-----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, V5A7ybf8KMwZKNk5DmLIrJe96JbkS9iJcaPVHNHAzWtxFxixsH4hJMtdhu/zfiMo RORE39xIQPzUW0PdgX1BgQ== 0000751364-98-000002.txt : 19980319 0000751364-98-000002.hdr.sgml : 19980319 ACCESSION NUMBER: 0000751364-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980318 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-K SEC ACT: SEC FILE NUMBER: 001-11290 FILM NUMBER: 98567757 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-K 1 COMMERCIAL NET LEASE REALTY, INC. 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 of (I.R.S. Employer Identification No.) incorporation or organization) 400 East South Street, Suite 500 Orlando, Florida 32801 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (407) 423-7348 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of exchange on which registered Common Stock, $.01 par value New York Stock Exchange Securities registered pursuant to section 12(g) of the Act: None (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Sities Exchange Act of 1934 during the preceding 12 months (or 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 9, 1998, was $475,609,877. The number of shares of common stock outstanding as of March 9, 1998, was 28,877,762. DOCUMENTS INCORPORATED BY REFERENCE: 1. Registrant incorporates by reference portions of the Commercial Net Lease Realty, Inc. Annual Report to Shareholders for the year ended December 31, 1997 (Items 5, 6, 7 and 8 of Part II). 2. Registrant incorporates by reference portions of the Commercial Net Lease Realty, Inc. Proxy Statement for the 1998 Annual Meeting of Shareholders (Items 10, 11, 12 and 13 of Part III). PART I Item 1. Business Commercial Net Lease Realty, Inc., a Maryland corporation (the "Registrant" or the "Company"), is a real estate investment trust (a "REIT") formed in 1984 that acquires, develops, owns and manages a diversified portfolio of high-quality, freestanding properties leased to major retail businesses generally under full-credit, long-term commercial net leases. The Company's strategy is to invest in single-tenant, freestanding retail properties with purchase prices of generally up to $7.5 million, which typically are located along intensive commercial corridors near traffic generators, such as regional malls, business developments and major thoroughfares. Management believes that these types of properties when leased to high-quality tenants with significant market presence provide attractive opportunities for a stable current return and the potential for capital appreciation. In management's view, these types of properties also provide the Company with flexibility in use and tenant selection when the Properties are re-let. The Company will hold its properties until it determines that the sale or other disposition of the properties is advantageous in view of the Company's investment objectives. In deciding whether to sell properties, the Company will consider factors such as potential capital appreciation, net cash flow and federal income tax considerations. Properties During the year ended December 31, 1997, the Company borrowed $152,600,000 under its credit facility to acquire 47 properties and three buildings which were developed by the tenant on land parcels owned by the Company. As of December 31, 1997, the Company owned 236 properties (the "Properties") that are leased to major businesses, including Academy, Babies "R" Us, Barnes & Noble, Best Buy, Borders, Burger King, CompUSA, Computer City, Denny's, Dick's Clothing & Sporting Goods, Eckerd, Food 4 Less, Food Lion, Golden Corral, Good Guys, Hardee's, Hi-Lo Automotive, HomePlace, International House of Pancakes, Kash N' Karry, Levitz, Linens 'n Things, Luria's, Marshalls, Office Depot, OfficeMax, Oshman's, Pier 1 Imports, Robb & Stucky, Scotty's, Sears, Sports Authority, SuperValu and Waccamaw. The Company's Property portfolio was 100 percent leased at December 31, 1997. The Properties are leased under net leases pursuant to which the tenant typically will bear responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation. The leases of each of the Company's Properties require payment of base rent plus, generally, either percentage rent based on the tenant's gross sales or contractual increases in base rent. During 1997, two of the Company's lessees, Eckerd Corporation and Barnes & Noble Superstores, Inc., each accounted for more than ten percent of the Company's total rental income (including the Company's share of rental income from nine properties owned by the Company's unconsolidated partnership). As of December 31, 1997, Eckerd Corporation and Barnes & Noble Superstores, Inc. leased 43 Properties and 13 Properties, respectively (including four properties and one property, respectively, under leases with the Company's unconsolidated partnership). It is anticipated that, based on the minimum rental payments required by the leases, Eckerd Corporation and Barnes & Noble Superstores, Inc. will each continue to account for more than ten percent of the Company's total rental income in 1998. Any failure of these lessees could materially affect the Company's income. Three of the Company's tenants, HomePlace, Luria's and Levitz (the "Tenants"), have each filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, each of the Tenants has the right to reject or affirm one or more of its leases with the Company. As of December 31, 1997, HomePlace, Luria's and Levitz leased five, three and one Properties, respectively, which accounted for 4.5 percent of the Company's total rental and earned income for the year ended December 31, 1997. In February 1998, Luria's rejected each of its three leases with the Company. 1 Investment in Subsidiaries In November 1995, the Company formed two wholly owned subsidiaries, Net Lease Realty I, Inc. and Net Lease Realty II, Inc. and in June 1997, the Company formed two wholly-owned subsidiaries, Net Lease Realty III, Inc. and Net Lease Realty IV, Inc. Net Lease Realty I, Inc. and Net Lease Realty IV, Inc. were formed to facilitate the acquisition of certain properties. Net Lease Realty II, Inc. was utilized to facilitate the acquisition of CNL Realty Advisors, Inc., the Company's advisor, and Net Lease Realty III, Inc. is the general partner of and holds a 20 percent interest in Net Lease Institutional Realty, L.P. Each of the wholly-owned subsidiaries is a qualified real estate investment trust subsidiary as defined under Internal Revenue Code Section 856(i)(2). Investment in Partnership In September 1997, Net Lease Realty III, Inc., a wholly-owned subsidiary of the Company, entered into a limited partnership arrangement, Net Lease Institutional Realty L.P. (the "Partnership"), with the Northern Trust Company, as Trustee of the Retirement Plan for the Chicago Transit Authority Employees ("CTA") to acquire, own and manage nine properties. Net Lease Realty III, Inc. is the sole general partner (the "General Partner") with a 20 percent interest in the Partnership, and CTA is the sole limited partner (the "Limited Partner") with an 80 percent interest in the Partnership. Pursuant to the Partnership agreement, the General Partner is responsible for the management of the Partnership's properties. Net income and losses of the Partnership are to be allocated to the partners in accordance with their respective percentage interest in the Partnership. The Partnership secured a $12 million non-recourse mortgage on the Partnership's nine properties in September 1997 at 7.37% interest rate. As of December 31, 1997, the Partnership owned nine properties (the "Partnership Properties") leased to six major retail tenants. Generally, the leases of the Partnership Properties provide for initial terms of 15 to 20 years with annual base rent ranging from $182,600 to $730,400 and building sites ranging from 11,000 to 54,300 square feet. All of the Partnership Properties are leased under net leases pursuant to which the tenant typically will bear the responsibility for substantially all property costs and expenses related to on going maintenance and operation, including utilities, property taxes and insurance. Advisory Services From July 10, 1992 through December 31, 1997, the Company and CNL Realty Advisors, Inc. (the "Advisor") were party to an advisory agreement (the "Advisory Agreement"), pursuant to which the Advisor provided certain management, advisory and acquisition services. In accordance with the terms of the Advisory Agreement, the Advisor received an annual fee, payable monthly, equal to (i) seven percent of funds from operations, as defined below, up to $10,000,000, (ii) six percent of funds from operations in excess of $10,000,000 but less than $20,000,000 and (iii) five percent of funds from operations in excess of $20,000,000. For the purposes of the Advisory Agreement, funds from operations means net income of the Company before advisory fee excluding depreciation and amortization expense, extraordinary gains and losses, nonrecurring items of income and expense and non-cash lease accounting adjustments. Under the Advisory Agreement, the Advisor generally was responsible for administering the day-to-day investment operations of the Company, including investment analysis and development, acquisitions, due diligence, and asset management and accounting services. These duties included collecting rental payments, inspecting and managing the Properties, assisting the Company in responding to tenant inquiries and notices, providing information to the Company about the status of the leases and the Properties, maintaining the Company's accounting books and records, and preparing and filing various reports, returns or statements with various regulatory agencies. In addition, the Advisor served as the Company's consultant in connection with policy decisions to be made by the Board of Directors, managed the Company's Properties and rendered other services as the Board of Directors deemed appropriate. Historically, the Company did not have a large enough asset base to provide the economies of scale needed to efficiently support the extensive general and administrative expenses of an in-house management team. As a result, the Advisor had incurred the full expense of a management and acquisition team while receiving advisory and acquisition fees that have offset this expense. In 1997, however, due to the Company's historical and anticipated growth, management believed that the efficiencies derived from being externally advised had diminished and that it would be more cost effective to become self-administered. As a result, on May 15, 1997, the Board of Directors of the Company unanimously approved an agreement and plan of merger with the Advisor, which when approved 2 by the stockholders of the Company on December 18, 1997 at the 1997 annual meeting of stockholders, resulted in the Company becoming a self-administered and self-managed real estate investment trust (the "Advisor Transaction"). The Advisor Transaction was completed on January 1, 1998. The Agreement and Plan of Merger provided for the merger of the Advisor into a wholly owned subsidiary of the Company pursuant to which all of the outstanding common stock of the Advisor was exchanged for 220,000 shares of common stock of the Company and the right, based upon the Company's continued growth in assets for a period of up to five years, to receive up to 1,980,000 additional shares of the Company's common stock. In addition, upon the consummation of the Advisor Transaction, all personnel employed by the Advisor became employees of the Company. Following consummation of the Advisor Transaction, the Advisory Agreement (as defined above) and the obligation of the Company to pay any fees thereunder was terminated. For a complete description of the Advisor Transaction, see the Company's Proxy Statement dated November 13, 1997 for the Company's 1997 annual meeting of stockholders. Competition The Company generally competes with other REIT's, real estate limited partnerships and other investors, including but not limited to, insurance companies, pension funds and financial institutions, in the acquisition, leasing, financing and disposition of investments in net-leased retail properties. Employees Reference is made to Item 10. Directors and Executive Officers of the Registrant for a listing of the Company's Executive Officers. Item 2. Properties As of December 31, 1997, the Company owned 236 Properties located in 36 states that are leased to 48 major retail tenants. Reference is made to the Schedule of Real Estate and Accumulated Depreciation filed with this Report for a listing of the Properties and their respective costs. Description of Properties Land. The Company's Property sites range from approximately 12,000 to 583,000 square feet depending upon building size and local demographic factors. Sites purchased by the Company are in locations zoned for commercial use which have been reviewed for traffic patterns and volume. Land costs range from approximately $36,500 to $6,200,000. Buildings. The buildings generally are rectangular, single-story structures constructed from various combinations of stucco, steel, wood, brick and tile. Building sizes range from approximately 1,000 to 82,000 square feet. Building costs range from approximately $195,000 to $7,082,000 for each Property, depending upon the size of the building and the site and the area in which the Property is located. Generally, the Properties owned by the Company are freestanding, with paved parking areas. Leases. Although there are variations in the specific terms of the leases, the following is a summarized description of the general structure of the Company's leases. Generally, the leases of the Properties owned by the Company provide for initial terms of 15 to 20 years. As of December 31, 1997, the average remaining lease term was approximately 14 years. The Properties are generally leased under net leases pursuant to which the tenant typically will bear responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. In addition, the majority of the Company's leases provide that the tenant is responsible for roof and structural repairs. The leases of the Properties provide for annual base rental payments (payable in monthly installments) ranging from $21,000 to $1,032,000. Generally, the leases provide for either percentage rent or contractual increases in annual rent. Leases which provide for contractual increases in annual rent generally have increases which range from six to 12 percent after every five years of the lease term. In addition, for those leases which provide for the payment of percentage rent, such rent 3 is generally one to eight percent of the tenants' annual gross sales, less the amount of annual base rent payable in that lease year. As of December 31, 1997, leases representing approximately 83 percent of annual base rent include contractual increases, leases representing approximately 31 percent of annual base rent include percentage rent provisions and leases representing approximately 22 percent of annual base rent include both contractual and percentage rent provisions. Generally, the leases of the Properties provide for two, three or four five-year renewal options subject to the same terms and conditions as the initial lease. Some of the leases also provide that, in the event the Company wishes to sell the Property subject to that lease, the Company first must offer the lessee the right to purchase the Property on the same terms and conditions, and for the same price, as any offer which the Company has received for the sale of the Property. During 1997, two of the Company's lessees, Eckerd Corporation (drugstore) and Barnes & Noble Superstores, Inc. (bookstore) each accounted for more than ten percent of the Company's total rental income (including the Company's share of rental income from the Partnership Properties. As of December 31, 1997, Eckerd Corporation and Barnes & Noble Superstores, Inc. leased 43 and 13 Properties, respectively (including four properties and one property, respectively, under leases with the Partnership). As of December 31, 1997, two of the Company's lessees, Eckerd Corporation and Barnes & Noble Superstores, Inc., leased Properties representing 11.6% and 10.6%, respectively, of total assets. For information regarding the results of operations and financial condition of these two entities, refer to their Annual Reports on Forms 10-K as filed with the Securities and Exchange Commission for the year ended February 1, 1997. The Company generally competes with other REIT's, real estate limited partnerships and other investors, including but not limited to, insurance companies, pension funds and financial institutions in the acquisition leasing financing and disposition of investments in net-leased retail properties. Investments in real property create a potential for environmental liability on the part of the owner of such property from the presence or discharge of hazardous substances on the property. It is the Company's policy, as a part of its acquisition due diligence process, to obtain a Phase I environmental site assessment for each property and where warranted, a Phase II environmental site assessment. Phase I assessments involve site reconnaissance and review of regulatory files identifying potential areas of concern, whereas Phase II assessments involve some degree of soil and/or groundwater testing. The Company may acquire a property whose environmental site assessment indicates that a problem or potential problem exists, subject to a determination of the level of risk and potential cost of remediation. In such cases, the Company requires the seller and/or tenant to (i) remediate the problem prior to the Company's acquiring the property, (ii) indemnify the Company for environmental liabilities or (iii) agree to other arrangements deemed appropriate by the Company to address environmental conditions at the property. The Company has 14 properties currently under some level of environmental remediation. The seller or the tenant is generally contractually responsible for the cost of the environmental remediation for each of these properties. The Company's principal executive offices are located at 400 E. South Street, Suite 500, Orlando, Florida 32801. Item 3. Legal Proceedings The Company is a defendant in a law suit filed on December 20, 1994, in the Circuit Court, Knox County, Tennessee, and in the Circuit Court, Greene County, Tennessee, by the surviving spouse of a patron of the Company's Property in Tusculum, Tennessee. The plaintiff is alleging that the Company was negligent in the design and control of the parking lot on the Company's Property and is seeking damages of $2,500,000. Management intends to vigorously contest these claims and to seek full indemnification from the tenant. Management believes that, if the Company were to be held liable for any damages, such damages would be covered by insurance. 