-----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, VLZyxne54X2FokYvQ7hNnYnwU8XDcthwzTJRWtKWj55BpTwwwgQbw8SdErEyH/vG NCjAQ4tN+h3hbEWlVXXbjg== 0000751364-99-000006.txt : 19990331 0000751364-99-000006.hdr.sgml : 19990331 ACCESSION NUMBER: 0000751364-99-000006 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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-K405 SEC ACT: SEC FILE NUMBER: 001-11290 FILM NUMBER: 99577457 BUSINESS ADDRESS: STREET 1: 455 S ORANGE AVE STREET 2: SUITE 700 CITY: ORLANDO STATE: FL ZIP: 32801 BUSINESS PHONE: 4074237348 MAIL ADDRESS: STREET 1: 455 S ORANGE AVE STE 700 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-K405 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, 1998 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) 455 South Orange Avenue, Suite 700 Orlando, Florida 32801 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (407) 265-7348 Securities registered pursuant to Section 12(b)(6) of the Act: Title of each class: Name of exchange on which registered: Common Stock, $0.01 par value New York Stock Exchange 10 Year 7.125% Notes None 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 Securities 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. [X] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 11, 1999, was $328,260,598. The number of shares of common stock outstanding as of March 11, 1999, was 30,033,278. 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, 1998 (Items 5, 6, 7, 7A and 8 of Part II). 2. Registrant incorporates by reference portions of the Commercial Net Lease Realty, Inc. Proxy Statement for the 1999 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 fully integrated, self-administered real estate investment trust ("REIT") formed in 1984 that acquires, develops, owns and manages a diversified portfolio of high-quality, freestanding properties that are generally leased to major retail businesses 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 $10 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, 1998, the Company borrowed $143,600,000 under its credit facility (i) to acquire 55 properties (23 of which were land only parcels, 14 of which are currently under construction), (ii) to purchase one building constructed by the tenant on a land parcel owned by the Company and (iii) to complete construction of 14 buildings by the Company on five land parcels acquired by the Company during 1997 and nine land parcels acquired by the Company in 1998. As of December 31, 1998, the Company owned 285 properties (the "Properties") that are leased to major businesses, including Academy, Babies "R" Us, Barnes & Noble, Bed Bath & Beyond, Best Buy, Borders, Burger King, CompUSA, Computer City, Dave & Buster's, Denny's, Dick's Clothing & Sporting Goods, Eckerd, Food 4 Less, Food Lion, Golden Corral, Good Guys, Hardee's, Heilig-Meyers, Hi-Lo Automotive, HomePlace, International House of Pancakes, Kash N' Karry, Levitz, Linens 'n Things, Marshalls, Michael's, Office Depot, OfficeMax, Oshman's, PETsMART, Pier 1 Imports, Robb & Stucky, Ross Dress For Less, Scotty's, Sears Homelife Centers, The Sports Authority, SuperValu and Waccamaw. The Company's Property portfolio was 99 percent leased at December 31, 1998. 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. 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 1998, one of the Company's lessees, Eckerd Corporation, 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, 1998, Eckerd Corporation leased 52 Properties (including four properties under leases with the Company's unconsolidated partnership). It is anticipated that, based on the minimum rental payments required by the leases, Eckerd Corporation will continue to account for more than ten percent of the Company's total rental income in 1999. Any failure of this lessee could materially affect the Company's income. In January 1998, one of the Company's tenants, HomePlace, filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, the tenant has the right to reject or affirm its leases with the Company. In May 1998, HomePlace rejected two of its five leases with the Company, at which time HomePlace was no longer required to pay rent on these two leases. In September 1998, one of these Properties was re-leased to Waccamaw Corporation. The Company is currently marketing the remaining Property, which is not subject to a lease, for sale or lease. As of December 31, 1998, HomePlace continued to lease three Properties which accounted for four percent of the Company's total rental and earned income for the year ended December 31, 1998. In August 1997, one of the Company's tenants, Luria's, filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, the tenant has the right to reject or affirm its leases with the Company. In March 1998, Luria's rejected its three leases with the Company, at which time Luria's was no longer required to pay rent on these three leases. In August 1998, the Company re-leased one of these three Properties to The Sports Authority and in October 1998, the Company re-leased one of these Properties to Ross Dress for Less. Investment in Subsidiaries In November 1995, the Company formed two wholly owned subsidiaries, Net Lease Realty I, Inc. and Net Lease Realty II, Inc. In June 1997, the Company formed two wholly-owned subsidiaries, Net Lease Realty III, Inc. and Net Lease Realty IV, Inc. and in August 1998, the Company formed one wholly owned subsidiary, Net Lease Funding, 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. Net Lease Funding, Inc. was formed to facilitate the development of certain properties. 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, formed a limited partnership, 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, 1998, 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 $183,000 to $730,000 and building sites ranging from 11,000 to 54,000 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. The stockholders of the Company approved an agreement and plan of merger with the Advisor on December 18, 1997 at the 1997 annual meeting of stockholders, which resulted in the Company becoming a self-administered and self-managed REIT (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 completed property acquisitions and completed development projects in accordance with the Merger agreement to receive up to 1,980,000 additional shares of the Company's common stock, for a period of up to five years. In connection with the property acquisitions during the year ended December 31, 1998, the Company issued an additional 57,813 shares of common stock in December 1998, and 371,938 shares of common stock in January 1999. 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, commercial developers, real estate limited partnerships and other investors, including but not limited to, insurance companies, pension funds and financial institutions, in the acquisition, leasing, financing, development and disposition of investments in net-leased retail properties. Employees As of December 31, 1998, the Company employed 78 full-time persons including executive, administrative and field personnel. 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, 1998, the Company owned 285 Properties located in 38 states that are leased to 55 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 carrying 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 $37,000 to $6,300,000. 