think that, I'm 81 years old. So that means that I was around in the 70s.

Starting point is 00:31:02 I remember in 1978, you know, we closed a loan on an apartment project. We just bought in the inflation rate that day was 13 and 3 quarters. 13 in 3 quarters was the inflation rate. So I was forced to learn how to navigate. a very, very difficult and treacherous environment, even though it also was an environment that created opportunity to do really, really well. I haven't forgotten that experience. And so despite all of the excitement and stuff that occurred over the last 30 years,

Starting point is 00:31:48 I haven't forgotten what it meant. I hadn't forgotten what it took to generate that kind of inflation. I looked at what the Fed was doing and I looked at what they were, you know, what I saw in the fact the interest rates were going significantly below the inflation rate. You don't need to see. All you need to know is that if the cost of money is four or five hundred basis points less than the inflation rate, you know, things are going to get turned upside down.

Starting point is 00:32:24 I don't think you need a PhD to figure that out. It's just another example of supply and demand. And while all of a sudden the supply became excessive, the result is that, you know, over the last 10 years, we sold a lot of real estate. We bought very little. And I'm waiting and hoping that there'll be an opportunity. to reload and buy, you know, a bunch of more stuff.

Starting point is 00:32:57 But, you know, I made a fortune buying real estate at below its replacement cost, which therefore guaranteed me that the guy couldn't build something across the street at less than my basis. Everything today is still being priced and dealt with at numbers that are above. in effect that would allow somebody to build and compete with me at a lower cost. That doesn't make sense. I love this point about the supply and demand of capital. You've got banks parking money with the Fed.

Starting point is 00:33:36 You've got depositors going to money market funds. I was telling David, I was at this dinner with a top four bank the other night. And I asked them, what are you going to do to discourage deposits from moving money to money markets? What incentives are you providing? And it was like this hushed all over this 20 person. dinner. And they were like, we don't really have an answer for it. And that's kind of a huge issue. And you're seeing the capital dry up and you're seeing even smaller banks becoming at risk of losing depositors. So I'm just kind of curious, have you ever witnessed anything like this?

Starting point is 00:34:07 It's different from the savings and loans crisis to a degree in the GFC. And I'm just kind of curious how you see this playing out where the liquidity eventually does enter back into the markets. Why is it different? Do you know, since the Silicon Valley deal occurred three or four weeks ago, we've had a run in the banks. We've had an enormous amount of deposits taken out of the banks and either taken out of the mid-sized banks can put into the to-legged to fail banks

Starting point is 00:34:41 or put into money market funds. That's not a solution to anything. That's just moving the pegs of the game. Nobody's solving a problem. They're just finding temporary ways to overcome what is it, you know, a significant challenge of not being able to, you know, safely put their money away today. I wouldn't be surprised if, you know, and I'm not predicting it,

Starting point is 00:35:12 but I wouldn't be surprised if the next thing we see is something, any market fund getting trouble. Why? Supply and demand. All of a sudden, they got so much supply. All of a sudden, they got so much demand for their, quote, unquote, services that they can't have enough to justify it. So they'll come up with subprime loans or some other, you know, new methodology to, in effect,

Starting point is 00:35:45 cause themselves their own problems. You've criticized the Fed and what they've done to date. I'm kind of curious if Sam Zell was sitting at the helm of the Fed right now. What would be the next move you would make? Raise interest rates. We've got to raise interest rates three or four or five percent. And we have to make it painful. Everybody's so worried about whether we're going to have a soft landing.

Starting point is 00:36:09 I'm worried about what kind of landing we're going to have. Because if we don't stop inflation in some fear, very, very deleterious thing. I mean, it robs purchasing power of everybody. You know, until 1971, the world was protected from inflation by the fact that we didn't have fiat currencies. We had currencies that were pegged to the price of gold. And in 1971, we, in effect, converted from negative currencies to fiat currencies to fiat currencies,

Starting point is 00:36:47 currencies. And today, you know, there's nothing back in the US dollar. We've increased, we've increased our debt, seven, eight trillion dollars in three or four years. How does that work? I don't know how that work. I know how, what's going to happen. Because I think that we just can't, just can't, you know, again, supply and demand. You just can't create. You just can't create. that much new supply and you had to work. My big concern for the last five years has been loss of EOS, it has the reserve currency of the world. I think that probably would result in a 20 or 25% reduction in the standard of living in the United States.

