Gazit's Chaim Katzman: 'Our Strategy Is Long-term Ownership'Published: January 12, 2011 in Knowledge@Wharton
Gazit Globe (usually called Gazit) is among the world's top real estate investment multinationals. Listed on the Tel Aviv stock exchange, the firm operates in some 20 countries and owns or operates 6.3 million square meters of space spread over more than 650 properties. In the U.S., Gazit's investment vehicles include Equity One, a real estate investment trust that focuses on high quality retail properties. Gazit's total asset value exceeds $15 billion. Chaim Katzman, Gazit's chairman and founder, spoke recently with Wharton real estate professor Peter Linneman and Knowledge@Wharton about the company's origins, strategy and his personal management philosophy.
An edited version of the conversation appears below:
Peter Linneman: When and why did you form Gazit?
Chaim Katzman: I formed Gazit in early 1990. To be precise, I bought what was then a publicly listed shell on the Tel Aviv Stock Exchange with the intent to raise capital and to invest it in the U.S. I moved to the U.S. in 1989 when I came across an [interesting] situation in the real estate markets here. Real estate was selling dirt cheap, but there was no financing available. So I went back to Israel, bought a publicly traded shell, then started raising capital with the idea of investing it here in shopping centers.
Linneman: Why shopping centers originally?
Katzman: We looked for an asset class that would be appealing to the institutions in Israel. In the early 1990s, they could not go out and buy on their own outside of Israel because of certain restrictions. The idea was to serve as a vehicle for the institutions to buy real estate in the U.S. by proxy, so they can own real estate through owning our stock. We figured that it would be easy to sell them supermarket-anchored shopping centers because of the stability, the resilience, the sustainable cash flows and all the good things that go along with it. So this is why we went for supermarket-anchored shopping centers. It was an easy sale to the institutions.
Linneman: That was a really small vehicle at the time you started, though.
Linneman: How did you grow it from essentially a couple of shopping centers into the third- or fourth-largest retail entity in the U.S.?
Katzman: First, you need to remember that in 1991, there wasn't any real big company. We all still remember when Kimco went public in 1991. They owned 120 shopping centers, and that looked unbelievable. We went public with I guess 28. And the others were not that much bigger. It all came together in the last 10 to 15 years, maybe 20. And we just kept buying one at a time. In 1998, we took the company public in the U.S. and that helped, of course. And between 2000 and 2003, through a series of three major M&A deals and, again, in a bunch of one-off transactions here and there, we grew the portfolio to close to 200 shopping centers. Initially we bought a company in Canada that Gazit took over called Center Fund. Now it's called First Capital. That company owned 28 shopping centers in the U.S.
Linneman: Why did you do it through the Gazit vehicle rather than through an Equity One vehicle?
Katzman: Because First Capital was the Canadian entity and Equity One was a U.S. REIT. A REIT has disadvantages in acquiring assets outside the U.S., tax-wise. Also, Gazit already had a base in Canada for almost three years. We started out in Canada in 1997. At that point we already owned eight or 10 shopping centers. And then this First Capital/Center Fund opportunity came along, so this was clearly something that was for Gazit. We figured out a way to move it over to Equity One. In exchange for stock of Equity One, it went back to First Capital. Gazit really operates through platforms like Equity One or First Capital, and it views it as an extension of Gazit and it would never compete with them. But we also work along borderlines with very well-defined boundaries between companies. We try and are usually successful in not crossing those boundaries.
Linneman: Did you consider other property types in the U.S. or in Canada?
Katzman: We did. We also have a less known small platform of medical office buildings and some retirement facilities in South Florida. We view the medical office building as definitely an asset class that we would like to be involved in both here and in Canada through Gazit America.
Linneman: By the way, we have retirement facilities here. They're called faculty offices.
Katzman: Yes. Yes [laughter].
Linneman: What about outside North America? When and how and why?
