William Sanders and Ron Blankenship (far right), co-chairmen of Verde Realty, standing in Verde’s Zaragoza Corporate Center in El Paso, Texas. This 2.7 million s.f. industrial park under development abuts the Zaragoza Bridge, second busiest on the U.S.-Mexico Border, and is located just a few hundred yards from Ciudad Juarez, the epicenter of Mexico’s emerging manufacturing industry. Other members of Verde’s team in background include, from right to left, Jose Luis Quiroga, Juan Gonzalez-Garza, and Rafael Garcia-Rovirosa.

What Sanders noticed was that these big, Fortune 500 companies had almost a quarter of their balance sheets in real estate, and it wasn't organized in any professional manner. He changed the name of his firm to LaSalle Partners Ltd. (he wanted it to sound and be more like an investment bank) and pushed it into real estate services. At the time, similar companies were brokerages, which made their money on deals, and their employee compensation was commission based. Because Sanders wanted LaSalle to actually be a service company, his employees became salary based. The concept worked. LaSalle eventually grew to be what it is today, Jones Lang LaSalle, the world's leading real estate services and investment management company.

In 1989, sensing the real estate industry had to move more toward public ownership through the nascent REIT market, Sanders retired as CEO of LaSalle Partners and began working on a new company, which would eventually become Security Capital Group, based in Santa Fe, N.M., driving distance from his homestead in El Paso.

Some might call Security Capital one of the most influential real estate companies that ever existed. Sanders' vision was to form a corporation that would in essence be an incubator of other real estate companies, both publicly traded and private. Sometimes Security Capital bought into existing REITs, sometimes it created new companies. At one point, Security Capital held controlling interest in 18 separate firms, including another publicly traded real estate holding company that did the same exact thing as the parent—invest in other companies.

As a result, the company became quite complex. The stock price had a solid run up after going public in 1997; yet the increasingly complex story for analysts, combined with a lagging stock market, put pressure on Security Capital's share price. Some investors never quite grasped the true nature of the company, and many in the analyst community never warmed to it. Sanders eventually sold the company to GE Capital in 2002.

The legacy of Sanders' Security Capital looms large, in part because many of today's leading REITs are the end product of Sanders' successful incubation through Security Capital. Two things to consider: first, Security Capital initially was capitalized at $108 million and sold for $5.4 billion; second, it created other companies such as Archstone-Smith (NYSE: ASN), ProLogis (NYSE: PLD) and Homestead Village, in addition to owning a controlling interest in companies likes CarrAmerica Realty Corporation (NYSE: CRE), Storage USA Inc. and Regency Centers Corporation (NYSE: REG). In addition, Sanders' reach can be seen in the executive suites at many of the industry's leading companies as dozens of top executives and industry professionals received a professional boost from Sanders (see sidebar).

Now in his 60s, Sanders, a former NAREIT chair and recipient of NAREIT's 2003 Industry Leadership Award, is giving the real estate world one more shot, or shock as it may be. Like his past business ventures, Verde Realty is another forward-looking concept in an industry that doesn't experience too many innovations.

The sale of your last company, Security Capital, to what is now GE Commercial Finance Real Estate was one of the most significant transactions of the modern REIT era. However, you maintained a relatively low profile after that deal. Now you are back. What is the strategy behind your latest venture, Verde Realty?
Verde Realty, which I co-founded with Ron Blankenship, is a leading real estate development, operating and investment company focused on the U.S.-Mexico border region. The company's strategy is to capitalize on the substantial real estate opportunities created by dynamic economic and population growth in the U.S.-Mexico border target market, from San Diego/Tijuana on the Pacific Coast to Brownsville/Matamoros on the Gulf of Mexico.

Why are you concentrating on the border area?
There are three principal reasons to target this region. First, I believe the U.S.-Mexico border region is North America's leading manufacturing platform to compete with China and other rapidly developing economies. There is tremendous pressure on manufacturers to reduce costs, and this region is clearly the most competitive location in North America. Today, there are more than 2,250 manufacturing facilities employing more than 1 million workers in our target market. Traditionally, the Midwest has reigned as the country's industrial heartland. However, we have lost a lot of production to low-cost, overseas manufacturers, and the companies that remain in manufacturing are relocating to the border in order to maintain their global competitiveness.

