After the news of Sam Zell's death at age 81 broke last week, it didn't take long for two of his three public real estate companies — Equity Residential and Equity LifeStyle Properties — to name his successors.
In the same May 18 press release in which it disclosed Zell's death, Equity Residential, a real estate investment trust that owns apartments, said board member and former CEO David Neithercut, 67, would succeed Zell as the company's chairman. Following a similar playbook, Equity LifeStyle, a mobile-home park REIT, revealed a couple of hours later that its former CEO and current vice chairman, Thomas Heneghan, 58, would succeed chairman Zell.
The announcements signaled stability and continuity at two companies founded by Zell and led by him since they went public in the 1990s. Neithercut and Heneghan are respected leaders in the REIT universe with successful track records.
"It's business as usual," said Michael Torres, former Equity LifeStyle board member and CEO of Adelante Capital Management, a California-based money manager that invests in REIT stock. "Sam has built the organizations to survive him."
But the loss of their charismatic chairman, considered by many to be the founding father of the modern REIT era, may remove some of the halo effect the companies enjoyed. The Zell brand was an important selling point for many shareholders who invested in the REITs, along with his reputation for embracing shareholder-friendly governance policies.
"Ensure management's interests are aligned with shareholders," was one of Zell's maxims.
Zell's three Chicago REITs, including Equity Commonwealth, will have to navigate an uncertain real estate sector disrupted by higher interest rates and volatile, though improving, financial markets. Property values have fallen across all property types, and securing financing is a lot tougher than it was a year or two ago.
But rents and occupancies remain solid at mobile-home parks and apartment buildings.
"Apartment demand is holding up reasonably well heading into peak leasing season, and perhaps better than many industry participants feared," analysts at Green Street Advisors wrote in a report last month.
You can't say that about the office market, Equity Commonwealth's historical turf. But the company has sold off so many office buildings over the past several years that it's not really feeling the pain.
After the sales, Equity Commonwealth now owns just four properties and is sitting on about $2.1 billion in cash. The REIT has morphed into a quasi-blank check company — a well-capitalized investment vehicle on the hunt for a big deal.
The current dislocation in the financial markets may deliver an opportunity, but company executives have yet to find one they like. They've been looking for a long time.
"We continue to evaluate a wide range of investments across asset classes," Equity Commonwealth President and CEO David Helfand told analysts in a recent conference call, according to a transcript. "We remain hopeful that the challenges in the real estate credit markets might be a catalyst for a compelling transaction."
But they will no longer be able to bounce their ideas off Zell, one of the most celebrated dealmakers in the business. Unlike Equity Residential and Equity LifeStyle, Equity Commonwealth did not disclose Zell's successor as chairman of its board. Helfand did not respond to requests for comment.
Though the three REITs are closely identified with Zell, he did not own especially large stakes in any of them. Zell and affiliates owned 3.5% of the shares of Equity LifeStyle, 1.3% of the shares of Equity Residential and less than 1% of Equity Commonwealth's shares, according to the companies' most recent proxy statements.
Zell mostly stayed in the background at his REITs, letting his executives do the talking at investor events and on quarterly conference calls with analysts. But he was a strong voice in the investment community, especially as an advocate for the listed REIT industry.
Equity Residential shares were essentially flat on the day Zell's death was announced, edging down 23 cents, or 0.4%, to $61.34, while shares in Equity LifeStyle fell $1.37, or 2.1%, to $64.74. Equity Commonwealth shares inched up 21 cents, or 1%, to $21.15.