Starting point is 00:37:41 We have this extraordinary benefit of being able to issue paper. if we couldn't issue that paper or we had to pay the real price of issuing that paper, it's our lifelibly different. All you have to do is look at what happened to England after World War II. Up until that time, sterling was the reserve currency of the world. And then it wasn't. And then all of a sudden England became, you know, part of the sick man of Europe as opposed to the leading economic player in the world

Starting point is 00:38:19 and sent the standard as opposed to had it come up to meet the standard. It would appear that this ridiculous inflation we've seen paired with fears of more inflation coming, because I agree with you, I would love it if you were the head of the Fed, because we could put an end to this, but most likely that's not the way the American populace votes. We tend to vote with the least need. And I'm really available. I went to the University of Michigan, and I took Econ 101, and I will never forget walking into that first classroom of that first day, and on the blackboard, the professor had written

Starting point is 00:39:01 supply and demand. I've never forgotten that lesson, and everything comes down to supply and demand. There is little question that the lowering of cap rates, the increase in the price of real estate, and by the way, the increase in the price of a lot of things, not just real estate, any kind of hard asset, is all been related to there's more supply of money than there is demand. And I'm critical to Fed and I'm critical of the leadership of our country because we have, in effect, bent over and allowed themselves to become the victims of too much supply, and therefore the deterioration of the values of everything,

Starting point is 00:39:55 because in effect everything is measured in terms of dollars. As to the question of, you know, are there places that I think are better to invest than others? Well, obviously, you know, I'm not really in long and slings. lungs as inexceivable. But my whole philosophy of investment has always been that I've never tried to identify a market or a particular opportunity as being the quote and quote right place. During the 70s, from about 1973 until about 1978, I bought about $4 billion. worth of real estate.

Starting point is 00:40:43 And $4 billion worth of real estate at that time was a staggering amount of real estate. And I bought most of it at a dollar down in a whole certificate because the real estate industry at the time was suffering from massive oversupply in fear of demand. And at the end of that period, I appeared on a panel. And when we got to the question and the answer period, this guy from one of the insurance companies raised his hand and he said, you know, Mr. Zell, you bought real estate everywhere in the country.

Starting point is 00:41:23 Where did you do the best? Where was the risk for reward highest? Nobody had ever asked me that question. And so I thought about it. Jury looked at him and said, Toledo, Ohio, you know the guy looked at me. I had lost by mine. And he said, Toledo, Ohio?

Starting point is 00:41:51 I said, yes. He said, Galito Ohio is losing population. Toledo, Ohio was the armpit of the nation. Jolito, Ohio was full of all these rest of the companies that were going broke. She doesn't make any sense. she said, well, if you were sat on the board of an insurance company in 1975, can somebody brought the apartment building or an office building or do some real estate activity before the board to approve a law, you would sit there and say,

Starting point is 00:42:31 I don't want to put any money in Tony to Ohio. I don't want to be dependent on the car companies or a part of the country that's growing. And so you turned down the long. So the result was that what I did buy in Tilly O had no competition. And that's another thesis that I very strongly believe. who you and I all went to high school and we all grew up and were all told how wonderful competition was. Competition kept prices low.

Starting point is 00:43:12 Competition created a competitive zeal. And by the way, the competition is terrific for you. Me, keep like a monopoly. I couldn't have a monopoly, at least a millicopoly. So when I bought two or three projects in Toledo, Ohio, she didn't have any money to compete with. Could raise rates, change the deal, could find myself in a position where

Starting point is 00:43:45 I didn't have to worry about what the guy did across the street because there was no guy across the street. So rather than say, gee, I want to own stuff in Phoenix because Phoenix is growing. Well, there's a lot of people who bought a lot of real estate in Phoenix who wish they hadn't because there's some limited ability to demand, to create demand. Places like Atlanta and Dallas and Houston, they grew developers. They grew people who wanted to build.

Starting point is 00:44:22 They grew savings and loans that wanted to say, you know, wanted to, you know, lend my All of those were wonderful things unless you're an investor. Now, if you're a flipper, it's a different story altogether. I think you're not an investor. Then you're just saying, okay, can I catch the minute when the market is very, very strong, and I can buy something and sell it quickly and, quote, make a profit? That's very different than being an investor whose real goal is long-term or You know, people like Bill Gates and Microsoft or Bin at Google or all of these people

Starting point is 00:45:08 made great fortunes, Jeff Bezos. But the real reason they made fortunes, the real reason they're billionaires is because they didn't have to mark to market at the end of every year in Pazac's. So if I were Bill Gates and I own Microsoft stock, the stock could double and I didn't have to pay any tax on that. I only had to pay tax when I sold. And that's a very important principle in terms of the creation of wealth on a long-term basis. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up.

