Equity Residential

2 North Riverside Plaza
Chicago, Illinois 60606
U.S.A.
Telephone: (312) 474-1300
Fax: (312) 454-8703
Web site: http://www.eqr.com

Public Company
Incorporated: 1993 as Equity Residential Properties Trust
Employees: 6,400
Sales: $2.3 billion (2001)
Stock Exchanges: New York
Ticker Symbol: EQR
NAIC: 525930 Real Estate Investment Trusts

Equity Residential is part of the farflung business empire of Chicago billionaire Samuel Zell, known as the “Grave Dancer” for his penchant of buying and turning around distressed businesses. Equity Residential is a real estate investment trust that acquires, owns, and operates apartment properties, the largest publicly traded REIT of its kind in the United States. It owns more than 1,000 properties in all parts of the country, totaling nearly 225,000 units. Zell serves as chairman of the board, but day-to-day responsibilities are handled by CEO Douglas Crocker II, who in late 2001 announced his intention to step down as soon as a suitable replacement could be found.

Fleeing Poland at Outbreak of World War II

Samuel Zell was the only son of a Polish Jewish couple who fled their native country only hours before it was invaded by German forces in 1939, the final step in the buildup to World War II. The couple immigrated to Chicago where Zell was born in 1941. The family was supported by the selling abilities of Zell’s father, who was known to peddle flour and jewelry as well as real estate. By 12 years of age Zell displayed his own entrepreneurial bent. Sent to Hebrew class in the suburbs each afternoon, he noticed at the train station a new Chicago-based magazine named Playboy, which was not generally available in his neighborhood. According to Zell, he began to buy issues for 50 cents at the train station, then resold them for $1.50 in the schoolyard.

After graduating from high school in 1959, Zell went to college as a political science major at the University of Michigan where he met his future long-term partner, Robert Lurie, who was a fraternity brother. As an undergraduate Zell began to manage some off-campus housing property and was able to accumulate enough of a stake for him and Lurie to go into the real estate business together. The two men were almost polar opposites in personality but complemented one another. Zell was the outspoken, often abrasive, visionary—the rainmaker—while Lurie was the retiring numbers man who minded the store. Both men continued to run their fledgling real estate business in Ann Arbor when they went on to law school at the University of Michigan. By the time they graduated in 1966, they owned a city block of student housing, all resulting from a $1,500 down payment.

Zell intended to practice law, however, and accepted a position with the Chicago firm of Yates Holleb and Michelson at a salary of $116 a week, with the possibility of earning more by bringing in new business. According to Zell he suffered through his first week drafting a contract, then over the weekend took advantage of real estate contacts to cobble together an apartment project in Toledo, Ohio, which he presented to the firm’s partners on Monday morning. All of them were impressed enough to invest in the deal. During the first year at Yates Holleb, he earned $93,000 in commissions, compared with $7,000 in salary, for a total compensation that eclipsed the firm’s senior partners. Zell stayed on until 1968, then decided to quit the practice of law and again joined forces with Lurie to pursue real estate ventures.

Zell and Lurie formed Equity Finance and Management Company in 1968. They became involved in two small development projects but quickly decided that there were too many uncontrollable elements and that the risks simply outweighed the rewards. Zell concluded that much of a developer’s compensation was psychological, the ability to point to a structure and declare that he had built it: “Look how big it is!” Instead Zell and Lurie elected to concentrate on acquiring existing properties at below replacement cost from distressed developers, a practice that would lead to Zell’s “Grave Dancer” moniker. One of their first deals of this kind involved a 1,000-unit apartment and office complex in downtown Cleveland. The property was in such poor shape that it was mostly inhabited by squatters. The partners renovated the complex and turned it into a fully rented facility worth many times more than the nominal amount they paid to acquire it.

Zell and Lurie were well positioned to take advantage of the collapse of the real estate market in 1974, buying numerous properties on the cheap. With high inflation during the decade those properties then experienced a tremendous increase in value. They concentrated on buying apartment buildings in fast-growing cities, primarily located in Sunbelt states. It was also a time of many dubious real estate tax shelter schemes, and in 1976 Zell became caught up in a federal investigation that nearly devastated the partnership. He and three Chicago tax attorneys, one of whom was his brother-in-law Roger Baskes, were indicted for their part in transferring some assets to an offshore bank to avoid paying taxes. Zell was not the target of the investigation and received immunity in exchange for his testimony. Although he attempted to exculpate Baskes, his brother-in-law was still sentenced to two years in a federal penitentiary. The incident would haunt Zell for years to come, as competitors strategically reopened the wound, despite the fact that Baskes and Zell maintained warm relations.

