-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wthrqh77JIO+3JrQHK+C397+y3ZyQr1v/5I5UywEanSQZR5daPajyl/nWdt2WN5k hyyP+Zswr2VsgdYd61cCMQ== 0000751364-97-000012.txt : 19971117 0000751364-97-000012.hdr.sgml : 19971117 ACCESSION NUMBER: 0000751364-97-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCIAL NET LEASE REALTY INC CENTRAL INDEX KEY: 0000751364 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 561431377 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11290 FILM NUMBER: 97719115 BUSINESS ADDRESS: STREET 1: 400 E SOUTH ST STE 500 CITY: ORLANDO STATE: FL ZIP: 32801 BUSINESS PHONE: 4074221574 MAIL ADDRESS: STREET 1: 400 E SOUTH ST STE 500 STREET 2: 400 E SOUTH ST STE 500 CITY: ORLANDO STATE: FL ZIP: 32801 FORMER COMPANY: FORMER CONFORMED NAME: CNL REALTY INVESTORS INC /DE/ DATE OF NAME CHANGE: 19930429 FORMER COMPANY: FORMER CONFORMED NAME: GOLDEN CORRAL REALTY CORP DATE OF NAME CHANGE: 19920703 10-Q 1 COMMERCIAL NET LEASE REALTY, INC. - 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-12989 Commercial Net Lease Realty, Inc. (Exact name of registrant as specified in its charter) Maryland 56-1431377 (State or other jurisdiction (I.R.S. Employer of incorporation or organiza- Identification No.) tion) 400 E. South Street, #500 Orlando, Florida 32801 (Address of principal (Zip Code) executive offices) Registrant's telephone number (including area code) (407) 422-1574 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 27,050,619 shares of Common Stock, $.01 par value, outstanding as of November 13, 1997. COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONTENTS Part I Page Item 1. Financial Statements: Condensed Consolidated Balance Sheets 1 Condensed Consolidated Statements of Earnings 2 Condensed Consolidated Statements of Stockholders' Equity 3 Condensed Consolidated Statements of Cash Flows 4 Notes to Condensed Consolidated Financial Statements 5-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-15 Part II Other Information 16-18 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) September 30, December 31, ASSETS 1997 1996 ------------- -------- Real estate leased to others: Accounted for using the operating method, net of accumulated depreciation $366,079 $269,031 Accounted for using the direct financing method 114,804 92,413 Investment in partnership 3,854 - Cash and cash equivalents 5,322 1,410 Receivables 545 812 Due from related parties 237 - Prepaid expenses 409 335 Loan costs, net of accumulated amortization of $1,697 and $1,055 1,959 2,185 Accrued rental income 6,303 4,421 Other assets 1,395 346 -------- -------- $500,907 $370,953 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable $152,127 $116,956 Accrued interest payable 629 390 Accounts payable and accrued expenses 437 161 Real estate taxes payable 41 - Due to related parties 50 93 Rents paid in advance 668 779 -------- -------- Total liabilities 153,952 118,379 -------- -------- Commitments and contingencies (Notes 7 and 8) Stockholders' equity: Common stock, $.01 par value. Authorized 50,000,000 shares; issued and outstanding 27,050,119 and 20,763,672 shares, respectively 271 208 Excess stock, $0.01 par value. Authorized 50,000,000 shares; none issued and outstanding - - Capital in excess of par value 347,307 254,299 Accumulated dividends in excess of net earnings (623) (1,933) -------- -------- Total stockholders' equity 346,955 252,574 -------- -------- $500,907 $370,953 ======== ======== See accompanying notes to condensed consolidated financial statements. 1 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Quarter Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 ---------- ---------- ---------- ------- Revenues: Rental income from operating leases $ 9,934 $ 6,685 $ 27,059 $ 17,334 Earned income from direct financing leases 3,111 2,257 8,623 5,735 Contingent rental income 191 184 560 541 Interest and other 54 50 131 121 ---------- ---------- ---------- ---------- 13,290 9,176 36,373 23,731 ---------- ---------- ---------- ---------- Expenses: General operating and administrative 290 258 954 930 Advisory fees to related party 523 376 1,507 1,027 Interest 3,509 2,473 8,603 5,535 State taxes 109 56 275 148 Depreciation and amortization 1,374 944 3,867 2,498 ---------- ---------- ---------- ---------- 5,805 4,107 15,206 10,138 ---------- ---------- ---------- ---------- Net earnings before equity in earnings of unconsolidated partnership and gain on sale of land and buildings 7,485 5,069 21,167 13,593 Gain on sale of land and buildings 126 45 397 45 Equity in earnings of unconsolidated partnership 11 - 11 - ---------- ---------- ---------- --------- Net earnings $ 7,622 $ 5,114 $ 21,575 $ 13,638 ========== ========== ========== ========== Earnings per share of common stock $ 0.32 $ 0.31 $ 0.94 $ 0.88 ========== ========== ========== ========== Weighted average number of shares outstanding 23,826,352 16,426,715 23,033,721 15,479,183 ========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements. 2 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Nine Months Ended September 30, 1997 and Year Ended December 31, 1996 (dollars in thousands, except per share data)