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 10 to 20 years. As of December 31, 1998, the weighted average remaining lease term was approximately 15 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 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, 1998, leases representing approximately 84 percent of annual base rent include contractual increases, leases representing approximately 30 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 1998, one of the Company's lessees, Eckerd Corporation (drugstore) 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, 1998, Eckerd Corporation leased 52 Properties (including four properties under leases with the Partnership). As of December 31, 1998, one of the Company's lessees, Eckerd Corporation, leased Properties representing 11.7% of total assets. For information regarding the results of operations and financial condition of this entity, refer to its Annual Report on Form 10-K as filed with the Securities and Exchange Commission for the year ended January 31, 1998. The Company generally competes with other REIT's, commercial developers, real estate limited partnerships and other investors, including but not limited to, insurance companies, pension funds and financial institutions in the acquisition, leasing, financing, development 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 20 properties currently under some level of environmental remediation. The seller or the tenant is contractually responsible for the cost of the environmental remediation for each of these properties. The Company's principal executive offices are located at 455 South Orange Avenue, Suite 700, Orlando, Florida 32801. The Company's telephone number is (407) 265-7348. Item 3. Legal Proceedings The Company is a co-defendant in a lawsuit filed on December 10, 1998 in the United States District Court for the District of Puerto Rico. The plaintiff is alleging that the Company is in breach of a ground lease agreement with the plaintiff regarding a land parcel owned by the plaintiff and is seeking damages of $7,500,000 and/or specific performance of the execution of the ground lease. Management believes it will prevail in this suit and intends to vigorously defend its position. If the Company were to be held liable for these damages, it could materially affect the Company's earnings. 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. PART II Item 4. Submission of Matters to a Vote of Security Holders None. 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 39 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1998; 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 1 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1998; 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 8 through 19 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1998; 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 7A. Quantitative and Qualitative Disclosures About Market Risk Information responsive to this Item is contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations", subsection "Market Risk", on page 19 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1998; 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 38 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1998; 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 LLP, appearing in the Annual Report to Shareholders for the year ended December 31, 1998, are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 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 responsive 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 "Executive Compensation - Annual 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. 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, 1998 and 1997 Consolidated Statements of Earnings for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998,1997 and 1996 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, 1998 Notes to Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1998 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 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). 3.5 First Amended and Restated Articles of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's Registration Statement No. 333-64511 on Form S-3, and incorporated herein by reference). 4.1 Specimen Certificate of Common Stock, par value $0.01 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). 4.2 Form of Indenture dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,00 of 7.125% Notes due 2008 (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference.) 4.3 Form of Supplement Indenture No. 1 dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference.) 4.4 Form of 7.125% Note due 2008 (filed as Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated March 20, 1998, 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). 12 Statement of Computation of Ratios of Earnings to Fixed Charges (filed herewith). 13 Annual Report to Shareholders for the year ended December 31, 1998 (filed herewith). 23 Consent of Independent Accountants dated March 30, 1999 (filed herewith). 27 Financial Data Schedule (filed herewith). (b) No reports on Form 8-K were filed during the quarter ended December 31, 1998. 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 30th day of March, 1999. 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 Directors March 30, 1999 - ----------------------- Chief Executive Officer (Principal James M. Seneff, Jr. Executive Officer) /s/ Robert A. Bourne Vice Chairman of the March 30, 1999 - -------------------- Board ofDirectors Robert A. Bourne /s/ Edward Clark Director March 30, 1999 - ---------------- Edward Clark /s/ Clifford R. Hinkle Director March 30, 1999 - ---------------------- Clifford R. Hinkle /s/ Ted B. Lanier Director March 30, 1999 - ----------------- Ted B. Lanier /s/ Gary M. Ralston President March 30, 1999 - ------------------- Gary M. Ralston /s/ Kevin B. Habicht Chief Financial Officer (Principal March 30, 1999 - -------------------- Financial and Accounting Officer), Kevin B. Habicht Secretary and Treasurer Report of Independent Auditors' on Supplementary Information The Board of Directors Commercial Net Lease Realty, Inc. Under date of January 15, 1999, we reported on the consolidated balance sheets of Commercial Net Lease Realty, Inc. as of December 31, 1998 and 1997, 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, 1998. 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 1998. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as of December 31, 1998. 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 therein. /s/KPMG LLP - ------------- Orlando, Florida January 15, 1999 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Initial Cost to Company Encum- --------------------------- brances Building and (n) Land Improvements - --------------------------- -------------- ------------ ------------- Properties the Company has Invested in 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 - Adjacent Excess Space: Memphis, TN - 549,309 539,643 Glendale, AZ - 340,753 - Babies "R" Us: Arlington, TX - 830,689 2,611,867 Barnes & Noble: Lakeland, FL - 1,070,902 1,516,983 Brandon, FL 1,515,699 (m) 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 Marlton, NJ - 2,831,370 4,318,554 Bed, Bath & Beyond: Richmond, VA - 1,184,144 3,154,970 Los Angeles, CA - 6,318,023 3,089,396 Glendale, AZ - 1,078,710 - Best Buy: Corpus Christi, TX 1,268,679 (l) 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 North Fayette, PA - 2,330,847 2,292,932 Blockbuster: Conyers, GA - 320,029 556,282 Borders Books & Music: Wilmington, DE 4,588,832 (m) 3,030,769 6,061,538 Richmond, VA 2,410,871 (m) 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 2,311,432 (m) 2,713,192 1,866,676 Baton Rouge, LA - 609,069 913,603 Anchorage, AK - 928,321 1,662,584 Dave's: Maple Heights, OH - 1,034,758 2,874,414 Dave & Buster's: Utica, MI - 3,776,169 - 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 618,229 (m) 440,985 - Dallas, TX 595,628 (m) 541,493 - Garland, TX 479,282 (m) 239,014 - Arlington, TX 507,235 (m) 368,964 - Millville, NJ 629,123 (m) 417,603 - Atlanta, GA 562,221 (m) 445,593 - Mantua, NJ 654,043 (m) 344,022 - Amarillo, TX 581,981 (m) 329,231 - Amarillo, TX 756,379 (m) 650,864 - Glassboro, NJ 717,544 (m) 534,243 - Kissimmee , FL 835,902 (m) 715,480 - Colleyville, TX 923,863 (m) 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 Tallahassee, 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 - 2,078,542 - Leavenworth, KS - 726,438 - Augusta, GA - 568,606 1,326,748 Riverdale, GA - 1,088,896 1,707,448 Morrow, GA - 550,457 1,248,422 Warner Robins, GA - 707,488 - Lewisville, TX - 789,237 - Forest Hill, TX - 692,165 - Del City, OK - 1,387,362 (c) Arlington, TX - 414,568 (c) Ft. Worth, TX - - - Land 'O Lakes, FL - 1,455,464 - Garland, TX - 522,461 - Garland, TX - 1,476,838 - Oklahoma City, OK - 1,543,480 - Vineland, NJ - 725,734 - Food 4 Less: Lemon Grove, CA - 3,695,816 - Chula Vista, CA - 3,568,862 (c) 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 Leitchfield, KY (e) - 73,660 306,642 Marietta, GA (e) - 156,190 346,509 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 