Time for a Tune-Up

During a recent conference call, a securities analyst posed a blunt question to Craig Macnab, the new chief executive of Commercial Net Lease Realty: Was the Orlando-based real estate investment trust (REIT) on the selling block. Macnab responded that the REIT was not considering a sale, but the question was hardly farfetched.

Macnab, who joined CNL Realty on Feb. 16, has a reputation as a fixer. In 2000, he became CEO of JDN Realty, a shopping center company that faced shaky finances and shareholder lawsuits. Macnab strengthened the balance sheet and sold the company in 2003 to Developers Diversified Realty.

At CNL Realty, Macnab faces less formidable problems. The Orlando REIT boasts a solid balance sheet and has increased its dividend annually for 14 consecutive years. But the earnings per share have only risen from $1.10 in 1998 to $1.13 in 2003. “This company is like a car that needs a tune-up,” says Jeffrey Donnelly, director of real estate equity research for Wachovia Capital Markets. “It doesn't need a new engine, but the company does need to run a bit better.”

Besides finding a way to boost earnings, the CEO must help the company adjust to significant personnel changes. Upon Macnab's arrival, James Seneff, who had been chairman and CEO, retained only the chairman title. Soon after, two top executives departed: Gary Ralston, president and COO, and David Cobb, chief investment officer. Ralston retired, while Cobb moved to BentleyForbes, a private real estate company in Los Angeles.

Macnab assumed the title of president, and the company said that it had no plans to fill the position of chief investment officer. Did the outgoing executives leave because they were passed over for the top job? Not so, says Christopher Barry, vice president of corporate communications. “The moves were not related,” he says. “Jim Seneff had been thinking about succession planning for several years, and Craig Macnab suddenly became available. Gary Ralston retired to spend time with his family, and David Cobb found a great opportunity.”

Whether Ralston jumped or was pushed, he could have faced friction with the new CEO. “The two have different styles,” says Donnelly. “Gary Ralston is a cautious mover who is research driven. Craig Macnab is more of a deal guy who likes to take action.”

The new CEO is inheriting a company that has traditionally been very conservative, primarily owning solid single-tenant retail properties with long-term net leases. Tenants include high-quality companies, such as Barnes & Noble and Best Buy. That approach has yielded steady revenues.

The stock's rich dividend yield, currently 7.5%, has appealed to some retail investors. But to increase demand for the shares, the company will have to provide growing earnings. “Macnab needs to ramp up earnings without alienating the retail shareholders who migrated to CNL because of the high yield,” says Donnelly.

Even before Macnab came aboard, the company had been considering some changes. After years of owning only retail properties, CNL Realty bought an office building last year. The company announced that it would seek to become diversified with some holdings in office and industrial properties, as well as retail.

Since then, Macnab has announced that he will cast a wider net, considering properties with car dealerships, convenience stores and movies theaters — building types that the company had never owned. Recently the company announced its first auto purchase, a 442,000 sq. ft. CarMax auto dealership in Albuquerque, N.M., for $10.8 million.


Total Portfolio: 8 million sq. ft. (83% retail and 17% office)

Stock Symbol: NYSE: NNN

Stock Price: $17.27 (as of June 23, 2004)

Market Cap: $895.5 million

Key Personnel Changes:

  • Craig Macnab joins company in February as CEO.

  • Gary Ralston, president and COO, retires in May.

  • Julian Whitehurst is promoted to COO in June.

  • David Cobb, chief investment officer, joins BentleyForbes in June.

Source: Company information

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