4 The Company is not a party to any other pending legal proceedings which, in the opinion of the Company and its general counsel, is likely to have a material adverse effect upon the Company's business or financial condition. 5 PART II Item 4. Submission of Matters to a Vote of Security Holders On December 18, 1997, the Company held its Annual Meeting of Shareholders (the "Annual Meeting"). At the Annual Meeting, the following nominees were elected to the Board of Directors of the Company: Messrs. Edward Clark (22,295,249 voted for and 1,763,157 abstained), Willoughby T. Cox, Jr. (22,298,014 voted for and 1,760,392 abstained), Clifford R. Hinkle (22,299,014 voted for and 1,758,849 abstained), Ted B. Lanier (22,276,413 voted for and 1,791,993 abstained), Robert A. Bourne (22,299,853 voted for and 1,758,553 abstained), James M. Seneff, Jr. (22,306,303 voted for and 1,752,103 abstained). In addition, the Shareholders voted to approve the Merger of CNL Realty Advisors, Inc. with and into Net Lease Realty II, Inc., a wholly-owned subsidiary of the Company (16,961,917 voted for, 216,667 voted against and 231,533 abstained) and to approve authorization of 90,000,000 shares of common stock (23,400,061 voted for, 425,126 voted against and 173,540 abstained). Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information responsive to this Item is contained in the section captioned "Share Price and Dividend Data" on page 27 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997; the information in such section is filed as an exhibit to this report and the cited portion of which is incorporated herein by reference. Item 6. Selected Financial Data Information responsive to this Item is contained in the section captioned "Historical Financial Highlights" on page four of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997; the information in such section is filed as an exhibit to this report and the cited portion of which is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information responsive to this Item is contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages six through 11 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997; the information in such section is filed as an exhibit to this report and the cited portion of which is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data Certain information responsive to this Item is contained in the section captioned "Consolidated Quarterly Financial Data" on page 26 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997; the information in such section is filed as an exhibit to this report and the cited portion of which is incorporated herein by reference. The financial statements of the Registrant, together with the report thereon of KPMG Peat Marwick LLP, appearing in the Annual Report to Shareholders for the year ended December 31, 1997, are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 6 PART III Item 10. Directors and Executive Officers of the Registrant Reference is made to the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsible to this Item is contained in the sections thereof captioned "Proposal I: Election of Directors - Nominees" and "Proposal I: Election of Directors - Executive Officers" and "Security Ownership," and the information in such sections is incorporated herein by reference. Item 11. Executive Compensation Reference is made to the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned "Proposal I: Election of Directors - Compensation of Directors" and "Proposal I: Executive Compensation," and the information in such sections is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Reference is made to the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned "Security Ownership," and the information in such section is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Reference is made to the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned "Certain Transactions," and the information in such section is incorporated herein by reference. 7 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this report. 1. Financial Statements Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Earnings for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements 2. Financial Statement Schedule Report of Independent Auditors' on Supplementary Information Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1997 Notes to Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1997 All other schedules are omitted because they are not applicable or because the required information is shown in the financial statements or the notes thereto. 3. Exhibits 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 ref- erence). 3.2 Bylaws of the Registrant, (filed as Exhibit 3(ii) to Amend- ment No. 2 to the Registrant's Registration No. 33-83110 on Form S-3, and incorporated herein by reference). 3.3 Articles of Amendment to the Articles of Incorporation of the Registrant (filed as Exhibit 3.3 to the Registrant's Form 10-Q for the quarter ended June 30, 1996, and incor- porated herein by reference). 3.4 Articles of Amendment to the Articles of Incorporation of the Registrant (filed as Exhibit 3.4 to the Registrant's Current Report on Form 8-K dated February 18, 1998, and filed with the Securities and Exchange Commission on February 19, 1998, 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). 8 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 and renewed January 1, 1997 (filed as Exhibit 10.04 to Amendment No. 1 to the Registrant's Registration Statement No. 33-61214 on Form S-2, and incor- porated 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). 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). 10.10 Second Renewal and Modification Promissory Note, dated September 3, 1996, by and among Registrant and First Union National Bank of Florida, as the Agent, relating to $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). 13 Annual Report to Shareholders for the year ended December 31, 1997 (previously filed). 9 23 Consent of Independent Accountants dated March 16, 1998 (previously filed). (b) The Registrant filed one report on Form 8-K on December 19, 1997, for the purpose of incorporating certain items by reference into its registration statement on Form S-3 dated December 19, 1997, and one report on form 8-K on December 22, 1997, reporting the approval by the stockholders of the Registrant of the Agreement and Plan of Merger by and among the Registrant, Net Lease Realty II, Inc. and the Stockholders of CNL Realty Advisors, Inc. 10 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on the 16th day of March, 1998. COMMERCIAL NET LEASE REALTY, INC. By: /s/ James M. Seneff, Jr. --------------------------- JAMES M. SENEFF, JR. Chairman of the Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ----- /s/ James M. Seneff, Jr. Chairman of the Board of March 16, 1998 - -------------------------- Directors Chief Executive James M. Seneff, Jr. Officer (Principal Executive Officer) /s/ Robert A. Bourne Vice Chairman of the Board March 16, 1998 - ------------------------- of Directors Robert A. Bourne /s/ Edward Clark Director March 16, 1998 - -------------------------- Edward Clark /s/ Willoughby T. Cox, Jr. Director March 16, 1998 - -------------------------- Willoughby T. Cox, Jr. /s/ Clifford R. Hinkle Director March 16, 1998 - -------------------------- Clifford R. Hinkle /s/ Ted B. Lanier Director March 16, 1998 - -------------------------- Ted B. Lanier /s/ Gary M. Ralston President March 16, 1998 - -------------------------- Gary M. Ralston /s/ Kevin B. Habicht Chief Financial Officer March 16, 1998 - -------------------------- (Principal Financial and Kevin B. Habicht Accounting Officer), Secretary & Treasurer Report of Independent Auditors' on Supplementary Information The Board of Directors Commercial Net Lease Realty, Inc.: Under date of January 16, 1998, we reported on the consolidated balance sheets of Commercial Net Lease Realty, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, as contained in the 1997 annual report to stockholders. These consolidated financial statements and our report thereon are both included in Item 14(a)1 of Form 10-K and incorporated by reference in the annual report on Form 10-K for the year 1997. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule at December 31, 1997. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth herein. /s/ KPMG Peat Marwick LLP Orlando, Florida January 16, 1998
Initial Cost to Company ------------------------------- Encumbrances Building and (1) Land Improvements - --------------------------- -------------------- ---------------- ----------------- Properties the Company has Invested in Under Under Operating Leases: Academy: Houston, TX - 1,074,232 - Houston, TX - 699,165 - N. Richland Hills, TX - 1,307,655 - Houston, TX - 3,086,610 - Houston, TX - 795,005 - Baton Rouge, LA - 1,547,501 - Babies "R" Us: Arlington, TX - 830,689 2,611,867 Barnes & Noble: Lakeland, FL - 1,070,902 1,516,983 Brandon, FL 1,574,542 (k) 1,476,407 1,527,150 Denver, CO - 3,244,785 2,722,087 Houston, TX - 3,307,562 2,396,024 Cary, NC - 2,778,458 2,650,008 Plantation, FL - 3,616,357 - Lafayette, LA - 1,204,279 2,301,983 Oklahoma City, OK - 1,688,556 2,311,487 Daytona, FL - 2,587,451 2,052,643 Freehold, NJ - 2,917,219 2,260,663 Dayton, OH - 1,412,614 3,223,467 Redding, CA - 497,179 1,625,702 Best Buy: Corpus Christi, TX 1,268,679 (j) 818,448 896,395 Brandon, FL - 2,985,156 2,772,137 Evanston, IL - 1,850,996 - Cuyahoga Falls, OH - 3,708,980 2,359,377 Rockville, MD - 6,233,342 3,418,783 Fairfax, VA - 3,052,477 3,218,018 St. Petersburg, FL - 4,031,744 2,959,316 Blockbuster: Dallas, TX - 346,548 1,963,773 Conyers, GA - 320,029 556,282 Borders Books & Music: Wilmington, DE 4,766,983 (k) 3,030,769 6,061,538 Richmond, VA 2,504,467 (k) 2,177,310 2,599,587 Ft. Lauderdale, FL - 3,164,984 3,934,577 Bangor, ME - 1,546,915 2,486,761 Altamonte Spgs, FL - 1,947,198 - Burger King: Asheboro, NC - 420,508 815,190 Galliano, LA - 249,001 1,130,506 John's Island, SC - 385,517 698,309 Lake Charles, LA - 272,381 965,713 Lancaster, OH - 220,846 582,815 Natchez, MS - 206,717 653,530 Tappahannock, VA - 289,840 572,779 Warren, MI - 298,817 785,031 Manchester, NH - 619,037 428,757 Rochester, NH - 216,652 779,450 Columbus, OH - 357,114 407,093 Coon Rapids, MN - 322,658 544,936 Opeleousas, LA - 460,374 824,510 St. Paul, MN - 225,297 542,847 Checkers: Orlando, FL - 256,568 - CompUSA: Mission Viejo, CA - 2,706,352 1,368,966 Computer City: Miami, FL 2,401,168 (k) 2,713,192 1,866,676 Baton Rouge, LA - 609,069 913,603 Anchorage, AK - 928,321 1,662,584 Richmond, VA - 888,772 1,948,036 Dave's: Maple Heights, OH - 1,034,758 2,874,414 Denny's: Duncan, SC - 219,703 - Greensboro, NC - 265,915 493,407 Greenville, SC - 344,817 400,895 Houston, TX - 289,036 572,985 Landrum, SC - 155,429 - Mooresville, NC - 307,299 - Santee, SC - 244,284 312,045 Topeka, KS - 414,686 - Winter Springs, FL - 555,232 - Dick's Clothing: Taylor, MI - 1,920,032 3,526,868 White Marsh, MD - 2,680,532 3,916,889 Eckerd: San Antonio, TX 642,231 (k) 440,985 - Dallas, TX 618,752 (k) 541,493 - Garland, TX 497,889 (k) 239,014 - Arlington, TX 526,927 (k) 368,964 - Millville, NJ 653,548 (k) 417,603 - Atlanta, GA 584,047 (k) 445,593 - Mantua, NJ 679,434 (k) 344,022 - Amarillo, TX 604,575 (k) 329,231 - Amarillo, TX 785,743 (k) 650,864 - Glassboro, NJ 745,401 (k) 534,243 - Kissimmee , FL 868,354 (k) 715,480 - Colleyville, TX 959,730 (k) 756,472 - Tampa, FL - 604,682 - Douglasville, GA - 413,439 995,209 Lafayette, LA - 967,528 - Moore, OK - 414,738 - Midwest City, OK - 1,080,637 1,103,351 Tallhassee, FL - 691,523 - Irving, TX - 1,000,222 - Snellville, GA - 486,272 1,320,087 Jasper, FL - 291,147 - Williston, FL - 622,403 - Pantego, TX - 1,016,062 1,448,911 Conyers, GA - 574,666 998,900 Norman, OK - 1,065,562 - Chattanooga , TN - 474,267 - Stone Mountain, GA - 638,643 1,111,064 Arlington, TX - 1,962,500 - Leavenworth, KS - 650,170 - Augusta, GA - 568,606 1,326,748 Riverdale, GA - 1,088,896 1,707,448 Morrow, GA - 550,457 1,248,422 Food 4 Less: Lemon Grove, CA - 3,695,816 - Golden Corral: Woodstock, GA (e) - 200,680 328,450 Edenton, NC - 36,578 318,481 Rockledge, FL (e) - 120,593 340,889 Gilmer, TX (e) - 116,815 296,454 Bonham, TX (e) - 128,451 344,170 Center, TX (e) - 103,187 308,859 Leitchfield, KY (e) - 73,660 306,642 Marietta, GA (e) - 156,190 346,509 Silsbee, TX (e) - 132,802 302,052 Atlanta, TX (e) - 88,457 368,317 Vernon, TX (e) - 105,798 328,943 Abbeville, LA (e) - 98,577 362,416 Fredricksburg, TX - 169,984 321,189 Clanton, AL (e) - 113,017 296,921 Pleasanton, TX (e) - 139,694 316,070 Bowie, TX (e) - 57,824 311,544 Jacksonville, TX - 115,276 318,196 Lake Placid, FL (e) - 115,113 305,074 Ennis, TX - 153,701 366,639 Melbourne, FL (e) - 193,447 341,351 Franklin, LA (e) - 105,840 396,831 Franklin, VA - 100,808 424,164 Minden, LA (e) - 86,120 402,364 Durant, OK - 140,862 411,135 The Good Guys: Foothill Ranch, CA - 1,456,113 2,505,022 Valencia,CA - 1,622,252 2,895,298 Riverside, CA - 1,722,736 2,761,220 Hardee's: Chalkville, AL - 170,834 457,167 Columbia, TN - 226,300 - Gulf Shores, AL - 348,281 595,164 Horn Lake, MS - 302,787 - Johnson City, TN - 215,567 - Mobile, AL - 336,696 - Petal, MS - 277,104 415,193 Rock Hill, SC - 216,777 466,450 Tusculum, TN - 182,349 507,293 Warrior, AL - 177,659 - West Point, MS - 173,386 - Hi-Lo Automotive: Mesquite, TX - 233,420 513,523 Arlington, TX - 295,331 571,609 Ft. Worth, TX - 197,037 512,296 Garland, TX - 239,570 512,023 Houston, TX - 261,318 531,968 Dallas, TX - 281,347 543,937 Bastrop, TX - 197,905 383,144 Eagle Pass, TX - 256,745 455,841 Lake Worth, TX - 252,141 539,510 McAllen, TX - 265,177 605,397 Nacogdoches, TX - 190,324 522,232 San Antonio, TX - 200,510 643,741 Temple, TX - 177,451 587,755 Universal City, TX - 247,264 570,677 HomePlace: Altamonte Spgs, FL - 2,906,409 4,877,225 White Marsh, MD - 3,625,792 - Ft. Myers, FL - 1,956,579 4,045,196 Bowie, MD - 1,965,508 - International House of Pancakes: Stafford, TX 500,126 (k) 382,084 - Sunset Hills, MO 528,585 (k) 271,853 - Las Vegas, NV 594,295 (k) 519,947 - Ft. Worth, TX 552,880 (k) 430,896 - Arlington, TX 530,916 (k) 404,512 - Matthews, NC 543,010 (k) 380,043 - Phoenix, AZ 546,664 (k) 483,374 - Just for Feet: Albuquerque, NM - 1,441,777 2,335,475 Kroger: Columbus, OH - 780,838 520,559 Linens 'n Things: Freehold, NJ 2,931,484 (j) 1,753,766 2,208,651 Luria's: Coral Gables, FL - 1,782,346 - South Miami, FL - 1,379,229 - Tampa, FL - 2,127,503 1,521,730 Marshalls: Freehold, NJ 3,431,576 (j) 2,052,946 2,585,432 Office Depot: Arlington, TX 1,052,484 (k) 596,024 1,411,432 OfficeMax: Corpus Christi, TX 1,439,600 (j) 893,270 978,344 Dallas, TX 1,482,890 (k) 1,118,500 1,709,891 Cincinnati, OH 1,110,461 (k) 543,489 1,574,551 Evanston, IL 1,900,778 (k) 1,867,831 1,757,618 Altamonte Spgs, FL - 1,689,793 3,050,160 Pompano Beach, FL - 2,266,908 1,904,803 Cutler Ridge, FL - 989,370 1,479,119 Sacramento, CA - 1,144,167 2,961,206 Salinas, CA - 1,353,217 1,829,325 Redding, CA - 667,174 2,181,563 Kelso, WA - 1,379,460 - Oshman's Sporting Goods: Dallas, TX - 1,311,440 - Petco: Grand Forks, ND - 306,629 909,671 Pier 1 Imports: Dallas, TX - 189,010 1,071,054 Memphis, TN - 713,319 821,770 Sanford, FL - 737,901 - Pizza Hut: Orlando, FL - 220,632 258,483 Rally's: Toledo, OH - 125,882 319,770 Robb & Stucky: Ft. Myers, FL - 2,246,406 6,390,295 Roger & Marv's: Kenosha, WI - 1,917,607 3,431,363 Ro-Jack's Food Store: Warwick, RI - 1,699,330 - Scotty's: Orlando, FL - 1,157,268 2,077,131 Orlando, FL - 1,044,796 2,011,952 Sears Homelife: Clearwater, FL 2,745,218 (j) 1,184,438 2,526,207 Orlando, FL 1,575,546 (k) 820,397 2,184,721 Pensacola, FL 1,820,864 633,125 1,595,405 Raleigh, NC 2,284,515 1,848,026 1,753,635 Tampa, FL 2,414,819 1,454,908 2,045,833 Shop & Save: Homestead, PA - 1,139,419 - Penn Hills, PA - 1,043,297 1,243,131 Sports Authority: Memphis, TN - 2,459,381 - SuperValu: Huntington, WV - 1,254,238 760,602 Top's: Lacey, WA - 2,777,449 7,082,150 Wacammaw: Fairfax, VA - 2,156,801 - Waremart: Eureka, CA - 3,135,036 5,470,607 Wendy's Old Fashioned Hamburger: Fenton, MO - 307,068 496,410 Longwood, FL - 333,335 194,926 Unallocated costs relating to construction in progress =============== ================ ================= 48,669,181 201,028,076 209,113,098 =============== ================ ================= Properties the Company has Invested in Under Direct Financing Leases: Academy: Houston, TX - - 1,924,740 Houston, TX - - 1,867,519 N. Richland Hills, TX - - 2,253,408 Houston, TX - - 2,112,335 Houston, TX - - 1,910,697 Baton Rouge, LA - - 2,405,466 Barnes & Noble: Plantation, FL - - 3,498,559 Best Buy: Evanston, IL - - 3,400,057 Borders: Altamonte Spgs, FL - - 3,267,579 Checkers: Orlando, FL - - 286,910 Denny's: Landrum, SC - - 374,684 Mooresville, NC - - 535,309 Duncan, SC - - 628,571 Akron, OH - 137,424 733,450 Topeka, KS - - 498,921 Winter Springs, FL - - 620,148 Eckerd: San Antonio, TX - - 783,974 Dallas, TX - - 638,684 Garland, TX - - 710,634 Arlington, TX - - 636,070 Millville, NJ - - 828,942 Atlanta. GA - - 668,390 Mantua, NJ - - 951,795 Vineland, NJ 707,459 (k) 286,231 1,063,142 Amarillo, TX - - 849,071 Amarillo, TX - - 869,846 Amarillo, TX 513,506 (k) 158,851 855,348 Glassboro, NJ - - 887,497 Kissimmee , FL - - 933,852 Colleyville, TX - - 1,076,066 Alice,TX 521,052 (k) 189,187 804,963 Tampa, FL - - 1,090,532 Lafayette, LA - - 949,128 Moore, OK - - 879,296 Tallhassee, FL - - 1,274,147 East Point, GA - 336,610 1,173,529 Irving, TX - - 1,228,436 Ft. Worth, TX - 399,592 2,529,969 Williston, FL - - 355,757 Jasper, FL - - 347,474 Oklahoma City, OK - (m) 1,365,125 Oklahoma City, OK - (m) 1,419,093 Norman, OK - - 1,225,477 Chattanooga , TN - - 1,344,240 Food 4 Less: Lemon Grove, CA - - 4,068,179 Food Lion: Keystone Hts, FL 1,014,283 (k) 88,604 1,845,988 Chattanooga, TN 1,068,267 (k) 336,488 1,701,072 Lynchburg, VA 1,333,443 (j) 128,216 1,674,167 Martinsburg, WV 1,044,497 (k) 448,648 1,543,573 Good Guys: Stockton, CA 1,864,093 (k) 580,609 2,974,868 Portland, OR - 817,574 2,630,652 Hardee's: Mobile, AL - - 479,107 Warrior, AL - - 470,556 Horn Lake, MS - - 555,975 West Point, MS - - 517,424 Columbia, TN - - 584,927 Johnson City, TN - - 570,690 Iuka, MS - 130,258 505,363 Biscoe, NC - 60,301 479,984 Aynor, SC - 44,871 521,192 Hi-Lo Automotive: Copperas Cove, TX - 116,637 476,331 Ft. Worth, TX - 92,779 607,971 Baton Rouge, LA - 89,954 508,146 Lake Jackson, TX - 120,313 609,300 Edinberg, TX - 97,056 418,926 Pantego, TX - 154,368 505,323 Ft. Worth, TX - 91,373 548,238 Pharr, TX - 94,576 472,880 Baton Rouge, LA - 122,349 527,930 Houston, TX - 37,508 596,069 HomePlace: Arlington, TX - 752,840 4,045,374 Bowie, MD - - 4,262,338 International House of Pancakes: Stafford, TX - - 571,832 Sunset Hills, MO - - 736,345 Las Vegas, NV - - 613,582 Ft. Worth, TX - - 623,641 Arlington, TX - - 608,132 Matthews, NC - - 655,668 Phoenix, AZ - - 559,307 Kash N' Karry: Brandon, FL - 1,234,519 3,255,257 Levitz: Tempe, AZ - 634,444 2,225,991 Luria's: South Miami, FL - - 1,756,808 Coral Gables, FL - - 1,692,012 Oshman's Sporting Goods: Dallas, TX - - 2,658,976 Ro-Jack's Food Store: Warwick, RI - - 2,978,154 Shop & Save: Homestead, PA - - 2,578,098 Wacammaw: Fairfax, VA - - 3,356,493 =============== ================ =============== 8,066,600 7,782,180 113,631,669 =============== ================ ===============
COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1997 Costs Capitalized Subsequent to Gross Amount at Which Acquisition Carried at Close of Period (b) --------------------------- ------------------------------------------------------- Improve- Carrying Building and ments Costs Land Improvements Total - ----------------------------------- -------------- ---------- ----------------- ----------------- ---------------- Properties the Company has Invested in Under Under Operating Leases: Academy: Houston, TX - - 1,074,232 (c) 1,074,232 Houston, TX - - 699,165 (c) 699,165 N. Richland Hills, TX - - 1,307,655 (c) 1,307,655 Houston, TX - - 2,098,895 (c) 2,098,895 Houston, TX - - 795,005 (c) 795,005 Baton Rouge, LA - - 1,547,501 (c) 1,547,501 Babies "R" Us: Arlington, TX - - 830,689 2,611,867 3,442,556 Barnes & Noble: Lakeland, FL - - 1,070,902 1,516,983 2,587,885 Brandon, FL - - 1,476,407 1,527,150 3,003,557 Denver, CO - - 3,244,785 2,722,087 5,966,872 Houston, TX - - 3,307,562 2,396,024 5,703,586 Cary, NC - - 2,778,458 2,650,008 5,428,466 Plantation, FL - - 3,616,357 (c) 3,616,357 Lafayette, LA - - 1,204,279 2,301,983 3,506,262 Oklahoma City, OK - - 1,688,556 2,311,487 4,000,043 Daytona, FL - - 2,587,451 2,052,643 4,640,094 Freehold, NJ - - 2,917,219 2,260,663 5,177,882 Dayton, OH - - 1,412,614 3,223,467 4,636,081 Redding, CA - - 497,179 1,625,702 2,122,881 Best Buy: Corpus Christi, TX 12,222 - 818,448 908,617 1,727,065 Brandon, FL - - 2,985,156 2,772,137 5,757,293 Evanston, IL - - 1,850,996 (c) 1,850,996 Cuyahoga Falls, OH - - 3,708,980 2,359,377 6,068,357 Rockville, MD - - 6,233,342 3,418,783 9,652,125 Fairfax, VA - - 3,052,477 3,218,018 6,270,495 St. Petersburg, FL - - 4,031,744 2,959,316 6,991,060 Blockbuster: Dallas, TX 39,243 - 346,548 2,003,016 2,349,564 Conyers, GA - - 320,029 556,282 876,311 Borders Books & Music: Wilmington, DE - - 3,030,769 6,061,538 9,092,307 Richmond, VA - - 2,177,310 2,599,587 4,776,897 Ft. Lauderdale, FL - - 3,164,984 3,934,577 7,099,561 Bangor, ME - - 1,546,915 2,486,761 4,033,676 Altamonte Spgs, FL - - 1,947,198 (c) 1,947,198 Burger King: Asheboro, NC - - 420,508 815,190 1,235,698 Galliano, LA - - 249,001 1,130,506 1,379,507 John's Island, SC - - 385,517 698,309 1,083,826 Lake Charles, LA - - 272,381 965,713 1,238,094 Lancaster, OH - - 220,846 582,815 803,661 Natchez, MS - - 206,717 653,530 860,247 Tappahannock, VA - - 289,840 572,779 862,619 Warren, MI - - 298,817 785,031 1,083,848 Manchester, NH - - 619,037 428,757 1,047,794 Rochester, NH - - 216,652 779,450 996,102 Columbus, OH - - 357,114 407,093 764,207 Coon Rapids, MN - - 322,658 544,936 867,594 Opeleousas, LA - - 460,374 824,510 1,284,884 St. Paul, MN - - 225,297 542,847 768,144 Checkers: Orlando, FL - - 256,568 (c) 256,568 CompUSA: Mission Viejo, CA - - 2,706,352 1,368,966 4,075,318 Computer City: Miami, FL - - 2,713,192 1,866,676 4,579,868 Baton Rouge, LA - - 609,069 913,603 1,522,672 Anchorage, AK - - 928,321 1,662,584 2,590,905 Richmond, VA - - 888,772 1,948,036 2,836,808 Dave's: Maple Heights, OH - - 1,034,758 2,874,414 3,909,172 Denny's: Duncan, SC - - 219,703 (c) 219,703 Greensboro, NC - - 265,915 493,407 759,322 Greenville, SC - - 344,817 400,895 745,712 Houston, TX - - 289,036 572,985 862,021 Landrum, SC - - 155,429 (c) 155,429 Mooresville, NC - - 307,299 (c) 307,299 Santee, SC - - 244,284 312,045 556,329 Topeka, KS - - 414,686 (c) 414,686 Winter Springs, FL - - 555,232 (c) 555,232 Dick's Clothing: Taylor, MI - - 1,920,032 3,526,868 5,446,900 White Marsh, MD - - 2,680,532 3,916,889 6,597,421 Eckerd: San Antonio, TX - - 440,985 (c) 440,985 Dallas, TX - - 541,493 (c) 541,493 Garland, TX - - 239,014 (c) 239,014 Arlington, TX - - 368,964 (c) 368,964 Millville, NJ - - 417,603 (c) 417,603 Atlanta, GA - - 445,593 (c) 445,593 Mantua, NJ - - 344,022 (c) 344,022 Amarillo, TX - - 329,231 (c) 329,231 Amarillo, TX - - 650,864 (c) 650,864 Glassboro, NJ - - 534,243 (c) 534,243 Kissimmee , FL - - 715,480 (c) 715,480 Colleyville, TX - - 756,472 (c) 756,472 Tampa, FL - - 604,682 (c) 604,682 Douglasville, GA - - 413,439 995,209 1,408,648 Lafayette, LA - - 967,528 (c) 967,528 Moore, OK - - 414,738 (c) 414,738 Midwest City, OK - - 1,080,637 1,103,351 2,183,988 Tallhassee, FL - - 691,523 (c) 691,523 Irving, TX - - 1,000,222 (c) 1,000,222 Snellville, GA - - 486,272 1,320,087 1,806,359 Jasper, FL - - 291,147 (c) 291,147 Williston, FL - - 622,403 (c) 622,403 Pantego, TX - - 1,016,062 1,448,911 2,464,973 Conyers, GA - - 574,666 998,900 1,573,566 Norman, OK - - 1,065,562 (c) 1,065,562 Chattanooga , TN - - 474,267 (c) 474,267 Stone Mountain, GA - - 638,643 1,111,064 1,749,707 Arlington, TX 167,830 - 1,962,500 (g) 1,962,500 Leavenworth, KS 86,279 - 650,170 (g) 650,170 Augusta, GA - - 568,606 1,326,748 1,895,354 Riverdale, GA - - 1,088,896 1,707,448 2,796,344 Morrow, GA - - 550,457 1,248,422 1,798,879 Food 4 Less: Lemon Grove, CA - - 3,695,816 (c) 3,695,816 Golden Corral: Woodstock, GA (e) - - 200,680 328,450 529,130 Edenton, NC - - 36,578 318,481 355,059 Rockledge, FL (e) - - 120,593 340,889 461,482 Gilmer, TX (e) - - 116,815 296,454 413,269 Bonham, TX (e) - - 128,451 344,170 472,621 Center, TX (e) - - 103,187 308,859 412,046 Leitchfield, KY (e) - - 73,660 306,642 380,302 Marietta, GA (e) - - 156,190 346,509 502,699 Silsbee, TX (e) - - 132,802 302,052 434,854 Atlanta, TX (e) - - 88,457 368,317 456,774 Vernon, TX (e) - - 105,798 328,943 434,741 Abbeville, LA (e) - - 98,577 362,416 460,993 Fredricksburg, TX - - 169,984 321,189 491,173 Clanton, AL (e) - - 113,017 296,921 409,938 Pleasanton, TX (e) - - 139,694 316,070 455,764 Bowie, TX (e) - - 57,824 311,544 369,368 Jacksonville, TX - - 115,276 318,196 433,472 Lake Placid, FL (e) - - 115,113 305,074 420,187 Ennis, TX - - 153,701 366,639 520,340 Melbourne, FL (e) - - 193,447 341,351 534,798 Franklin, LA (e) - - 105,840 396,831 502,671 Franklin, VA - - 93,719 424,164 517,883 Minden, LA (e) - - 86,120 402,364 488,484 Durant, OK - - 140,862 411,135 551,997 The Good Guys: Foothill Ranch, CA - - 1,456,113 2,505,022 3,961,135 Valencia,CA - - 1,622,252 2,895,298 4,517,550 Riverside, CA - - 1,722,736 2,761,220 4,483,956 Hardee's: Chalkville, AL - - 170,834 457,167 628,001 Columbia, TN - - 226,300 (c) 226,300 Gulf Shores, AL - - 348,281 595,164 943,445 Horn Lake, MS - - 302,787 (c) 302,787 Johnson City, TN - - 215,567 (c) 215,567 Mobile, AL - - 336,696 (c) 336,696 Petal, MS - - 277,104 415,193 692,297 Rock Hill, SC - - 216,777 466,450 683,227 Tusculum, TN - - 182,349 507,293 689,642 Warrior, AL - - 177,659 (c) 177,659 West Point, MS - - 173,386 (c) 173,386 Hi-Lo Automotive: Mesquite, TX - - 233,420 513,523 746,943 Arlington, TX - - 295,331 571,609 866,940 Ft. Worth, TX - - 197,037 512,296 709,333 Garland, TX - - 239,570 512,023 751,593 Houston, TX - - 261,318 531,968 793,286 Dallas, TX - - 281,347 543,937 825,284 Bastrop, TX - - 197,905 383,144 581,049 Eagle Pass, TX - - 256,745 455,841 712,586 Lake Worth, TX - - 252,141 539,510 791,651 McAllen, TX - - 265,177 605,397 870,574 Nacogdoches, TX - - 190,324 522,232 712,556 San Antonio, TX - - 200,510 643,741 844,251 Temple, TX - - 177,451 587,755 765,206 Universal City, TX - - 247,264 570,677 817,941 HomePlace: Altamonte Spgs, FL - - 2,906,409 4,877,225 7,783,634 White Marsh, MD 2,401,918 - 3,625,792 (g) 3,625,792 Ft. Myers, FL - - 1,956,579 4,045,196 6,001,775 Bowie, MD - - 1,965,508 (c) 1,965,508 International House of Pancakes: Stafford, TX - - 340,561 (c) 340,561 Sunset Hills, MO - - 271,853 (c) 271,853 Las Vegas, NV - - 519,947 (c) 519,947 Ft. Worth, TX - - 430,896 (c) 430,896 Arlington, TX - - 404,512 (c) 404,512 Matthews, NC - - 380,043 (c) 380,043 Phoenix, AZ - - 483,374 (c) 483,374 Just for Feet: Albuquerque, NM - - 1,441,777 2,335,475 3,777,252 Kroger: Columbus, OH - - 780,838 520,559 1,301,397 Linens 'n Things: Freehold, NJ - - 1,753,766 2,208,651 3,962,417 Luria's: Coral Gables, FL - - 1,782,346 (c) 1,782,346 South Miami, FL - - 1,379,229 (c) 1,379,229 Tampa, FL - - 2,127,503 1,521,730 3,649,233 Marshalls: Freehold, NJ - - 2,052,946 2,585,432 4,638,378 Office Depot: Arlington, TX - - 596,024 1,411,432 2,007,456 OfficeMax: Corpus Christi, TX 76,664 - 893,270 1,055,008 1,948,278 Dallas, TX - - 1,118,500 1,709,891 2,828,391 Cincinnati, OH - - 543,489 1,574,551 2,118,040 Evanston, IL - - 1,867,831 1,757,618 3,625,449 Altamonte Spgs, FL - - 1,689,793 3,050,160 4,739,953 Pompano Beach, FL - - 2,266,908 1,904,803 4,171,711 Cutler Ridge, FL - - 989,370 1,479,119 2,468,489 Sacramento, CA - - 1,144,167 2,961,206 4,105,373 Salinas, CA - - 1,353,217 1,829,325 3,182,542 Redding, CA - - 667,174 2,181,563 2,848,737 Kelso, WA 1,079,000 - 1,379,460 (g) 1,379,460 Oshman's Sporting Goods: Dallas, TX - - 1,311,440 (c) 1,311,440 Petco: Grand Forks, ND - - 306,629 909,671 1,216,300 Pier 1 Imports: Dallas, TX 20,710 - 189,010 1,091,764 1,280,774 Memphis, TN - - 713,319 821,770 1,535,089 Sanford, FL - - 737,901 (f) 737,901 Pizza Hut: Orlando, FL - - 220,632 258,483 479,115 Rally's: Toledo, OH - - 125,882 319,770 445,652 Robb & Stucky: Ft. Myers, FL - - 2,246,406 6,390,295 8,636,701 Roger & Marv's: Kenosha, WI - - 1,917,607 3,431,363 5,348,970 Ro-Jack's Food Store: Warwick, RI - - 1,699,330 (c) 1,699,330 Scotty's: Orlando, FL - - 1,157,268 2,077,131 3,234,399 Orlando, FL - - 1,044,796 2,011,952 3,056,748 Sears Homelife: Clearwater, FL 10,555 - 1,184,438 2,536,762 3,721,200 Orlando, FL - - 820,397 2,184,721 3,005,118 Pensacola, FL - - 633,125 1,595,405 2,228,530 Raleigh, NC - - 1,848,026 1,753,635 3,601,661 Tampa, FL - - 1,454,908 2,045,833 3,500,741 Shop & Save: Homestead, PA - - 1,139,419 (c) 1,139,419 Penn Hills, PA - - 1,043,297 1,243,131 2,286,428 Sports Authority: Memphis, TN 66,860 - 2,459,381 (g) 2,459,381 SuperValu: Huntington, WV - - 1,254,238 760,602 2,014,840 Top's: Lacey, WA - - 2,777,449 7,082,150 9,859,599 Wacammaw: Fairfax, VA - - 2,156,801 (c) 2,156,801 Waremart: Eureka, CA - - 3,135,036 5,470,607 8,605,643 Wendy's Old Fashioned Hamburger: Fenton, MO - - 307,068 496,410 803,478 Longwood, FL - - 333,335 194,926 528,261 Unallocated costs relating to construction in progress 208,295 ============== ========== ================= ================= ================ 4,169,576 - 199,991,749 209,272,492 409,264,241 ============== ========== ================= ================= ================ Properties the Company has Invested in Under Direct Financing Leases: Academy: Houston, TX - - - (c) (c) Houston, TX - - - (c) (c) N. Richland Hills, TX - - - (c) (c) Houston, TX - - - (c) (c) Houston, TX - - - (c) (c) Baton Rouge, LA - - - (c) (c) Barnes & Noble: Plantation, FL - - - (c) (c) Best Buy: Evanston, IL - - - (c) (c) Borders: Altamonte Spgs, FL - - - (c) (c) Checkers: Orlando, FL - - - (c) (c) Denny's: Landrum, SC - - - (c) (c) Mooresville, NC - - - (c) (c) Duncan, SC - - - (c) (c) Akron, OH - - (d) (d) (d) Topeka, KS - - - (c) (c) Winter Springs, FL - - - (c) (c) Eckerd: San Antonio, TX - - - (c) (c) Dallas, TX - - - (c) (c) Garland, TX - - - (c) (c) Arlington, TX - - - (c) (c) Millville, NJ - - - (c) (c) Atlanta. GA - - - (c) (c) Mantua, NJ - - - (c) (c) Vineland, NJ - - (d) (d) (d) Amarillo, TX - - - (c) (c) Amarillo, TX - - - (c) (c) Amarillo, TX - - (d) (d) (d) Glassboro, NJ - - - (c) (c) Kissimmee , FL - - - (c) (c) Colleyville, TX - - - (c) (c) Alice,TX - - (d) (d) (d) Tampa, FL - - - (c) (c) Lafayette, LA - - - (c) (c) Moore, OK - - - (c) (c) Tallhassee, FL - - - (c) (c) East Point, GA - - (d) (d) (d) Irving, TX - - - (c) (c) Ft. Worth, TX - - (d) (d) (d) Williston, FL - - - (c) (c) Jasper, FL - - - (c) (c) Oklahoma City, OK - - (m) (c) (c) Oklahoma City, OK - - (m) (c) (c) Norman, OK - - - (c) (c) Chattanooga , TN - - - (c) (c) Food 4 Less: Lemon Grove, CA - - - (c) (c) Food Lion: Keystone Hts, FL - - (d) (d) (d) Chattanooga, TN - - (d) (d) (d) Lynchburg, VA - - (d) (d) (d) Martinsburg, WV - - (d) (d) (d) Good Guys: Stockton, CA - - (d) (d) (d) Portland, OR - - (d) (d) (d) Hardee's: Mobile, AL - - - (c) (c) Warrior, AL - - - (c) (c) Horn Lake, MS - - - (c) (c) West Point, MS - - - (c) (c) Columbia, TN - - - (c) (c) Johnson City, TN - - - (c) (c) Iuka, MS - - (d) (d) (d) Biscoe, NC - - (d) (d) (d) Aynor, SC - - (d) (d) (d) Hi-Lo Automotive: Copperas Cove, TX - - (d) (d) (d) Ft. Worth, TX - - (d) (d) (d) Baton Rouge, LA - - (d) (d) (d) Lake Jackson, TX - - (d) (d) (d) Edinberg, TX - - (d) (d) (d) Pantego, TX - - (d) (d) (d) Ft. Worth, TX - - (d) (d) (d) Pharr, TX - - (d) (d) (d) Baton Rouge, LA - - (d) (d) (d) Houston, TX - - (d) (d) (d) HomePlace: Arlington, TX - - (d) (d) (d) Bowie, MD - - - (c) (c) International House of Pancakes: Stafford, TX - - - (c) (c) Sunset Hills, MO - - - (c) (c) Las Vegas, NV - - - (c) (c) Ft. Worth, TX - - - (c) (c) Arlington, TX - - - (c) (c) Matthews, NC - - - (c) (c) Phoenix, AZ - - - (c) (c) Kash N' Karry: Brandon, FL - - (d) (d) (d) Levitz: Tempe, AZ - - (d) (d) (d) Luria's: South Miami, FL - - - (c) (c) Coral Gables, FL - - - (c) (c) Oshman's Sporting Goods: Dallas, TX - - - (c) (c) Ro-Jack's Food Store: Warwick, RI - - - (c) (c) Shop & Save: Homestead, PA - - - (c) (c) Wacammaw: Fairfax, VA - - - (c) (c) ============== ========== - - ============== ==========