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 Durant, OK - 140,862 411,135 Good Guys, The: Foothill Ranch, CA - 1,456,113 2,505,022 Valencia,CA - 1,622,252 2,895,298 Riverside, CA - 1,718,892 2,755,059 Clackamas, OR - 1,639,995 1,446,764 Bellingham, WA - 1,732,378 1,764,549 Federal Way, WA - 2,037,392 1,661,577 East Palo Alto, CA - 2,294,449 - 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 - Heilig-Meyers: Baltimore, MD - 469,782 813,074 Glen Burnie, MD - 625,588 922,897 Lima, OH - 344,742 1,097,694 Copperas Cove, TX - 445,558 943,339 Nacadoches, TX - 397,074 1,257,402 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 Ft. Myers, FL - 1,956,579 4,045,196 Bowie, MD - 1,965,508 - International House of Pancakes: Stafford, TX 481,435 (m) 382,084 - Sunset Hills, MO 508,831 (m) 271,853 - Las Vegas, NV 572,085 (m) 519,947 - Ft. Worth, TX 532,218 (m) 430,896 - Arlington, TX 511,075 (m) 404,512 - Matthews, NC 522,717 (m) 380,043 - Phoenix, AZ 526,235 (m) 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 (l) 1,753,766 2,208,651 Marshalls: Freehold, NJ 3,431,576 (l) 2,052,946 2,585,432 Michael's Grapevine, TX - 1,017,934 2,066,715 Office Depot: Arlington, TX 1,013,151 (m) 596,024 1,411,432 Richmond, VA 888,772 1,948,036 OfficeMax: Corpus Christi, TX 1,439,600 (l) 893,270 978,344 Dallas, TX 1,427,472 (m) 1,118,500 1,709,891 Cincinnati, OH 1,068,962 (m) 543,489 1,574,551 Evanston, IL 1,829,742 (m) 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 - 868,003 - Lynchburg, VA - 561,509 - Leesburg, FL - 640,019 - Plymouth Meeting, PA - 2,906,424 - Tigard, OR - 1,539,873 2,247,321 Dover, NJ - 1,138,296 3,238,083 Griffin, GA - 683,747 - Oshman's Sporting Goods: Dallas, TX - 1,311,440 - Party City: Memphis, TN - 238,229 - Petco: Grand Forks, ND - 306,629 909,671 PETsMART: Chicago - 2,723,463 3,564,837 Pier 1 Imports: Memphis, TN - 713,319 821,770 Sanford, FL - 738,051 803,082 Knoxville, TN - 466,636 - Mason, OH - 592,257 - Harlingen, TX - 315,434 - Pizza Hut: Orlando, FL - 220,632 258,483 Rally's: Toledo, OH - 125,882 319,770 Robb & Stucky: Ft. Myers, FL - 2,188,440 6,225,401 Roger & Marv's: Kenosha, WI - 1,917,607 3,431,363 Ro-Jack's Food Store: Warwick, RI - 1,699,330 - Ross Dress For Less: Coral Gables, FL - 1,782,346 1,661,174 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 (l) 1,184,438 2,526,207 Orlando, FL 1,516,665 (m) 820,397 2,184,721 Pensacola, FL 1,750,804 633,125 1,595,405 Raleigh, NC 2,205,051 1,848,026 1,753,635 Tampa, FL 2,277,113 1,454,908 2,045,833 7-Eleven: Land 'O Lakes, FL - 1,076,495 - Tampa Palms, FL - 1,080,670 - Shop & Save: Homestead, PA - 1,139,419 - Penn Hills, PA - 1,043,297 1,243,131 Sports Authority: Memphis, TN - 820,340 - Little Rock, AR - 3,418,875 2,660,206 Tampa, FL - 2,127,503 1,521,730 SuperValu: Huntington, WV - 1,254,238 760,602 Top's: Lacey, WA - 2,777,449 7,082,150 Waccamaw: Fairfax, VA - 2,156,801 - White Marsh, MD - 3,762,030 - 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 Sacramento, CA - 585,872 - Vacant Properties: Arlington, TX - 752,840 3,980,309 South Miami, FL - 1,379,229 1,723,047 Unallocated costs relating to con- struction in progress =========== ============ ============= 47,248,377 259,590,038 249,823,310 =========== ============ ============= 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 Dave & Buster's: Utica, MI - - 4,888,743 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 681,021 (m) 286,231 1,063,142 Amarillo, TX - - 849,071 Amarillo, TX - - 869,846 Amarillo, TX 494,316 (m) 158,851 855,348 Glassboro, NJ - - 887,497 Kissimmee , FL - - 933,852 Colleyville, TX - - 1,076,066 Alice,TX 501,579 (m) 189,187 804,963 Tampa, FL - - 1,090,532 Lafayette, LA - - 949,128 Moore, OK - - 879,296 Tallahassee, 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 - (o) 1,365,125 Oklahoma City, OK - (o) 1,419,093 Norman, OK - - 1,225,477 Chattanooga , TN - - 1,344,240 Del City, OK - - - Arlington, TX - - - Food 4 Less: Lemon Grove, CA - - 4,068,179 Chula Vista, CA - - 4,266,181 Food Lion: Keystone Hts, FL 976,377 (m) 88,604 1,845,988 Chattanooga, TN 1,028,344 (m) 336,488 1,701,072 Lynchburg, VA 1,333,443 (l) 128,216 1,674,167 Martinsburg, WV 1,005,462 (m) 448,648 1,543,573 The Good Guys: Stockton, CA 1,794,428 (m) 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 Heilig-Meyers: Rincon, GA - 254,320 1,212,349 Bourbonnais, IL - 309,769 1,381,112 Mount Vernon, IL - 235,675 1,128,976 Muskogee, OK - 250,932 1,209,673 Stillwater, OK - 262,779 1,126,116 Everett, PA - 235,548 1,206,879 Lebanon, PA - 220,282 1,168,636 York, PA - 279,312 1,109,609 Marlow Heights, MD - 415,926 1,397,178 Clovis, NM - 237,362 1,151,531 Middletown, OH - 250,284 1,138,639 Conway, SC - 256,893 1,185,517 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: 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 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 ========== ========== =========== 7,814,970 10,238,422 129,708,614 ========== ========== ===========
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 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 Adjacent Excess Space: Memphis, TN - - 549,309 539,643 1,088,952 Glendale, AZ 294,706 - 340,753 (g) 340,753 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 Marlton, NJ - - 2,831,370 4,318,554 7,149,924 Bed, Bath & Beyond: Richmond, VA - - 1,184,144 3,154,970 4,339,114 Los Angeles, CA - - 6,318,023 3,089,396 9,407,419 Glendale, AZ 933,157 - 1,078,710 (g) 1,078,710 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 North Fayette, PA - - 2,330,847 2,292,932 4,623,779 Blockbuster: 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 Dave's: Maple Heights, OH - - 1,034,758 2,874,414 3,909,172 Dave & Buster's: Utica, MI - - 3,776,169 (c) 3,776,169 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 Tallahassee, 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 1,396,508 - 2,078,542 1,396,508 3,475,050 Leavenworth, KS 1,330,830 - 726,438 1,330,830 2,057,268 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 Warner Robins, GA 1,199,202 - 707,488 (g) 707,488 Lewisville, TX 1,335,426 - 789,237 1,335,426 2,124,663 Forest Hill, TX 1,174,549 - 692,165 1,174,549 1,866,714 Del City, OK - - 1,387,362 (c) 1,387,362 Arlington, TX - - 414,568 (c) 414,568 Ft. Worth, TX 81,167 - - 81,167 81,167 Land 'O Lakes, FL 344,728 - 1,455,464 (g) 1,455,464 Garland, TX 1,418,531 - 522,461 1,418,531 1,940,992 Garland, TX 1,400,278 - 1,476,838 1,400,278 2,877,116 Oklahoma City, OK 1,446,932 - 1,543,480 (g) 1,543,480 Vineland, NJ 1,557,030 - 725,734 (q) 725,734 Food 4 Less: Lemon Grove, CA - - 3,695,816 (c) 3,695,816 Chula Vista, CA - - 3,568,862 (c) 3,568,862 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 Leitchfield, K(e) - - 73,660 306,642 380,302 Marietta, GA (e) - - 156,190 346,509 502,699 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 Lake Placid, F(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 Durant, OK - - 140,862 411,135 551,997 Good Guys, The: 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 - - 1,718,892 2,755,059 4,473,951 Clackamas, OR - - 1,639,995 1,446,764 3,086,759 Bellingham, WA - - 1,732,378 1,764,549 3,496,927 Federal Way, WA - - 2,037,392 1,661,577 3,698,969 East Palo Alto, CA - - 2,294,449 (f) 2,294,449 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 Heilig-Meyers: Baltimore, MD - - 469,782 813,074 1,282,856 Glen Burnie, MD - - 625,588 922,897 1,548,485 Lima, OH - - 344,742 1,097,694 1,442,436 Copperas Cove, TX - - 445,558 943,339 1,388,897 Nacadoches, TX - - 397,074 1,257,402 1,654,476 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 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 - - 331,756 (c) 331,756 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 Marshalls: Freehold, NJ - - 2,052,946 2,585,432 4,638,378 Michael's Grapevine, TX - - 1,017,934 2,066,715 3,084,649 Office Depot: Arlington, TX - - 596,024 1,411,432 2,007,456 Richmond, VA - - 888,772 1,948,036 2,836,808 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 1,805,539 - 868,003 1,805,539 2,673,542 Lynchburg, VA 1,851,326 - 561,509 1,851,326 2,412,835 Leesburg, FL 1,929,028 - 640,019 1,929,028 2,569,047 Plymouth Meeting, PA 1,275,738 - 2,906,424 (g) 2,906,424 Tigard, OR - - 1,539,873 2,247,321 3,787,194 