A New Lifestyle
- Jul 09, 2011
R. Byron Carlock, president & CEO of CNL Lifestyle Advisors Corp., talked with CPE editor-in-chief Suzann Silverman about the lifestyle-focused non-exchange-traded REIT. What follows is a discussion of his expansion plans in the lifestyle sector. For more on this as well as a discussion of non-exchange-traded REITs in today’s market, see “Living it Up,” the Visionary feature on page 25 of CPE’s July 2011 issue (click here for the digital edition).
Q: What’s different about investing in lifestyle properties versus more traditional property areas?
A: The biggest difference is it requires a tenant between you and the real estate. Because these are asset categories that are not subject to the REIT Modernization Act of 2001 … these have to be held as net-leased assets to an operator who pays you rent.
Q: You’ve recently expanded into seniors housing, a sector that I’d think of as being more of a demographic play rather than having the recreation focus of your other lifestyle properties. Are there any other new investment areas that you’re looking at?
A: There are two areas that we wanted to be investing in where we have not found the right transactions, and that would be outdoor lifestyle — which is also a very popular demographically driven phenomenon: hunting, fishing and camping. And the other would be spa, fitness and wellness, which will play into our healthcare thesis for the next fund especially, because we do see spa, fitness and wellness as an important piece of the American demographic.
Q: Do those tend to be separately owned properties?
A: To date, the spa, fitness and wellness industry is largely housed in inland leased space, as opposed to freestanding real estate. But now you do see it grow in the medical office building space toward the wellness industry, with everything ranging from chiropractic to homeopathic being integrated in with traditional medical practice. So I do think the statistics would prove it’s an industry worth watching that will continue to gain maturity in the real estate marketplace.
Q: And what about the hunting, fishing and camping space? What types of properties does that tend to entail?
A: Well, I guess the most logical would be to see the resilience of companies like Cabela’s and Bass Pro (Shops) through the recession—to show that, really, in times of economic uncertainty, those basic-level recreations associated with the outdoors, like hunting and fishing, still are very passion oriented and continue to do pretty well.
So as we look at that space, it could range from stores like Bass Pro and Cabela’s — although they’re very expensive to buy — to campgrounds to … one of the assets that we looked at doing in CNL Lifestyle Properties was an Orvis-branded fishing community. Those types of assets definitely have a place in a demographics story. I mention it because it is something that we continue to evaluate and watch. We just haven’t found the first appropriate deal.
Q: Do you see other companies buying them on a larger basis? Or is that really kind of a new area for a real estate investment firm?
A: Sam Zell bought Thousand Trails campgrounds (in 2008), which is the nation’s largest campground company. Blackstone owns the largest camping company in the U.K. So private equity and large real estate funds have discovered this niche. But most of them are still held in the hands of private mom-and-pop owners. In fact, many of the assets that you’ve seen CNL buy through the years have started as aggregations of mom-and-pop industries. That’s where the assisted-living industry was when we started in that back in 1998 or 1999. That is clearly true of the marina industry. That’s also been true of many of the ski mountains that we’ve bought.
Q: Does that make it tougher— kind of a bigger job for you, because you’re having to aggregate them?
A: It does require a well-executed acquisition strategy to penetrate the industry, build the relationships in the industry and start the aggregation process in the industry. We go into industries and become active in organizations like IAAPA in the attractions industry, NSAA in the ski industry, MRA in the marina industry, so that we go in and establish ourselves and then become a preferred capital provider to those industries. NGF for golf.
Q: And what do you see as the pros and cons of these properties? The risks and rewards?
A: I actually like the fact that you can take businesses that have seasonal and cyclical characteristics and smooth the rent payments across a timeline and then share the rent payments with the investors the way we do through our distribution. It shields the investors from the operational volatility, because there’s an operator between the investor and the REIT that is smoothing those operations into a rent payment. It allows the investor to participate in businesses with a steady distribution, as opposed to being an equity investor in the operations of that business.
Q: What about on the risk side?
A: On the risk side would be what we saw in the Great Recession. We made it through the recession without a single tenant bankruptcy, thankfully. But we did have some tenants lose their operating lines of credit, like we saw in other businesses. At that point, we had to restructure some leases and help our tenants through that process. But the good news is, in these businesses, what really revealed itself was that these affordable drive-through businesses had very strong visitation even throughout the recession. The per-cap spending fell and is now coming back. But it told us that even in tough times, people continue to pursue their passions. Entertainment Properties Trust saw the same thing, with respect to movie attendance. I think when times are tough economically, people still find ways to enjoy affordable outlets. A skier still tries to ski, even though more affordably, by driving instead of flying. A golfer still tries to golf, although they may take advantage of day courses with discounts. And a parent or grandparent still wants to take their children to a theme park. They just may go to the regional or local theme park instead of getting on an airplane.
