>From a mere blip on the retail real estate investment map five years ago, Commercial Net Lease Realty Inc. has become a trendsetter in the competitive retail real estate industry.

The man behind the firm's growing dominance is Gary M. Ralston, 47, president of the Orlando, Fla.-based, publicly traded real estate investment trust (REIT). The company invests exclusively in freestanding retail properties with long-term net leases.

After trying for more than two years, Ralston almost single-handedly persuaded the National Association of Real Estate Investment Trusts (NAREIT), Washington, D.C., to change the basis for REIT classification to property type rather than ownership structure. As a result, effective Jan. 1, 1998, NAREIT Indices eliminated the triple-net lease category and added a "Retail - Freestanding" category.

"What is compelling is the significance of freestanding stores. It's a major category that had been ignored," says Ralston, nicknamed "Freestanding" Gary Ralston because of his battle for the recognition of freestanding stores.

NAREIT's newly created freestanding retail category includes seven REITs, with a total market capitalization of $3.2 billion and representing 12 percent of all retail categories. The market cap of the regional malls category is $10.5 billion, followed by strip centers at $12.5 billion and outlet centers at $1.5 billion.

The share of freestanding retail real estate is likely to increase dramatically in the near future, says Ralston, who has yet another mission: to make CNLR the nation's dominant REIT engaged in net-leased freestanding retail properties.

"We want to build a reputation for customer credibility. That is our job," Ralston says. "We believe that we operate retail real estate stores more efficiently than anybody else, including retailers. We understand our customers and their customers."

On Jan. 1, CNLR became a self-advised, self-managed REIT when it merged with its former external adviser, CNL Realty Advisor Inc. The trust was founded in 1984 as Golden Corral Realty Corp. Its name became Commercial Net Lease Realty in 1993.

CNLR has capitalized on the booming freestanding retail market. Five years ago, the company owned 41 properties, valued at $24 million. Today, its diversified portfolio includes 249 properties, totaling 4.6 million sq. ft., in 37 states with 17 different retail lines of trade. The firm's total market capitalization today stands at $650 million, and it boasts 48 national or regional retailers as its tenants.

CNLR funds from operations (FFO) in 1997 rose to $34.23 million, or $1.42 per share - up from the previous year's $22.57 million, or $1.34 per share. The firm's revenue, which has grown tenfold in five years, increased to $50.14 million in 1997 from $33.37 million in 1996.

The company plans to invest $200 million to $240 million on real estate acquisitions and development this year. Its stock has been hovering around $16.50 per share, with a 52-week high of $18.31 per share and 52-week low of $13.87 per share.

Explaining the secret of CNLR's success, company officials point to two major factors: the firm's acquisitions and build-to-suit strategy combined with world-class service and marketing techniques; and an unprecedented demand for freestanding space nationwide and favorable consumer trends.

"Since 1991, there has been more freestanding stores built than all shopping centers and malls combined," Ralston says. "Freestanding space will continue to be the most-sought-after space in retail during the next five years. Over half of all retail space built in the United States by the end of the year 2001 will be freestanding stores."

Alone but not lonely Industry data indicate that there will be 438.1 million sq. ft. of new freestanding retail real estate construction between 1997 and 2001, Ralston says. This compares with a new supply of 67.7 million sq. ft. for malls and 255.5 million sq. ft. for shopping centers.

Accounting for the growth of freestanding stores, Ralston points to their lower costs, greater operational efficiency and increased predictability of performance, as well as their ability to replicate a specific format in a variety of locations. For example, he notes, drugstores that have relocated to freestanding format have enjoyed substantial gains in customers and revenue.

Retailers and investors, too, benefit from the freestanding format. "It increases operating efficiency. It allows you to open stores wherever you want," Ralston says. "In this particular sector, all freestanding stores are also pre-leased. And since they are pre-leased, it is really tough to overbuild pre-leased space. It is probably the safest place to be as an investor."

Glenn R. Mueller, head of real estate research at Legg Mason, a Baltimore-based investment banker, says he has been impressed with CNLR's focus and strategy since his firm started following CNLR a year ago. "We have a buy recommendation for Commercial Net Lease Realty," Mueller says. "They have a well-defined and focused strategy."

Boosted by positive ratings, CNLR recently sold $100 million of investment-grade senior unsecured notes. Proceeds from the sale will be used to pay down borrowings under the company's existing bank credit facility and for general corporate purposes."We are pleased to have achieved inve stment-grade debt ratings at this point in our company's history," says Kevin B. Habicht, executive vice president and chief financial officer of CNLR. "We believe these ratings reflect the quality of our portfolio, capital structure and operating practices."

One of the firm's operating practices is a focus on its retail customers and serving their needs. "Retail customers don't need to own real estate; they need to control it," Ralston says. "And we help them do that efficiently and on a cost-effective basis."

Ralston foresees significant growth in the freestanding business, as major retailers start unloading their real estate portfolios and outsourcing real estate activities. The same has been done by some major Fortune 500 corporations.

"Retail companies are just starting to get into that. They are five to six years behind," Ralston says. "The country's top 100 retailers have a total of $60 billion of real estate on their balance sheets. They are going to outsource their real estate activities. It's a good deal for retailers."

Among CNLR's 48 tenants are Eckerd Drug Stores, Barnes & Noble, Best Buy, Office Max, Borders Books, Marshalls, CompUSA and Pier 1 Imports. For Eckerd alone, which accounts for more than 12 percent of the company's total rent base, CNLR has 80 stores either open or under construction.

Handling it all by itself Joseph A. Ciardiello, senior vice president of acquisitions at CNLR, says the firm does extensive research before making any acquisition. As a marketing tool, it uses its own target list of top freestanding retailers and networks extensively at industry and trade conferences.

"In addition to our target list and face-to-face meetings with potential clients, we also send 700 mailings to real estate executives and CFOs every four to six weeks," Ciardiello says. "It's a relationship business, and strong relationships result in direct retailer transactions and repeat business."

Of 49 retail real estate acquisitions CNLR made in 1997, 40 were direct acquisitions from retailers and 73 percent of that was repeat business, Ciardiello says.

"We bring a lot to this relationship through our strategic procurement program: one lease document, one rent check, one property manager, one site review and due diligence, one acquisition process, and one attorney," Ciardiello says. "It saves effort, saves time and saves money."

On a $10 million CNLR project, for example, a retailer can save about $100,000 in up-front costs and about $300,000 in taxes in a 20-year lease, Ciardiello says. Total savings may reach 5 percent to 10 percent of the total project cost.

Alex Dmyterko, executive vice president and chief operating officer of CNLR's build-to-suit group, heads the team responsible for front-line budgets, schedules and quality control. The team also oversees development of freestanding retail properties, from site identification through certificate of occupancy and rent commencement.

The team approach, says Dmyterko, reduces time-to-market by nine months over traditional development approaches. He says that while typically only one in four deals ends up in development, CNLR has a track record of completing 85 percent of its real estate concept deals.

CNLR also recently won a contract to manage 150 surplus stores for Woonsocket, R.I.-based CVS Pharmacy, says Mez R. Birdie, CNLR's vice president and asset manager. His team assists retailers with their asset management needs for existing or surplus properties.

"The surplus department is a stepchild of most retailers. They neglect it. In fact, many retailers have written off rents from surplus properties," Birdie says. "We locate and negotiate with a prospective tenant to lease vacant premises at the highest possible rent. Their return is tenfold."

CNLR aims to build on its past achievements. "We were known as landlords; now we call ourselves land servants," Birdie says. "We want to be ahead of the curve. We want to go beyond the expectations of our customers."