Acquiring American Management & Investment Inc. in 1981

Zell and Lurie gained national attention in 1981 when they acquired a controlling 68 percent stake in Great American Management & Investment Inc., an Atlanta-based REIT with some $500 million in assets. It had been one of the largest REITs in the United States before going bankrupt in 1977. The partners sold much of Great American’s assets, restructured its debt, and returned it to fiscal health. Zell and Lurie then moved beyond residential and commercial real estate, applying the same principles of buying properties at distressed prices to the corporate world. Moreover, with real estate values spiraling out of control, Zell sensed that a crash was coming, making it a good time to diversify into other areas. The partners bought stakes in Consolidated Fibers, Commodore Corp., and Itel Corp. They became involved in a wide range of businesses, including radio stations, fertilizer companies, dredging equipment, drugstores, mattresses, and rail cars. An investment in bicycle maker Schwinn was a notable failure, but the bulk of their turnaround activity proved lucrative.

Many real estate operators who had engaged in dubious tax shelter schemes during the 1970s faced a day of reckoning when the Tax Reform Act of 1986 undercut their activities, resulting in the crash that Zell had anticipated. As in an earlier time, he and Lurie were able to take advantage of other people’s problems and acquire properties at a steep discount. In 1987 they began to set up real estate “vulture funds” with Merrill Lynch & Co. and acquired the bulk of the properties that would form the basis of Equity Residential. By the end of the decade, however, commercial banking money dried up and severely hampered Equity Finance. More important, Lurie was diagnosed with cancer during this period and the final years of his life were difficult for both men. Unable to accept the inevitable, the partners reportedly stopped seeing each other to conduct business, instead talking by telephone on an hourly basis. Lurie died in 1990 and much of his day-to-day duties were taken over by Sheli Rosenberg, also an attorney with a flair for deal-making. She had done some work for Equity Finance during the 1970s while a partner at the Chicago firm of Schiff Hardin & Waite. She went to work for Zell and Lurie in 1980 to start an in-house law firm and became their top lawyer, involved in the structuring of all their major deals.

Zell was able to scrape by during the recession of the early 1990s but his deal-making activity was curtailed. When real estate began to recover, he and others rediscovered the value of REITs. REITs originally were created by Congress in 1960 as a way for small investors to become involved in real estate in much the same way a mutual fund allowed them to pool resources to buy stocks. REITs could be taken public and their shares traded like any other stock, but they were required by law to pay out at least 95 percent of their taxable income to shareholders each year, thus severely limiting the ability of REITs to raise funds internally. REITs also were hindered because they were only allowed to own real estate. Third parties had to be engaged to operate or manage the properties. Moreover, the tax code made direct real estate investments an attractive tax shelter for many individuals, thereby absorbing funds that might have been invested in REITs. The Tax Reform Act of 1986 not only eliminated these tax shelters, it also permitted REITs to provide customary services for property, in effect allowing the trusts to operate and manage the properties they owned. Nevertheless, REITs were still not embraced as an investment option because banks, insurance companies, pension funds, and foreign investors (in particular the Japanese) were investing heavily in real estate. Overbuilding and a glutted marketplace, however, resulted in falling property values in the early 1990s, and lending institutions, as a result of the recent savings and loan debacle, were forced by regulators to be more circumspect about their investments. Capital essentially dried up and REITs finally became an attractive way for many private real estate companies to raise funds. Moreover, property owners like Zell realized that by converting their holdings into REIT shares they could postpone paying capital gains taxes.

Company Perspectives

We are building value for our shareholders, residents and employees by combining the resources of a large company and a national presence with strong local management and expertise.

The Formation of Equity Residential As a REIT in 1993

Zell converted three of the Merrill investment funds into REITs, one of which was Equity Residential Property Trust, formed in Maryland in March 1993. To handle the day-to-day operations of the new REIT, which started out with 22,000 apartment units, he hired Douglas Crocker, who established an executive team well before the REIT was formed and spent six months analyzing the apartment market in 30 U.S. cities. They targeted communities that had vibrant economies yet were strict on issuing zoning permits, thus limiting the supply on housing. Crocker was also thorough in the management structure of the REIT, following a corporate model that was unusual for real estate. He instituted a profit-sharing plan for all employees and extended stock options down to the regional manager level. He even set up a training program, known as Equity University, for promising young executives. Unlike many real estate operators, Crocker made certain that Equity Residential paid attention to the kind of details that are often neglected but prove crucial in the long run: making sure that painting is done on a regular basis, the hedges trimmed, the pool cleaned. A major part of Equity Residential’s strategy was to take advantage of size to buy equipment and services in bulk. From the outset the REIT was aggressive in acquiring new properties, focusing on B-plus and A-grade apartment complexes built before 1985. In little more than a year, it added nearly 11,000 apartments at a cost of $478 million. The areas of the country initially targeted included Seattle, Portland, southern California, Las Vegas, Dallas, the research triangle in North Carolina, Atlanta, and Florida.