Life on Which Depreciation in Date Latest Income Accumulated of Con- Date Statement is Depreciation struction Acquired Computed - ----------------------------------- --------------- ---------- ---------- ----------------- Properties the Company has Invested in Under Under Operating Leases: Academy: Houston, TX - 1994 05/95 (c) Houston, TX - 1995 06/95 (c) N. Richland Hills, TX - 1996 08/95 (h) (c) Houston, TX - 1996 02/96 (h) (c) Houston, TX - 1996 06/96 (h) (c) Baton Rouge, LA - 1997 08/96 (h) (c) Babies "R" Us: Arlington, TX 98,489 1996 06/96 40 years Barnes & Noble: Lakeland, FL 112,733 1995 07/94 (h) 40 years Brandon, FL 113,699 1995 08/94 (h) 40 years Denver, CO 221,282 1994 09/94 40 years Houston, TX 134,785 1995 10/94 (h) 40 years Cary, NC 128,048 1996 05/95 (h) 40 years Plantation, FL - 1996 05/95 (h) (c) Lafayette, LA 97,834 1996 06/95 (h) 40 years Oklahoma City, OK 114,021 1996 06/95 (h) 40 years Daytona, FL 99,183 1996 09/95 (h) 40 years Freehold, NJ 108,637 1995 01/96 40 years Dayton, OH 50,367 1996 05/97 40 years Redding, CA 22,015 1997 06/97 40 years Best Buy: Corpus Christi, TX 92,987 1967 11/93 40 years Brandon, FL 60,640 1996 02/97 40 years Evanston, IL - 1994 02/97 (c) Cuyahoga Falls, OH 31,950 1970 06/97 40 years Rockville, MD 39,174 1995 07/97 40 years Fairfax, VA 30,169 1995 08/97 40 years St. Petersburg, FL 21,578 1997 09/97 40 years Blockbuster: Dallas, TX 186,430 1985 04/94 40 years Conyers, GA 7,533 1997 06/97 40 years Borders Books & Music: Wilmington, DE 458,689 1994 12/94 40 years Richmond, VA 166,446 1995 06/95 40 years Ft. Lauderdale, FL 180,900 1995 02/96 40 years Bangor, ME 94,980 1996 06/96 40 years Altamonte Spgs, FL - 1997 09/97 (c) Burger King: Asheboro, NC 112,089 1986 07/92 40 years Galliano, LA 155,445 1991 07/92 40 years John's Island, SC 96,017 1988 07/92 40 years Lake Charles, LA 132,786 1988 07/92 40 years Lancaster, OH 80,137 1987 07/92 40 years Natchez, MS 89,860 1986 07/92 40 years Tappahannock, VA 78,757 1987 07/92 40 years Warren, MI 107,942 1987 07/92 40 years Manchester, NH 49,234 1980 05/93 40 years Rochester, NH 89,503 1987 05/93 40 years Columbus, OH 45,826 1982 06/93 40 years Coon Rapids, MN 61,343 1990 06/93 40 years Opeleousas, LA 92,814 1989 06/93 40 years St. Paul, MN 61,107 1986 06/93 40 years Checkers: Orlando, FL - 1988 07/92 (c) CompUSA: Mission Viejo, CA 88,410 1994 02/94 (h) 40 years Computer City: Miami, FL 172,795 1994 04/94 40 years Baton Rouge, LA 45,741 1995 12/95 40 years Anchorage, AK 76,441 1995 02/96 40 years Richmond, VA 77,372 1996 05/96 40 years Dave's: Maple Heights, OH 62,878 1985 02/97 40 years Denny's: Duncan, SC - 1992 05/93 (c) Greensboro, NC 56,657 1992 05/93 40 years Greenville, SC 46,034 1985 05/93 40 years Houston, TX 65,795 1985 05/93 40 years Landrum, SC - 1992 05/93 (c) Mooresville, NC - 1992 05/93 (c) Santee, SC 35,832 1992 05/93 40 years Topeka, KS - 1989 06/93 (c) Winter Springs, FL - 1994 01/94 (c) Dick's Clothing: Taylor, MI 114,244 1996 08/96 40 years White Marsh, MD 126,878 1996 08/96 40 years Eckerd: San Antonio, TX - 1993 12/93 (c) Dallas, TX - 1994 01/94 (c) Garland, TX - 1994 02/94 (c) Arlington, TX - 1994 02/94 (c) Millville, NJ - 1994 03/94 (c) Atlanta, GA - 1994 03/94 (c) Mantua, NJ - 1994 06/94 (c) Amarillo, TX - 1994 12/94 (c) Amarillo, TX - 1994 12/94 (c) Glassboro, NJ - 1994 12/94 (c) Kissimmee , FL - 1995 04/95 (c) Colleyville, TX - 1995 06/95 (c) Tampa, FL - 1995 12/95 (c) Douglasville, GA 47,825 1996 01/96 40 years Lafayette, LA - 1995 01/96 (c) Moore, OK - 1995 01/96 (c) Midwest City, OK 50,348 1996 03/96 40 years Tallhassee, FL - 1996 06/96 (c) Irving, TX - 1996 12/96 (c) Snellville, GA 33,180 1996 12/96 40 years Jasper, FL - 1994 01/97 (c) Williston, FL - 1995 01/97 (c) Pantego, TX 19,621 1997 06/97 40 years Conyers, GA 13,527 1997 06/97 40 years Norman, OK - 1997 06/97 (c) Chattanooga , TN - 1997 09/97 (c) Stone Mountain, GA 8,102 1997 09/97 40 years Arlington, TX - (g) 11/97 (g) Leavenworth, KS - (g) 11/97 (g) Augusta, GA 1,382 1997 12/97 40 years Riverdale, GA 1,779 1997 12/97 40 years Morrow, GA 1,300 1997 12/97 40 years Food 4 Less: Lemon Grove, CA - 1996 07/95 (h) (c) Golden Corral: Woodstock, GA (e) 128,940 1984 11/84 35 years Edenton, NC 125,075 1984 11/84 35 years Rockledge, FL (e) 132,800 1984 12/84 35 years Gilmer, TX (e) 115,501 1984 12/84 35 years Bonham, TX (e) 134,079 1984 12/84 35 years Center, TX (e) 120,334 1984 12/84 35 years Leitchfield, KY (e) 119,460 1984 12/84 35 years Marietta, GA (e) 134,992 1984 12/84 35 years Silsbee, TX (e) 117,686 1984 12/84 35 years Atlanta, TX (e) 143,117 1985 01/85 35 years Vernon, TX (e) 124,528 1985 03/85 35 years Abbeville, LA (e) 137,200 1985 04/85 35 years Fredricksburg, TX 121,593 1985 04/85 35 years Clanton, AL (e) 112,406 1985 05/85 35 years Pleasanton, TX (e) 119,655 1985 05/85 35 years Bowie, TX (e) 117,942 1985 05/85 35 years Jacksonville, TX 120,460 1985 05/85 35 years Lake Placid, FL (e) 115,492 1985 05/85 35 years Ennis, TX 135,132 1985 07/85 35 years Melbourne, FL (e) 125,812 1985 07/85 35 years Franklin, LA (e) 146,260 1985 07/85 35 years Franklin, VA 114,777 1987 02/87 40 years Minden, LA (e) 88,853 1989 03/89 40 years Durant, OK 86,573 1989 08/89 40 years The Good Guys: Foothill Ranch, CA 62,962 1995 12/96 40 years Valencia,CA 63,335 1995 02/97 40 years Riverside, CA 43,144 1995 05/97 40 years Hardee's: Chalkville, AL 47,721 1992 10/93 40 years Columbia, TN - 1993 10/93 (c) Gulf Shores, AL 62,125 1993 10/93 40 years Horn Lake, MS - 1993 10/93 (c) Johnson City, TN - 1993 10/93 (c) Mobile, AL - 1993 10/93 (c) Petal, MS 43,339 1993 10/93 40 years Rock Hill, SC 48,690 1993 10/93 40 years Tusculum, TN 52,953 1993 10/93 40 years Warrior, AL - 1992 10/93 (c) West Point, MS - 1993 10/93 (c) Hi-Lo Automotive: Mesquite, TX 41,137 1994 10/94 40 years Arlington, TX 44,099 1993 11/94 40 years Ft. Worth, TX 39,521 1993 11/94 40 years Garland, TX 39,498 1993 11/94 40 years Houston, TX 41,043 1994 11/94 40 years Dallas, TX 40,941 1994 12/94 40 years Bastrop, TX 21,658 1994 09/95 40 years Eagle Pass, TX 25,768 1994 09/95 40 years Lake Worth, TX 30,497 1995 09/95 40 years McAllen, TX 34,222 1995 09/95 40 years Nacogdoches, TX 29,521 1995 09/95 40 years San Antonio, TX 36,389 1994 09/95 40 years Temple, TX 33,224 1989 09/95 40 years Universal City, TX 32,259 1995 09/95 40 years HomePlace: Altamonte Spgs, FL 35,563 1997 09/97 40 years White Marsh, MD - (g) 10/97 (g) Ft. Myers, FL 4,214 1997 12/97 40 years Bowie, MD - 1997 12/97 (c) International House of Pancakes: Stafford, TX - 1992 10/93 (c) Sunset Hills, MO - 1993 10/93 (c) Las Vegas, NV - 1993 12/93 (c) Ft. Worth, TX - 1993 12/93 (c) Arlington, TX - 1993 12/93 (c) Matthews, NC - 1993 12/93 (c) Phoenix, AZ - 1993 12/93 (c) Just for Feet: Albuquerque, NM 31,626 1997 06/97 40 years Kroger: Columbus, OH 11,387 1982 02/97 40 years Linens 'n Things: Freehold, NJ 184,500 1994 08/94 40 years Luria's: Coral Gables, FL - 1994 06/96 (c) South Miami, FL - 1988 06/96 (c) Tampa, FL 57,382 1994 06/96 40 years Marshalls: Freehold, NJ 215,974 1994 08/94 40 years Office Depot: Arlington, TX 138,122 1991 01/94 40 years OfficeMax: Corpus Christi, TX 108,276 1967 11/93 40 years Dallas, TX 171,106 1993 12/93 40 years Cincinnati, OH 137,099 1994 07/94 40 years Evanston, IL 112,536 1995 06/95 40 years Altamonte Spgs, FL 143,236 1995 01/96 40 years Pompano Beach, FL 90,724 1972 02/96 40 years Cutler Ridge, FL 55,775 1995 06/96 40 years Sacramento, CA 74,203 1996 12/96 40 years Salinas, CA 40,016 1995 02/97 40 years Redding, CA 29,542 1997 06/97 40 years Kelso, WA - (g) 09/97 (g) Oshman's Sporting Goods: Dallas, TX - 1994 03/94 (c) Petco: Grand Forks, ND 972 1996 12/97 40 years Pier 1 Imports: Dallas, TX 101,631 1980 04/94 40 years Memphis, TN 11,128 1997 09/96 (h) 40 years Sanford, FL - (f) 06/97 (f) Pizza Hut: Orlando, FL 54,552 1974 08/93 20.9 years Rally's: Toledo, OH 45,347 1989 07/92 38.8 years Robb & Stucky: Ft. Myers, FL 6,657 1997 12/97 40 years Roger & Marv's: Kenosha, WI 70,372 1992 02/97 40 years Ro-Jack's Food Store: Warwick, RI - 1992 02/97 (c) Scotty's: Orlando, FL 131,096 1995 06/95 40 years Orlando, FL 128,595 1995 06/95 40 years Sears Homelife: Clearwater, FL 290,797 1992 05/93 40 years Orlando, FL 251,018 1992 05/93 40 years Pensacola, FL 60,271 1994 06/96 40 years Raleigh, NC 66,248 1995 06/96 40 years Tampa, FL 77,287 1992 06/96 40 years Shop & Save: Homestead, PA - 1994 02/97 (c) Penn Hills, PA 27,194 1991 02/97 40 years Sports Authority: Memphis, TN - (g) 12/97 (g) SuperValu: Huntington, WV 16,638 1971 02/97 40 years Top's: Lacey, WA 154,922 1992 02/97 40 years Wacammaw: Fairfax, VA - 1995 12/95 (c) Waremart: Eureka, CA 119,670 1965 02/97 40 years Wendy's Old Fashioned Hamburger: Fenton, MO 82,859 1985 07/92 33 years Longwood, FL 34,179 1982 07/92 31.4 years Unallocated costs relating to construction in progress =============== 12,296,997 =============== Properties the Company has Invested in Under Direct Financing Leases: Academy: Houston, TX (c) 1994 05/95 (c) Houston, TX (c) 1995 06/95 (c) N. Richland Hills, TX (c) 1996 08/95 (h) (c) Houston, TX (c) 1996 02/96 (h) (c) Houston, TX (c) 1996 06/96 (h) (c) Baton Rouge, LA (c) 1997 08/96 (h) (c) Barnes & Noble: Plantation, FL (c) 1996 05/95 (h) (c) Best Buy: Evanston, IL (c) 1994 02/97 (c) Borders: Altamonte Spgs, FL (c) 1997 09/97 (c) Checkers: Orlando, FL (c) 1988 07/92 (c) Denny's: Landrum, SC (c) 1992 05/93 (c) Mooresville, NC (c) 1992 05/93 (c) Duncan, SC (c) 1992 05/93 (c) Akron, OH (d) 1992 05/93 (d) Topeka, KS (c) 1989 06/93 (c) Winter Springs, FL (c) 1994 01/94 (c) Eckerd: San Antonio, TX (c) 1993 12/93 (c) Dallas, TX (c) 1994 01/94 (c) Garland, TX (c) 1994 02/94 (c) Arlington, TX (c) 1994 02/94 (c) Millville, NJ (c) 1994 03/94 (c) Atlanta. GA (c) 1994 03/94 (c) Mantua, NJ (c) 1994 06/94 (c) Vineland, NJ (d) 1994 11/94 (d) Amarillo, TX (c) 1994 12/94 (c) Amarillo, TX (c) 1994 12/94 (c) Amarillo, TX (d) 1994 12/94 (d) Glassboro, NJ (c) 1994 12/94 (c) Kissimmee , FL (c) 1995 04/95 (c) Colleyville, TX (c) 1995 06/95 (c) Alice,TX (d) 1995 06/95 (d) Tampa, FL (c) 1995 12/95 (c) Lafayette, LA (c) 1995 01/96 (c) Moore, OK (c) 1995 01/96 (c) Tallhassee, FL (c) 1996 06/96 (c) East Point, GA (d) 1996 12/96 (d) Irving, TX (c) 1996 12/96 (c) Ft. Worth, TX (d) 1996 12/96 (d) Williston, FL (c) 1995 01/97 (c) Jasper, FL (c) 1994 01/97 (c) Oklahoma City, OK (c) 1997 06/97 (c) Oklahoma City, OK (c) 1997 06/97 (c) Norman, OK (c) 1997 06/97 (c) Chattanooga , TN (c) 1997 09/97 (c) Food 4 Less: Lemon Grove, CA (c) 1996 07/95 (h) (c) Food Lion: Keystone Hts, FL (d) 1993 05/93 (d) Chattanooga, TN (d) 1993 10/93 (d) Lynchburg, VA (d) 1994 01/94 (d) Martinsburg, WV (d) 1994 08/94 (d) Good Guys: Stockton, CA (d) 1991 07/94 (d) Portland, OR (d) 1996 05/96 (d) Hardee's: Mobile, AL (c) 1993 10/93 (c) Warrior, AL (c) 1992 10/93 (c) Horn Lake, MS (c) 1993 10/93 (c) West Point, MS (c) 1993 10/93 (c) Columbia, TN (c) 1993 10/93 (c) Johnson City, TN (c) 1993 10/93 (c) Iuka, MS (d) 1993 10/93 (d) Biscoe, NC (d) 1993 10/93 (d) Aynor, SC (d) 1993 10/93 (d) Hi-Lo Automotive: Copperas Cove, TX (d) 1994 10/94 (d) Ft. Worth, TX (d) 1993 10/94 (d) Baton Rouge, LA (d) 1994 10/94 (d) Lake Jackson, TX (d) 1994 10/94 (d) Edinberg, TX (d) 1993 10/94 (d) Pantego, TX (d) 1993 10/94 (d) Ft. Worth, TX (d) 1993 11/94 (d) Pharr, TX (d) 1993 11/94 (d) Baton Rouge, LA (d) 1994 12/94 (d) Houston, TX (d) 1982 09/95 (d) HomePlace: Arlington, TX (d) 1996 06/96 (d) Bowie, MD (c) 1997 12/97 (c) International House of Pancakes: Stafford, TX (c) 1992 10/93 (c) Sunset Hills, MO (c) 1993 10/93 (c) Las Vegas, NV (c) 1993 12/93 (c) Ft. Worth, TX (c) 1993 12/93 (c) Arlington, TX (c) 1993 12/93 (c) Matthews, NC (c) 1993 12/93 (c) Phoenix, AZ (c) 1993 12/93 (c) Kash N' Karry: Brandon, FL (d) 1997 10/96 (h) (d) Levitz: Tempe, AZ (d) 1994 01/95 (d) Luria's: South Miami, FL (c) 1988 06/96 (c) Coral Gables, FL (c) 1994 06/96 (c) Oshman's Sporting Goods: Dallas, TX (c) 1994 03/94 (c) Ro-Jack's Food Store: Warwick, RI (c) 1992 02/97 (c) Shop & Save: Homestead, PA (c) 1994 02/97 (c) Wacammaw: Fairfax, VA (c) 1995 12/95 (c)
COMMERCIAL NET LEASE REALTY, INC. NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1997
(a) Transactions in real estate and accumulated depreciation during 1997, 1996 and 1995, are summarized as follows: 1997 1996 1995 ----------- ----------- ----------- Land and Buildings: Balance at the Beginning of Period 277,109,358 161,454,129 109,852,431 Acquisitions 156,011,944 116,563,622 51,601,698 Sale of land and buildings (19,846,879) (908,393) - ----------- ----------- ----------- Balance at the Close of Period 413,274,423 277,109,358 161,454,129 =========== =========== =========== Accumulated Depreciation: Balance at the Beginning of Period 8,078,562 5,497,390 3,761,369 Sale of land and buildings (258,942) (222,940) - Depreciation expense 4,477,377 2,804,112 1,736,021 ----------- ------------ ---------- Balance at the Close of Period 12,296,997 8,078,562 5,497,390 ============ ============ ===========
(b) As of December 31, 1997, all of the leases are treated as operating leases for federal income tax purposes. As of December 31, 1997, the aggregate cost of the properties owned by the Company and its subsidaries for federal income tax purposes was $534,688,369. (c) For financial reporting purposes, the portion of the lease relating to the building has been recorded as a direct financing lease; therefore, depreciation is not applicable. (d) For financial reporting purposes, the lease for the land and building has been recorded as a direct financing lease; therefore, depreciation is not applicable. (e) The tenant of this property, Golden Corral Corporation, has subleased this property. Golden Corral Corporation continues to be responsible for complying with all the terms of the lease agreement and is continuing to pay rent on this property to the Company. (f) The Company owns only land for this property. Pursuant to the lease agreement, the Company is to purchase the building once construction is complete. (g) The Company owns only land for this property. The building is under construction; therefore, no depreciation was taken. (h) Date acquired represents acquisition date of land. Pursuant to the lease agreement, the Company purchased the buildings from the tenants upon completion of construction, generally within 12 months from the acquisition of the land. (i) During the years ended December 31, 1997, 1996 and 1995, the Company (i) incurred acquisition fees and expense reimbursement fees totalling $2,552,205, $2,278,306 and $937,363, respectively, paid to CNL Realty Advsisors, Inc. and (ii) acquired land and buildings purchased from affiliates of CNL Realty Advisors, Inc. for an aggregate cost of $39,322,795, $37,712,514, and $17,968,518, respectively. Such amounts are included in land and buildings on operating leases and net investments in direct financing leases. (j) Property is encumbered as a part of the Company's $13,150,000 long term, fixed rate mortgage and security agreement. (k) Property is encumbered as a part of the Company's $39,450,000 long term, fixed rate mortgage and security agreement. (l) Encumbered properties for which the portion of the lease relating to the land is accounted for as an operating lease and the portion of the lease relating to the building is accounted for as a direct financing lease, the total amount of the encumberance is listed with the land portion of the property. (m) The Company owns only the building for this property. The land is subject to a ground lease between the Company and an unrelated third party. EXHIBITS EXHIBIT INDEX Exhibit Number Page -------------- ---- 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(ii) to Amendment No. 2 to the Registrant's Registration No. 33- 83110 on Form S-3, and incorporated herein by reference). 3.3 Articles of Amendment to the Articles of Incorporation of the 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). 3.4 Articles of Amendment to the Articles of Incorporation of the Registrant (filed as Exhibit 3.4 to the Registrant's Current Report on Form 8-K dated February 18, 1998, and filed with the Securities and Exchange Commission on February 19, 1998, 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). 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 and renewed January 1, 1997 (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). 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). 10.10 Second Renewal and Modification Promissory Note, dated September 3, 1996, by and among Registrant and First Union National Bank of Florida, as the Agent, relating to $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). 13 Annual Report to Shareholders for the year ended December 31, 1997 (previously filed). 23 Consent of Independent Accountants dated March 16, 1998 (previously filed). (b) The Registrant filed one report on Form 8-K on December 19, 1997, for the purpose of incorporating certain items by reference into its registration statement on Form S-3 dated December 19, 1997, and one report on form 8-K on December 22, 1997, reporting the approval by the stockholders of the Registrant of the Agreement and Plan of Merger by and among the Registrant, Net Lease Realty II, Inc. and the Stockholders of CNL Realty Advisors, Inc. EX-13 2 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 ANNUAL REPORT TO SHAREHOLDERS 1997 ANNUAL REPORT - PAGE 4 TABLE OF CONTENTS - ----------------- Company Profile 1 To Our Shareholders 2 Historical Financial Highlights 4 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Diversification of Assets 11 Independent Auditors' Report 12 Consolidated Balance Sheets 13 Consolidated Statements of Earnings 14 Consolidated Statements of Stockholders' Equity 15 Consolidated Statements of Cash Flows 16 Consolidated Notes to Financial Statements 17 Consolidated Quarterly Financial Data 26 Share Price and Dividend Data 27 People - Service - Relationships 28 Directors and Executive Officers 32 Shareholder Information 31 1996 ANNUAL REPORT - PAGE 1 HISTORICAL FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) -------------------------------
[Picture 1] Candid photograph of Denise Reyes, employee of the Company 1997 1996 1995 1994 1993 ---------- ---------- --------- --------- --------- Gross Revenues $ 50,135 $ 33,369 $ 20,580 $ 12,289 $ 5,069 Net Earnings $ 30,385 $ 19,839 $ 12,707 $ 8,915 $ 3,522 Total Assets $ 537,014 $ 370,953 $ 219,257 $ 152,211 $ 91,619 Total Long-Term Debt $ 171,836 $ 116,956 $ 82,600 $ 14,800 $ - Total Equity $ 362,144 $ 252,574 $ 135,842 $ 136,665 $ 91,145 Cash Dividends Paid to Stock- holders $ 28,381 $ 18,868 $ 13,529 $ 9,897 $ 3,156 Weighted Average Shares Basic 24,070,697 16,798,918 11,663,672 8,606,138 3,711,807 Diluted 24,220,792 16,838,719 11,693,772 8,613,672 Per Share Information: Net Earnings Basic $ 1.26 $ 1.18 $ 1.09 $ 1.04 $ 0.95 Diluted $ 1.25 $ 1.18 $ 1.09 $ 1.04 Dividends $ 1.20 $ 1.18 $ 1.16 $ 1.14 $ 1.10 Other Data Funds from oper- ations (1) $ 34,230 $ 22,570 $ 14,443 $ 9,992 $ 3,884 Cash Flows from: Operating activities $ 34,010 $ 22,216 $ 14,140 $ 9,505 $ 3,750 Investing activities $ (167,002) $(144,247) $ (67,518) $ (79,081) $(48,609) Financing activities $ 133,742 $ 123,140 $ 52,609 $ 50,799 $ 64,236 Equity Market Capitalization ($ mil) $499.7 $329.6 $148.7 $142.9 $105.4