Accumulated dividends Capital in in excess Number Common excess of of net of shares stock par value earnings Total --------- ------- ---------- ------------- ------ Balance at December 31, 1995 11,663,672 $117 $138,629 $(2,904) $135,842 Net earnings - - - 19,839 19,839 Dividends declared and paid ($1.18 per share of common stock) - - - (18,868) (18,868) Issuance of common stock 9,100,000 91 123,284 - 123,375 Stock issuance costs - - (7,614) - (7,614) ---------- ---- -------- ------- -------- Balance at December 31, 1996 20,763,672 208 254,299 (1,933) 252,574 Net earnings - - - 21,575 21,575 Dividends declared and paid ($0.90 per share of common stock) - - - (20,265) (20,265) Issuance of common stock 6,286,447 63 96,153 - 96,216 Stock issuance costs - - (3,145) - (3,145) ---------- ---- -------- ------- -------- Balance at September 30, 1997 27,050,119 $271 $347,307 $ (623) $346,955 ========== ==== ======== ======= ========
See accompanying notes to condensed consolidated financial statements. 3 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1997 1996 -------- ------ Cash flows from operating activities: Net earnings $ 21,575 $ 13,638 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 3,243 1,998 Amortization 624 501 Gain on sale of land and buildings (397) (46) Equity in earnings of unconsolidated partnership (11) - Decrease in net investment in direct financing leases 847 527 Increase in accrued rental income (1,969) (1,554) Decrease (increase) in receivables 128 (103) Increase in prepaid expenses (74) (4) Decrease (increase)in other assets (108) 10 Increase in accrued interest payable 239 295 Increase in accounts payable and accrued expenses 22 1 Increase in real estate taxes payable 41 22 Increase (decrease) in due to related parties (37) 65 Increase (decrease) in rents paid in advance (111) 346 -------- -------- Net cash provided by operating activities 24,012 15,696 -------- -------- Cash flows from investing activities: Additions to land and buildings on operating leases (118,665) (87,921) Investment in direct financing leases (25,177) (26,644) Proceeds from sale of land and buildings 18,093 423 Investment in partnership (855) - Increase in other assets (707) (126) Other (346) 116 -------- -------- Net cash used in investing activities (127,657) (114,152) -------- -------- Cash flows from financing activities: Proceeds from loan 126,800 139,450 Repayment of loans (91,629) (129,696) Payment of loan costs (511) (1,371) Proceeds from issuance of common stock 96,216 120,225 Payment of stock issuance costs (3,062) (7,025) Payment of dividends (20,265) (12,639) Other 8 (5) -------- -------- Net cash provided by financing activities 107,557 108,939 -------- -------- Net increase in cash and cash equivalents 3,912 10,483 Cash and cash equivalents at beginning of period 1,410 301 -------- -------- Cash and cash equivalents at end of period $ 5,322 $ 10,784 ======== ======== Supplemental Schedule of Non-Cash Investing Activities: Contribution of land and building to unconsolidated partnership $ 2,930 $ - ======== =======
See accompanying notes to condensed consolidated financial statements. 4 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended September 30, 1997 and 1996 1. Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. The financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Operating results for the quarter and nine months ended September 30, 1997, may not be indicative of the results that may be expected for the year ending December 31, 1997. Amounts as of December 31, 1996, included in the financial statements, have been derived from audited financial statements as of that date. These unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Form 10-K of Commercial Net Lease Realty, Inc. (the "Company") for the year ended December 31, 1996. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Earnings per share are calculated based upon the weighted average number of shares outstanding during each period. Stock options outstanding are not included since their inclusion would not result in a material dilution of earnings per share. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, Earnings Per Share. The Statement, which is effective for fiscal years ending after December 15, 1997, provides for a revised computation of earnings per share. The Company will adopt this Standard in 1997 and does not expect compliance with such Standard to have a material effect, if any, on the Company's earnings per share. 