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Starting point is 00:49:07 Back to the show. I'm really curious about the selling aspect. One of my favorite quotes from your book is that you said, every day I own something, I'm choosing to buy it, fagging the question of would I buy it at today's price? And I think investors are often sold on this idea on buy and hold. And you were even just, again, reaffirming the merits of doing that kind of thing and taking a passive strategy to a degree. But when does buy and hold make sense? And when do you consider the daily price as that, you know, would I buy it at today's price enacting a decision to sell? Well, you know, you always ask yourself the question, you know, would I buy it at this price?

Starting point is 00:49:52 Would I sell it at this price? You have to consider the tax invocations until Sam takes a big bite of everything you sell. So you need to be keenly aware of what your after tax yield. is not your pre-tax yield. And what you paid for is much less important than how much you get left with after you've satisfied an employee. Sam, you sold the equity office rate to Blackstone for $39 billion in 2007, speaking of selling. And that was one of the most insane bidding wars in history. Looking back on that transaction in your decision to sell, what memories or lessons have stayed with you? Well, you're right. It was quite an experience. And what was interesting was that I had a bunch of really, really smart guys on the other side. And in the beginning, maybe six months before the transaction, someone approached me and wanted to buy Equity Office. And I was really surprised because I thought that Equity Office was just,

Starting point is 00:51:07 just too big for anybody to buy. And then I really, at that time, Focked it, we probably owned this company forever, and we'd be passed on the other generations of investors because just the scale was so large that it just didn't fit, you know, anybody doing a buy out of it. In that particular offer or inquiry,

Starting point is 00:51:34 was there a price that, frankly, I didn't think was attractive even if I wanted to sell or could sell. And so I didn't do anything about it. I said no and that was the end of it. Give or take. And by the way, as with all of our companies, we continually have looked at our companies and done an analysis of what they thought when they were worked so that we never were in a position.

Starting point is 00:52:06 where we weren't prepared to understand what we owned and what we thought what we owned was worth. About six months later, Blackstone approached us. And as opposed to giving us an offer, they said, what would it take for Sam to sell equity office? And I remember my response being, yes, they would take a bad feeling. father, offer, which is, you know, from the Mario Pusio story of the godfather. And I said, he would take the godfather offer for me to consider selling equity office. And I remember responding to the broker and saying, that's what it would take. And much to my surprise, they came up with one. And I was extraordinarily flattered by what they thought the company was

Starting point is 00:53:05 work and why and I said well I said I was willing to consider it but I would only consider it if the breakup fee which is the fee that was paid to a loser if there was a competitive bid was small enough that it would not discourage anyone from competing because obviously anytime there is a sale, it's nothing more than price discovery. And I wanted to make sure to protect my investors, to protect myself, that I could say that I had this, you know, gone through and inidentified what I thought the real value was. And so we ended up concluding an appeal at what his men $36 billion with a $200 million dollar break of fee.

Starting point is 00:54:05 Normally, a break of fee in a deal like that would be to protect 3%. So normally that breakup fee should have been a billion two or something like that. Instead, the breakup fee was $200 million, which gave me comfort in that and no one would be discouraged from bidding based on the fact that there was a humongous breakup fee and that the price of playing, that just playing was so high. So that was one of the first and part of the strategy involved in the sales. And by the way, you know, I'm a great believer that there's always significant strategy in everything you do. Whether you're selling or you're buying, there's a strategy involved in a thought process that's involved. And so,

Starting point is 00:55:02 We concluded a deal. I think the first price was $48 a share, a $200 million break-up fee. Then there were various people who expressed an interest or theoretically expressed interest. One never knew until you see the color of their money. So the Blackstone people, in particular, looked at the situation and said,

Starting point is 00:55:31 you know, we're vulnerable. Well, somebody could easily outbid us, and we didn't want to be outbid. And so he came back to us, even before we had a second bid, and said, you know, we'll raise the price if you raise the breakup fee. You know, we'll pay a little more

Starting point is 00:55:55 if you'll make it a little more expensive for anybody to compete with us. We agreed. And so then the price went from, you remember exactly what they went from 48 to 51. And then there was some discussion and speculation that there was another group that was about to get involved. But that other group had a problem. And the problem was that the banking system had been pied up.