- -------------------------------------------------------------------------------- (1) The Company has recently adopted the NAREIT definition of funds from operations and has restated funds from operations for prior years in accordance with this definition. Funds from operations are net earnings excluding depreciation, gains and losses on the sale of real estate and nonrecurring items of income and expense of the Company, and the Company's share of these items from the Company's unconsolidated partnership. For purposes of this table, funds from operations exclude nonrecurring NYSE initial listing expenses of $111,638 in 1993. Funds from operations are generally considered by industry analysts to be the most appropriate measure of performance and do not necessarily represent cash provided by operating activities in accordance with generally accepted accounting principles and are not necessarily indicative of cash available to meet cash needs. Management considers funds from operations an appropriate measure of performance of an equity REIT because it is predicated on cash flow analysis. The Company's computation of funds from operations may differ from the methodology for calculating funds from operations utilized by other equity REIT's and, therefore, may not be comparable to such other REIT's. 1997 ANNUAL REPORT - PAGE 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Commercial Net Lease Realty, Inc., a Maryland corporation, is a real estate investment trust ("REIT") formed in 1984 that acquires, develops, owns and manages high-quality, freestanding properties leased to major retail businesses under long-term commercial net leases. As of December 31, 1997, Commercial Net Lease Realty, Inc. and its subsidiaries (the "Company") owned 236 properties (the "Properties") that are leased to major retail businesses, including Academy, Babies "R" Us, Barnes & Noble, Best Buy, Borders, Burger King, CompUSA, Computer City, Denny's, Dick's Clothing & Sporting Goods, Eckerd, Food 4 Less, Food Lion, Golden Corral, Good Guys, Hardee's, Hi-Lo Automotive, HomePlace, International House of Pancakes, Kash N' Karry, Levitz, Linens 'n Things, Luria's, Marshalls, Office Depot, OfficeMax, Oshman's, Pier 1 Imports, Robb & Stucky, Scotty's, Sears Homelife Centers, Sports Authority, Waccamaw and eight independently operated grocery stores leased to or partially guaranteed by SuperValu, Inc. LIQUIDITY AND CAPITAL RESOURCES General. Historically, the Company's only need 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 the public or private offering of the Company's debt or equity securities, secured or unsecured borrowings [Picture 2] Candid photograph of a meeting between James M. Seneff and Gary M. Ralston, employees of the Company from banks or other lenders, or the sale of Properties, as well as undistributed funds from operations. For the years ended December 31, 1997, 1996 and 1995, the Company generated $34,010,000, $22,216,000 and $14,140,000, respectively, in net cash provided by operating activities. The increase in cash from operations for each of the years ended December 31, 1997, 1996 and 1995, 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 borrowings or other sources of capital in the event of unforeseen significant capital expenditures. Indebtedness. In September 1996, the Company entered into an amended and restated loan agreement for a $150,000,000 revolving credit facility. The credit facility amended the Company's $100,000,000 credit facility by (i) increasing the borrowing capacity from $100,000,000 to $150,000,000, (ii) extending the expiration date to June 30, 1998 (and for up to two additional 12 month periods at the option of the Company), and (iii) lowering the interest rate from 170 basis points above LIBOR to 160 basis points above LIBOR or the lender's prime rate, whichever the Company selects. 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 amended the company's $150,000,000 credit facility by (i) increasing the borrowing capacity from $150,000,000 to $200,000,000, (ii) extending the expiration date to June 30, 1999 (and for up to two additional 12 month periods at the option of the Company), and (iii) lowering the interest rate from 160 basis points above LIBOR to 150 points above LIBOR or the lender's prime rate, whichever the Company selects. [Picture 3] Candid photograph of Kevin Habicht, employee of the Company In connection with the Credit Facility, the Company is required to pay a commitment fee of 20 basis points per annum on the unused commitment. The Credit Facility is collateralized by an assignment of the rents and leases of certain of the Company's Properties. As of December 31, 1997, $115,100,000 was outstanding under the Credit Facility. The Company expects to use the Credit Facility primarily to invest in freestanding, retail properties, although up to $25,000,000 of the available credit may be used for working capital ($15,000,000 of which may be used for the issuance of standby letters of credit). As a means to reduce its exposure to rising interest rates on the Company's variable rate Credit Facility, the Company was a party to three interest rate cap agreements during the three years ended December 31, 1997. As of December 31, 1997, two of the interest rate cap agreements had expired and one remained effective, providing for a fixed LIBOR rate of 6.9% per annum on a notional amount of $30 million. This agreement is effective through December 1999. In December 1995, the Company entered into a long-term, fixed rate mortgage and security agreement for $13,150,000. The loan provides for a four-year mortgage with interest payable monthly and principal payable at maturity on December 15, 1999, and bears interest at a rate of 6.75% per annum. The mortgage is secured by a first lien on and assignment of rents and leases of certain of the Company's Properties. As of December 31, 1997, the outstanding principal balance was $13,150,000. In January 1996, the Company entered into a long-term, fixed rate mortgage and security agreement for $39,450,000. The loan is a ten-year loan with principal and interest payable monthly, based on a 17-year amortization, with the balance due in February 2006 and bears interest at a rate of 7.435% per annum. The loan is secured by a first lien on and an assignment of rents and leases of 1997 ANNUAL REPORT - PAGE 7 certain of the Company's Properties. As of December 31, 1997, the outstanding principal balance was $37,066,000. In June 1996, the Company acquired three Properties each subject to a mortgage totalling $6,864,000 (collectively the "Mortgages"). The Mortgages bear interest at a weighted average rate of 8.6% and have a weighted average maturity of 7.3 years. As of December 31, 1997, the outstanding principal balances for the Mortgages totalled $6,520,000. Payments of principal on the mortgage debt and on advances outstanding under the Credit Facility are expected to be met from the proceeds of renewing or refinancing the Credit Facility, proceeds from public or private offerings of the Company's debt or equity securities, secured or unsecured borrowings from banks or other lenders or proceeds from the sale of one or more of its Properties. Debt and Equity Securities. In July 1995, the Company filed a shelf registration statement with the Securities and Exchange Commission that permits the issuance of debt and equity securities of up to $200,000,000. In January 1996, the Company filed a prospectus supplement to the shelf registration and issued 4,025,000 shares of common stock, including the underwriters' over- allotment of 525,000 shares, and received gross proceeds of $52,325,000. In September 1996, the Company filed a prospectus supplement to the shelf registration and issued 4,850,000 shares of common stock and received gross proceeds of $67,900,000. In addition, in October 1996, the Company issued an additional 225,000 shares of common stock in connection with the underwriters' over- allotment option and received gross proceeds of $3,150,000. In connection with these offerings, the Company incurred stock issuance costs totalling $7,614,000, consisting primarily of underwriters' commissions and fees, legal and accounting fees and printing expenses. 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 December 1997, the Company filed a prospectus supplement to the shelf registration and issued 882,353 shares of common stock and received gross proceeds of $15,000,000. In connection with the four 1997 offerings, the Company incurred stock issuance costs totalling $3,953,000 consisting primarily of underwriters' commissions and fees, legal and accounting fees and printing expenses. Net proceeds from the offerings were generally used to pay down the outstanding indebtedness under the Company's Credit Facility. In February 1998, the Company filed a prospectus supplement to the shelf registration and issued 688,172 shares of common stock at $14.4375 per share. Net proceeds of the offering were approximately $11,350,000, after deducting offering expenses and underwriter's discounts. Proceeds of the offering were used to pay down the outstanding indebtedness of the Company's Credit Facility. Subsequent to the February 1998 offering, the Company had $216,722,000 remaining on its shelf registration. Property Acquisitions and Commitments. During the year ended December 31, 1997, the Company borrowed $152,600,000 under its Credit Facility to acquire 47 Properties and three buildings (the "Acquisition Properties") which were developed by the tenant on land parcels owned by the Company. The Acquisition Properties include 14 Eckerd drugstores, six Best Buy consumer electronic stores, three OfficeMax office supply stores, two Barnes & Noble bookstores, one Borders bookstore, two Good Guys consumer electronic stores, four HomePlace home furnishing stores, one Pier 1 Imports home furnishings store, one Robb & Stucky furniture store, one Blockbuster video store, one Just For Feet shoe store, one Kroger grocery store, one Petco pet supply store, one Sports Authority sporting goods store and eight independently operated grocery stores leased to or partially guaranteed by SuperValu, Inc. The three buildings included one Academy sporting goods store, one Pier 1 Imports home furnishings store and one Kash N' Karry grocery store. [Picture 4] Portrait photograph of Mez Birdie, employee of the Company [Sidebar 1] SERVICE BUILDING RELATIONSHIPS THROUGH SERVICE - -------------------------------------- "To serve people through Commercial Net Lease Realty is an opportunity that comes once in a lifetime, and we don't take it lightly," says Mez Birdie, his voice filled with pride and determination. "As vice president of asset management, my job is to ensure that we are the consummated Land Servant, by providing services above and beyond our customers' expectations. We care about building a relationship before we care about making a transaction. Mez's responsibilities include property management, lease administration and leasing and disposition. While most retailers expect Commercial Net Lease Realty to own and build stores within budgets and timeframes, Mez points out that most don't' expect the additional services that have earned the company its national reputation for going the extra mile. For example, when the company bought properties leased to Sears, Mez assisted Sears in reducing their store insurance premiums by 25 percent. "We did this because we wanted to serve the tenant in the best possible way," says Mez. "We don't just collect rent," says Mez. "We also provide service, and the end result is always positive for our shareholders. When retailers want to expand, why wouldn't they come to us and say, 'Be our Land Servant for more stores.' Satisfied customers are a key part of creating value for shareholders," says Mez. Mez, like his fellow associates, owns stock in the company. "What better way to show commitment than by putting your money where your mouth is," says Mez. 1997 ANNUAL REPORT - PAGE 8 [Picture 5] Strip of three candid photographs, each of John Awsumb, employee of the Company [Picture 6] Photograph of an exterior view of the OfficeMax located in Altamonte Springs, Florida The Company leases the Acquisition Properties to major retail tenants and accounts for the leases under the provisions of the Statement of Financial Accounting Standards No. 13, "Accounting for Leases." Pursuant to the requirements of this provision, 37 of the leases relating to the 47 Properties acquired during 1997 have been classified as operating leases and 10 leases have been classified as direct 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 eight of these leases are accounted for as operating leases. Also pursuant to the requirements of this provision, one of the leases relating to the three buildings which were developed by the tenant on land parcels owned by the Company have been classified as operating leases and two leases have been classified as direct financing leases. In connection with the acquisition and lease relating to the land parcel of the Pier 1 Imports Property, the tenant is obligated to develop a building on the respective land parcel. The Company has agreed to acquire the completed building for an amount of up to $798,000, at which time rental income will increase for the Property. The Company owns five land parcels subject to lease agreements with tenants whereby the Company has agreed to construct a building on each respective land parcel for an aggregate amount of approximately $10,000,000 for the five buildings. Pursuant to the lease agreements, rent is to commence on the properties upon completion of construction of the buildings. As of December 31, 1997, the Company had entered into agreements to purchase three additional properties for an estimated aggregate amount of $7,847,000. In connection with the acquisition of two of these properties, the Company was contingently liable for $350,000 related to bank letters of credit which guarantee the Company's obligation under the purchase agreements to acquire these properties. 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 three properties under contract and the building being developed by the tenant as of December 31, 1997, the Company is currently negotiating the acquisition 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 Credit Facility and long-term, fixed rate financing, the Company may enter into additional financing arrangements. During 1996, the Company sold its properties in Marble Falls and Gonzales, Texas for a total of $790,000 and received net proceeds of $759,000, resulting in a gain of $73,000 for financial statement purposes. The Company reinvested the proceeds to acquire two additional Properties and structured the transactions to qualify as like-kind exchange transactions for federal income tax purposes. 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. (see "Investment in Partnership") at the Company's original cost of $17,542,000. In addition, the Company sold an undeveloped portion of land of one of its Properties for $1,313,000 and received net proceeds of $1,265,000. The Company recognized a gain on the sale of these five properties and the portion of the land parcel of $651,000 for financial reporting purposes. The Company reinvested the proceeds to acquire additional properties and structured the transactions to qualify as like-kind exchange transactions for federal income tax purposes. 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. Investment in Partnership. In September 1997, the Company entered into a partnership arrangement, Net Lease Institutional Realty, L.P. (the "Partnership"), with the Northern Trust Company, as Trustee of the Retirement Plan for the Chicago Transit Authority Employees ("CTA"). The Company is the sole general partner (the "General Partner") with a 20 percent interest in the Partnership and CTA is the sole limited partner (the "Limited Partner") with an 80 percent limited partnership interest. The Partnership owns and leases nine properties to major retail tenants under long-term commercial net leases. Net income and losses of the Partnership are to be allocated to the partners in accordance with their respective percentage interest in the Partnership. The Company accounts for its 20 percent interest in the Partnership under the equity method of accounting. 