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2009 Spring Members’ Meeting Summary

More than 400 members and guests attended the 2009 Zell/Lurie Spring Members’ Meeting, April 28-29 at the Rittenhouse Hotel in Philadelphia.

Prior to Tuesday’s dinner and award ceremony, Research Sponsors, members of the Executive Committee and their guests enjoyed a private reception with Fareed Zakaria, author, editor of Newsweek International, columnist and host of CNN’s Fareed Zakaria GPS.

After dinner and the recognition of student and faculty award winners, Zakaria spoke on “The Rise of the Rest: The Post-American World.” In his illuminating and thought-provoking talk, he discussed his theories of change and evolution in the distribution of power around the world.

Michael Fascitelli, Chairman of the Advisory Board of the Zell/Lurie Real Estate Center, opened Wednesday’s meeting by noting the “terrific attendance” and encouraged attendees to share, discuss, network and interact during the day and to take advantage of all the program would offer.

Fascitelli introduced Joseph Gyourko, the Center’s Director, who moderated the first panel, “Sharing the Pain: Debt Restructuring in 2009 and Beyond.” Gyourko structured the discussion by asking each panelist, beginning with Matthew Lustig, Managing Director of Lazard, “What is different now and what is the same from the last time we had a bona fide credit crunch in the early 1990s?” “There is a similar feeling of hopelessness,” said Lustig. “Will the world as we know it come to an end? The market is deeply troubled and shrinking, with owners of debt often hard to get to. This is an uncertain and untested process and it’s much more complex.” As capital markets have shut down, companies with near-term debt rollovers have faced large problems; however, some have found opportunities behind the closed doors when they have been able to restructure and buy back their liabilities at a discount.

Michael Elrad, Senior Managing Partner of GEM Realty Capital, said in the 1990s, “the bad news was concentrated in real estate and Wall Street was fine; now the bad news is everywhere. The negative news is spread evenly across all markets.” Glenn Rufrano, CEO of Centro Properties Group, quoted figures about recent restructuring cases including Kmart, Circuit City and Linens and Things, which have all gone through bankruptcy proceedings. While Kmart was able to restructure and gave back only half its stores, the latter two immediately went into Chapter 7 and gave back all their outlets, being past the point of reorganization. “Retailers are fighting to stay out of Chapter 11,” he said. “More companies and countries, too, are vulnerable. But this is creating the leaders of the future. In real estate and finance, those who are building new companies and are less vulnerable will break out over the next few years.” The group agreed with Rufrano’s assessment that staying open, honest, and transparent is critical to the restructuring process. Designing a deal that is fair and equitable to creditors also is crucial. “It comes down to getting the people at the table to agree,” concurred John McDonagh, Managing Director of J.P. Morgan Securities, Global Credit Portfolio,, “Look at the assets, the borrower, where the lending is happening, and understand the organizational chart to ensure fair dealings and enable a successful restructure.” Elrad added, “How you conduct yourself in the darkest hour is important because you have to remember that relationships are also made during down markets.”

The keynote speaker, President and CEO of The Vanguard Group, F. William McNabb, spoke on the financial markets and investing.” “How did we get here? Where exactly are we? And where are we headed? It’s tough sledding right now, but I’m an optimist by nature, and I’m still optimistic about the longer term,” said McNabb. Root causes of the current economic crisis can be traced to three of the seven deadly sins: greed, envy and pride. The heart of the crisis is built around greed, which, according to Gordon Gekko, Michael Douglas’s character in the movie Wall Street, “…is good.” “I don’t understand the ‘follow the competitor’ mindset,” McNabb said. “So if the music plays, we should all get up and dance? No. It’s all about how you differentiate yourself.” This need to “keep up with the Jones’s” is, in McNabb’s estimation, the cause of our current problems. He presented a chart delineating the real home price index versus the trend in home buying from 1890 to the present. Home prices have, over time, appreciated at the rate of inflation. But real home prices for the past several years tracked well above that, indicating the bubble that has now burst. “It’s simple. Your assets and liabilities have to reflect similarly or eventually it catches up to you,” said McNabb. McNabb said half of the most volatile days of all time in the stock market occurred in 2008. “The volatility is incredibly unsettling to investors, and Vanguard fields many calls daily. The only other time that came close was in 1938. But we tell investors to look at the long term, and think in ten-year increments. It’s important to stay balanced and diversified.” McNabb closed his speech by stating “It’s important to restore trust, and we can only do that through candor, transparency and simplicity."