Katzman: The answer as to why is, I guess, because it's there. But on a serious note, we view our mission as fiduciary for shareholders, and we need to always be on the lookout to increase our cash flows and dividends, and also make them safer. By diversifying, you get more advantages and get more security in your cash flows, and Europe seemed like a good opportunity. In 2004, we looked at four places in the Nordic region, which very few people even consider to be part of Europe. We started out in Finland. I looked at a map and saw that Finland is part of Europe and the currency is the euro, actually, and I said to myself, "What else do you need to call it Europe?" And we started investing there. We actually gained control through capital market activities over a small company called Citycon, and to date we control it -- we took it over. Citycon was about a 200 million-euro company. Today they have about 2 billion euros. We just grew it. We implemented very much the same business philosophy we put to work here in the U.S. and it worked. It goes to demonstrate that people are people all over the world.
Linneman: What about elsewhere in Europe or outside the U.S.?
Katzman: Later on, in 2008, we came across an opportunity in Central Europe. We were with a company that was then called Meinl Real Estate. Now we call it Atrium. It was a very interesting deal where we could amass a big amount of real estate in one shot. And we took over in a friendly deal. We took it over along with our friends from Citibank through CPI. And that gave us access to Russia, Poland, Hungary, Czech Republic.
Then Gazit started a private arm in Germany where we own eight or nine shopping centers, but it's not moving as fast as we wanted. Hopefully that will change. Another place where we have operations is Brazil, where just recently we completed our first ground-up development -- and we opened our first mall in Brazil. We own three shopping centers there. It takes a long time to buy a shopping center in Brazil, but hopefully we are making progress in that. And then of course we have a little base in Israel, where we actually started owning in 2005, and we have 16 or 17 shopping centers. In Israel we are opening a new one in a couple of weeks.
Linneman: What about future growth targets? China? India? Others? Or is it opportunistic as it arises?
Katzman: Number one, it is opportunistic as it arises. Clearly we are looking for opportunities. We have a whole department here made up of smart kids who went to schools like Wharton and others -- and that's all they do. They look for opportunities. And clearly opportunities are something of which we would like to take advantage. We know basically where we want to go. We know we want to be in Europe. So if an opportunity comes up in France we definitely take advantage of it. We constantly look for that. We look also for opportunities within our own territories where we would like to be helpful to one of our platforms, so if an opportunity presents itself in Canada, for instance, we would be more than happy to assist First Capital in taking advantage of it.
As for new markets, I think the following would be accurate. I don't think we should go to China. In India we are involved through a fund with some institutions where we try to get some business going, but we are not in a leading position over there. It is managed by Indian guys. India is so complicated that I said to myself that I want to sit next to somebody who knows what he is doing and learn. That is exactly what we are doing over there.
I view some countries in South America as a huge opportunity. Right now we are very focused on growing our base in Brazil. The reason is some exposure that goes along with investing in South America. And Brazil is so big -- it is a third of this whole continent. We feel we better focus right now on Brazil as far as our South American efforts are concerned. But clearly the other countries in South America are not worth looking at. But also you need to have bandwidth to do things.
Linneman: How do you manage currency? And how do you manage your time -- not just your's, your team's time -- across platforms?
Katzman: As far as currency is involved, we will always borrow -- with the exception of Brazil, and this is why this one is tricky -- the same currency that we are buying in. So if we are buying in euros, it would be euros. In Canada, Canadian dollars. In the U.S., American dollars. As to our equity, we made a decision a long time ago that we are happy with what we call the Gazit currency, and the Gazit currency is made of the proportions we are invested in each of those major currencies, with a little bit of Israeli shekels, reai, and what have you. So, in others words, Gazit's equity -- if you think about it -- all the debt is fully matched to the assets. Then the equity is invested some 25% in the U.S., or 27%; some 30% in Canada, in Canadian dollars; 30% in euros; and whatever is left, a little in Israeli shekels, a little in Brazil and so forth. Brazil is tricky because there is no financing over there. So Brazil is fully financed off our balance sheet. This is why South America is tricky in that regard, because then the question that arises is, "How much exposure do you really want to have to the Brazilian currency knowing that you cannot finance it locally and everything comes actually from your balance sheet?"
As to our time, first, we have teams in each of those locations. Usually we have a team on the ground between a year to 18 months before we make our first acquisition. Sometimes we wait maybe two years before the first acquisition is made. And often the first acquisition would not be the greatest opportunity, but rather done with the understanding that we need to face some entry fee and give our team a chance to learn on the real asset and get its feet wet. That's what we did in Brazil. That's what we did in Canada years ago. And personally I fly around and am constantly jetlagged -- visiting the teams and dealing always with the one that has problems. I'm kept around for the bad news, not for the good news.
