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The long view of business

CNL Financial Group, Orlando

No. 33 — Private Company

» CNL Commercial Real Estate: Invests in, develops and manages commercial real estate

» CNL Securities Corp.: Sales agent for capital sources

» CNL Lifestyle Properties: Unlisted publicly traded REIT that invests in lifestyle properties

» CNL Healthcare Properties: REIT that invests in senior housing and health care properties

» CNL Growth Properties: REIT focusing on capital appreciation

» Global Income Trust: REIT that invests in a global portfolio

» Corporate Capital Trust: Business development company that invests in private U.S. companies

Looking out a floor-to-ceiling window in his eighth-floor executive meeting room, CNL Financial Group’s executive chairman, James Seneff, points his right hand in the direction of the construction site of Orlando’s performing arts center across the street. The city’s newest venue has taken shape in recent months, and Seneff has a top-down view of the $500-million project on the south end of downtown. He has had to wait a few years longer to watch the arts center go up, as the recession put a chokehold on the facility’s funding not long after the company’s charitable foundation donated $10 million to it. But construction cranes have returned to downtown’s skyline, a promising sign for Seneff, whose company’s influence extends far beyond the city limits.

In his meeting room, Seneff is surrounded by furnishings both decorative and symbolic — a limestone sculpture of Noah’s Ark, for example, and a shiny brass telescope suggesting the long view he has taken as an early leader in the real estate investment trust (REIT) market. Starting in 1973 with a $5,000 loan from his father, Seneff has formed or acquired companies with more than $26 billion in assets, primarily through real estate investment trusts. CNL also operates an investment management company and a commercial real estate services firm.

As he explains CNL’s strategy, the 66-year-old Seneff draws on insights gleaned from a variety of influential figures, including Winston Churchill, Albert Einstein, T.S. Eliot and Isaiah Berlin along with traditional business gurus like Peter Drucker. He has a library of 8,000 books and spends up to four hours a day reading, soaking up five books at a time.

“The innovative process involves four people,” he says, describing how his firm classifies its employees’ personalities to take advantage of their strengths. “The explorer, who gathers the information; the artist, who makes it beautiful; the judge, who says it’s good or bad; and the warrior, who makes it work.”

He’s strictly an explorer, he says: “When you’re an explorer, you’re out in front and people don’t see where you’re going.” He says it’s his job, as well as a corporate principle, to look ahead, anticipate where the “puck” is headed and lead CNL, its partners and clients to it.

Yes, “puck,” as in hockey. Like the late Steve Jobs, Seneff is fond of hockey icon Wayne Gretzky’s adage about anticipating opportunity on the ice. “Gretzky said: ‘Skate to where the puck is going, not to where it’s been,’ ” Seneff says.

In addition to using his own explorer instincts, Seneff has also figured out where CNL should skate by creating an in-house idea spa of sorts, the CNL da Vinci Center, just down the hall from his command post in CNL Tower II. The room brings together teams that synthesize data and brainstorm new strategic approaches to investments [“An In-House Think Tank”].

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%.

The senior living acquisitions converged with an improving economy, a surge in golf rounds played and an early snowfall in the 2012-13 ski season to boost Lifestyle’s lease revenue and cash flow. Lifestyle’s 2012 annual report showed $175 million in adjusted earnings before interest, taxes, depreciation and amortization, a 22% improvement over the previous year. CEO Tom Sittema, who joined the firm three years ago, says he believes the REIT has turned the corner, a view shared by Stubben but tempered by Chereso, who sees “a lot of work ahead” for Lifestyle Properties.

But a drop in share value has led to a class-action suit against CNL. In January, a group of investors who purchased additional stock through the distribution reinvestment program on or after April 1, 2010, sued, claiming CNL sold shares at $9.50 each when it knew the stock’s value was less. Seneff and Sittema both declined to comment on the suit.

A look at holdings in Lifestyle and three other CNL REIT offerings — Growth Properties, Global Income Trust and Healthcare Properties — might leave the impression that the investment firm’s leadership team doesn’t see the puck headed toward Florida. The Sunshine State is barely represented among the vast holdings of properties in the REITs. For example, only one of the 90 senior living units owned by Lifestyle and Healthcare is in Florida, located in Lady Lake near The Villages retirement community.

Sittema says Florida’s scant presence in the REIT portfolios shouldn’t be taken as a sign that CNL isn’t bullish on its home state. “We generally don’t target geographic areas. We target sectors, and then we go where our partners and clients have opportunities,” he says. “We would love to do more in Florida, and we’re striving to do more. We’re planning to do more multifamily development. We have an office building under construction in Winter Park. We’re securing tenants for a new building” in Orlando.