Dover, NJ - - 1,138,296 3,238,083 4,376,379 Griffin, GA 491,821 - 683,747 (g) 683,747 Oshman's Sporting Goods: Dallas, TX - - 1,311,440 (c) 1,311,440 Party City: Memphis, TN 209,674 - 238,229 (g) 238,229 Petco: Grand Forks, ND - - 306,629 909,671 1,216,300 PETsMART: Chicago - - 2,723,463 3,564,837 6,288,300 Pier 1 Imports: Memphis, TN - - 713,319 821,770 1,535,089 Sanford, FL - - 738,051 803,082 1,541,133 Knoxville, TN - - 466,636 (f) 466,636 Mason, OH - - 592,257 (f) 592,257 Harlingen, TX - - 315,434 (f) 315,434 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 - - 2,188,440 6,225,401 8,413,841 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 Ross Dress For Less: Coral Gables, FL - - 1,782,346 1,661,174 3,443,520 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 7-Eleven: Land 'O Lakes, FL 409,606 - 1,076,495 (g) 1,076,495 Tampa Palms, FL 254,450 - 1,080,670 (g) 1,080,670 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 2,573,264 - 820,340 2,573,264 3,393,604 Little Rock, AR - - 3,418,875 2,660,206 6,079,081 Tampa, FL - - 2,127,503 1,521,730 3,649,233 SuperValu: Huntington, WV - - 1,254,238 760,602 2,014,840 Top's: Lacey, WA - - 2,777,449 7,082,150 9,859,599 Waccamaw: Fairfax, VA - - 2,156,801 (c) 2,156,801 White Marsh, MD 3,006,391 - 3,762,030 3,006,391 6,768,421 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 Sacramento, CA - - 585,872 - 585,872 Vacant Properties: Arlington, TX - - 752,840 3,980,309 4,733,149 South Miami, FL - - 1,379,229 1,723,047 3,102,276 Unallocated costs relating to construction in progress 1,095,703 =========== ===== =========== =========== =========== 28,915,025 - 258,544,906 269,225,588 527,770,494 =========== ===== =========== =========== =========== 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) Dave & Buster's: Utica, MI - - - (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) Tallahassee, 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 - - (o) (c) (c) Oklahoma City, OK - - (o) (c) (c) Norman, OK - - - (c) (c) Chattanooga , TN - - - (c) (c) Del City, OK 1,376,025 - - (c) (c) Arlington, TX 1,416,071 - - (c) (c) Food 4 Less: Lemon Grove, CA - - - (c) (c) Chula Vista, 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) The 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) Heilig-Meyers: Rincon, GA - - (d) (d) (d) Bourbonnais, IL - - (d) (d) (d) Mount Vernon, IL - - (d) (d) (d) Muskogee, OK - - (d) (d) (d) Stillwater, OK - - (d) (d) (d) Everett, PA - - (d) (d) (d) Lebanon, PA - - (d) (d) (d) York, PA - - (d) (d) (d) Marlow Heights, MD - - (d) (d) (d) Clovis, NM - - (d) (d) (d) Middletown, OH - - (d) (d) (d) Conway, 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: 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) 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) ========= ======= =========== ========== ========== 2,792,096 - - - - ========= ======= =========== ========== ==========
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 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) Adjacent Excess Space: Memphis, TN 1,686 1998 11/98 40 years Glendale, AZ - (g) 12/98 (g) Babies "R" Us: Arlington, TX 163,786 1996 06/96 40 years Barnes & Noble: Lakeland, FL 150,657 1995 07/94 (h) 40 years Brandon, FL 151,878 1995 08/94 (h) 40 years Denver, CO 289,334 1994 09/94 40 years Houston, TX 194,685 1995 10/94 (h) 40 years Cary, NC 194,298 1996 05/95 (h) 40 years Plantation, FL - 1996 05/95 (h) (c) Lafayette, LA 155,384 1996 06/95 (h) 40 years Oklahoma City, OK 171,808 1996 06/95 (h) 40 years Daytona, FL 150,500 1996 09/95 (h) 40 years Freehold, NJ 165,154 1995 01/96 40 years Dayton, OH 130,953 1996 05/97 40 years Redding, CA 62,657 1997 06/97 40 years Marlton, NJ 13,495 1998 11/98 40 years Bed, Bath & Beyond: Richmond, VA 42,724 1997 06/98 40 years Los Angeles, CA 9,654 1975 11/98 40 years Glendale, AZ - (g) 12/98 (g) Best Buy: Corpus Christi, TX 115,720 1967 11/93 40 years Brandon, FL 129,944 1996 02/97 40 years Evanston, IL - 1994 02/97 (c) Cuyahoga Falls, OH 90,934 1970 06/97 40 years Rockville, MD 124,643 1995 07/97 40 years Fairfax, VA 110,619 1995 08/97 40 years St. Petersburg, FL 95,561 1997 09/97 40 years North Fayette, PA 31,050 1997 06/98 40 years Blockbuster: Conyers, GA 21,440 1997 06/97 40 years Borders Books & Music: Wilmington, DE 610,227 1994 12/94 40 years Richmond, VA 231,436 1995 06/95 40 years Ft. Lauderdale, FL 279,265 1995 02/96 40 years Bangor, ME 157,150 1996 06/96 40 years Altamonte Spgs, FL - 1997 09/97 (c) Burger King: Asheboro, NC 132,468 1986 07/92 40 years Galliano, LA 183,707 1991 07/92 40 years John's Island, SC 113,475 1988 07/92 40 years Lake Charles, LA 156,928 1988 07/92 40 years Lancaster, OH 94,707 1987 07/92 40 years Natchez, MS 106,199 1986 07/92 40 years Tappahannock, VA 93,077 1987 07/92 40 years Warren, MI 127,568 1987 07/92 40 years Manchester, NH 59,953 1980 05/93 40 years Rochester, NH 108,989 1987 05/93 40 years Columbus, OH 56,003 1982 06/93 40 years Coon Rapids, MN 74,966 1990 06/93 40 years Opeleousas, LA 113,427 1989 06/93 40 years St. Paul, MN 74,679 1986 06/93 40 years Checkers: Orlando, FL - 1988 07/92 (c) CompUSA: Mission Viejo, CA 122,634 1994 02/94 (h) 40 years Computer City: Miami, FL 219,462 1994 04/94 40 years Baton Rouge, LA 68,581 1995 12/95 40 years Anchorage, AK 118,005 1995 02/96 40 years Dave's: Maple Heights, OH 134,738 1985 02/97 40 years Dave & Buster's: Utica, MI - 1998 06/98 (c) Denny's: Duncan, SC - 1992 05/93 (c) Greensboro, NC 68,993 1992 05/93 40 years Greenville, SC 56,057 1985 05/93 40 years Houston, TX 80,120 1985 05/93 40 years Landrum, SC - 1992 05/93 (c) Mooresville, NC - 1992 05/93 (c) Santee, SC 43,633 1992 05/93 40 years Topeka, KS - 1989 06/93 (c) Winter Springs, FL - 1994 01/94 (c) Dick's Clothing: Taylor, MI 202,416 1996 08/96 40 years White Marsh, MD 224,800 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 72,706 1996 01/96 40 years Lafayette, LA - 1995 01/96 (c) Moore, OK - 1995 01/96 (c) Midwest City, OK 77,932 1996 03/96 40 years Tallahassee, FL - 1996 06/96 (c) Irving, TX - 1996 12/96 (c) Snellville, GA 66,182 1996 12/96 40 years Jasper, FL - 1994 01/97 (c) Williston, FL - 1995 01/97 (c) Pantego, TX 55,843 1997 06/97 40 years Conyers, GA 38,499 1997 06/97 40 years Norman, OK - 1997 06/97 (c) Chattanooga , TN - 1997 09/97 (c) Stone Mountain, GA 35,878 1997 09/97 40 years Arlington, TX 13,092 1998 11/97 (i) 40 years Leavenworth, KS 18,022 1998 11/97 (i) 40 years Augusta, GA 34,551 1997 12/97 40 years Riverdale, GA 44,465 1997 12/97 40 years Morrow, GA 32,511 1997 12/97 40 years Warner Robins, GA - (g) 03/98 (g) Lewisville, TX 9,737 1998 04/98 (i) 40 years Forest Hill, TX 11,011 1998 04/98 (i) 40 years Del City, OK - 1998 05/98 (c) Arlington, TX - 1998 05/98 (c) Ft. Worth, TX 2,706 1998 06/98 15 years Land 'O Lakes, FL - (g) 08/98 (g) Garland, TX 1,478 1998 06/98 (i) 40 years Garland, TX 4,376 1998 06/98 (i) 40 years Oklahoma City, OK - (g) 08/98 (g) Vineland, NJ - (q) 09/98 (q) Food 4 Less: Lemon Grove, CA - 1996 07/95 (h) (c) Chula Vista, CA (c) 1995 11/98 (c) Golden Corral: Woodstock, GA (e) 138,325 1984 11/84 35 years Edenton, NC 134,174 1984 11/84 35 years Rockledge, FL (e) 142,540 1984 12/84 35 years Gilmer, TX (e) 123,971 1984 12/84 35 years Bonham, TX (e) 143,912 1984 12/84 35 years Leitchfield, KY (e) 128,221 1984 12/84 35 years Marietta, GA (e) 144,892 1984 12/84 35 years Atlanta, TX (e) 153,641 1985 01/85 35 years Vernon, TX (e) 133,927 1985 03/85 35 years Abbeville, LA (e) 147,555 1985 04/85 35 years Fredricksburg, TX 130,770 1985 04/85 35 years Clanton, AL (e) 120,889 1985 05/85 35 years Pleasanton, TX (e) 128,686 1985 05/85 35 years Bowie, TX (e) 126,843 1985 05/85 35 years Lake Placid, FL (e) 124,209 1985 05/85 35 years Ennis, TX 145,608 1985 07/85 35 years Melbourne, FL (e) 135,565 1985 07/85 35 years Franklin, LA (e) 157,598 1985 07/85 35 years Franklin, VA 125,381 1987 02/87 40 years Durant, OK 96,852 1989 08/89 40 years Good Guys, The: Foothill Ranch, CA 125,588 1995 12/96 40 years Valencia,CA 135,717 1995 02/97 40 years Riverside, CA 113,249 1995 05/97 40 years Clackamas, OR 19,592 1995 06/98 40 years Bellingham, WA 23,895 1994 06/98 40 years Federal Way, WA 22,501 1994 06/98 40 years East Palo Alto, CA - (f) 12/98 (f) Hardee's: Chalkville, AL 59,150 