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 1997 ANNUAL REPORT - PAGE 9 substantial portion of its funds available from operations to its stockholders in the form of dividends. During the years ended December 31, 1997, 1996 and 1995, the Company declared and paid dividends to its stockholders of $28,381,000, $18,868,000, and $13,529,000, respectively, or $1.20, $1.18 and $1.16 per share of common stock, respectively. For the years ended December 31, 1997, 1996 and 1995, 91.4%, 89.8% and 79.3%, respectively, of such dividends were considered to be ordinary income and 8.6%, 10.2% and 20.7%, respectively, were considered return of capital for federal income tax purposes. In January 1998, the Company declared dividends to its stockholders of $8,452,000 or $.30 per share of common stock, payable in February 1998. RESULTS OF OPERATIONS Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996. During the years ended December 31, 1997 and 1996, the Company owned and leased 242 (including five properties which were sold and one property which was contributed to the Partnership during 1997) and 197 (including two properties which were sold during 1996) Properties, respectively, to operators of major retail businesses. The Properties are leased on a long-term basis, generally 15 to 20 years, with renewal options for an additional 10 to 20 years. As of December 31, 1997, the average remaining initial lease term of the Properties was approximately 14 years. During the years ended December 31, 1997 and 1996, the Company earned $49,163,000 and $32,487,000, respectively, in rental income from operating leases and earned income from direct financing leases. The 51 percent increase in rental and earned income during 1997, as compared to 1996, is primarily attributable to income earned on the 47 Properties acquired and the three buildings upon which construction was completed during 1997. In addition, rental and earned income increased during 1997 as a result of the fact that the 40 Properties acquired and nine buildings upon which construction was completed during 1996 were operational for a full fiscal year in 1997. Rental and earned income is expected to increase in 1998 as the Company acquires additional properties and due to the fact that the 47 Properties acquired and three buildings upon which construction was completed in 1997 will contribute to the Company's income for a full fiscal year. During 1997, two of the Company's lessees, Eckerd Corporation and Barnes & Noble Superstores, Inc., each accounted for more than ten percent of the Company's total rental income (including the Company's share of rental income from nine properties owned by the Company's unconsolidated partnership). As of December 31, 1997, Eckerd Corporation and Barnes & Noble Superstores, Inc. leased 43 Properties and 13 Properties, respectively (including four properties and one property, respectively, under leases with the Company's unconsolidated partnership). It is anticipated that, based on the minimum rental payments required by the leases, Eckerd Corporation and Barnes & Noble Superstores, Inc. will each continue to account for more than ten percent of the Company's total rental income in 1998. Any failure of these lessees could materially affect the Company's earnings. The Company incurred $11,478,000 and $7,206,000, in interest expense for the years ended December 31, 1997 and 1996, respectively. Interest expense increased for the year ended December 31, 1997 as a result of higher average borrowing levels. As a means to reduce its exposure to variable rate debt, the Company entered into interest rate cap agreements as described above in "Liquidity and Capital Resources." During the years ended December 31, 1997 and 1996, the Company's operating expenses, including depreciation and amortization, were $9,025,000 and $6,397,000, respectively (18.0% and 19.2%, respectively, of gross operating revenues). The increase in the dollar amount of operating expenses for the year ended December 31, 1997, is primarily attributable to the increase in depreciation as a result of the depreciation of the additional Properties acquired during 1997 and a full year of depreciation on the Properties acquired during 1996. The increase is also attributable to (i) an increase in amortization expense as a result of the amortization of loan costs relating to the Company's amendment to the Company's Credit Facility, (ii) an increase in advisory fees as a result of increased funds from operations for the year ended December 31, 1997, and (iii) an increase in state tax expense primarily as a result of the acquisition of additional Properties and an increase in capital resulting from the equity offerings during the year ended December 31, 1996 and 1997. [Picture 7] Portrait and strip of two candid photographs of Yvonne Adams, employee of the Company [Sidebar 2] PEOPLE GOING THE EXTRA MILE WITH A SMILE - --------------------------------- When asked what contribution she brings to the Commercial Net Lease Realty team, Yvonne Adams - without a moment's hesitation - says, "A smile. The more you smile, the easier life is." As she says this, she is, of course, smiling. A member of the team since 1994, Yvonne is an administrative assistant responsible for distribution of site information and closing documents. She is also responsible for training new administrative assistants. "I joined the Commercial Net Lease Realty team because I wanted to be where the action is," she says. "I see plenty of action and also interaction. We've assembled a great group of people who know how to serve. This is really a team effort." Yvonne especially appreciates the affirmation she receives from her manager, even for her daily tasks: "When you hear 'good job!', you strive harder to do an even better job," she says. Also inspiring her efforts is the fact that she is an employee/owner. Her plans are to grow and reinvest her dividends over time. In the meantime, she'll grow her investment through simple hard work: "I'm no longer working just for Commercial Net Lease Realty, but also for myself. When I do a good job, it's great to know that all shareholders will benefit." 1997 ANNUAL REPORT - PAGE 10 [Picture 8] Photograph of an exterior view of The Good Guys! located in Stockton, California [Picture 9] Photograph of an exterior view of Linens 'n Things located in Freehold, New Jersey 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. In addition, the Company sold an undeveloped portion of land of one is its Properties for $1,313,000 and received net proceeds of $1,265,000. The Company recognized a gain on the sale of these five properties and the portion of the land parcel of $651,000 for financial reporting purposes. The Company reinvested the proceeds to acquire additional properties and structured the transactions to qualify as like-kind exchange transactions for federal income tax purposes. Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995. During the years ended December 31, 1996 and 1995, the Company owned and leased 197 (including two properties which were sold during 1996) and 157 Properties, respectively, to operators of major retail businesses. The Properties are leased on a long-term basis, generally 15 to 20 years, with renewal options for an additional 10 to 20 years. As of December 31, 1996, the average remaining initial lease term of the Properties was approximately 14 years. During the years ended December 31, 1996 and 1995 the Company earned $32,487,000 and $19,723,000, respectively, in rental income from operating leases and earned income from direct financing leases. The 65 percent increase in rental and earned income during 1996, as compared to 1995, is primarily attributable to income earned on the 40 Properties acquired and the nine buildings upon which construction was completed during 1996. In addition, rental and earned income increased during 1996 as a result of the fact that the 29 Properties acquired and four buildings upon which construction was completed during 1995 were operational for a full fiscal year in 1996. Rental and earned income is expected to increase in 1997 as the Company acquires additional properties and due to the fact that the 40 Properties acquired and nine buildings upon which construction was completed in 1996 will contribute to the Company's income for a full fiscal year. During 1996, one of the Company's lessees, Barnes & Noble Superstores, Inc., accounted for more than ten percent of the Company's total rental income. As of December 31, 1996, Barnes & Noble Superstores, Inc. was the lessee under leases relating to 11 Properties. It is anticipated that, based on the minimum rental payments required by the lease, Barnes & Noble Superstores, Inc. will continue to account for more than ten percent of the Company's total rental income in 1997. Any failure of this lessee could materially affect the Company's income. The Company incurred $7,206,000 and $3,834,000 in interest expense for the years ended December 31, 1996 and 1995, respectively. Interest expense increased for the year ended December 31, 1996, as a result of higher average borrowing levels. However, the increase in interest expense in 1996 was partially offset by the Company's long-term, fixed rate financing and a decrease in the average interest rates under the Company's credit facility. As a means to reduce its exposure to variable rate debt, the Company entered into interest rate cap agreements as described above in "Liquidity and Capital Resources." During the years ended December 31, 1996 and 1995, the Company's operating expenses, including depreciation and amortization, were $6,397,000 and $4,039,000, respectively (19.2% and 19.6%, respectively, of gross operating revenues). The increase in the dollar amount of operating expenses for the year ended December 31, 1996, is primarily attributable to the increase in depreciation as a result of the depreciation of the additional Properties acquired during 1996 and a full year of depreciation on the Properties acquired during 1995. The increase is also attributable to an increase in amortization expense as a result of the amortization of loan costs relating to the Company's long-term 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 year ended December 31, 1996. In December 1996, the Company sold two of its Properties to an unrelated, third party for $790,000, resulting in an aggregate gain of $73,000. No such sales occurred during the year ended December 31, 1995. Investment Considerations. Three of the Company's tenants, HomePlace, Luria's and Levitz (the "Tenants"), have each filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, each of the Tenants has the right to reject or affirm one or more of its leases with the Company. As of December 31, 1997, HomePlace, Luria's and Levitz leased five, three and one Properties, respectively, which accounted for 4.5 percent of the Company's rental, earned and contingent rental income for the year ended December 31, 1997. The Company had made an election to be taxed as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. As a REIT, for federal income tax purposes, the Company generally will not be subject to federal income tax on income that it distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost. Such an event could materially affect the Company's income. However, the Company believes that it was organized and operated in such a manner as to qualify for treatment as a REIT for the years ended December 31, 1997, 1996 and 1995, and intends to continue to operate the Company so as to remain qualified as a REIT for federal income tax purposes. Inflation has had a minimal effect on income from operations. Management expects that increases in retail sales volumes due to inflation and real sales growth should result in an increase in rental income over time. Continued inflation also may cause capital appreciation of the Company's Properties; however, inflation and changing prices also may have an adverse impact on the operating margins of retail businesses and on potential capital appreciation of the Properties. Management of the Company currently knows of no trends that will have a material adverse effect on liquidity, capital resources or results of operations. 1997 ANNUAL REPORT - PAGE 11 The Company is in the process of assessing and addressing the impact of the Year 2000 on its computer software packages. The Company's hardware and software are believed to be Year 2000 compliant. Accordingly, the Company does not expect this matter to materially impact how it conducts business nor its future results of operations or financial position. However, the Company cannot be assured that all of its tenants and vendors have considered the impact of the Year 2000. Investments in real property create a potential for environmental liability on the part of the owner of such property from the presence or discharge of hazardous substances on the property. It is the Company's policy, as a part of its acquisition due diligence process, to obtain a Phase I environmental site assessment for each property and where warranted, a Phase II environmental site assessment. Phase I assessments involve site reconnaissance and review of regulatory files identifying potential areas of concern, whereas Phase II assessments involve some degree of soil and/or groundwater testing. The Company may acquire a property whose environmental site assessment indicates that a problem or potential problem exists, subject to a determination of the level of risk and potential cost of remediation. In such cases, the Company requires the seller and/or tenant to (i) remediate the problem prior to the Company's acquiring the property, (ii) indemnify the Company for environmental liabilities or (iii) agree to other arrangements deemed appropriate by the Company to address environmental conditions at the property. The Company has 14 properties currently under some level of environmental remediation. The seller or the tenant is generally contractually responsible for the cost of the environmental remediation for each of these properties. This information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference include the following: changes in general economic conditions, changes in real estate market conditions, continued availability of proceeds from the Company's debt or equity capital, the ability of the Company to locate suitable tenants for its Properties and the ability of tenants to make payments under their respective leases. DIVERSIFICATION OF ASSETS [Pie Chart 1] LINE OF TRADE DIVERSIFICATION - ----------------------------- Percentage of Line of Trade Pie Chart - ------------- ------------- Apparel 0.9% Auto Supply 3.3% Computer/Computer Software 2.9% Home Furnishings 7.0% Sporting Goods 7.0% Restaurant 10.0% Furniture 6.1% Office Supply 6.5% Grocers 12.1% Consumer Electronics 11.4% Drug Stores 11.6% Books 15.8% Catalog and Mail Order 2.0% Building Materials and Hardware 1.3% Shoes 0.6% Music 0.7% Miscellaneous Retail 0.8% -------- 100.0% ======== TENANT DIVERSIFICATION ---------------------- Academy Babies "R" Us Barnes & Noble Best Buy Borders Books & Music Blockbuster Music Burger King CompUSA Computer City Denny's Dick's Sporting Goods Eckerd Food 4 Less Food Lion Golden Coral The Good Guys! Hardees Hi-Lo Automotive HomePlace IHOP Kash N' Karry Levitz Linens 'n Things Luria's Marshalls OfficeMax Office Depot Oshman's Pier 1 imports Robb & Stucky Scotty's Sears Homelife The Sports Authority SuperValu Waccamaw [Map 1] GEOGRAPHICAL DIVERSIFICATION - ---------------------------- State # of Properties - ------- --------------- Alabama 5 Alaska 1 Arizona 2 California 11 Colorado 1 Delaware 1 Florida 39 Georgia 12 Illinois 2 Kansas 2 Kentucky 1 Louisiana 12 Maine 1 Maryland 4 Michigan 2 Minnesota 2 Mississippi 5 Missouri 2 New Hampshire 2 New Jersey 7 New Mexico 1 Nevada 1 North Carolina 8 North Dakota 1 Ohio 9 Oklahoma 7 Oregon 1 Pennsylvania 2 Rhode Island 1 South Carolina 7 Tennessee 7 Texas 65 Virginia 7 Washington 2 West Virginia 2 Wisconsin 1 1997 ANNUAL REPORT - PAGE 12 FINANCIAL STATEMENTS INDEPENDENT AUDITOR'S REPORT The Board of Directors Commercial Net Lease Realty, Inc.: We have audited the accompanying consolidated balance sheets of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Orlando, Florida January 16, 1998 [Picture 10] Photograph of an exterior view of the Eckerd located in Snellville, Georgia [Picture 11] Photograph of an exterior view of the Sears Homelife located in Clearwater, Florida 1997 ANNUAL REPORT - PAGE 13 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) December 31, Assets 1997 1996 - ------ --------- --------- Real estate leased to others: Accounted for using the operating method, net of accumulated depreciation $400,977 $269,031 Accounted for using the direct financing method 118,747 92,413 Investment in partnership 3,925 - Cash and cash equivalents 2,160 1,410 Receivables 527 812 Prepaid expenses 287 335 Loan costs, net of accumulated amortization of $1,868 and $1,055 1,762 2,185 Accrued rental income 7,063 4,421 Other assets 1,566 346 -------- -------- $537,014 $370,953 ======== ======== Liabilities and Stockholders' Equity - ------------------------------------ Line of credit $115,100 $ 58,700 Mortgages payable 56,736 58,256 Accrued interest payable 765 390 Accounts payable and accrued expenses 1,392 254 Rents paid in advance 877 779 -------- -------- Total liabilities 174,870 118,379 -------- -------- Commitments and contingencies (Note 13) Stockholders' equity: Common stock, $.01 par value. Authorized 90,000,000 and 50,000,000 shares, respect- ively; issued and outstanding 27,953,627 and 20,763,672 shares, respectively 280 208 Excess stock, $0.01 par value. Authorized 90,000,000 and 50,000,000 shares, respec- tively; none issued and out- standing - - Capital in excess of par value 361,793 254,299 Retained earnings (deficit) 71 (1,933) -------- -------- Total stockholders' equity 362,144 252,574 -------- -------- $537,014 $370,953 ======== ======== See accompanying notes to consolidated financial statements. 1997 ANNUAL REPORT - PAGE 14 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands, except per share data) Year Ended December 31, 1997 1996 1995 ------------ ------------ ------------ Revenues: Rental income from operating leases $ 37,384 $ 24,418 $ 14,455 Earned income from direct financing leases 11,779 8,069 5,268 Contingent rental income 759 722 745 Interest and other 213 160 112 ----------- ----------- ----------- 50,135 33,369 20,580 ----------- ----------- ----------- Expenses: General operating and administrative 1,216 1,183 722 Advisory fees to related party 2,110 1,466 1,001 Interest 11,478 7,206 3,834 State taxes 397 195 258 Depreciation and amortization 5,302 3,553 2,058 ----------- ----------- ----------- 20,503 13,603 7,873 ----------- ----------- ----------- Earnings before equity in earnings of unconsol- idated partnership and gain on sale of real estate 29,632 19,766 12,707 Equity in earnings of unconsolidated partner- ship 102 - - Gain on sale of real estate 651 73 - ----------- ----------- ----------- Net earnings $ 30,385 $ 19,839 $ 12,707 =========== =========== =========== Net earnings per share of common stock: Basic $ 1.26 $ 1.18 $ 1.09 =========== =========== =========== Diluted $ 1.25 $ 1.18 $ 1.09 =========== =========== =========== Weighted average number of shares outstanding: Basic 24,070,697 16,798,918 11,663,672 =========== =========== =========== Diluted 24,220,792 16,838,917 11,671,197 =========== =========== =========== See accompanying notes to consolidated financial statements. 1997 ANNUAL REPORT - PAGE 15 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1997, 1996 and 1995 (dollars in thousands, except per share data)
Capital in Retained Number Common excess of arnings of shares stock par value deficit) Total ---------- --------- ------------ ------------ ---------- Balance at December 31, 1994 11,663,672 $117 $138,629 $(2,082) $136,664 Net earnings - - - 12,707 12,707 Dividends declared and paid ($1.16 per share of common stock) - - - (13,529) (13,529) ---------- ---- -------- -------- -------- 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 - - - 30,385 30,385 Dividends declared and paid ($1.20 per share of common stock) - - - (28,381) (28,381) Issuance of common stock 7,189,955 72 111,448 - 111,520 Stock issuance costs - - (3,954) - (3,954) ---------- ---- -------- ------- -------- Balance at December 31, 1997 27,953,627 $280 $361,793 $ 71 $362,144 ========== ==== ======== ======= ========