Texas appears to be the land of opportunity in CNL’s eyes. The company’s REITs hold several properties there, ranging from golf courses to apartments to office buildings. “Texas has a strong economy,” Sittema says. “The net migration into Texas is ridiculous. ... It’s a pro-business state; it’s propelled by the energy industry, it’s a favorable tax environment, so there’s a huge net migration and job creation. So it’s a fantastic opportunity for new development.”

While foreign markets interest Seneff, particularly Germany, where Global Income Trust owns retail centers, Seneff says the United States is the place to be right now. “We’re recovering. Prices are going back up. Yields are going up. Rents are going back up. And so it’s a very attractive time to be in the U.S.”

With CNL entering the final decade of Seneff’s 50-year business plan — which he wrote while serving in Vietnam with an Army military police unit — an obvious question involves his future with the company.

Seneff says he has no plans to retire. He’s turned CNL’s day-to-day operations over to Sittema, 12 years his junior. Meanwhile, Seneff devotes his time to asset allocation, “the most important function of business.” The two have known each other for nearly 20 years, a relationship that stems from Sittema’s career as an investment banker at Bank of America in Charlotte. One of Seneff’s children, Tim, served at CNL for 12 years, rising to be president before leaving to head a non-profit. His four other children aren’t involved in the business.

“I don’t think entrepreneurs ever retire,” Seneff replies when asked about leaving CNL. “They might change their job description. But for me, I am executive chairman, and I plan to stay that indefinitely.”

Wisdom from Winston

Among Seneff’s prize possessions is a complete collection of books and speeches by Winston Churchill.

“Churchill was a great predictor of the future because he knew the past so well,” he says. “He says the further you look back, the further you can look forward. It teaches you to think in time. Thinking in time means you look at the past, you look at the future, you look at the present and you’re able to think about what will happen next. Most people don’t do that; they don’t synthesize.”

Synthesizing — finding the narrative context in disparate volumes of information — is the leader’s job, Seneff says. “We try to create a context out of all the information because information all by itself isn’t really valuable, to give us a sense of what we should be doing in the future and trying to find out where the puck is going to go as opposed to where it is.”

 

What Capitalism Should Look Like’

CNL Chairman Jim Seneff’s business philosophy and religious convictions are intertwined. Seneff serves on the board of the Reformed Theological Seminary, a non-denominational Christian school with campuses or branches in seven cities. Seneff says his faith has helped shape CNL business practices.

The CNL Charitable Foundation has made million-dollar donations to the Central Florida Council of the Boy Scouts of America, Valencia College and the Sanford-Burnham Medical Research Institute. Additionally, the foundation gave $160,000 to the University of Central Florida College of Medicine. Seneff estimates the company has contributed or pledged more than $15 million over the last five years, with $10 million alone going to the Dr. Phillips Center for the Performing Arts.

An In House Think Tank

“What we’re looking to do here is to connect ideas that previously hadn’t been connected,” Jim Seneff says as he looks around an area of comfortable chairs and tables facing six tall white panels. An incomplete reproduction of the Mona Lisa sits on an artist’s easel nearby, in a space named “Aspire.”

Seneff is talking about the CNL da Vinci Center, a 4,000-sq.-ft. sectional room named for the 16th-century master of many disciplines. This is where ideas and information take form on the 10-foot white panels that dominate the main body of the center, an airy space called “Create.”

At the panels, “scribes” transform abstract thoughts into pictures that resemble cave drawings by modern man. The pictures form a matrix of key words written in circles, squares and rectangles, with arrows going vertical and horizontal to and from central and peripheral points. Somewhere in all of the ideas and diagrams is a eureka moment waiting to be discovered.

Nick McKinney, principal at CNL Specialty Real Estate Services, which handles church and non-profit properties, also serves as a scribe.

“You need to see things in order to remember them,” McKinney says, sounding like a disciple of the company’s founder. “You’re trying to connect big ideas.”

The da Vinci Center is at the heart of a corporate culture that exhorts employees to “find simplicity on the far side of complexity.” Simple, says Seneff, borrowing from Einstein, “is the highest level of insight.”

Strategy teams meet regularly in the firm’s think tank for hours at a time, synthesizing reams of information — market data, Census figures, historical economic patterns, etc. — like code breakers trying to read encrypted messages.

“Business is a liberal art,” says Seneff. “You have to be able to think in many different ways in order to really address the complex problems of the world we live in today.”