1992 10/93 40 years Columbia, TN - 1993 10/93 (c) Gulf Shores, AL 77,004 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 53,719 1993 10/93 40 years Rock Hill, SC 60,351 1993 10/93 40 years Tusculum, TN 65,635 1993 10/93 40 years Warrior, AL - 1992 10/93 (c) West Point, MS - 1993 10/93 (c) Heilig-Meyers: Baltimore, MD 2,541 1968 11/98 40 years Glen Burnie, MD 2,884 1968 11/98 40 years Lima, OH 3,430 1997 11/98 40 years Copperas Cove, TX 2,948 1972 11/98 40 years Nacadoches, TX 3,929 1997 11/98 40 years Hi-Lo Automotive: Mesquite, TX 53,975 1994 10/94 40 years Arlington, TX 58,389 1993 11/94 40 years Ft. Worth, TX 52,328 1993 11/94 40 years Garland, TX 52,299 1993 11/94 40 years Houston, TX 54,342 1994 11/94 40 years Dallas, TX 54,540 1994 12/94 40 years Bastrop, TX 31,237 1994 09/95 40 years Eagle Pass, TX 37,164 1994 09/95 40 years Lake Worth, TX 43,985 1995 09/95 40 years McAllen, TX 49,357 1995 09/95 40 years Nacogdoches, TX 42,576 1995 09/95 40 years San Antonio, TX 52,483 1994 09/95 40 years Temple, TX 47,918 1989 09/95 40 years Universal City, TX 46,526 1995 09/95 40 years HomePlace: Altamonte Spgs, FL 157,494 1997 09/97 40 years Ft. Myers, FL 105,344 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 90,013 1997 06/97 40 years Kroger: Columbus, OH 24,401 1982 02/97 40 years Linens 'n Things: Freehold, NJ 239,716 1994 08/94 40 years Marshalls: Freehold, NJ 280,610 1994 08/94 40 years Michael's Grapevine, TX 27,987 1998 06/98 40 years Office Depot: Arlington, TX 173,408 1991 01/94 40 years Richmond, VA 126,072 1996 05/96 40 years OfficeMax: Corpus Christi, TX 134,664 1967 11/93 40 years Dallas, TX 213,854 1993 12/93 40 years Cincinnati, OH 176,463 1994 07/94 40 years Evanston, IL 156,477 1995 06/95 40 years Altamonte Spgs, FL 219,490 1995 01/96 40 years Pompano Beach, FL 138,345 1972 02/96 40 years Cutler Ridge, FL 92,753 1995 06/96 40 years Sacramento, CA 148,257 1996 12/96 40 years Salinas, CA 85,750 1995 02/97 40 years Redding, CA 84,081 1997 06/97 40 years Kelso, WA 43,258 1998 09/97 40 years Lynchburg, VA 13,499 1998 02/98 40 years Leesburg, FL 2,009 1998 08/98 40 years Plymouth Meeting, PA - (g) 10/98 (g) Tigard, OR 7,023 1995 11/98 40 years Dover, NJ 10,119 1995 11/98 40 years Griffin, GA - (g) 11/98 (g) Oshman's Sporting Goods: Dallas, TX - 1994 03/94 (c) Party City: Memphis, TN - (g) 12/98 (g) Petco: Grand Forks, ND 23,713 1996 12/97 40 years PETsMART: Chicago 25,994 1998 09/98 40 years Pier 1 Imports: Memphis, TN 31,672 1997 09/96 (h) 40 years Sanford, FL 15,894 1998 06/97 (h) 40 years Knoxville, TN - (f) 01/98 (f) Mason, OH - (f) 06/98 (f) Harlingen, TX - (f) 11/98 (f) Pizza Hut: Orlando, FL 66,910 1974 08/93 20.9 years Rally's: Toledo, OH 53,599 1989 07/92 38.8 years Robb & Stucky: Ft. Myers, FL 164,758 1997 12/97 40 years Roger & Marv's: Kenosha, WI 156,156 1992 02/97 40 years Ro-Jack's Food Store: Warwick, RI - 1992 02/97 (c) Ross Dress For Less: Coral Gables, FL 37,836 1994 06/96 40 years Scotty's: Orlando, FL 183,025 1995 06/95 40 years Orlando, FL 178,894 1995 06/95 40 years Sears Homelife: Clearwater, FL 354,234 1992 05/93 40 years Orlando, FL 305,636 1992 05/93 40 years Pensacola, FL 100,156 1994 06/96 40 years Raleigh, NC 110,089 1995 06/96 40 years Tampa, FL 128,433 1992 06/96 40 years 7-Eleven: Land 'O Lakes, FL - (g) 10/98 (g) Tampa Palms, FL - (g) 12/98 (g) Shop & Save: Homestead, PA - 1994 02/97 (c) Penn Hills, PA 58,272 1991 02/97 40 years Sports Authority: Memphis, TN 13,402 1998 12/97 (i) 40 years Little Rock, AR 19,397 1998 09/98 40 years Tampa, FL 95,425 1994 06/96 40 years SuperValu: Huntington, WV 35,653 1971 02/97 40 years Top's: Lacey, WA 331,976 1992 02/97 40 years Wacammaw: Fairfax, VA - 1995 12/95 (c) White Marsh, MD 59,502 1998 03/98 (i) 40 years Waremart: Eureka, CA 256,435 1965 02/97 40 years Wendy's Old Fashioned Hamburger: Fenton, MO 97,939 1985 07/92 33 years Longwood, FL 40,400 1982 07/92 31.4 years Sacramento, CA - (p) 02/98 (p) Vacant Properties: Arlington, TX 65,321 1996 06/96 38.4 years South Miami, FL 39,244 1988 06/96 38.1 years Unallocated costs relating to con- struction in progress =========== 17,335,079 =========== 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) Dave & Buster's: Utica, MI (c) 1998 06/98 (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) Tallahassee, 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) Del City, OK (c) 1998 10/98 (j) (c) Arlington, TX (c) 1998 11/98 (j) (c) Food 4 Less: Lemon Grove, CA (c) 1996 07/95 (h) (c) Chula Vista, CA (c) 1995 11/98 (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) The 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) Heilig-Meyers: Rincon, GA (d) 1997 11/98 (d) Bourbonnais, IL (d) 1997 11/98 (d) Mount Vernon, IL (d) 1997 11/98 (d) Muskogee, OK (d) 1997 11/98 (d) Stillwater, OK (d) 1998 11/98 (d) Everett, PA (d) 1998 11/98 (d) Lebanon, PA (d) 1997 11/98 (d) York, PA (d) 1997 11/98 (d) Marlow Heights, MD (d) 1968 11/98 (d) Clovis, NM (d) 1996 11/98 (d) Middletown, OH (d) 1997 11/98 (d) Conway, SC (d) 1997 11/98 (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: 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) 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, 1998 (a) Transactions in real estate and accumulated depreciation during 1998, 1997 and 1996, are summarized as follows:
1998 1997 1996 ----------- ----------- ----------- Land and Buildings: Balance at the Beginning of Period 413,274,423 277,109,358 161,454,129 Acquisitions 129,416,817 156,011,944 116,563,622 Sale of land and buildings (5,407,999) (19,846,879) (908,393) ----------- ----------- ----------- Balance at the Close of Period 537,283,241 413,274,423 277,109,358 =========== =========== =========== Accumulated Depreciation: Balance at the Beginning of Period 12,296,997 8,078,562 5,497,390 Sale of land and buildings (820,506) (258,942) (222,940) Depreciation expense 5,858,588 4,477,377 2,804,112 ---------- ---------- ---------- Balance at the Close of Period 17,335,079 12,296,997 8,078,562 ========== ========== ========== (b) As of December 31, 1998, all of the leases are treated as operating leases for federal income tax purposes. As of December 31, 1998, the aggregate cost of the properties owned by the Company and its subsidiaries for federal income tax purposes was $668,371,927. (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. (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 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) Date acquired represents acquisition date of land. The Company developed the buildings, generally completing construction within 12 months from the acquisition date of the land. (j) Date acquired represents date of building construction completion. The land has been recorded as operating lease. (k) During the years ended December 31, 1997 and 1996, the Company (i) incurred acquisition fees and expense reimbursement fees totaling $2,278,306 and $937,363, respectively, paid to CNL Realty Advisors, Inc. and (ii) acquired land and buildings purchased from affiliates of CNL Realty Advisors, Inc. for an aggregate cost of $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. On January 1, 1998, the Company acquired CNL Realty Advisors, Inc. and became self-administered. As a result, the Company was not a party to such transactions and began internally performing the services previously provided by CNL Realty Advisors, Inc. for the year ended December 31, 1998. (l) Property is encumbered as a part of the Company's $13,150,000 long term, fixed rate mortgage and security agreement. (m) Property is encumbered as a part of the Company's $39,450,000 long term, fixed rate mortgage and security agreement. (n) 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 encumbrance is listed with the land portion of the property. (o) 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. (p) The Company owns only the land for this property, which is subject to a ground lease between the Company and the tenant. The tenant funded the improvements on the property. (q) The Company acquired a land parcel adjacent to its existing Eckerd in Vineland, New Jersey, and is in the process of replacing the building in order to increase the gross leaseable area. The original lease is recorded as a direct financing lease.
