The long view of business
For James Seneff and his billion-dollar real estate powerhouse, the social sciences offer as much strategic guidance as hard economics.
In Seneff’s view, capital is overconcentrated in the bond market, and inflation is on the horizon, foreshadowing a shift away from defensive-minded bonds. Seneff says CNL sees high-net-worth investors fleeing bonds for growth-focused “alternative assets” calculated to outpace inflation. “The bond market and the 30-year run on bond markets are coming to an end. That’s a strategic inflection point. So when you’re seeing us building on our platform, that’s in anticipation of this change,” he says.
Among the alternative investments Seneff cites are business development companies. In 2011, CNL launched Corporate Capital Trust, which lends money to or buys debt or equity in mid- and large-market private companies primarily based in the United States. The fund has raised $800 million since inception and historically has reported a 7% annual distribution to investors. An affiliate of Kohlberg Kravis Roberts & Co. helps advise CNL on investing the money.
“This is the most opportunistic time in this niche in 35 years because the banks can’t make the traditional loans because of new capital requirements,” Seneff says, referring to the higher capital demands the Dodd-Frank Act imposed on banks.
Analysts Anthony Chereso and Michael Stubben, CEOs of FactRight and MTS Research Advisors, respectively, like CNL’s move into the business development market. Corporate Capital Trust is “an emerging non-traded product, which complements their existing REIT offerings,” Chereso says. “It allows them to leverage their existing relationships and offer a diversified product.”
Stubben says he sees more growth for CNL in the corporate lending market than in REITs. “I don’t see a lot of growth on the REIT side,” he says. CNL is “always fighting for market share there. They can capture more market share” with a business development company.
As it develops Corporate Capital Trust, CNL manages four REITs and a traditional commercial real estate services firm that develops properties and provides leasing and management services. The commercial firm includes a division that specializes in educational and religious properties.
CNL’s name comes from the term “commercial net lease” — an arrangement under which tenants pay both rent and some other property-related expenses, such as utilities and taxes. CNL signs many of its tenants to long-term “triple-net leases,” shifting to them the responsibility for paying real estate taxes, insurance and maintenance. This arrangement protects CNL’s REITs from rising costs while providing a consistent level of rent from tenants. The REITs collect rents and in some cases a percentage of property revenue, then deduct debt service, REIT operating costs and management and advisory fees from the revenue from the real estate investments before passing on income to investors.
Each of CNL REITs owns a particular group or type of property, such as office buildings and retail centers, with the intention of selling it by a certain date. “You want to be early in and early out,” says Seneff, stating a practice influenced by a view that the economy tends to sour every five to seven years.
That perspective on timing has usually served CNL well. In 2006-07, for example, at the height of the real estate boom, CNL sold $15 billion of assets, unloading three REITs just before the economy crashed. Among the REITs it sold was CNL Hotels & Resorts, whose portfolio included the Ritz-Carlton in Orlando and the Arizona Biltmore Resort & Spa. Morgan Stanley Real Estate paid $6.6 billion for the REIT, only to lose it to creditors a few years later amid a depressed leisure market.
CNL, meanwhile, stuck with another leisure market fund that suffered as consumers tightened their belts. Started in 2003 as the U.S. economy emerged from its post-9/11 stupor, Lifestyle Properties originally offered a portfolio of ski resorts, marinas, golf courses and attractions. The REIT has written off millions of dollars in unpaid rents over the last few years. In 2011, the Lifestyle REIT began acquiring senior living facilities as a hedge against poorly performing assets, a move that has produced momentum. By the end of 2012, Lifestyle’s holdings of 179 properties included 62 retirement living facilities, making up 33% of the total by acquisition price. Ski and mountain assets were next, with 19%.