Second, this region will continue to experience significant population growth for the next 25 years and beyond. The U.S. side of the border is growing 62 percent faster than the U.S. average, and the Mexico side is growing 68 percent faster than Mexico's average.

And third, our target market has limited competition, limited competitive product and limited investment capital. This combination of factors makes the U.S.-Mexico border region a very attractive place to be.

Haven't the maquiladoras (goods manufactured or assembled in Mexico but distributed from the U.S.) been hurt by China, which has even cheaper production costs?
China's internal market is so big that most international companies will maintain operations there to, at a minimum, develop and service that marketplace. We're seeing two very interesting things happen. First, manufacturing companies that rushed to move entire operations to China are rethinking that strategy and some of these companies are coming back to the border region because they can better service their North American customer base from here. Second, an increasing number of Chinese companies that want to establish a cost-competitive North American manufacturing base are locating facilities in our target market.

There are an awful lot of people who think they are very good at managing a process, at deploying capital and at being a strategic thinker, but I still have yet to meet anyone who is outstanding at all of these. I would rather get someone who is an A+ at each one and put them together as a team.

Is Verde Realty concentrating on one type of asset class or will it employ a diversified strategy?
Verde Realty has three operating business platforms. First, Verde Corporate Realty Services will be the leading owner and operator of corporate facilities on both sides of the U.S.-Mexico border through development and acquisition. The company has acquired more than 5 million square feet of corporate facilities and currently is developing nearly 2 million square feet in six key target cities.

Second, Verde Realty will be the leading developer of workforce, master-planned communities in the target market. We will sell fully developed, single-family residential lots to small and medium-sized homebuilders and develop and retain long-term ownership interest in all income-producing real estate within these master-planned communities. Verde's first master-planned community is Santa Teresa, which is a 22,000-acre development project just west of El Paso.

Third, Verde Commercial Development will develop and own long-term, multifamily and retail properties both within Verde's master-planned communities and in other target market locations. The company already has begun several apartment community development projects on the U.S. side of the border.

At Security Capital we were involved in all of these specific product types: industrial and suburban office through ProLogis and CarrAmerica; multifamily through Archstone-Smith; and retail through Regency. All of these property types will be thoughtfully integrated into our master-planned communities and all of the real estate will be owned in one entity, Verde Realty.

I see you opted to make Verde Realty a master limited partnership (MLP). Why not a REIT?
Electing to operate as a MLP gives us the flexibility to build critical mass in the early stages of the company, and at the appropriate time, consider converting to a REIT structure.

With a proven track record in the real estate industry, what are some of the key changes you've seen in the industry over the years?
If you ask me what is the most important thing that has taken place in the real estate industry, and the one thing that will continue to affect the industry going forward, I would says it is the transparency and real-time flow of information. When I started out in the real estate industry, it was dominated by pension funds, but real-time information to them was two-and-a-half to three years old via the appraisal process.

What you have now is an avalanche of current information. Real-time data have brought knowledge to the industry for the investing world. It has created a much better supply and demand ratio, new products in the marketplace and much more confidence in the industry.

One of the reasons why you have real estate cap rates coming in as low as they are today is that we have exceptional transparency. Investors can compare real estate to bonds. Transparency has brought confidence which has brought a linkage to the bond industry.

What's the future look like for REITs?
You are going to see public real estate entities, whether they are REITs, master limited partnerships or corporations, dominate the capital flow into income-producing real estate.

Can you elaborate on that?
The securitization of the industry has brought about a radical change in the management of real estate in the U.S. The public real estate industry is now as well managed as any industry group worldwide. So what we are seeing is more globalization and more concentration. Also, it is very expensive to operate a small public company due to Sarbanes-Oxley. As a result, I expect there will be a significant amount of consolidation with larger and larger companies emerging.