EXHIBITS EXHIBIT INDEX Exhibit Number - -------------- 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). 3.5 First Amended and Restated Articles of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's Registration Statement No. 333-64511 on Form S-3, and incorporated herein by reference). 4.1 Specimen Certificate of Common Stock, par value $0.01 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). 4.2 Form of Indenture dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,00 of 7.125% Notes due 2008 (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated March 20, 1998, andincorporated herein by reference.) 4.3 Form of Supplement Indenture No. 1 dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference.) 4.4 Form of 7.125% Note due 2008 (filed as Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated March 20, 1998, 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). 12 Statement of Computation of Ratios of Earnings to Fixed Charges (filed herewith). 13 Annual Report to Shareholders for the year ended December 31,1998 (filed herewith). 23 Consent of Independent Accountants dated March 30, 1999 (filed herewith). 27 Financial Data Schedule (filed herewith). (b) No reports on Form 8-K were filed during the quarter ended December 31, 1998. EX-12 2 STMT OF COMPUTATION OF EARNINGS TO FIXED CHARGES
EXHIBIT 12 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ Net Earnings Before Extraordinary Item $ 32,441,198 $ 30,384,643 $ 19,839,374 $ 12,707,271 $ 8,915,373 Plus: Merger Transaction Costs 5,501,343 0 0 0 0 ------------ ------------ ------------ ------------ ----------- Net Earnings Before Extraordinary Item and Merger Transaction Costs 37,942,541 30,384,643 19,839,374 12,707,271 8,915,373 Fixed Charges: Interest on Indebtedness 13,444,646 11,477,929 7,206,291 3,834,388 497,670 Discount Relating to Indebtedness 15,244 0 0 0 0 Amortization of Loan Costs 710,491 825,014 748,638 322,176 254,080 ------------ ------------ ------------ ------------ ----------- 14,170,381 12,302,943 7,954,929 4,156,564 751,750 Net Earnings Before Extraordinary Item, Merger Transaction Costs and Fixed Charges 52,112,922 42,687,586 27,794,303 16,863,835 9,667,123 Divided by Fixed Charges Fixed Charges 14,170,381 12,302,943 7,954,929 4,156,564 751,750 Capitalized Interest 1,111,615 133,202 0 0 0 ------------ ------------ ------------ ------------ ----------- $ 15,281,996 $ 12,436,145 $ 7,954,929 $ 4,156,564 $ 751,750 ------------ ------------ ------------ ------------ ----------- Ratio of Net Earnings to Fixed Charges 3.41 3.43 3.49 4.06 12.86 ============ ============ ============ ============ ===========
EX-13 3 ANNUAL REPORT TO SHAREHOLDERS Exhibit 13 Annual Report to Shareholders 1998 ANNUAL REPORT - PAGE 1 [Picture 1] Background photograph of a construction site located in East Ridge, Tennessee. HISTORICAL FINANCIAL HIGHLIGHTS (dollars in thousands, except per share data)
1998 1997 1996 1995 1994 ----------- ------------ ------------ ----------- ----------- Gross Revenues $ 64,773 $ 50,135 $ 33,369 $ 20,580 $ 12,289 Net Earnings $ 32,441 $ 30,385 $ 19,839 $ 12,707 $ 8,915 Total Assets $ 685,595 $ 537,014 $ 370,953 $ 219,257 $ 152,211 Total Long-Term Debt $ 292,907 $ 171,836 $ 116,956 $ 82,600 $ 14,800 Total Equity $ 383,890 $ 362,144 $ 252,574 $ 135,842 $ 136,665 Cash Dividends Paid to Stockholders $ 35,672 $ 28,381 $ 18,868 $ 13,529 $ 9,897 Weighted Average Shares Basic 29,169,371 24,070,697 16,798,918 11,663,672 8,606,138 Diluted 29,397,154 24,220,792 16,838,719 11,671,197 8,613,672 Per Share Information: Net Earnings Basic $ 1.11 $ 1.26 $ 1.18 $ 1.09 $ 1.04 Diluted $ 1.10 $ 1.25 $ 1.18 $ 1.09 $ 1.04 Dividends $ 1.23 $ 1.20 $ 1.18 $ 1.16 $ 1.14 Other Data Funds from operations (1) $ 42,517 $ 34,230 $ 22,570 $ 14,443 $ 9,992 Cash flows provided by (used in): Operating activities $ 41,260 $ 34,010 $ 22,216 $ 14,140 $ 9,505 Investing activities $ (145,643) $ (167,002) $ (144,247) $ (67,518) $ (79.081) Financing activities $ 103,665 $ 133,742 $ 123,140 $ 52,609 $ 50,799 Equity Market Capitalization ($mil) $ 391.2 $ 499.7 $ 329.6 $ 148.7 $ 142.9 (1) The Company adopted the NAREIT definition of funds from operations in 1995 and has restated funds from operations for 1994 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 $5,501 of expenses incurred in acquiring CNL Realty Advisors, Inc. from a related party in 1998. 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 REITs, and therefore, may not be comparable to such other REITs.