Starting point is 00:56:31 By Foxtone had, in one subtle fashion or another, suggested that almost everybody could play. Nobody wanted to, quote, be on the wrong side of a deal, so literally a potential comparator couldn't finance competing bit. So then it became my responsibility to sit down with Blackstone, which I did, and in a nice, you know, comfortable fashion explained to them that how we did have antitrust laws, and that, you know, tying up all of the sources of capital for a potential competing bid didn't really shit the definition of what was, quote, acceptable behavior. And they ultimately agreed in that let go a whole bunch of financing sources, that ultimately became the financing sources for a competing bid.

Starting point is 00:57:36 Whereupon, the Blackstone people then looked at their situation and said, gee, maybe we ought to raise the bid a little more. If we could get a higher rate of fee and more important than a break-up fee was that the original provision did not allow Blackstone to have any contact with any potential buyer of the assets of the OP that Blackstone didn't want. And so they came back to us with still a higher bid with a higher breakup fee, but most important, allow with us agreeing that they could engage in conversations with potential buyers who wanted to buy pieces of EOP.

Starting point is 00:58:30 that they didn't want to. That's how we ultimately made the deal where they were given the right to negotiate with potential buyers for parts of the portfolio. We increased the breakup $700 million, and then we closed the deal February 7th. It was a great day.

Starting point is 00:58:53 I was still smiling. Interestingly enough, Blackstone, to their credit, was able to liquidate almost two-thirds of the portfolio at prices above what they were paying us for the whole. So the net result was that from our perspective, the deal is an enormous economic success. From Blackstone's perspective, because they had stole two-thirds of the portfolio had a premium, Well, their measurement of how they did. They did extraordinarily well.

Starting point is 00:59:34 The unfortunate part of the story was that almost every single buyer who bought anything by any poor part of the portfolio from Blackstone ended up losing because they had basically crossed the line and paid too much. So that was my experience with that particular transaction. I've learned a lot of lessons from it. Most significant lesson is, you know, to fear a seller create competition. Sellers who don't create competition don't get the highest price.

Starting point is 01:00:14 And at the same time, being the last guy on the totem fall to buy something also doesn't like, produce a positive result. My question that comes up, I have a couple. One is, you know, I'm curious how you celebrated on that day. And I remember hearing that you bought your partners, or maybe it was the Blackstone folks. I can't remember some watches that were engraved.

Starting point is 01:00:41 Timing is everything. And I just, I thought that was such a great little anecdote from that transaction. And you're right that timing was everything. And of course, that was right before the great financial crisis. The only thing will rule with your story is that the watches went to the losers in the bidding war. Ah, I see, gotcha. Not subtle at all, right, yes. Watch went to Barry Sterling, the watch went to Steve Roth, not to John Gray.

Starting point is 01:01:11 That's right. Okay, thank you for that correction. I figured Juniperie made enough on the deal that he could buy his own watch. That makes so much sense. it's not uncommon for people to get a sense of or lack of purpose after something like that. And you were already a very successful man even before EOP. But I'm curious how much of your identity was wrapped up in that group and that sale. And were you ever fearful of, you know, oh my gosh, what is my purpose going beyond this transaction? Or in any point in your career, have you ever experienced anything like that?

Starting point is 01:01:45 You know, I think it's a very interesting question. I don't think I've ever tried to answer it, nor do I think I've ever really thought about it. Next Monday, I'm closing another transaction where I'm the majority beneficiary of the transaction, and I'm getting $500 million. And I never thought about it as anything other than part of the goal in the floor. low of what I do. Numbers are bigger. I don't think that I got smarter because the number has got better or dumber because

Starting point is 01:02:28 they didn't. I'm challenged by the opportunities that are, you know, given to me. I'm blessed by the fact that I have the still set in the credibility to be able to achieve the objectives. But I don't really think. I've never really thought about it as a competition between me and somebody else. I've always thought about it as, well, this is what I do. I'm very lucky that society places a very high value on the peculiar skill set that I was born with.

Starting point is 01:03:11 And I'm thankful for the opportunity, but I've never really thought of it was climbing in my And, you know, this transaction or that transaction represents, you know, some kind of a peak. I've done a lot of transactions in my life. Most of them, from a numerical photo view, are real estate transactions. But I've done non-real estate transactions that are significantly smaller than, say, the O.P. sale that I'm equally as proud of and equally as satisfied with because they represent, you know, a challenge and a challenge that I overached. I think historically I've always, you know, believe that I have a responsibility to society, to everything that I do

Starting point is 01:04:07 to be the best that what I can possibly be the best at. Yes, Society has rewarded me with enormous financial awards. I think that's wonderful. But it's not what drives me. What drives me is, can I do it? Can I achieve the objective? Can I do so legally and with pride that I can sit here today and describe a transaction to you and feel very comfortable that I text?

