IN THE NEWS

💸 PacWest Surges after Loan Portfolio Sale (CNBC)

Banking crisis update: Determined not to go under like its regional bank peers, First Republic, Silicon Valley Bank, and Signature, PacWest has, against the odds, clung to life (so far).

The troubled lender had lost some 75% of its market value earlier this year. Investors worried it would be the next victim of depositor flight, aka bank runs, following the Federal Reserve’s rate hiking campaign, generating substantial paper losses on banks’ bond investments.

• But its stock (PACW) bounced back more than 12% today, recovering over 50% in the past week, on news that it had sold a portfolio of real estate construction loans worth about $2.6 billion to the investment company Kennedy-Wilson Holdings.

• Like PacWest, Kennedy-Wilson is based in Beverly Hills. The firm uses its $23 billion of assets under management to largely invest in multifamily, industrial, and office properties, snapping up PacWest’s loans at a discount price.

Why it matters:

• That prompted the bank to announce that it was exploring “strategic options” to bolster its financial situation, which it seemingly now has to some extent with this loan sale, hence investors’ favorable reaction.

To fund its shortfall on deposits, PacWest has secured cash via loans from the Fed against $5.1 billion worth of assets, in addition to a borrowing arrangement, or financing facility in Wall Street parlance, worth $1.4 billion with Atlas SP Partners.

• Whether that’s enough to survive on remains to be seen.

 

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🍺 Heineken Shakes Up U.S. Light Beer Scene (Reuters)

While investors evaluate the implications of the Bud Light backlash on the global brewing giant Anheuser-Busch, its Dutch competitor Heineken is making strategic moves by investing $100 million in marketing, introducing a new light beer targeted at the American market.

• Heineken recently shared a plan for revitalizing its U.S. operations, capitalizing on evolving consumer preferences for a light beer with lower alcohol, calories, and carbs.

Notably, the established “light” beer brands in the U.S. market noted a decline over the past six years. According to Euromonitor International, the drop in sales volumes has been caused by the rise of craft beers and hard seltzers.

But light beers, including Miller Lite and Coors Light, hold a significant share, comprising almost half of the $118 billion U.S. beer market in 2022.

Why it matters:

Although Anheuser-Busch (BUD) retains dominance in the “light beer” category, led by Bud Light, it marked a 20% sales drop and a 10% stock decline since the backlash began.

Heineken, the world’s second-largest brewer, aims to transcend its fourth-place position in the U.S. market through a strategic marketing campaign of Heineken Silver, introduced in late March.

• The brewer hopes to take over the “premium” lager segment in the U.S., which currently represents 25% of light beer sales.
• Heineken’s U.S. Chief Executive is optimistic about Silver’s potential in the higher-priced category, announcing plans to give away two million free samples at the U.S. Open (tennis) and to sponsor the Las Vegas Formula One Grand Prix.

 

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LESSONS FROM REAL ESTATE LEGEND SAM ZELL

The Grave Dancer

Sam Zell, the real estate investor who died last week at 81, was an entrepreneur by age 12. In his Chicago hometown, he found Hugh Hefner’s new Playboy magazine on newsstands, bought copies for $0.50, and peddled them to neighborhood kids for $3 each.

He majored in political science at the University of Michigan, graduating in 1963. In Ann Arbor, he managed a 15-unit apartment building in exchange for free room and board.

Mr. Zell stayed in town for law school, though his classes were an afterthought to his real estate business.

In 1965, he bought a three-unit apartment for $19,500, putting down $1,500 that he had made from managing other apartments.

“I repainted the interior, replaced all the furniture, and doubled the rents,” he wrote in his memoir. “A couple of months later, I bought another building nearly next door, and then I bought the house in between.”

For years, he and a friend bought cheap homes, fixed them, then rented them to fellow students. He was always looking for a bargain and how to buy an asset and then sell it for more than he paid.

That experience in college led to what made him a billionaire: Buying financially distressed apartment buildings, office towers, and other properties, then raising rents after fixing them up.

“Some might see buying and creating value from others’ mistakes as a form of exploitation, but I see it as giving neglected or devalued assets, in any industry, new life,” says Zell. “I’m not claiming to be altruistic — just optimistic and confident that I can turn those assets around.”

He later called himself “the grave dancer,” a reference to his philosophy of finding opportunities where others saw only stress.

In honor of the late investor, here are a few more stories and lessons from his career in real estate.

 

Play hard, be kind

Zell was known to shock others with expletives, insults, and lace speeches with profanities.

But then he’d send hundreds of music boxes as gifts to acquaintances during the holidays.

 

Sales

Sales departments are often distinct business entities, but Zell believed everyone is in sales.

Said Zell: “Arthur Miller did a huge disservice to entrepreneurship by writing Death of a Salesman. Salesmen are not scummy and dirty – people you would not want to ring your doorbell. In fact, all successful entrepreneurs are salesmen. Selling is a highly underrated skill in life.”

Simplicity

Many successful leaders, entrepreneurs, and investors aren’t known for complicated strategies or formulas. They kept it simple, stuck to relationships, and kept learning as much as possible. Over time, the rewards compounded.

Zell believed business schools emphasized the wrong things, namely formulas and single answers to questions.

“It starts and ends with a simple idea,” he once said. “Don’t get confused by education: Simpler solutions are often better.”

 

Risk

Zell knew risk management was critical, but you must take on some risk to perform well. It’s virtually impossible to outperform without being a contrarian sometimes, without taking risks.

“The risk/return ratio is probably the most significant determinant of success as an investor,” he said. “Measuring and gauging the risk-reward ratio is the biggest (margin of) safety issue every investor has.”

Mistakes

One of Zell’s biggest mistakes was his $8.2 billion purchase of the Tribune Company, which owned the Chicago Tribune and Los Angeles Times, in 2007. The company filed for bankruptcy during the Global Financial Crisis in late 2008.

The company, already reeling like other newspapers from internet disruption, was saddled with a big problem: a staggering amount of debt.

Supply & demand

Said Zell: “I would tell you whatever business I’ve been in — real estate, barges, rail cars — it’s all about supply and demand. When there is no supply, real estate performs very well. Almost without regard, within reason to the economic conditions. When there is oversupply, it doesn’t matter what’s going on, real estate is going to suffer.”

 

Dive deeper

Here’s Zell’s 2017 memoir, Am I Being Too Subtle?

Zell was recently on We Study Billionaires, too.