1998 ANNUAL REPORT - PAGE 8 [Picture 2] Photograph of a man welding at a construction site located in East Ridge, Tennessee. Photograph caption reads, "Measure not the work until the day's out and the labor done, Then bring your gauge." - Elizabeth Barrett Browning MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Commercial Net Lease Realty, Inc., a Maryland corporation, is a fully integrated, self-administered real estate investment trust ("REIT") formed in 1984 that acquires, develops, owns and manages high-quality, freestanding properties that are generally leased to major retail businesses under long-term commercial net leases. As of December 31, 1998, Commercial Net Lease Realty, Inc. and its subsidiaries (the "Company") owned 285 properties (the "Properties") that are leased to major retail businesses, including Academy, Babies "R" Us, Barnes & Noble, Bed Bath & Beyond, Best Buy, Borders, Burger King, CompUSA, Computer City, Dave & Buster's, Denny's, Dick's Clothing & Sporting Goods, Eckerd, Food 4 Less, Food Lion, Golden Corral, Good Guys, Hardee's, Heilig-Meyers, Hi-Lo Automotive, HomePlace, International House of Pancakes, Kash N' Karry, Levitz, Linens 'n Things, Marshalls, Michael's, Office Depot, OfficeMax, Oshman's, PETsMart, Pier 1 Imports, Robb & Stucky, Ross Dress For Less, Scotty's, Sears Homelife Centers, The 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 development and for the payment of interest on its outstanding indebtedness. Generally, cash needs for items other than property acquisitions and development have been met from operations and property acquisitions and development have been funded by equity and debt 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 from banks or other lenders, or the sale of Properties, as well as undistributed funds from operations. For the years ended December 31, 1998, 1997 and 1996, the Company generated $41,260,000, $34,010,000 and $22,216,000, respectively, in net cash provided by operating activities. The increase in cash from operations for each of the years ended December 31, 1998, 1997 and 1996, is primarily a result of changes in revenues and expenses as discussed in "Results of Operations." The Company's leases typically provide that the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including 1998 ANNUAL REPORT - PAGE 9 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. In January 1998, one of the Company's tenants, HomePlace, filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, the tenant has the right to reject or affirm its leases with the Company. In May 1998, HomePlace rejected two of its five leases with the Company, at which time HomePlace was no longer required to pay rent on these two leases. In September 1998, one of these Properties was re-leased to Waccamaw Corporation. The Company is currently marketing the remaining Property, which is not subject to a lease, for sale or lease. As of December 31, 1998, HomePlace continued to lease three Properties which accounted for four percent of the Company's total rental and earned income for the year ended December 31,1998. In August 1997, one of the Company's tenants, Luria's, filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, the tenant has the right to reject or affirm its leases with the Company. In March 1998, Luria's rejected its three leases with the Company, at which time Luria's was no longer required to pay rent on these three leases. In August 1998, the Company re-leased one of these three Properties to The Sports Authority and in October 1998, the Company re-leased one of these Properties to Ross Dress for Less. The remaining Property, which is not subject to a lease, is currently under contract for sale. Indebtedness. In August 1997, the Company entered into an amended and restated loan agreement for a $200,000,000 revolving credit facility (the "Credit Facility") 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 July 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 a tiered rate structure with a maximum rate of 140 basis points above LIBOR (based upon the Company's investment grade rating) 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. As of December 31, 1998, $138,100,000 was outstanding under the Credit Facility. The Company expects to use the Credit Facility primarily to invest in freestanding, retail properties. 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 two interest rate cap agreements during the three years ended December 31, 1998. As of December 31, 1998, one 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, 1998, the outstanding principal balance was $13,150,000 and the aggregate carrying value of these Properties totaled $16,539,000. The Company intends to use available funds from its Credit Facility to pay the $13,150,000 principal balance of this loan upon its maturity in December 1999. 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 mortgage is secured by a first lien on and an assignment of rents and leases of certain of the Company's Properties. As of December 31, 1998, the outstanding principal balance was $35,680,000 and the aggregate carrying value of the Properties totaled $72,841,000. 1998 ANNUAL REPORT - PAGE 10 In June 1996, the Company acquired three Properties each subject to a mortgage totaling $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 6.4 years. As of December 31, 1998, the outstanding principal balances for the Mortgages totaled $6,233,000 and the aggregate carrying value of these three properties totaled $8,155,000. 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. During the year ended December 31, 1996, the Company issued a total of 9,100,000 shares of common stock pursuant to two prospectus supplements to its $200,000,000 shelf registration statement and received gross proceeds totaling $123,375,000. In connection with the two offerings, the Company incurred stock issuance costs totaling $7,614,000 consisting primarily of underwriters' commissions and fees, legal and accounting fees and printing expenses. Proceeds from the offerings were used to pay down the Company's Credit Facility. In April of 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 (which includes approximately $36,846,000 of unissued debt and equity securities under the Company's previous $200,000,000 shelf registration statement). During the year ended December 31, 1997, the Company issued a total of 7,158,033 shares of common stock pursuant to four prospectus supplements to these shelf registration statements and received gross proceeds totaling $111,056,000. In connection with [Map 1] GEOGRAPHIC DIVERSIFICATION Alabama Alaska Arkansas Arizona California Colorado Delaware Florida Georgia Illinois Kansas Kentucky Louisiana Maine Maryland Michigan Minnesota Mississippi Missouri New Hampshire New Jersey New Mexico Nevada North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina Tennessee Texas Virginia Washington West Virginia Wisconsin the four offerings, the Company incurred stock issuance costs totaling $3,954,000 consisting primarily of underwriters' commissions and fees, legal and accounting fees and printing expenses. Net proceeds from the offerings, were used to pay down the Company's Credit Facility. During the year ended December 31, 1998, the Company issued a total of 988,172 shares of common stock pursuant to three prospectus supplements to its $300,000,000 shelf registration statement, and received gross proceeds totaling $16,962,000. In connection with the three offerings, the Company incurred stock issuance costs totaling $933,000 consisting primarily of underwriters' commissions and fees, legal and accounting fees and printing expenses. Proceeds from the offerings were used to pay down the Company's Credit Facility. During the year ended December 31, 1998, the Company received investment grade ratings from Standard and Poor's, Moody's Investor Service and Fitch IBCA on its senior, unsecured debt. In March 1998, the Company filed a prospectus supplement to its $300,000,000 shelf registration and issued $100,000,000 of 7.125% Notes due 2008 (the "Notes"). The Notes are senior, unsecured obligations of the Company subordinated to all of the Company's secured indebtedness. The Notes were sold at a discount for an aggregate purchase price of $99,729,000. In connection with the debt offering, the Company incurred debt issuance costs totaling $1,208,000, consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. The net proceeds from the debt offering were used to pay down outstanding indebtedness of the Company's Credit Facility. Effective July 10, 1998, the shareholders approved an amendment to the Company's Articles of Incorporation to authorize the issuance of up to 15,000,000 shares of preferred stock, par value $0.01 per share, which may be issued in various classes with different characteristics as determined by the Board of Directors. On September 29, 1998, 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 (which includes approximately $112,000,000 of unissued debt and equity securities under the Company's previous $300,000,000 shelf registration statement). 1998 ANNUAL REPORT - PAGE 11 Property Acquisitions and Commitments. During the year ended December 31, 1998, the Company borrowed $143,600,000 under its Credit Facility (i) to acquire 55 properties (23 of which were land only parcels, 14 of which are currently under construction), (ii) to purchase one building constructed by the tenant on a land parcel owned by the Company and (iii) to complete construction of 14 buildings by the Company on five land parcels acquired by the Company during 1997 and nine land parcels acquired by the Company in 1998 (the "Acquisition Properties"). The Properties acquired during 1998 are leased to tenants including Barnes & Noble, Bed Bath & Beyond, Best Buy, Dave & Buster's, Eckerd, Food 4 Less, Good Guys, Heilig-Meyers, Michael's, OfficeMax, PETsMART, Pier I Imports, The Sports Authority and Wendy's. The Company generally 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 Statement, 39 of the leases relating to the 55 Properties acquired during 1998 have been classified as operating leases and 14 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 two of these leases are accounted for as operating leases. Two of the properties are adjacent excess parcels that are not subject to a lease. Also pursuant to the requirements of this Statement, the lease relating to the building which was developed by the tenant on a land parcel owned by the Company and the leases relating to the five buildings developed by the Company on land parcels owned by the Company have been classified as operating leases. In connection with the acquisition and lease relating to the land parcels of the three Pier 1 Imports Properties and one of the Good Guys Properties, the tenants are obligated to develop a building on the respective land parcels. The Company has agreed to acquire the completed buildings for an amount of up to $3,939,000, at which time rental income will increase for the Properties. The Company owns 11 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 $15,458,000, of which $8,417,000 of costs had been incurred at December 31, 1998. The lease agreements provide for rent to commence upon completion of construction of the buildings. [Picture 3] Photograph of a construction site located in East Ridge, Tennessee. [Picture 4] Photograph of an exterior view of the Linens 'n Things located in Freehold, New Jersey. [Picture 5] Photograph of an exterior view of the Borders Books and Music located in Ft. Lauderdale, Florida. [Picture 6] Photograph of an exterior view of The Good Guys! located in Stockton, California. 