2. Leases: The Company generally leases its land and buildings to operators of major retail businesses. The leases are accounted for under the provisions of Statement of Financial Accounting Standards No. 13, Accounting for Leases. As of September 30, 1997, 139 of the leases have been classified as operating leases and 86 leases have been classified as direct 5 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Nine Months Ended September 30, 1997 and 1996 2. Leases - Continued: financing leases. For the leases classified as direct financing leases, the building portions of the leases are accounted for as direct financing leases while the land portions of 56 of these leases are accounted for as operating leases. Substantially all leases have initial terms of 15 to 20 years (expiring between 2000 and 2020) and provide for minimum rentals. In addition, the majority of the leases provide for contingent rentals and/or scheduled rent increases over the terms of the leases. The tenant is also generally required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building and carry insurance coverage for public liability, property damage, fire and extended coverage. The lease options generally allow tenants to renew the leases for two to four successive five-year periods subject to substantially the same terms and conditions as the initial lease. 3. Real Estate Leased to Others: Accounted for Using the Operating Method - Land and buildings on operating leases consisted of the following at (dollars in thousands): September 30, December 31, 1997 1996 ----------- ----------- Land $183,568 $138,520 Buildings and improvements 193,574 138,589 -------- -------- 377,142 277,109 Accumulated depreci- ation (11,063) (8,078) -------- -------- $366,079 $269,031 ======== ======== Some leases provide for scheduled rent increases throughout the lease term. Such amounts are recognized on a straight-line basis over the terms of the leases. For the nine months ended September 30, 1997 and 1996, the Company recognized $2,012,000 and $1,554,000 respectively, of such income, $727,000 and $621,000 of which was recognized for the quarters ended September 30, 1997 and 1996, respectively. 6 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Nine Months Ended September 30, 1997 and 1996 3. Real Estate Leased to Others - Continued: The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at September 30, 1997 (dollars in thousands): 1997 $ 9,413 1998 37,796 1999 38,010 2000 38,435 2001 39,106 Thereafter 461,873 -------- $624,633 Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the initial lease terms. In addition, this table does not include any amounts for future contingent rentals which may be received on the leases based on a percentage of the tenant's gross sales. Accounted for Using the Direct Financing Method - The following lists the components of real estate leased to others using the direct financing method at (dollars in thousands): September 30, December 31, 1997 1996 ------------- ------------ Minimum lease payments to be received $251,988 $207,838 Estimated residual values 34,915 28,309 Less unearned income (172,099) (143,734) -------- -------- Real estate leased to others using the direct financing method $114,804 $ 92,413 ======== ======== 7 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Nine Months Ended September 30, 1997 and 1996 3. Real Estate Leased to Others - Continued: The following is a schedule of future minimum lease payments to be received on direct financing leases at September 30, 1997 (dollars in thousands): 1997 $ 3,475 1998 13,904 1999 13,953 2000 14,071 2001 14,109 Thereafter 192,476 ------- $251,988 The above table does not include future minimum lease payments for renewal periods or contingent rental payments that may become due in future periods (see Real Estate Leased to Others - Accounted for Using the Operating Method). 4. Investment in Partnership: In September 1997, the Company contributed cash, land and building to Net Lease Institutional Realty, L.P. (the "Partnership") for a 20 percent interest in the Partnership. The Company accounts for its 20 percent interest in the Partnership under the equity method of accounting. 5. Notes Payable: In August 1997, the Company entered into an amended and restated loan agreement for a $200,000,000 revolving credit facility (the "Credit Facility") which expires on June 30, 1999. The Credit Facility amended the Company's $150,000,000 credit facility by increasing the borrowing capacity from $150,000,000 to $200,000,000 and lowering the interest rate from 160 basis points above LIBOR to 150 basis points above LIBOR or the lender's prime rate, whichever the Company selects. As of September 30, 1997 and December 31, 1996, the outstanding principal balance was $95,000,000 and $58,700,000, respectively, plus accrued interest of $435,000 and $192,000, respectively. 6. Related Party Transactions: During the nine months ended September 30, 1997, the Company acquired 26 properties and three buildings which were developed by the tenant on land parcels owned by the Company 8 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Nine Months Ended September 30, 1997 and 1996 6. Related Party Transactions - Continued: from unrelated, third parties for purchase prices totalling $121,745,000. In connection with the acquisition of 25 of these properties and the three buildings, the Company paid CNL Realty Advisors, Inc. $2,409,000 in acquisition fees and expense reimbursement fees (representing 1.5% and 0.5%, respectively, of the cost of the properties). During the nine months ended September 30, 1997, the Company acquired ten properties for purchase prices totalling $18,352,000 from affiliates of CNL Realty