You have overseen many real estate operations and are a past recipient of NAREIT's Industry Leadership Award, so you know a thing or two about what it takes to be a successful leader in this industry. What do you think of the current generation of REIT CEOs? Are there any executives you would single out as doing a particularly good job?
I am not going to talk about one person who has done a good job and then forget and leave out another CEO who has also done well. I will say that a unifying characteristic of those executives who I respect the most is that they are all asset creators. In the REIT world there are asset gatherers and asset creators. Asset gatherers think they know how to manage. They've got some rhetoric that says they are great managers, but these REITs are basically index funds. They do well, as an index fund in the stock market does well when the market in general does well. But, the real leaders are the asset creators who are active asset operators. They are the leaders in terms of creating value.

So, how does a REIT CEO create value?
They have got to get off the quarterly earnings merry-go-round. The REIT industry, like most of corporate America, is too tied to quarterly numbers. The smartest players in American industry in general and the public real estate industry specifically are going to focus on creating strategic value through very solid cash flow. Also, you have to have leaders who build deep management teams.

How does someone become an effective REIT CEO?
It's very simple. You've got to work hard, read every business journal that comes out every week to keep you in the flow, be professional and want to differentiate yourself from the market. Most important, you have to try to figure out what is going to happen tomorrow. The key thing about any business is identifying the future trend that is going to change the industry in a significant way. Unless you got the best patent in the world, you cannot relax. You have to be alert to changes.

That seems more difficult than it sounds. If we all knew what was going to happen tomorrow, we all would be rich.
I have been real lucky in terms of picking out things that are going to happen. In the early days of LaSalle Partners, people thought we were nuts and our major competitors said we were going to go bankrupt. But we put our head down and kept hiring very professional people and it worked. Same with Security Capital, again everybody said we were crazy, that real estate is not an asset that will be publicly owned.

You have to find some people who will believe in you or if not, trust you enough to go along with your judgment and your co-investment capital. In forming Security Capital we brought in 13 institutions and all of them, with one exception, thought I was nuts, that real estate would not be securitized. Only Peter Lincoln, who ran a key part of the U.S. Steel pension fund, bought into my strategy, but the others knew I was a hard worker and I was putting money in on the same basis that they were.

How would you describe your management strategy?
My management strategy is very simple: put together the best team that you can. That means people who enjoy working together as a team, can be very open, and realize strengths and weaknesses in people. I am pretty good at some things but I am not worth a darn at others. There are an awful lot of people who think they are very good at managing a process, at deploying capital and at being a strategic thinker, but I still have yet to meet anyone who is outstanding at all of these. I would rather get someone who is an A+ at each one and put them together as a team.

One of your strengths has always been the ability to raise significant capital when needed. Is there a secret formula to this that you can pass on to other CEOs?
I have been lucky in the capital markets, but I also create my own luck by doing a significant amount of research and preparing professionally. The secret formula is converting your corporate idea and research into a story, which must be succinct. If we learned anything from Security Capital, it is to avoid the confusing. With Security Capital, we were able to raise all of the capital we wanted, but we confused the public markets. Investors want a simple, succinct story.

How do you determine whether a potential investment is solid or risky?
I don't give a darn what a building looks like; I want to be very confident that it is a strategic asset. Is it going to continually generate income for as far out as you can see, say 25 years?

Generally, what type of real estate do you like? Dislike?
When I say income in regards to real estate, I mean free cash flow. For example, hotels are fabulous, they look good, you walk in and everybody greets you, you are a big shot, but look at the money you have to spend to keep it fresh. It's a very, very expensive investment. You don't generate the quantity of free cash flow that you do with many other real estate assets.

On the other hand, self-storage, you sweep it out, paint it and that is it. Industrial is very similar. Basically, the more tenant improvements you have to make with a particular asset, the more money you will spend keeping the investment current.

There has been a lot made about the significant fund flows pouring into real estate in recent years. Do you think investors are viewing listed real estate securities as a safe, non-cyclical investment?
Due to the outstanding, real-time information that exists today, we have less overbuilding than in the past. But, despite the transparency, anyone who believes the business won't hit a down cycle again is crazy. What will cause it to happen? It might be a general economic recession, terrorism or interest rates.

Whatever it might be, we are still going to experience down cycles. Nevertheless, the smartest players in the public real estate industry are going to continue focusing on creating strategic value with solid cash flow.