Asuka Nakahara, Associate Director of the Center, moderated the second panel, "Learning from the past: How did we survive the last collapse?" The panelists—Jeff Rhodes of The Rhodes Company; Ron Terwilliger, Chairman of Trammell Crow Residential; and Don Williams of the Foundation for Community Empowerment and Chairman Emeritus of Trammell Crow Co.—spoke about working through the last economic downturns. Terwilliger and Rhodes talked about their experiences with Sea Pines, a development company in Hilton Head Island. During the 1970s, when the prime was at 12.5, they carried 100 percent debt, which Terwilliger called a "losing strategy." "Then the market shut down and we learned that the second home industry is highly cyclical, and it shook my thinking." Similarly, now there is little or no construction funding available, as in 1991 and ’92. "We went from building 10,000 to 13,000 units a year, to 2,000 a year, three years in a row." The saying in the early ’90s was "survive ’til ’95" and they did, even as Rhodes explained that the Japanese bought most of the projects he was involved in then. Earlier, in 1973 and ’74, the country was suffering through a real estate depression and economic recession, just prior to Williams taking over as CEO of Trammell Crow in 1977. "It was rebuilt over the years," he said. "We learned the lessons of the ’70s and now we’re suffering through a different set of mistakes." The three talked about the need to focus on the core of the business, and determine the best business model going forward, which may mean getting rid of miscellaneous businesses as Terwilliger did when Trammell Crow shed its senior housing and community development departments.

Panelists discussed the need to move into survival mode and take stock, lower overhead, look at available cash, and look ahead. "We’d say, ‘If we can survive for a few years, we can get to the other side," said Terwilliger. He added the need to gather people around who are "keepers" not necessarily the most senior members of an organization, but those who work hard and have integrity and confidence. "Leaders will possess certain characteristics across the board," said Williams, "character, honesty, innovation, thoughtfulness, and commitment to lifelong learning, a certain understanding and discernment of the times, respect and humility. Over time, those who have those qualities will do best." Nakahara asked the question everyone in the room was thinking: "Are we at or near the bottom-either through data you’ve seen or just a gut feeling?" "We may hit it at the end of this year or early 2010," said Terwilliger. "It’s hard to tell in real estate and hard to define. But I’m optimistic." The future looks different, they all agreed, and new ground rules will need to be figured out on the other side of the recession. The country continues to grow by three million people each year, but a new frugality may take hold in which people live more simply as one extreme. The other is if a major depression hits, then all bets are off. Through four downturns-1974, 1981, 1994 and 2001-Terwilliger has seen people take too long to come "to grips with reality" and make the hard decisions. "It’s all about rightsizing, reducing overhead and not procrastinating on the hard decisions." "The bottom line is that no one really knows what they’re doing," Williams said, eliciting laughter, "but it’s up to us to learn as much as we can and grow positive relationships, and take individual responsibility." Williams echoed the relationship-building comments from the first panel in his concluding remarks, "Partnerships depend on human character and you don’t really know what that is until the tough times."

In order to survive the last major downturn in the commercial property market, major changes in the structure and organization of the industry took place; large publicly traded firms and specialized private equity entities were created. During the third panel, moderated by Michael Fascitelli, the panelists—Neil Bluhm, President of Walton Street Capital; David Simon, Chairman and Chief Executive Officer of Simon Property Group; and Barry Sternlicht, Chairman and Chief Executive Officer of Starwood Capital Group—discussed what is needed to survive this time and what changes they expect to see over the next few years. "So, what will the industry look like in 2013, as far as accessing capital?" asked Fascitelli. Barry Sternlicht said he is finding that high net-worth families are beginning to make up the bulk of the private capital he sees, replacing the private equity funds that don’t have the mechanisms in place to fund commitments. Endowments and pension plans no longer provide those funds. Private firms also struggle with legacy issues, which didn’t exist in the early 90s.