Advisors, Inc. who had developed the properties. The purchase prices paid by the Company for these ten properties equalled the affiliates' cost including development costs. The affiliates' cost consisted of the land purchase price, construction costs, various soft costs including legal costs, survey fees and architect fees and developer fees aggregating $962,500 paid to affiliates of CNL Realty Advisors, Inc. In January 1997, the Company sold its property in Foley, Alabama, for $570,000 and received net proceeds of $551,000, resulting in a gain of $271,000 for financial reporting purposes. In connection with the sale of this property, the Company paid CNL Realty Advisors, Inc. $11,400 in disposition fees. In addition, the Company sold four of its properties to the Partnership at the Company's original cost of $17,542,000. The Company recognized a gain on the sale of these properties of $126,000 for financial reporting purposes. 7. Commitments and Contingencies: As of September 30, 1997, the Company had entered into agreements to purchase eight additional properties for an estimated aggregate amount of $40,648,000. In connection with the acquisition of five of these properties, the Company was contingently liable for $1,527,000 related to bank letters of credit which guarantee the Company's obligation under the purchase agreements to acquire these properties. In addition, the Company was contingently liable for $13,395,000 relating to its obligations under a purchase agreement to acquire two properties. As of September 30, 1997, the Company owned one land parcel which is leased to a tenant who is obligated to develop a building on the land parcel. The Company has agreed to acquire the completed building for an aggregate amount of up to $798,000, upon which time rental income will increase for the property. 9 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Nine Months Ended September 30, 1997 and 1996 7. Commitments and Contingencies - Continued: As of September 30, 1997, the Company owned one land parcel subject to a lease agreement with a tenant whereby the Company has agreed to construct a building on the land parcel for approximately $1,300,000. Pursuant to the lease agreement, rent will commence on the property upon completion of construction of the building. 8. Subsequent Events: In October 1997, the Company declared dividends to its shareholders of $8,115,000 or $.30 per share of common stock, payable in November 1997. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction Commercial Net Lease Realty, Inc. (the "Company") is an equity real estate investment trust that acquires, owns and manages high-quality, freestanding properties leased to major retail businesses under long-term commercial net leases. As of September 30, 1997, the Company owned, either directly or through a partnership interest, 234 properties (the "Properties") each of which is leased to major retail businesses. Liquidity and Capital Resources General. Historically, the Company's only demand for funds has been for the payment of operating expenses and dividends, for property acquisitions and for the payment of interest on its outstanding indebtedness. Generally, cash needs for items other than property acquisitions have been met from operations and property acquisitions have been funded by equity offerings, bank borrowings and, to a lesser extent, from internally generated funds. Potential future sources of capital include proceeds from public or private offerings of the Company's debt or equity securities, secured or unsecured borrowing from banks or other lenders, or the sale of Properties, as well as undistributed funds from operations. For the nine months ended September 30, 1997 and 1996, the Company generated $24,012,000 and $15,696,000, respectively, in net cash provided by operating activities. The increase in cash from operations for the nine months ended September 30, 1997, as compared to the nine months ended September 30, 1996, is primarily a result of changes in revenues and expenses as discussed in "Results of Operations." The Company's leases typically provide that the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. In addition, the Company's leases generally provide that the tenant is responsible for roof and structural repairs. Certain of the Company's Properties are subject to leases under which the Company retains responsibility for certain costs and expenses associated with the Property. Because many of the Properties which are subject to leases that place these responsibilities on the Company are recently constructed, management anticipates that capital demands to meet obligations with respect to these Properties will be minimal for the foreseeable future and can be met with funds from operations and working capital. The Company may be required to use bank borrowing or other sources of capital in the event of unforeseen significant capital expenditures. Indebtedness. In August 1997, the company entered into an amended and restated loan agreement for a $200,000,000 revolving credit facility (the "Credit Facility"). The Credit Facility amended the Company's $150,000,000 credit facility by increasing the borrowing capacity from $150,000,000 to $200,000,000 and lowering the interest rate from 160 basis points above LIBOR to 150 11 Liquidity and Capital Resources - Continued basis points above LIBOR. As of September 30, 1997, $95,000,000 was outstanding under the Credit Facility. The Credit Facility will be used primarily to invest in freestanding retail properties, although $25,000,000 of the available credit may be used for the issuance of standby letters of credit or working capital. Debt and Equity Securities. In February 1997, the Company filed a prospectus supplement to its $200,000,000 shelf registration and issued 2,300,000 shares of common stock and received gross proceeds of $34,787,000. In addition, in March 1997, the Company issued an additional 330,000 shares of common stock in connection with the underwriters' overallotment option and received gross proceeds of $4,991,000. In April 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission which permits the issuance by the Company of up to $300,000,000 in debt and equity securities. In September 1997, the Company filed two prospectus supplements to its $300,000,000 shelf registration and issued 3,645,680 shares of common stock and received gross proceeds of $56,278,000. In connection with the February offering and two September offerings, the Company incurred stock issuance costs totalling $3,114,000 consisting primarily of underwriters' commissions and fees, legal and accounting fees and printing expenses. Proceeds from the offerings were used to pay down the Company's Credit Facility. Property Acquisitions and Commitments. During the nine months ended September 30, 1997, the Company borrowed $126,800,000 under its Credit Facility to acquire 36 Properties (nine Eckerd drugstores, six Best Buy consumer electronics stores, three OfficeMax office supply stores, two Barnes & Noble bookstores, two Good Guys consumer electronics stores, one Pier 1 Imports home furnishings store, one Blockbuster video store, one Borders bookstore, one Just For Feet shoe store, one HomePlace home furnishings store, one Kroger grocery store and eight independently operated grocery stores leased to or partially guaranteed by SuperValu, Inc., and three buildings (one Academy sporting goods store, one Kash N' Karry grocery store and one Pier 1 Imports home furnishings store) which were developed by the tenant on land parcels owned by the Company. As of September 30, 1997, the Company owned one land parcel which is leased to a tenant who is obligated to develop a building on the land parcel. The Company has agreed to acquire the completed building for an aggregate amount of up to $798,000, at which time rental income will increase for the Property. As of September 30, 1997, the Company owned one land parcel subject to a lease agreement with a tenant whereby the Company has agreed to construct a building on the land parcel for approximately $1,300,000. Pursuant to the lease agreement, rent will commence on the property upon completion of construction of the building. 12 Liquidity and Capital Resources - Continued As of September 30, 1997, the Company had entered into agreements to purchase eight additional properties for an estimated aggregate amount of $40,648,000. The purchase of these properties is subject to conditions relating to completion of development activities, review of title and obtaining title insurance, engineering and environmental inspections and other matters. In addition to the eight properties under contract and the two buildings under construction as of September 30, 1997, the Company is currently negotiating the acquisition of a number of prospective properties. The Company may elect to acquire these prospective properties or other additional properties (or interests therein) in the future. Such property acquisitions are expected to be the primary demand for additional capital in the future. The Company anticipates that it may engage in equity or debt financing, through either public or private offerings of its securities for cash, issuance of such securities in exchange for assets, or a combination of the foregoing. Subject to the constraints imposed by the Company's $200,000,000 Credit Facility and long-term, fixed rate financing, the Company may enter into additional financing arrangements. In January 1997, the Company sold its property in Foley, Alabama, for $570,000 and received net sales proceeds of $551,000. In addition, in September 1997, the Company sold four of its properties to Net Lease Institutional Realty, L.P. at the Company's original cost of $17,542,000. The Company recognized a gain on the sale of these five properties of $397,000 for financial reporting purposes. The Company reinvested the proceeds to acquire additional properties and structured the transactions to qualify as a like-kind exchange transactions for federal income tax purposes. Investment in Partnership. In September 1997, the Company contributed cash of $855,000 and land and building at the Company's original cost of $2,895,000 to Net Lease Institutional Realty, L.P. (the "Partnership") for a 20 percent interest in the Partnership. The Company accounts for its 20 percent interest in the Partnership under the equity method of accounting. Management believes that the Company's current capital resources (including cash on hand), coupled with the Company's borrowing capacity, are sufficient to meet its liquidity needs for the foreseeable future. Dividends. One of the Company's primary objectives, consistent with its policy of retaining sufficient cash for reserves and working capital purposes, is to distribute a substantial portion of its funds available from operations to its stockholders in the form of dividends. For the nine months ended September 30, 1997 and 1996, the Company declared and paid dividends to its stockholders of $20,265,000 and $12,639,000, respectively, or $.90 and $.88, respectively, per share of common stock. In October 1997, the Company declared dividends to its shareholders of $8,115,000 or $.30 per share of common stock, payable in November 1997. 13 Results of Operations During the nine months ended September 30, 1997 and 1996, the Company owned and leased 231 wholly owned Properties (including five Properties which were sold and one Property which was contributed to the Partnership during 1997) and 187 wholly owned Properties, respectively, to operators of major retail businesses. In connection therewith, during the nine months ended September 30, 1997 and 1996, the Company earned $36,242,000 and $23,610,000, respectively, in rental income from operating leases, earned income from direct financing leases and contingent rental income, $13,236,000 and $9,126,000 of which was earned during the quarters ended September 30, 1997 and 1996, respectively. The increase in rental and earned income during the nine months ended September 30, 1997, is primarily a result of the facts that (i) the 40 Properties acquired and nine buildings upon which construction was completed during 1996 were operational for a full nine months in 1997 and (ii) the Company acquired 36 Properties and three buildings upon which construction was completed during the nine months ended September 30, 1997. Rental and earned income are expected to increase as the Company acquires additional properties and due to the fact that the 36 Properties and three buildings acquired during the nine months ended September 30, 1997, will contribute to the Company's income for a full fiscal quarter in future quarters. The Company incurred $8,603,000 and $5,535,000 in interest expense for the nine months ended September 30, 1997 and 1996, respectively, $3,509,000 and $2,473,000 of which was incurred for the quarters ended September 30, 1997 and 1996. Interest expense increased during the quarter and nine months ended September 30, 1997, primarily as a result of higher average borrowing levels on the Company's Credit Facility. However, the increase was partially offset by a decrease in the average interest rates of the Company's Credit Facility. During the nine months ended September 30, 1997 and 1996, operating expenses, including depreciation and amortization, were $6,603,000 and $4,603,000, respectively (18.2% and 19.4%, respectively, of gross operating revenues) of which $2,296,000 and $1,634,000 (17.3% and 17.8%, respectively, of gross operating revenues) were incurred for the quarters ended September 30, 1997 and 1996, respectively. The increase in the dollar amount of operating expenses for the quarter and nine months ended September 30, 1997, as compared to the quarter and nine months ended September 30, 1996, is primarily attributable to the increase in depreciation expense as a result of the additional Properties acquired during the nine months ended September 30, 1997, and a full quarter of depreciation expense relating to the 40 Properties and nine buildings acquired during 1996. The increase for the nine months ended September 30, 1997, is also attributable to an increase in amortization expense as a result of the amortization of loan costs relating to the Company's fixed rate financing and amendment to the Company's Credit Facility. In addition, advisory fees increased as a result of increased funds from operations for the quarter and nine months ended September 30, 1997. 14 Results of Operations - Continued In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, Earnings Per Share. The Statement, which is effective for fiscal years ending after December 15, 1997, provides for a revised computation of earnings per share. The Company will adopt this Standard in 1997 and does not expect compliance with such Standard to have a material effect, if any, on the Company's earnings per share. 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings. No material developments in legal proceedings as previously reported in the Form 10-K for the year ended December 31, 1996. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are filed as a part of this report. 3.1 Articles of Incorporation of the Registrant (filed as Exhibit 3.3(i) to the Registrant's Registration Statement No. 1-11290 on Form 8- B, and incorporated herein by reference). 