Q: So you just sort of adapt for the conditions and the impact they have on the consumer.
A: Exactly. But yet, the desire to do it and the passion to pursue that did not go away.
Q: It’s certainly been interesting in this recession, as tough as it’s been. I’ve read similar observations elsewhere, as well.
A: Well, you look at, in the ski industry, Vail and Aspen being down 25 and 30 percent. We didn’t see that in our affordable day ski visitation. It was flat to even slightly up in some resorts.
Q: Do you see this as an area for specialists only? Or might more traditional real estate investors, say retail investors, expand into this area? Do you see new competitors coming from those types of real estate investors?
A: Not so much from the REIT spaces I’ve seen. I have seen it in the private equity world. You’ve seen Blackstone make big bets in the attractions space with their acquisitions of Anheuser-Busch Entertainment, their growth and their investment at Universal with the Harry Potter exhibit, their activities with Legoland and Merlin and Madame Tussauds. Blackstone’s probably been the most active private equity firm. Apollo has been an investor in the golf industry. Q Investments recently recapitalized Cedar Fair Entertainment. So we’ve seen private equity really come in. Entertainment Properties Trust is the most obvious public example of a REIT that has come into the space through their acquisitions of some ski resorts and vineyards, to complement their movie theater investments.
Q: With so much of the lifestyle sector still mom-and-pop owned, what are the growth opportunities?
A: If you think about most of these industries being non-institutionally owned, there’s still probably some aggregation opportunity in each of the spaces. The marina space, for example, is ripe for aggregation. The ski business still has acquisitions that can be made from private ownership hands. The attractions business, same thing. Healthcare is a trillion-dollar real estate industry that’s still 85 or 90 percent privately owned. And so I think there’s a lot of aggregation work that can still be done.
Q: And are these properties actively being put up for sale?
A: There are some that are. We don’t typically play in the brokered transaction market. We’re more off-market relationally based. But yes, I think healthcare real estate has really moved into the mainstream and has gotten a lot of institutional attention of late with the transactions like ManorCare and Genesis (Healthcare) by the big players. The larger portfolios—$100 million and above—are really getting a lot of institutional interest. But those transactions $100 million and below are very appropriate for consideration by funds like us.
Q: And with the existing properties, what are the opportunities you’re seeing for improving their value?
A: This weekend, I was up in Seattle at our Wild Waves theme park there, looking with the operator at some ideas for expansion. Each of the theme parks and ski resorts always has new ideas that can be employed. This year, we opened a mountain coaster at Mt. Cranmore in Conway, N.H., which has been a huge success. And we also opened what I believe is the largest winter tubing park in North America. We have just completed a $60 million renovation of the Mt. Washington Hotel in New Hampshire, which added a spa and conference center, and redid all the rooms, and that has been a terrific beautification process that is also driving occupancy. George Soros just had an international economic summit there, because that’s where the 1944 conference on the gold standard had been held, and so he wanted to reconvene economic leaders there. And it got high marks, especially in light of our renovation.
You’ll see enhancements at our theme parks and ski resorts, and in golf courses we doubled the size of the common area at the Cowboys Golf Club in Dallas. So we’re looking for ways to grow the businesses that we’ve invested in, as well as looking for add-on investments to the portfolio.
Q: Now, did you alter your strategy at all during the recession?
A: Yes, we did. We realized that golf was not as much of a growth industry as we thought it was when we started. Our research showed that a golfer in his 60s played three times as much golf as a golfer in his 30s, and someone at the time was turning 60 every seven seconds. So we thought golf really had a big growth run. What we didn’t realize is that they may play three times as much but they’re going to look for three times as big a discount on that round of play.
Whereas visitation and playership really stayed pretty constant during the recession, per-cap spending declined and discounting really increased in order to maintain that playership. So we saw that was an adaptation we had to make, and we stopped buying so much golf. Thankfully, that’s beginning to reverse now. We’re seeing membership sales trend up again and per-cap spending trend up again, and ClubCorp, which is the largest player in the industry, is doing quite well. They’re a good bellwether for the industry’s recovery.
Q: And are you making changes now to address the improving economy?
A: We are. We are very excited to be able to reach back into the opportunities related to the seniors demographic. Our pipeline has add-on acquisitions for our businesses in golf, ski, attractions, marinas. But it has some more bets that we’d like to make in seniors-related and medically related real estate.