Will Sam Zell’s bet on industrial real estate pay off?

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The Monmouth acquisition may remind some of another big deal in a hot real estate market: the 2001 $7.2 billion takeover of Spieker Properties by Equity Office, an office real estate investment trust run by Zell.

Zell faced widespread criticism from analysts and investors for buying Spieker, which had a high concentration of office properties in tech-heavy markets, just as the tech market slumped. was collapsing. Zell managed to write a happy ending to this story. He cemented his reputation as a savvy timekeeper by selling Equity Office in a blockbuster $39 billion deal in 2007, as the economy and the office market peaked.

It’s one of the reasons why few investors are willing to bet against Zell, a 79-year-old man with a Fortune of 5.4 billion dollars, according to Forbes. Nicknamed the “Grave Dancer”, he is best known as a buyer of distressed assets, but Zell describes himself as a “professional opportunist”, an investor with a much broader repertoire.

He saw an opportunity in 2014 when he teamed up with a group of investors to take the helm of a company called Commonwealth REIT. The Newtown, Mass.-based office owner has come under fire for his mismanagement and conflicting interests that have dragged down his stock price. Dissident shareholders overthrew the board and brought in Zell and longtime lieutenant David Helfand to lead the company.

They quickly moved the company to Chicago and renamed it Equity Commonwealth, an adoptive sibling of Zell’s two other REITs, Equity Residential, a large apartment owner, and Equity Lifestyle Properties, a mobile home park owner.

Since then, Equity Commonwealth has sold properties and amassed war chest for a big acquisition. It now owns only four office buildings. After the pandemic sent the economy and the real estate market to the dumps last spring, many investors pondered the possibility of a struggling major deal.

This is why some may have been surprised by the Monmouth deal. The REIT owns 120 properties totaling 24.5 million square feet, including nine in Illinois, and it is not struggling with low occupancy rates or bad debts.

But Monmouth has clear parallels to the Commonwealth circa 2014. Its management and board are also being criticized for insider-friendly arrangements and poor stock market performance. Two shareholders campaigned for change.

One of them, Blackwells Capital, a New York-based hedge fund manager, made an unsolicited cash offer of $18 per share for the Monmouth in December. While it’s hard to find value in the industrial market today, a takeover could create value for Monmouth shareholders simply by putting its portfolio under new management.

Still, Blackwells could complicate things for Zell by sweetening his offer for Monmouth. Equity Commonwealth’s all-stock friendly deal is $19.40 per share, or $19.58, including an additional dividend payment. Blackwells called the offer “totally inadequate” and said it would “consider its options” after reviewing the merger documents.

This raises the prospect of a bidding war for Monmouth, something Equity Commonwealth executives have almost certainly played on. Monmouth shares closed today at $19.35, up 6%. Factoring in a 4.5% decline in Equity Commonwealth shares and the expected market ratio in the deal, trading activity suggests to investors that a higher bid is possible, according to Green Street Advisors, a firm California-based researcher. Many may wonder how much Zell is willing to pay to join the herd.

This story has been corrected with information suggesting investors believe a higher bid for Monmouth is possible.

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