Starting point is 01:04:42 that I tested my limits. Find out you, could I do it? And by doing it, I'd be in great satisfaction. I certainly have made more money than I could ever spend. But money was never really the driver. Other than money creates freedom. Money creates an environment where you can do what you want to do. maybe without asking permission.

Starting point is 01:05:13 So I guess to look at what I do differently than maybe somebody who's, you know, a very early stage in their career and, you know, an opportunity to, you know, make a hit is a real, you know, real satisfaction. And I'm both sympathetic and appreciative of that position. I'm just not in that position today and haven't been, for a long time. Do you mention that money equals freedom?

Starting point is 01:05:44 You've also said liquidity equals value. Can you explain that philosophy and how that's led your investment decisions throughout your career? You know, as a sport or as a hobby, I ride motorcycles. And when you ride a motorcycle, then you feel the wind

Starting point is 01:06:04 comes through your helmet. Do you realize that you're in, total control of what you're doing. There's a sense of freedom that's irreplaceable. In the same manner, having the resources to not start every conversation with, can I afford it whether I want to do it? How are true, very different things. There's nothing more important to me than freedom.

Starting point is 01:06:35 I'm a great student of, you know, I read, enormous amounts. I'm very understanding and knowledgeable about loss of freedom to all kinds of people, you know, from all kinds of different situations, many of them, frankly, you know, very negative. So I guess what I would say to you is that I gave you money as a way of eliminating a step to achieve my objectives, but not be constrained by limitations. In the same manner, when it comes to liquidity equals value, you know, that's something that I coined for my own path to remind me of the fact that I'm constrained only by the exterior events that occur around me.

Starting point is 01:07:37 to the extent that I have liquidity, I can make choices. And if I can make those choices, can be so without the constraints of liquidity. You know, it's I don't have to start by saying, where am I going to get the money? But I'm going to start by saying, how do I want to spend the money? What do I think is important? I think those are criteria that define what I call freedom. It's certainly been a big part of my life. Sam, we are so privileged to get to talk to you today.

Starting point is 01:08:16 I really appreciate all the wisdom you've shared with us. Thank you so much for coming onto our show and sharing all of this with our audience. We really appreciate it and we wish you well and hope to do this again someday soon, but appreciate the time today. Thank you. Well, thank you very much and gladden. that you chose to make me part of this process. I've tried to answer you as unsettly as possible. I mean, you made reference to the fact that I wrote a book.

Starting point is 01:08:48 And as you know, that when I got to the point where I was attempting to describe or come up with a name to the book, and I had a lot of cartoon from names, there was only one that really made sense, and that was, in my being, too several. Because all my life, the one thing that's governed the way I act is I want people to know where I stand. I don't ever want anybody to leave a meeting with me and say, do you think you meant?

Starting point is 01:09:27 And so, I've always been very, very, direct. You have tried to be very direct today and certainly made a pleasure. Thank you very much for their privilege. Thank you, Sam. David. Sam, this was a fantastic interview. I've interviewed lots of real estate investors and I think you gave the most unsubtle, direct, and still valuable advice that I've maybe ever heard. There is a shortage of people in our space that have been through several different market cycles that have such a broad perspective that you have so many people are trying to be gurus after doing two or three deals and raise this money that's very easy to raise and giving bad advice. So thank you very much for taking some time out of a very busy day to share some

Starting point is 01:10:09 wisdom and hopefully prevent some other people from getting hurt if it was an honor. Truly my pleasure. Thank you gentlemen. Good night. All right, everybody. That's all we had for you this week. If you're loving the show, don't forget to follow us on your favorite podcast app. And if you'd be so kind, please leave us a review. It really helps the show. If you want to reach out directly, you can find me on Twitter at Trey Lockerby. And don't forget to check out all of the amazing resources we've built for you at the investors podcast.com. You can also simply Google TIP Finance and it should pop right up. And with that, we'll see you again next time. Thank you for listening to TIP. Make sure to subscribe

Starting point is 01:10:43 to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to the investorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP552: Mastering the Art of Investing: A Deep Dive w/ Sam Zell

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