3.2 Bylaws of the Registrant (filed as Exhibit 3.3(ii) to Amendment No. 2 to the Registrant's Registration Statement No. 1-11290 on Form 8- B, and incorporated herein by reference). 3.3 Articles of Amendment to the Articles of Incorporation of Registrant (filed as Exhibit 3.3 to the Registrant's Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference). 4 Specimen Certificate of Common Stock, par value $.01 per share, of the Registrant (filed as Exhibit 3.4 to the Registrant's Registration Statement No. 1-11290 on Form 8- B, and incorporated herein by reference). 16 10.1 Letter Agreement dated July 10, 1992, amending Stock Purchase Agreement dated January 23, 1992 (filed as Exhibit 10.34 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, and incorporated herein by reference). 10.2 Advisory Agreement between Registrant and CNL Realty Advisors, Inc. effective as of April 1, 1993 (filed as Exhibit 10.04 to Amendment No.1 to the Registrant's Registration Statement No. 33-61214 on Form S-2, and incorporated herein by reference). 10.3 1992 Commercial Net Lease Realty, Inc. Stock Option Plan (filed as Exhibit No. 10(x) to the Registrant's Registration Statement No. 33- 83110 on Form S-3, and incorporated herein by reference). 10.4 Second Amended and Restated Line of Credit and Security Agreement, dated December 7, 1995, among Registrant, certain lenders listed therein and First Union National Bank of Florida, as the Agent, relating to a $100,000,000 loan (filed as Exhibit 10.14 to the Registrant's Current Report on Form 8-K dated January 18, 1996, and incorporated herein by reference). 10.5 Secured Promissory Note, dated December 14, 1995, among Registrant and Principal Mutual Life Insurance Company relating to a $13,150,000 loan (filed as Exhibit 10.15 to the Registrant's Current Report on Form 8-K dated January 18, 1996, and incorporated herein by reference). 10.6 Mortgage and Security Agreement, dated December 14, 1995, among Registrant and Principal Mutual Life Insurance Company relating to a $13,150,000 loan (filed as Exhibit 10.16 to the Registrant's Current Report on Form 8-K dated January 18, 1996, and incorporated herein by reference). 10.7 Loan Agreement, dated January 19, 1996, among Registrant and Principal Mutual Life Insurance Company relating to a $39,450,000 loan (filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference). 17 10.8 Secured Promissory Note, dated January 19, 1996, among Registrant and Principal Mutual Life Insurance Company relating to a $39,450,000 loan (filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference). 10.9 Third Amended and Restated Line of Credit and Security Agreement, dated September 3, 1996, by and among Registrant, certain lenders and First Union National Bank of Florida, as the Agent, relating to a $150,000,000 loan (filed as Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference). 10 Second Renewal and Modification Promissory Note, date September 3, 1996, by and among Registrant and First Union National Bank of Florida, as the Agent, relating to a $150,000,000 loan (filed as Exhibit 10.12 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference). 10.11 Agreement and Plan of Merger dated May 15, 1997, by and among Commercial Net Lease Realty, Inc. and Net Lease Realty II, Inc. and CNL Realty Advisors, Inc. and the Stockholders of CNL Realty Advisors, Inc. (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated May 16, 1997, and incorporated herein by reference). 10.12 Fourth Amended and Restated Line of Credit and Security Agreement, dated August 6, 1997, by and among Registrant, certain lenders and First Union National Bank, as the Agent, relating to a $200,000,000 loan (filed as Exhibit 10 to the Registrant's Current Report on Form 8-K dated September 12, 1997, and incorporated herein by reference). (b) The Registrant filed two reports on Form 8-K on September 12, 1997, and September 18, 1997, for the purpose of incorporating certain items by reference into its registration statement on Form S-3 dated September 13, 1997, and September 18, 1997, respectively. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATED this 14th day of November, 1997. COMMERCIAL NET LEASE REALTY, INC. By: /s/ Gary M. Ralston ------------------- Gary M. Ralston President By: /s/ Kevin B. Habicht -------------------- Kevin B. Habicht Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the balance sheet of Commercial Net Lease Realty, Inc. at September 30, 1997, and its statement of earnings for the nine months then ended and is qualified in its entirety by reference to the Form 10-Q of Commercial Net Lease Realty, Inc. for the nine months ended September 30, 1997. 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 5,322,000 0 782,000 0 0 0 377,142 11,063 500,907 0 0 0 0 271,000 346,684 500,907 0 36,373,000 0 6,603,000 0 0 8,603,000 21,575,000 0 21,575,000 0 0 0 21,575,000 .94 .94 Due to the nature of its industry, Commercial Net Lease Realty, Inc. has an unclassified balance sheet, therefore, no values are shown above for current assets and current liabilities.
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