See accompanying notes to consolidated financial statements. 1997 ANNUAL REPORT - PAGE 16 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Year Ended December 31, 1997 1996 1995 -------- -------- --------- Cash flows from operating activities: Net earnings $ 30,385 $ 19,839 $ 12,707 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 4,477 2,804 1,736 Amortization 825 748 322 Gain on sale of real estate (651) (73) - Equity in earnings of unconsolidated partnership (102) - - Decrease in net investment in direct financing leases 1,166 751 462 Increase in accrued rental income (2,729) (2,227) (1,233) Decrease (increase) in receivables 146 (279) (50) Decrease (increase) in prepaid expenses 48 (180) 207 Decrease (increase) in other assets (53) 10 (7) Increase in accrued interest payable 375 262 93 Increase (decrease) in accounts payable and accrued expenses 25 48 (34) Increase (decrease) in real estate taxes payable - (83) 49 Increase (decrease) in rents paid in advance 98 596 (112) -------- -------- -------- Net cash provided by operating activities 34,010 22,216 14,140 -------- -------- -------- Cash flows from investing activities: Proceeds from sale of real estate 19,402 759 - Additions to land and buildings on operating leases (154,688) (108,597) (51,402) Investment in direct financing leases (29,439) (36,335) (14,710) Contribution to unconsolidated partnership (855) - - Increase in other assets (660) (185) (1,451) Other (762) 111 45 -------- -------- -------- Net cash used in investing activities (167,002) (144,247) (67,518) -------- -------- -------- Cash flows from financing activities: Proceeds from line of credit 152,600 128,700 68,800 Repayment of line of credit (96,200) (139,450) (14,150) Proceeds from mortgages payable - 39,450 13,150 Repayment of mortgages payable (1,520) (1,208) - Payment of loan costs (417) (1,389) (899) Proceeds from issuance of common stock 111,520 123,375 - Payment of stock issuance costs (3,875) (7,467) (4) Payment of dividends (28,381) (18,868) (13,529) Other 15 (3) (759) -------- -------- -------- Net cash provided by financing activities 133,742 123,140 52,609 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 750 1,109 (769) Cash and cash equivalents at beginning of year 1,410 301 1,070 -------- -------- -------- Cash and cash equivalents at end of year $ 2,160 $ 1,410 $ 301 ======== ======== ======== Supplemental disclosure of non-cash investing and financing activities: Contribution of land and building to unconsolidated partnership $ 2,930 $ - $ - ======== ======== ======== Mortgages assumed in acquisition of three properties $ - $ 6,864 $ - ======== ======== ======== See accompanying notes to consolidated financial statements. 1997 ANNUAL REPORT - PAGE 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996 and 1995 1. Organization and Summary of Significant Accounting Policies: Organization and Nature of Business - Commercial Net Lease Realty, Inc., a Maryland corporation, is a real estate investment trust formed in 1984. Commercial Net Lease Realty, Inc. owns and manages high-quality, freestanding properties leased to major retail businesses under long-term commercial net leases. Principles of Consolidation - The consolidated financial statements include the accounts of Commercial Net Lease Realty, Inc. and its four wholly-owned subsidiaries (hereinafter referred to as the "Company"). Each of the subsidiaries is a qualified real estate investment trust subsidiary as defined in the Internal Revenue Code Section 856(i)(2). All significant intercompany accounts and transactions have been eliminated in consolidation. Real Estate and Lease Accounting - The Company records the acquisition of land and buildings at cost, including acquisition and closing costs. Land and buildings are leased to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance and repairs. The leases are accounted for using either the direct financing or the operating methods. Such methods are described below: Direct financing method - Leases accounted for using the direct financing method are recorded at their net investment (which at the time of acquisition generally represents the cost of the property) (Note 3). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Company's net investment in the leases. Operating method - Land and building leases accounted for using the operating method are recorded at cost, revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives (generally 35 to 40 years). When scheduled rentals vary during the lease term, income is recognized on a straight- line basis so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis. When properties are sold, the related cost and accumulated depreciation for operating leases and the net investment for direct financing leases, plus any accrued rental income, are removed from the accounts and gains and losses from the sales are reflected in income. Management reviews its properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. Management determines whether an impairment in value occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the property, with the carrying cost of the individual property. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. 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 is the sole general partner of the Partnership and accounts for its 20 percent interest in the Partnership under the equity method of accounting. Cash and Cash Equivalents - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash and money market accounts. Cash equivalents are stated at cost plus accrued interest, which approximates market value. Loan Costs - Loan costs have been deferred and are being amortized over the terms of the loan commitments using the straight-line method. The premium paid for the interest rate cap agreement of $257,000 has been recorded as a prepaid [Picture 12] Strip of three candid photographs: Jim Seneff, employee of the Company, Dawn Peterson, employee of the Company; and Kolleen Kubik and Dennis Tracy, employees of the Company 1997 ANNUAL REPORT - PAGE 18 [Picture 13] Strip of two photographs: an exterior view of the Barnes and Noble located in Freehold, New Jersey and an exterior view of the Sports Authority located in Sarasota, Florida expense and is being amortized as interest expense over the term of the agreement using a method which approximates the effective interest method. Line of Credit and Mortgages Payable - Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the year end fair value of significant financial instruments, including long-term debt. The interest rate on the Company's line of credit is variable; therefore, the carrying value of the line of credit approximates fair value. The Company believes that the carrying value of its mortgages payable at December 31, 1997, approximates fair value, based upon current market prices of similar issues. Income Taxes - The Company has made an election to be taxed as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. The Company generally will not be subject to federal income taxes on amounts distributed to stockholders, providing it distributes at least 95 percent of its real estate investment trust taxable income and meets certain other requirements for qualifying as a real estate investment trust. For each of the years in the three-year period ended December 31, 1997, the Company believes it has qualified as a real estate investment trust; accordingly, no provisions have been made for federal income taxes in the accompanying consolidated financial statements. Not withstanding the Company's qualification for taxation as a real estate investment trust, the Company is subject to certain state taxes on its income and property. Earnings Per Share - In accordance with Statement of Financial Accounting Standard No. 128, "Earnings Per Share," basic earnings per share are calculated based upon the weighted average number of common shares outstanding during each year and diluted earnings per share are calculated based upon weighted average number of common shares outstanding and potential dilutive common stock (See Note 9). Use of Estimates - Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Reclassification - Certain items in prior years' financial statements have been reclassified to conform with the 1997 presentation. New Accounting Standards - In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The Statement, which is effective for fiscal years beginning after December 15, 1997, requires the reporting of net earnings and all other changes to equity during the period, except those resulting from investments by owners and distributions to owners, in a separate statement that begins with net earnings or in the consolidated statement of operations below net earnings. Currently, the Company's only component of comprehensive income is its net earnings. The Company does not believe that adoption of this Statement will have a material effect on the Company's financial position or results of operations. In June 1997, the Financial Accounting Standards Board issued Statement of Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for periods beginning after December 15, 1997, requires reporting of financial and descriptive information about reportable operating segments. Currently, the Company is not structured in reportable operating segments, and therefore, disclosures to this statement are not applicable. 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 December 31, 1997, 149 of the leases have been classified as operating leases and 87 leases have been classified as direct financing leases. For the leases classified as direct financing leases, the building portions of the property leases are accounted for as direct financing leases while the land portions of 57 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 1997 ANNUAL REPORT - PAGE 19 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 December 31 (dollars in thousands): 1997 1996 -------- -------- Land $199,992 $138,520 Buildings and improvements 209,272 138,589 -------- -------- 409,264 277,109 Less accumulated depreciation (12,297) (8,078) -------- -------- 396,967 269,031 Construction in progress 4,010 - -------- -------- $400,977 $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 years ended December 31, 1997, 1996 and 1995, the Company recognized $2,786,000, $2,285,000 and $1,233,000, respectively, of such income. At December 31, 1997 and 1996, the balance of accrued rental income was $7,063,000, net of allowance of $310,000, and $4,421,000, respectively. The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 1997 (dollars in thousands): 1998 $ 40,244 1999 40,494 2000 40,919 2001 41,593 2002 41,305 Thereafter 457,294 -------- $661,849 ======== 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 net investment in direct financing leases at December 31 (dollars in thousands): 1997 1996 --------- --------- Minimum lease payments to be received $ 258,715 $207,838 Estimated residual values 35,981 28,309 Less unearned income (175,949) (143,734) --------- --------- Net investment in direct financing leases $ 118,747 $ 92,413 ========= ========= 1997 ANNUAL REPORT - PAGE 20 The following is a schedule of future minimum lease payments to be received on direct financing leases at December 31, 1997 (dollars in thousands): 1998 $ 14,385 1999 14,463 2000 14,581 2001 14,618 2002 14,690 Thereafter 185,978 -------- $258,715 ======== The above table does not include future minimum lease payments for renewal periods or for 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 entered into a Partnership arrangement, Net Lease Institutional Realty, L.P. (the "Partnership"), with the Northern Trust Company, as Trustee of the Retirement Plan for the Chicago Transit Authority Employees ("CTA"). The Company is the sole general partner with a 20 percent interest in the Partnership and CTA is the sole limited partner with an 80 percent interest in the Partnership. The Partnership owns and leases nine properties to major retail tenants under long-term, commercial net leases. The following presents the Partnership's condensed financial information at December 31, 1997 and for the period September 19, 1997 (date of inception) through December 31, 1997 (dollars in thousands). Real estate leased to others: Accounted for using the operating method, net of accumulated depreciation $25,381 Accounted for using the direct financing method 5,155 Other assets 793 Note payable 11,911 Other liabilities 154 Partners' capital 19,264 Revenues 933 Net income 514 For the year ended December 31, 1997, the Company recognized income of $102,000 from the Partnership. 5. Other Assets: Other assets consisted of the following at December 31 (dollars in thousands): 1997 1996 ---- ----- Deposits and miscellaneous acquisition costs $ 596 $ 237 Self administration costs 764 - Deferred offering costs 97 61 Other 109 48 $1,566 $ 346 1997 ANNUAL REPORT - PAGE 21 6. Line of Credit: In September 1996, the Company entered into an amended and restated loan agreement for a $150,000,000 revolving credit facility. The credit facility amended the Company's $100,000,000 credit facility by (i) increasing the borrowing capacity from $100,000,000 to $150,000,000, (ii) extending the expiration date to June 30, 1998, and (iii) lowering the interest rate from 170 basis points above LIBOR to 160 basis points above LIBOR or the lender's prime rate, whichever the Company selects. 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 amended the Company's $150,000,000 credit facility by (i) increasing the borrowing capacity from $150,000,000 to $200,000,000, (ii) extending the expiration date to June 30, 1999, and (iii) 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. In connection with the Credit Facility, the Company is required to pay a commitment fee of 20 basis points per annum on the unused commitment. The Credit Facility is collateralized by an assignment of rents and leases of certain of the Company's properties. The principal balance is due in full upon termination of the Credit Facility on June 30, 1999, which can be extended for two additional 12 month periods at the option of the Company, and interest is payable quarterly. As of December 31, 1997 and 1996, the outstanding principal balance was $115,100,000 and, $58,700,000 respectively, plus accrued interest of $552,000 and $192,000, respectively. The terms of the Credit Facility include financial covenants which provide for the maintenance of certain financial ratios. The Company was in compliance with such covenants as of December 31, 1997. During the three years ended December 31, 1997, the Company was a party to three interest rate cap agreements as a means to reduce its exposure to rising interest rates on the Company's variable rate Credit Facility. As of December 31, 1997, two of the interest rate cap agreements had expired and one remained effective, providing for a fixed LIBOR rate of 6.9% per annum on a notional amount of $30 million. This agreement is effective through December 1999. The Company capitalizes interest as a part of the cost of land and buildings constructed for its own use. For the year ended December 31, 1997, interest cost incurred was $11,150,000, of which $133,000 was capitalized, and $11,017,000 which was charged to operations. For the years ended December 31, 1996 and 1995, interest cost incurred was $6,857,000 and $3,545,000, respectively, all of which was charged to operations. 7. Mortgages Payable: On December 14, 1995, the Company entered into a long-term, fixed rate mortgage and security agreement for $13,150,000. The loan provides for a four-year mortgage with interest payable monthly and principal payable at maturity on December 15, 1999, and bears interest at a rate of 6.75% per annum. The loan is secured by a first lien on and assignment of rents and leases of certain of the Company's properties. As of December 31, 1997 the aggregate carrying value of these properties totalled $16,805,000. The outstanding principal balance as of December 31, 1997 and 1996, was $13,150,000, plus accrued interest of $42,000 and $37,000 and respectively. In January 1996, the Company entered into a long- term, fixed rate mortgage and security agreement for $39,450,000. The loan provides for a ten-year loan with principal and interest payable monthly, based on a 17-year amortization, with the balance due in February 2006 and bears interest at a rate of 7.435% per annum. The loan is secured by a first lien on and assignments of rents and leases of certain of the Company's properties. As of December 31, 1997, the aggregate carrying value of these properties totalled $73,772,000. The outstanding principal balance as of December 31, 1997 and 1996, was $37,066,000 and $38,352,000 respectively, plus accrued interest of $130,000 and $119,000, respectively. In June 1996, the Company acquired three properties each subject to a mortgage totalling $6,864,000 (collectively, the "Mortgages"). The Mortgages bear interest at a weighted average rate of 8.6% and have a weighted average maturity of 7.3 years, with principal and interest payable monthly. As of December 31, 1997 and 1996, the outstanding balances for the Mortgages totalled $6,520,000 and $6,754,000, plus accrued interest of $41,000 and $42,000, respectively. As of December 31, 1997, the aggregate carrying value of these three properties totalled $8,290,000. The following is a schedule of the annual maturities of the Company's outstanding term indebtedness for each of the next five years (dollars in thousands): 1998 $ 1,673 1999 14,984 2000 2,005 2001 2,170 2002 2,342 ------- $23,174 ======= 1997 ANNUAL REPORT - PAGE 22 8. Dividends: The following presents the characterization for tax purposes of dividends paid to stockholders for the years ended December 31: 1997 1996 1995 ----- ----- ----- Ordinary income $1.10 $1.06 $ .92 Capital gain - - - Return of capital .10 .12 .24 ----- ----- ----- $1.20 $1.18 $1.16 ===== ===== ===== On January 16, 1998, the Company declared dividends of $8,452,000 or 30 cents per share of common stock, payable on February 13, 1998, to stockholders of record on January 30, 1998. 9. Earnings Per Share: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." The Statement, which provides for a revised computation of earnings per share was adopted by the Company for the year ended December 31, 1997. Pursuant to the Statement, all comparative earnings per share amounts have been restated. The following represents the calculation of earnings per share and the weighted average number of shares of dilutive potential common stock for the years ended December 31:
1997 1996 1995 ----------- ----------- ----------- Net earnings-basic and diluted $30,385,000 $19,839,000 $12,707,000 =========== =========== =========== Weighted average number of shares outstanding used in basic EPS 24,070,697 16,798,918 11,663,672 Effect of dilutive securities: Stock options 150,095 39,999 7,525 ----------- ----------- ----------- Weighted average number of shares and dilutive potential shares used in diluted EPS 24,220,792 16,838,917 11,671,197 =========== =========== ===========
For the year ended December 31, 1995, options on 343,100 shares of common stock were not included in computing diluted earnings per share because their effects were antidilutive. 1997 ANNUAL REPORT - PAGE 23 10. Stock Option Plan: The Company's stock option plan (the "Plan") provides compensation and incentive to persons ("Key Employees of the Advisor" and "Outside Directors of the Company") whose services are considered essential to the Company's continued growth and success. As of December 31, 1995, the Plan had 600,000 shares of common stock reserved for issuance. Pursuant to the Plan, the shares of common stock reserved for issuance automatically increased to 1,200,000 and 2,000,000 shares in connection with the equity offerings during January 1996 and September 1997, respectively. The following summarizes transactions in the Plan for the years ended December 31:
1997 1996 1995 ---------------------- --------------------- ---------------------- Weighted Weighted Weighted Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares Price Shares Price Shares Price -------- --------- -------- --------- -------- --------- Outstanding, January 1 956,600 13.21 578,100 $13.36 568,100 $13.38 Granted 210,000 14.92 390,000 13.01 10,000 12.50 Exercised (11,500) 13.52 - - - - Surrendered (10,000) 13.94 (11,500) 13.54 - - -------- -------- -------- Outstanding, December 31 1,145,100 13.52 956,600 13.21 578,100 13.36 ========= ======== ======== Exercisable, December 31 681,767 13.29 403,533 13.29 232,000 13.11 ========= ======== ======== Available for grant, December 31 821,900 231,900 21,900 ========= ======== ========
The weighted-average remaining contractual life of the 1,145,100 options outstanding at December 31, 1997 was 7.5 years, with exercise prices ranging from $11.25 to $15.875. One third of the grant to each individual becomes exercisable at the end of each of the first three years of service following the date of the grant and the options maximum term is ten years. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for the Plan. Accordingly, no compensation expense has been recorded with respect to the options in the accompanying consolidated financial statements. Had compensation cost for the Plan been determined based upon the fair value at the grant dates for options granted after December 31, 1994 under the Plan consistent with the method of Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below for the years ended December 31 (dollars in thousands, except per share data):
1997 1996 1995 ----------- ----------- ----------- Net earnings as reported $ 30,385 $ 19,839 $ 12,707 =========== =========== =========== Pro forma net earnings $ 30,220 $ 19,681 $ 12,596 =========== =========== =========== Earnings per share as reported: Basic $ 1.26 $ 1.18 $ 1.09 =========== =========== =========== Diluted $ 1.25 $ 1.18 $ 1.09 =========== =========== =========== Pro forma earnings per share: Basic $ 1.26 $ 1.17 $ 1.08 =========== =========== =========== Diluted $ 1.25 $ 1.17 $ 1.08 =========== =========== ===========
1997 ANNUAL REPORT - PAGE 24 [Picture 14] Photograph of an exterior view of the Borders Books and Music located in Ft. Lauderdale, Florida The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1997, 1996 and 1995: (i) risk free rates of 6.85 and 7.04 percent for 1997 grants, 6.17 and 6.95 percent for 1996 grants and 7.2% for 1995 grants, (ii) expected volatility of 13.6% for 1997 and 12.9% for 1996 and 1995 (iii) dividend yields of 7.7, 8.6 and 8.8 percent, respectively, and (iv) expected lives of ten years for grants in 1997, 1996 and 1995. 11. Related Party Transactions: Certain directors and officers of the Company hold similar positions with CNL Realty Advisors, Inc. (the "Advisor"), the Company's advisor. During the year ended December 31, 1996, the Company acquired one property for a purchase price of $3,400,000 from a partnership in which an affiliate of the Advisor is a partner. The purchase price paid by the Company for this property represented the costs incurred by the affiliate to acquire the property, including closing costs. In connection with the acquisition of this property, plus 22 properties and four buildings which were developed by the tenant on land parcels owned by the Company in 1995, 26 properties and nine buildings which were developed by the tenant on land parcels owned by the Company in 1996 and 27 properties and three buildings which were developed by tenant on land parcels owned by the Company in 1997, from unrelated, third parties, the Company paid the Advisor $937,000, $2,278,000 and $2,552,000, respectively, in acquisition fees and expense reimbursement fees (representing 1.5% and 0.5%, respectively, of the cost of the properties). In addition, during the years ended December 31, 1997, 1996, and 1995, the Company acquired 15 properties for purchase prices totalling $39,323,000, 13 properties for purchase prices totalling $34,313,000, and seven properties for purchase prices totalling $17,969,000 respectively, from affiliates of the Advisor who had developed the properties. The purchase prices paid by the Company for these properties equalled the affiliates' costs including development costs. The affiliates' costs consisted of the land purchase prices, construction costs, various soft costs including legal costs, survey fees and architect fees, and developers fees aggregating $2,180,000 in 1997, $1,453,000 in 1996 and $1,106,000 in 1995 paid to an affiliate of the Advisor. In addition, during 1997, the Company purchased five land parcels from unrelated, third parties on which buildings are being developed by an affiliate of the Advisor. The Company paid developers fees totalling $376,000 to an affiliate of the Advisor who is developing the five properties. No acquisition fees or expense reimbursement fees were paid to the Advisor in connection with the acquisition of these 40 properties. During 1996, the Company sold its properties in Marble Falls and Gonzales, Texas for a total of $790,000 and received net proceeds of $759,000, resulting in a gain of $73,000 for financial reporting purposes. In connection with the sale of these properties, the Company paid the Advisor $16,000 in disposition fees. 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 the Advisor $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 for financial reporting purposes on the sale of these properties of $101,000 after elimination of the Company's 20 percent interest in the gain on the sale. The Company and the Advisor have entered into an advisory agreement (the "Advisory Agreement"), which provides for the Advisor to perform services in connection with the day to day operations of the Company. In connection therewith, the Advisor receives an annual fee, payable monthly, equal to (i) seven percent of funds from operations, as defined in the Advisory Agreement, up to $10,000,000, (ii) six percent of funds from operations in excess of $10,000,000 but less than $20,000,000 and (iii) five percent of funds from operations in excess of $20,000,000. For purposes of the Advisory Agreement, funds from operations generally includes the Company's net earnings excluding the advisory fee, depreciation and amortization expenses, extraordinary gains and losses and non- cash lease accounting adjustments. Under the Advisory Agreement, the Company incurred $2,110,000, $1,466,000 and $1,001,000 in advisory fees for the years ended December 31, 1997, 1996, and 1995, respectively (See Note 14). 1997 ANNUAL REPORT- PAGE 25 12. Major Tenants: The following schedule presents rental and earned income, including contingent rent, from operators or affiliated groups of operators representing more than ten percent of the Company's total rental and earned income for the years ended December 31 (dollars in thousands): 1997 1996 1995 ------- ------- ------- Barnes & Noble Superstores, Inc. $5,951 $5,204 $2,371 Denny's, Inc. and Flagstar Enterprises, Inc. (a) (a) 2,075 Eckerd Corporation 5,149 (a) (a) (a) Rental and earned income from the operator or affiliated group of operators did not represent more than ten percent of the Company's total rental and earned income for the respective year. 13. Commitments and Contingencies: As of December 31, 1997, the Company had entered into agreements to purchase three additional properties for an estimated aggregate amount of $7,847,000. In connection with the acquisition of two of these properties, the Company was contingently liable for $350,000 related to bank letters of credit which guarantee the Company's obligation under the purchase agreements to acquire these properties. As of December 31, 1997, the Company owned and leased one land parcel to a tenant which was obligated to develop a building on the respective land parcel. The Company has agreed to acquire the completed building for an amount of up to $798,000, at which time rental income will increase for the property. In addition, the Company owns five land parcels subject to lease agreements with tenants whereby the Company has agreed to construct a building on each of the respective land parcels for approximately $10,000,000, of which $3,802,000 of costs had been incurred at December 31, 1997. Pursuant to the lease agreements, rental income is to commence on the properties upon completion of construction of the buildings. 14. Subsequent Events: On December 18, 1997, the Company's stockholders voted to approve an agreement with CNL Realty Advisors, Inc. and the stockholders of CNL Realty Advisors, Inc. to exchange 100% of the outstanding shares of common stock of the Advisor for up to 2,200,000 shares (the "Share Consideration") of the Company's common stock (the "Merger"). As a result, the Company became an internally managed real estate investment trust (REIT) effective January 1, 1998. Ten percent of the Share Consideration (220,000 shares) was paid on January 1, 1998, and the balance (the "Share Balance") of the Share Consideration will be paid over time to the extent the Company expands its operations after the Merger. The market value of the common shares issued on January 1, 1998 was $3,933,000 of which $12,000 was allocated to the net tangible assets acquired and the difference of $3,921,000 was accounted for as costs incurred in acquiring the Advisor from a related party. For accounting purposes, the Advisor was not considered a "business" for purposes of applying APB Opinion No. 16, "Business Combinations," and therefore, the market value of the common shares issued in excess of the fair value of the net tangible assets acquired was charged to operations rather than capitalized as goodwill. To the extent the Share Balance is paid over time, the market value of the common shares issued will also be charged to operations. Upon consummation of the Merger on January 1, 1998, all personnel employed by the Advisor became employees of the Company, and any obligation to pay fees under the Advisory Agreement was terminated. In February 1998, the Company filed a prospectus supplement to its $300,000,000 shelf registration and issued 688,172 shares of common stock and received gross proceeds of $12,000,000. Proceeds from the offering were used to pay down the outstanding indebtedness under the Company's Credit Facility. 1997 ANNUAL REPORT - PAGE 26 CONSOLIDATED QUARTERLY FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
First Second Third Fourth 1997 Quarter Quarter Quarter Quarter Year - ------------ -------- -------- -------- -------- -------- Rent and other revenue $11,287 $12,067 $13,416 $14,016 $50,786 Depreciation and amortization expense 1,168 1,325 1,374 1,435 5,302 Interest expense 2,363 2,731 3,509 2,875 11,478 Other expenses 1,011 803 922 987 3,723 Net earnings 6,745 7,208 7,622 8,810 30,385 Net earnings per share: Basic 0.31 0.31 0.32 0.32 1.26 Diluted (1) 0.31 0.31 0.32 0.32 1.25 1996 - ------------ Rent and other revenue $6,924 $7,631 $9,221 $9,666 $33,442 Depreciation and amortization expense 748 806 944 1,055 3,553 Interest expense 1,460 1,602 2,473 1,671 7,206 Other expense 727 689 690 738 2,844 Net earnings 3,989 4,534 5,114 6,202 19,839 Net earnings per share: Basic 0.28 0.29 0.31 0.30 1.18 Diluted (1) 0.28 0.32 0.31 0.30 1.18
(1) Calculated independently for each period, and consequently, the sum of the quarters may differ from the annual amount. [Picture 15] Photograph of an exterior view of the Academy located in Houston, Texas [Picture 16] Candid photograph of a meeting between Alex Dmyterko, Jim Seneff, and Gary Ralston, employees of the Company [Picture 17] Candid photograph of Haingo Rasolofonjoa, employee of the Company [Picture 18] Candid photograph of Joe Ciardiello, employee of the Company 1997 ANNUAL REPORT - PAGE 27 SHARE PRICE AND DIVIDEND DATA
The common stock of the Company currently is traded on the New York Stock Exchange ("NYSE") under the symbol "NNN." For each calendar quarter indicated, the following table reflects the respective high, low and closing sales prices for the common stock as quoted by the "NYSE" and the dividends paid per share in each such period. First Second Third Fourth 1997 Quarter Quarter Quarter Quarter Year - ------------ -------- --------- --------- -------- --------- High $16.1250 $ 15.3750 $ 16.7500 $18.1875 $18.1875 Low 14.3750 14.1250 15.0625 15.3125 14.1250 Close 14.7500 15.3125 15.9735 17.8750 17.8750 Dividends paid per share 0.30 0.30 0.30 0.30 1.20 1996 - ------------ High $13.3750 $14.0000 $14.2500 $16.3750 $16.3750 Low 12.7500 12.7500 13.3750 13.3750 12.7500 Close 13.2500 13.8750 13.6250 15.8750 15.8750 Dividends paid per share 0.29 0.29 0.30 0.30 1.18
The portion of dividends paid in 1997 and 1996, which was treated as a non- taxable return of capital, was 8.6% and 9.8%, respectively. On February 13, 1998, there were approximately 1,537 shareholders of record of common stock. [Picture 19] Candid photograph of Chris Barry, employee of the Company [Picture 20] Candid photograph of Mez Birdie, employee of the Company [Picture 21] A strip of three candid photographs: Courtney Hubbard, employee of the Company; Dennis Tracy, employee of the Company; and Heather O'Brien and Carole Jones, employees of the Company [Picture 22] Photograph of an exterior view of the Pier 1 imports located in Memphis, Tennessee APPENDIX PICTURE 1 1997 ANNUAL REPORT - PAGE 6 PICTURE 2 1997 ANNUAL REPORT - PAGE 6 PICTURE 3 1997 ANNUAL REPORT - PAGE 6 PICTURE 4 1997 ANNUAL REPORT - PAGE 7 SIDEBAR 1 1997 ANNUAL REPORT - PAGE 7 PICTURE 5 1997 ANNUAL REPORT - PAGE 8 PICTURE 6 1997 ANNUAL REPORT - PAGE 8 PICTURE 7 1997 ANNUAL REPORT - PAGE 9 SIDEBAR 2 1997 ANNUAL REPORT - PAGE 9 PICTURE 8 1997 ANNUAL REPORT - PAGE 10 PICTURE 9 1997 ANNUAL REPORT - PAGE 10 PIE CHART 1 1997 ANNUAL REPORT - PAGE 11 MAP 1 1997 ANNUAL REPORT - PAGE 11 PICTURE 10 1997 ANNUAL REPORT - PAGE 12 PICTURE 11 1997 ANNUAL REPORT - PAGE 12 PICTURE 12 1997 ANNUAL REPORT - PAGE 17 PICTURE 13 1997 ANNUAL REPORT - PAGE 18 PICTURE 14 1997 ANNUAL REPORT - PAGE 24 PICTURE 15 1997 ANNUAL REPORT - PAGE 26 PICTURE 16 1997 ANNUAL REPORT - PAGE 26 PICTURE 17 1997 ANNUAL REPORT - PAGE 26 PICTURE 18 1997 ANNUAL REPORT - PAGE 26 PICTURE 19 1997 ANNUAL REPORT - PAGE 27 PICTURE 20 1997 ANNUAL REPORT - PAGE 27 PICTURE 21 1997 ANNUAL REPORT - PAGE 27 PICTURE 22 1997 ANNUAL REPORT - PAGE 27 EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 Consent of Independent Accountants dated March 17, 1998 The Board of Directors Commercial Net Lease Realty, Inc.: We consent to the incorporation in the registration statement (No. 33-24773) on Form S-3 of Commercial Net Lease Realty, Inc. of our reports dated January 16, 1998, relating to the consolidated balance sheets of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, and the related financial statement schedule, which report appears in the December 31, 1997 annual report on Form 10-K of Commercial Net Lease Realty, Inc. /s/ KPMG Peat Marwick LLP Orlando, Florida March 17, 1998 EX-27 4 FDS
5 This schedule contains summary financial information extracted from the balance sheet of Commercial Net Lease Realty, Inc. at December 31, 1997, and its statement of earnings for the year then ended and is qualified in its entirety by reference to the Form 10-K of Commercial Net Lease Realty, Inc. for the year ended December 31, 1997. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 2,160,000 0 527,000 0 0 0 413,274,000 12,297,000 537,014,000 0 0 0 0 280,000 361,864,000 537,014,000 0 50,135,000 0 9,025,000 0 0 11,478,000 30,385,000 0 30,385,000 0 0 0 30,385,000 1.26 1.25 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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