Linneman: I suspect every place you first appear you get accused of being a short-term flipper, and yet you end up being a really long-term holder.
Linneman: What is your view of holding, exiting, etc.?
Katzman: I think each company has to figure out its own business model. I have no problem with developers who develop, fill the properties up and sell them if that's the model and if this is what they have advertised. We have a different model. Our model is long-term ownership. We are, I call it, cap-rate players, not IRR [internal rate of return] players. We don't believe in IRRs. That's what we advertise, and our shareholders are ones who are willing to stay with the assets or with the stock for a very long time, get the dividends, see the dividend get increased. Every year we have raised our dividends in the last 10 or 15 years, I think, in double digits. Every year. And we achieve it through a proactive approach to the assets. We work our assets. We are a soup-to-nuts kind of store. We do everything from cleaning the property to redeveloping them. We work for growth. We need more growth and we regenerate it usually from our portfolio. That increases our cash flows that eventually allows us to increase our dividends, and that's the model.
If you also are looking for quality assets, then why sell them? Just keep owning them and extracting more and more from them if you are in the right markets. Now, again, it's not a 100% formula. There are always assets that you should sell, and we do sell -- like at the bottom of the barrel -- in a constant effort to improve the quality of our portfolio. But basically the strategy is long-term ownership and increasing cash flows from these assets over extended periods of time.
Knowledge@Wharton: You said earlier that one of your objectives is to make the portfolio as safe as possible for your shareholders. What was your strategy for surviving the financial crisis and how did that work out?
Katzman: The number-one secret was to keep low leverage and a lot of equity. I say jokingly that companies with greater equity have a lower propensity to go bankrupt. And I'm sure we can put together a spreadsheet to demonstrate that. But on a serious note, it's all about cash flow and staying power.
Now I would tell you something else. In real estate, a recession or a downturn is not an "if," it is a "when." This is a cyclical business by design. Any CEO who tells you, "Look, it caught me by surprise" should not be the CEO of a real estate company. You need to be ready for a recession every day of the week. You need to have your leverage at such a level that you can cruise through a two-year or three-year period of difficulties comfortably with a combination of long-term debt and available lines of credit that are not in addition to your long-term debt but a shock absorber to fill the gaps in times where the capital markets are wide open for refinancing.
You cannot have borrowed 100% on all the long-term debt you can qualify for, and then get a line of credit and max it out. That's not how it works. The line of credit is a shock absorber for your long-term borrowing. It is meant to help you breach periods where the capital markets are not open. That has been demonstrated this time around. If you look at what happened to GGP -- to General Growth Properties [a large shopping center REIT that failed during the downturn] -- this is exactly what happened to it. It is not that they were underwater. They were just illiquid. Liquidity is of crucial importance.
Now, of course, what helps a lot is to have the best assets that suffer the least in such periods of time and generate the cash flows that keep all your lending institutions and bond holders very calm because they know that you have the cash flows to service your loans in a timely manner.
Knowledge@Wharton: Could you describe your management philosophy, particularly your approach to hiring and keeping good people?
Linneman: Not to mention board members.
Katzman: This is something that I admit I have developed with time and age. Today I fully understand and recognize that the company is as good as the people you hire to run it. I'm saying that a real estate company without a great team should trade at a discount. Really, the premium should be assigned to the people who run the company because they can make the company so much better or so much worse, God forbid.
We try to attract and to retain talent in the company and I do it throughout many platforms. First, you need to give people the sense and the feeling that they are partners and they are part of it. They are not just hired guns to do something. And sometimes it's not just the paycheck. It's how you treat people and how you make them feel that they are part of something. You have to keep them interested and motivated. You also need to incentivize them appropriately. I would not say this is not part of it. But I think that keeping smart people around -- and we have a lot of smart people working for us -- you need to do more than just pay them. You need to keep them interested, excited and motivated in what they are doing. That's what we try to do.
Knowledge@Wharton: One last question. How do you define success?
Katzman: I don't know. I haven't reached it yet.