Equity Residential soon graduated from purchasing small portfolios to acquiring entire real estate companies, due in large part to institutional investors shying away from smaller REITs. Larger players such as Equity Residential now vied with one another to achieve the kind of size that would make them more attractive investments. Early in 1997 Zell’s REIT acquired New York-based Wellsford Residential Property Trust for $620 million in stock and the assumption of $332 million in debt. The Wellsford portfolio totaled some 19,000 apartments located mostly in Colorado, Utah, Texas, Arizona, Nevada, New Mexico, Washington, and Oklahoma. In August 1997 Equity Residential paid $625 million in stock and assumed $432 million in debt to acquire Arizona-based Evans Withycomb Residential Inc. and its nearly 16,000 apartment units. Equity Residential also continued to pursue smaller deals and by the end of 1997 had nearly doubled in size over the course of the year. In March 1998 the National MultiHousing Council announced that the REIT was now the largest single owner of apartments, with a total of 138,923 units. At the beginning of 1997 Equity Residential had ranked only sixth.

The REIT continued its buying spree in 1998, spurred by a general slump in REIT share prices that put pressure on smaller companies to join up with larger rivals to compete. Equity Residential established a major presence in Silicon Valley by acquiring approximately 1,000 apartments from Lincoln Property Co. It then acquired Merry Land & Investment Co., a major apartment owner in the Southeast based in Augusta, Georgia. At a cost of $1.54 billion in stock and the assumption of $656 million in debt, Equity Residential added nearly 35,000 apartment units spread across nine states. A year later it paid $730 million for Lexford Residential Trust, gaining 36,609 apartment units, located in 16 states. The Lexford deal was a departure from previous transactions because it involved lesser grade assets, apartments that were geared toward the “cost-conscious renter.” Crocker explained that although the company would continue to focus on multistory garden apartments it also planned to pursue niche opportunities such as Lexford’s, as well as housing for students and the elderly.

During the depressed real estate market of the late 1990s the price of Equity Residential shares languished, but conditions improved by early 2001. Housing shortages in major cities allowed the REIT to raise rental rates. Moreover, the company was able to take advantage of falling interest rates to refinance debt. Several months later, however, terrorist attacks on U.S. soil had a debilitating effect on an already troubled economy and Equity Residential began to feel the effects. In October 2001 management announced that it expected earnings to be adversely affected for the remainder of 2001 and into the next few years, with leasing of some units proving more difficult and rents likely to fall in some cities. In fact, rising unemployment in 2002 had an impact on vacancy rates while at the same time low interest rates encouraged some renters to buy homes. To help maintain occupancy, the company slashed rents and even instituted rent-free months. Equity Residential, which also dropped Properties Trust from its name in 2002, even began to sell off more apartments than it acquired. Although profits were down by 13.6 percent in 2001, the company continued to be very profitable and looked to rebound with the economy. Of more concern for the REIT was recruiting new leadership. Crocker, 61, announced in October 2001 his intention to retire, and although he planned to stay at the helm for the next three years he initiated a search for his replacement and also put in place a future senior management team.

Principal Subsidiaries

ERP Operating Limited Partnership; Equity Residential Properties Management Corp.

Principal Competitors

Apartment Investment and Management Company; Archstone-Smith Trust; Lincoln Property Company; Security Capital Group; Walden.

Key Dates

1969:

Samuel Zell and Robert Lune form Equity Finance and Management Company.

1987:

Co-managed funds with Merrill Lynch form basis of Equity Residential.

1990:

Lurie dies of cancer.

1993:

Equity Residential Properties Trust is formed as a REIT.

1997:

Merry Land & Investment Co. is acquired.

2002:

The company shortens its name to Equity Residential.

Further Reading

Barboza, David, “Visions of a Brand-Name Office Empire,” New York Times, December 16, 2001, p. 1.

Barsky, Neil, “Buying Low: Sam Zell Was Right About Real Estate—and Still Overbought,” Wall Street Journal, July 9, 1992, p. A1.

Gray, Patricia Bellew, “Unlikely Mogul: Breezy and Irreverent, Raider Sam Zell Runs a $2.5 Billion Empire,” Wall Street Journal, November 7, 1985, p. 1.

Henkoff, Ronald, “Property to the People,” Fortune, October 13, 1997, pp. 98–100.

Kirkpatrick, David D., “Big Apartment Firm Is to Buy Merry Land,” Wall Street Journal July 9, 1998, p. A4.

Laing, Jonathan R., “The Vulture Capitalist,” Barron’s, July 30, 1990, p. 8.

Pacelle, Mitchell, “Zell-Controlled REIT Will Buy Rival in $620 Million Swap in Push to Be No. 1,” Wall Street Journal, January 17, 1997, p. A3.

——, “Zell’s Residential Agrees to Buy Rival Apartment Firm for $625 Million,” Wall Street Journal, August 28, 1997, p. A2.

—Ed Dinger