Sam Zell Could Make You Rich

 | Mar 29, 2014 | 10:30 AM EDT  | Comments
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Sam Zell is one of the best investors of our time. He built a multibillion-dollar fortune buying up out of favor assets, primarily real estate, cleaning them up and holding on to them as conditions improved and cash flows returned. Zell also has a knack for selling bubbly markets, as shown in his pull-out from China real estate markets in 2010, as well as the 2007 sale of his Equity Office Properties Trust to Blackstone (BX) for $39 billion. It makes a lot of sense to pay attention when he talks about markets.

Best of all, Zell is a tad outspoken and always good for a great quote. During a recent appearance at the Reinventing America Summit put on by Forbes, he gave advice that could actually make you rich over time -- if you take it. During a discussion in which he dropped some real gems of wisdom, along with impressive profanity and humor, Zell said something about real estate that made an enormous amount of sense to me: "If you could find a major city that actually had a functioning, good public school system, you should buy all the real estate."

While this can be taken as a well-deserved slap at the current education system, the suggestion also contains some incredibly wise investment advice. One of the first questions people ask when moving to a new area is: How are the schools? Good schools attract businesses, and businesses bring people that buy homes. The quality of the public education system is a major factor in quality of life and property values.

While I can't think of a way to buy real estate in the public market with that kind of precision, I can think of a way to invest in companies that will directly benefit from strong real estate markets. Outside of the property owners themselves, the companies with the most exposure and potential profit from a strong school system are the local banks. It makes an enormous amount of sense to me, in order to get more bang for your buck, to look for regional and community banks -- my Trade of the Decade -- that serve cities with a strong school system.

The best public school system in the nation, according to GreatSchools.com, is in Raleigh, N.C. This city of 375,000 has recovered from the recession more quickly than most of the rest of the nation, and it has shown up on several lists of best places to live in the U.S.

One of the largest banks in Raleigh is First Citizens Bank and Trust, operating under First Citizens Bancshares (FCNCA). The bank has 414 branches and also serves the rest of North Carolina as well as 15 other states and Washington, D.C. The bank has been a buyer during the crisis, and it just closed on its acquisition of Mountain First Bank and Trust in order to expand its footprint in North Carolina. The stock, which closed Friday at $238.96, is not particularly cheap at 1.6x book value. However, it should definitely be on your watch list. It is a very well-run bank that should be able to grow as the region continues to improve. There are also a few micro-cap banks that serve Raleigh that are too small to mention here, but it would be worth your time to search for them.

I could not find any publicly traded banks in the second-best city, Colorado Springs, Colo., or the third, Mesa, Ariz. However, Honolulu is the city with the fourth-best public-school system in the country, and it offers investors an opportunity o benefit from great schools and strong real estate markets. There is only one school district in Hawaii, and Honolulu is part of it. The average school size is pretty small, and the student-to-teacher ratio is just 14 to 1 -- so, in addition to living in paradise, if you're living in Hawaii you have the bonus of a great education for your kids.

An obvious beneficiary of these conditions is Territorial Bancorp (TBNK), whose shares closed Friday at $21.64. Founded in 1921, the bank has grown to 28 branches in the state. It has about $1.6 billion in assets and an equity-to-assets ratio of 12.2x, and nonperforming assets are 0.38% of total assets. The bank's loans are 95% residential real estate -- so as Hawaii goes, the bank goes. Hawaii and Honolulu seem to be going in the right direction right now, and that's potentially great news for the bank. The shares trade at some 95% of book value. They are cheap enough to buy a little at these levels, and I would plan to buy a lot more if we get a market pullback that brings the shares down a bit.

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