In the past few months, changes have been brewing at CNL Capital Markets Inc. In November, Grayson Sanders took over as president of the Orlando-based firm, which oversees several other units such as CNL Investments Co., CNL Securities Corp. and CNL Institutional Advisors. CCM itself helps bring individual and institutional investors into various CNL investment products and now Sanders is poised to lead the affiliate of CNL Financial Group in new directions. One of those directions is uncovering new lifestyle niches, like ski resorts–an area CCM ventured into this summer when it agreed to buy 80% ownership interest in commercial properties at several resort villages owned by Intrawest Corp. In an exclusive interview with, Sanders talks about the state of capital markets in general and CCMs future plans specifically.(Melissa Kress contributed to this article.) You deal in both private and institutional capital. What’s the breakout of each of those?

Sanders: Historically it was largely the individual investor, the retail channel if you will, and the institutional side is a matter of more recent interest. The preponderance of capital comes from the retail channel. With all of the talk about private investors using real estate as a safe haven and the influx of private capital, are those proportions changing? Or is that more hype than reality?

Sanders: Both sides are growing. I’m not aware of the proportions changing as much as I’m aware of real estate being increased in the asset allocation of both institutional and individual investors. Where is that capital going? And where are your favorite plays, both in terms of geography and product type?

Sanders: We have stayed away from the four food groups of office, industrial, apartments and retail shopping centers. The focus is more on property types than geography, and they have included sale-leaseback financing of restaurants, the hospitality sector and the retirement sector–running from assisted living to nursing homes. Don’t you find a lot of investors shying away from the complexity of the health care play?

Sanders: We have to make the case that we are, in those particular asset types, providing capital but we’re teaming up with experienced operators. We aren’t trying to be the hotel or nursing home operator. We’re leasing it back to the people whose business that is but who don’t want to carry the bricks and mortar on their balance sheet. Isn’t now an awful good time to explore some of the more popular food groups given the opportunity available?

Sanders: The fundamentals are tightening up some but there’s no question that an awful lot of capital has come into all sectors of real estate. Prices are pretty high compared to incomes. Capitalization rates have fallen, and that’s universally true. But, generally, those four main food groups have lower capitalization rates than property types that are more specialized. What is the hold philosophy? Is it based on a quick return or a value-enhancement and a longer-term hold?

Sanders: It really has been focused on producing current income. The investments here have been core, or even core-minus. Core-minus might mean net-lease real estate that has almost all of the return expected to come from the current cash distribution, and the leases provide tremendous safety and stability, normally not as much upside as multi-tenant properties that you manage yourself in the four basic food groups. We’ve heard investors talk about the over abundance of capital and the way underwriting is being stretched beyond reasonable limits in some cases. Because of the niche plays that CNL engages in, are you immune from all of that?

Sanders: No one is immune, but this company has a history of looking around the next corner and trying to stay a step ahead of the game by being in the sectors that are the least overpopulated or overpriced. One of our latest investment plays is the lifestyle niche. We’ve just made our first investment in the area of ski resorts. We’ve purchased eight bottom-of-the-mountain facilities, particularly the retail facilities that were owned by Intrawest. We now have this lifestyle category that is the last of the niches we can find outside the food groups. We also have a new fund, CNL Income Properties, which specializes in lifestyle niches. It was launched about six months ago and we’ve raised between $50 and $100 million. We expect to be in the market with this for the next year or two and raise $1 billion or more over time. Is that in fact the last niche?

Sanders: The circle always keeps going. Some of the other niches will open up again, but its one right now we think is attractive. We’re also planning smaller funds in some of the same niches; but instead of leasing back to operators for current income, we might get involved a little bit earlier. We might provide some of the capital with the operators to build these projects and have investments that start off being not as high income but wind up having higher levels of appreciation. It would be more of a balance between income and appreciation. Is that a strategy you see spreading throughout the rest of your investment criteria?

Sanders: I do. We’re not jumping out to do opportunistic funds, ala some of the big Wall Street players. I think we’ll be slower to get there. We’re starting from a conservative, income-oriented approach. Anybody who invests in any CNL product always sleeps well at night because the products are very low risk and high-income return. We’ll take some steps in the direction of a little more balance between income and growth. Is there any projection you can give on potential return increases by doing that?

Sanders: Historically, over the past 20 years, if large institutional funds had an average annual return of 10%, that probably has broken down to 7% to 8% current income and 2% to 3% growth. I would call that your basic core model. So you are looking at 2% to 3% conservatively, in addition to the investment you are making.

Sanders: We’re moving from net-lease real estate into core and maybe core-plus. Eventually, we might see the day where some of our investments are designed to be half income and half growth. That’s what I mean by moving in that direction; I don’t mean 0% income and 20% growth like some of the wild and wooly opportunistic funds are projected to do. Provide me with some numbers then, if you would. What does your investment total look like in ’04? How does that compare to what you hope ’05 will be?

Sanders: I don’t know if I want to talk about next year, but this year we will have raised around $1.6 billion of investor capital. Some of those funds can employ some leverage. We would expect to invest $2.5 billion to $3 billion. How would that compare then, just to set a trend, to ’03?

Sanders: Last year was the biggest year ever. 2003 was a watershed, the kind of year that I don’t know if anyone can replicate. We raised around $2.3 billion and purchased nearly $4 billion of property. That’s just one of those unbelievable perfect storms that doesn’t come along very often. We don’t consider 2004 a bad year, and if 2005 happens to be a little less than this year, then I don’t think we would be disappointed. You have to take what the market gives you.

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