As a wave of maturities grows, David Simon said lenders will have to extend secured capital, and banks are already starting to get aggressive on extensions. He said, "Things happen so fast; the world gets hot fast and cold fast, and four years actually equals ten years. We need more patient lenders." He predicted that the constant evolution means strong retail centers will get stronger and there will be a big shake-out in the next year or two. "Time is in warp speed, and when demand comes back, stronger properties will be even more dominant and return value will be new public companies. Smaller companies will go away, leaving a new breed." From the perspective of raising capital, Simon feels that being a public REIT now is a real advantage. He cited the bond offering he did at 10 percent, claiming that is not really a true indicator of pricing. It was more or less a symbolic gesture, proving they can access capital. Fascitelli’s REIT, Vornado, accomplished a $750 million equity offering in just one day, showing that market demand is there.

Every time the government has stepped in before, the opportunities to make money in the market were incredible, and while that may still be true, this time it’s not considered politically correct to do that, Sternlicht said. "The government keeps changing the rules," he added. "I hope it puts the brakes on some of its spending programs. I’m an optimist, but I worry about fund flow, and the overbuilt hotel market, which has been terrible in the US for some time. Companies have been cutting costs, but even if revenue goes up, expenses are going up faster." He added, "Americans are optimists. We don’t remember what happened yesterday. Consumers need to slow down consumption, and we need an overall slow growth to the economy."

Bluhm said, "We just don’t know what will provide the ultimate solution or where this may go. Will government programs help? Changes constantly occur, and the biggest risk today is something no one’s thought of yet, like Fannie or Freddie for commercial. This is my $64,000 question." In general, Simon and Bluhm would look to buy at cap rates of between 8 percent and 10 percent, with financing assumable or available. Sternlicht’s Starwood Capital Group loves this market, having closed on $50 million so far. Bluhm said, "We always come back. But it’s harder this time."

Real estate legend Sam Zell and Peter Linneman, Sussman Professor of Real Estate and Finance, closed the day with a conversation about the outlook for business and real estate in today’s economy. Linneman wondered if regulators are being "gentle," and perhaps there will be more regulation, a suggestion Zell strongly resisted, insisting we need more "enforcement" instead, and used the Madoff case as an example. "The SEC had been warned for many years about him before he was charged … if existing regulations were actually enforced we might learn we have more regulations than necessary. The government has gone from being a rules maker to being the whole game. It’s no longer passive, and seems to have driven others out of the game. Connecting political ideas to the economy is scary."

One thing the United States has on its side is that the country is still growing. Western Europe is experiencing depopulation, which can only have negative impact on its economy. There is no doubt, according to Zell, that we will see inflation, and "chances for deflation are nil." He stated that gains in quality of life have been significant in our country, citing a statistic from 1929, in which an average household income was about $3,000 in today’s dollars. Today’s average income per household is $51,000. "The resiliency of the American people and work ethic will see us through this cycle like it has in the past."

"All we’re seeing right now is stress, and not much distress," said Linneman, "There’s not many distress sales available." "Right," Zell agreed. "Nothing will be sold this year or next. If the motto before was stay alive to ’95, now it’s ‘Be clean ’til ’13!"

Linneman then wondered about the "new frugality" mentioned in another panel, and Zell urged us all not to equate six months of difficulties to a nine-year depression. He predicted the single-family market will equalize this summer. "Everyone seems too pessimistic…everyone wants to pontificate," he added. "Resiliency has steered us in the past, and I believe it will again."

Michael Fascitelli closed the meeting announcing that the Fall Members’ Meeting will be Tuesday, October 20 at the Inn at Penn. The 2010 Spring Meeting will be on Monday and Tuesday, April 26-27 at the Rittenhouse Hotel, Philadelphia.

Members may contact Ron Smith for information on a webcast of the meeting.

Posted May 2009

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