On Thursday, Bill Ackman, the silver-haired hedge fund virtuoso, fielded a challenge in the gleaming dining room of the Pierre Hotel in Manhattan.
Is JC Penney [NYSE: JCP] a bad company? asked David Shulman, a former real estate investment trust (REIT) analyst for Lehman Brothers, who was moderating a panel during the NYU Schack Institute's annual gathering of real estate developers, brokers and investors.
Ackman, a member of JC Penney's board and the boss of Pershing Square Capital Management LP, whose 22 percent annual returns have rivaled Warren Buffet's, replied that there are both better and worse companies than JC Penney. He later described the century-old company as a start-up, which happens to have $18 billion in annual revenue and spends $1.3 billion each year on advertising. And he conceded that the company has been mediocre for years -- but he lauded its new CEO, Ron Johnson, who spearheaded the rollout of Apple Inc. (Nasdaq: AAPL)'s retail stores.
On the upside, JC Penney owns around 40 percent of its stores outright and leases the rest for the bargain price of a couple dollars per square foot. It has no net debt and spends $1.3 billion each year on advertising, making it among the 20 biggest spenders in its sector and one of the most recognized brands in the world. Even with the encroachment of online shopping, retail has created the wealth of some of the wealthiest families, he said, and if you get the box right, you can replicate it and do phenomenally, Ackman added. JC Penney is shifting to expand its offerings of luxury brands to include brands like Sephora and improving its website, he said, which in turn should benefit mall landlords.
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Ackman praised Johnson for helping invent Apple's Genius Bar, and he believes Ackman will accelerate the evolution of brick-and-mortar stores. It's a place to meet girls, Ackman said of Apple's stores, citing the union of actor Robin Williams and his wife, Susan Schneider, who met outside an Apple store.
Ackman said one merely had to follow Apple's stock price after Johnson joined, when it was around $6, to where it is now, at over $570 on Friday, to see where JC Penney's shares would go in the coming years. He was only half-kidding -- after all, Pershing owns 16.5 percent of JC Penney.
If that happened, it wouldn't be the first time Ackman won big. In 2009, he bought part of bankrupt General Growth Properties Inc. (NYSE: GGP), the second-largest U.S. mall landlord, for 34 cents per share. On Friday, those shares were trading at around $17. In the next year, Ackman plans to launch a $4 billion IPO for Pershing to secure permanent investor capital, and he is also seeking to turn Burger King back into a public company.
In the afternoon, Sam Zell, the real estate mogul who heads the largest apartment REIT, Equity Residential (NYSE: EQR), said that while there are opportunities for deals, the real estate industry is constipated, with limited opportunities.
In the past six months, Zell has been chasing one prize: Archstone, a private apartment landlord that controls over 70,000 extraordinarily attractive apartments. The estate of Lehman Brothers now has a majority stake in Archstone, and Zell's Equity Residential has been trying to buy the remaining 26.5 percent of the company held by Barclays and Bank of America. That stake would give Equity veto power over the company's decisions, but Lehman has the right to match Equity's offer, and the failed bank has said that it wants an IPO to return Archstone to the public and use the funds to pay off its creditors.
Zell demurred on Archstone's future -- it depends if you ask Lehman or me, he said, but he added that it was hard to make a case for another apartment REIT.
When prompted to offer advice to Schack's students, Zell said that the real estate industry was full of successful deal makers, but few conceptualists who understood the larger picture. Zell, who's called the grave dancer for his forays into distressed assets, remembered how he ascended to the heights of his career by buying buildings in little towns with surging growth, taking advantage of high returns while his peers sought weightier buildings in big cities. I had an opinion, he said. I had a direction.
He conceded one misstep: his 2007 acquisition of the Tribune Company, publisher of the Chicago Tribune and Los Angeles Times, which saw revenue drop by 30 percent in the first month, and which subsequently filed for bankruptcy in December 2008. But Zell said he would still do the deal again, because he put $300 million of his own money into the company for a chance at $6 billion in profits.
Our whole philosophy of doing business is 'no surprises,' he said. The biggest risk is the Black Swan, when you can't respond.
Zell ended with a joke: A pious Jew is facing bankruptcy, and he beseeches God repeatedly each week to let him win the lottery to save his livelihood. The first week, he doesn't win. The second week, he doesn't win. But the third time, a flash of light appears, and a voice from the heaven booms, You gotta buy a ticket!
Ultimately, success is dependent on taking a chance, preferably a novel one, Zell said. If you just float around, you'll be mediocre.