1998 ANNUAL REPORT - PAGE 12 As of December 31, 1998, the Company had entered into agreements to purchase 33 additional properties for an estimated aggregate amount of $63,123,000. In connection with the acquisition of 23 of these properties, the Company was contingently liable for $5,000,000 related to a bank letter of credit which guarantees 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 33 properties under contract and the 15 buildings under construction as of December 31, 1998, 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 Company's 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 tax-free 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 tax-free like-kind exchange transactions for federal income tax purposes. During 1998, the Company sold six of its Properties for a total of $6,130,000 and received net sales proceeds of $5,947,000. The Company recognized a gain on the sale of these six Properties of $1,355,000 for financial reporting purposes. The Company reinvested the proceeds to acquire three additional properties and structured the transactions to qualify as tax-free like-kind exchange transactions for federal income tax purposes. Merger Transaction. On December 18, 1997, the Company's stockholders voted to approve an agreement and plan of merger with CNL Realty Advisors, Inc. (the "Advisor"), whereby the stockholders of the Advisor agreed 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 a fully integrated, self-administered REIT effective January 1, 1998. Ten percent of the Share Consideration (220,000 shares) was paid January 1, 1998, and the balance (the "Share Balance") of the Share Consideration is to be paid over time based upon the Company's completed property acquisitions and completed development projects in accordance with the Merger agreement. In the event of a change in control of the Company, any remaining Share Balance will be immediately issued and paid to stockholders of the Advisor. 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 expenses incurred in acquiring the Advisor from a related party. In addition, in connection with the Merger, the Company incurred costs totaling $771,000 consisting primarily of legal and accounting fees, directors' compensation and fairness opinions. 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. During the year ended December 31, 1998, the Company issued 57,813 shares of the Share Balance in connection with the property acquisitions during the nine months ended September 30, 1998. The market value of the shares at the date the shares became issuable totaled $809,000, all of which was charged to operations during the year ended December 31, 1998. In addition, in connection with the property acquisitions during the quarter ended December 31, 1998, on January 1, 1999, an additional 371,938 shares of the Share Balance 1998 ANNUAL REPORT - PAGE 13 became issuable to the stockholders of the Advisor. The market value of the shares at the date the shares became issuable totaled $4,928,000, all of which is to be charged to operations during the year ended December 31, 1999. Pursuant to the agreement and plan of merger, the Company is required to issue the shares within 90 days after the shares become issuable. To the extent the remaining 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 employees of the Advisor became employees of the Company and any obligation to pay fees under the advisor agreement between the Company and the Advisor was terminated. 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 and maintaining its status as a real estate investment trust, is to distribute a substantial portion of its funds available from operations to its stockholders in the form of dividends. During the years ended December 31, 1998, 1997 and 1996, the Company declared and paid dividends to its stockholders of $35,672,000, $28,381,000 and $18,868,000, respectively, or $1.23, $1.20, and $1.18 per share of common stock, respectively. For the years ended December 31, 1998, 1997 and 1996, 88.9%, 91.4% and 90.2%, respectively, of such dividends were considered to be ordinary income and 11.1%, 8.6% and 9.8%, respectively, [Picture 7] Photograph of a construction site located in Land O' Lakes, Florida. [Picture 8] Photograph of an exterior view of the Eckerd located in Snellville, Georgia. [Picture 9] Photograph of an exterior view of the Marshalls located in Freehold, New Jersey. [Picture10] Photograph of an exterior view of the Academy located in Houston, Texas. 1998 ANNUAL REPORT - PAGE 14 [Picture 11] Photograph of a construction site located in East Ridge, Tennessee. were considered return of capital for federal income tax purposes. In January 1999, the Company declared dividends to its stockholders of $9,267,000 or $0.31 per share of common stock, payable in February 1999. RESULTS OF OPERATIONS Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997. As of December 31, 1998 and 1997, the Company owned 285 and 237 wholly-owned Properties, respectively, 281 and 237, respectively, of which were leased to operators of major retail businesses. In addition, during the year ended December 31, 1998, the Company leased six properties which were sold during 1998. During the year ended December 31, 1997, the Company leased one property which was contributed to the Partnership during 1997 and five properties which were sold during 1997. In connection therewith, during the years ended December 31, 1998 and 1997, the Company earned $61,750,000 and $49,922,000, respectively, in rental income from operating leases, earned income from direct financing leases and contingent rental income ("Rental Income"). The 23.7 percent increase in Rental Income during 1998, as compared to 1997, is primarily attributable to income earned on the 55 Properties acquired and the 15 buildings upon which construction was completed during 1998. In addition, Rental Income increased during 1998 as a result of the fact that the 47 Properties acquired and three buildings upon which construction was completed during 1997 were operational for a full fiscal year in 1998. The increase in Rental Income was partially offset by a decrease in Rental Income relating to five Properties which became vacant during the year ended December 31, 1998. Rental Income is expected to increase in 1999 as the Company acquires additional properties and due to the fact that the 55 Properties acquired and 15 buildings upon which construction was completed in 1998 will contribute to the Company's income for a full fiscal year. In addition, the Company has re-leased three of its five vacant Properties. The Properties are leased on a long-term basis, generally 10 to 20 years, with renewal options for an additional 10 to 20 years. As of December 31, 1998, the weighted average remaining lease term of the Properties was approximately 15 years. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Statement requires that a public business enterprise report financial and descriptive 1998 ANNUAL REPORT - PAGE 15 information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. While the Company does not have more than one reportable segment as defined by the Statement, the Company has identified two primary sources of revenue: (i) rental and earned income from triple net leases and (ii) fee income from development, property management and asset management services. During the years ended December 31, 1998, 1997 and 1996, the Company generated $62,067,000, $50,135,000 and $33,369,000, respectively, from its triple net lease segment. For the year ended December 31, 1998, the Company generated revenues totaling $2,706,000 from its fee income segment. Prior to January 1, 1998, the Company did not provide services for development, property management and asset management. During 1998, one of the Company's lessees, Eckerd Corporation, 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, 1998, Eckerd Corporation leased 52 Properties (including four properties under leases with the Company's unconsolidated partnership). It is anticipated that, based on the minimum rental payments required by the leases, Eckerd Corporation will continue to account for more than ten percent of the Company's total rental income in 1999. Any failure of this lessee could materially affect the Company's earnings. During the year ended December 31, 1998, the Company earned $2,362,000 in development and asset management fees from related parties. No development and asset management fees were earned during 1997. The Company began providing development and asset management services on January 1, 1998 in connection with the Merger of the Company's Advisor. During the years ended December 31, 1998 and 1997, the Company's operating expenses, excluding interest and including depreciation and amortization, were $20,594,000 and $9,025,000, respectively (31.8% and 18.0%, respectively, of total revenues). The increase in the dollar amount of operating expenses for the year ended December 31, 1998, is primarily attributable to a $5,501,000 charge related to the costs incurred in acquiring the Advisor from a related party. Operating expenses for the year ended December 31, 1998, excluding the costs relating to the acquisition of the Advisor, were $15,093,000 (23.3 % of gross operating revenues). The increase for the year ended December 31, 1998 is also attributable to the increase in depreciation as a result of the depreciation of the additional Properties acquired during 1998 and a full year of depreciation on the Properties acquired during 1997. Real estate expenses also increased primarily as a result of costs incurred on the five Properties that became vacant during 1998. In addition, during the year ended December 31, 1997, the Company paid an advisory fee to the Advisor. The increase in general and administrative expense for the year ended December 31, 1998, was largely a result of the administrative overhead assumed in connection with the Merger of the Company's Advisor on January 1, 1998, (in lieu of paying advisory, acquisition and development fees to the Advisor) and due to the increase in the Company's asset size and operations. In accordance with generally accepted accounting principles, certain costs relating to development of Properties for the Company's own use have been capitalized. The Company recognized $13,460,000 and $11,478,000 in interest expense for the years ended December 31, 1998 and 1997, respectively. Interest expense increased for the year ended December 31, 1998 primarily as a result of interest expense related to the Notes issued in March 1998. However, the increase was partially offset by a decrease in the average interest rates and average borrowing levels of the Company's Credit Facility. During 1998, the Company sold six of its Properties for a total of $6,130,000 and received net sales proceeds of $5,947,000. The Company recognized a gain on the sale of these six Properties of $1,355,000 for financial reporting purposes. The Company reinvested the proceeds to acquire three additional properties and structured the transactions to qualify as tax-free 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. 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 1998 ANNUAL REPORT - PAGE 16 financial reporting purposes. The Company reinvested the proceeds to acquire additional properties and structured the transactions to qualify as tax-free like-kind exchange transactions for federal income tax purposes. Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996. As of December 31, 1997 and 1996, the Company owned and leased 237 and 195 Properties, respectively, to operators of major retail businesses. In addition, during the year ended December 31, 1997, the Company leased one property which was contributed to the Partnership during 1997 and five properties which were sold during 1997. During the year ended December 31, 1996, the Company leased two properties which were sold during 1996. 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 weighted average remaining lease term of the Properties was approximately 14 years. During the years ended December 31, 1997 and 1996, the Company earned $49,922,000 and $33,209,000, respectively, in Rental Income. The 50 percent increase in Rental Income during 1997, as compared to 1996, was primarily attributable to income earned on the 47 Properties acquired and the three buildings upon which construction was completed during 1997. In addition, Rental 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. 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). 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 total revenues). The increase in the dollar amount of operating expenses for the year ended December 31, 1997, was 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 was 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 years ended December 31, 1997 and 1996. 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 tax-free like-kind exchange transactions for federal income tax purposes. Investment Considerations. Two of the Company's tenants, HomePlace 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, 1998, HomePlace and Levitz continued to lease three and one Properties, respectively, which accounted for four percent of the Company's Rental Income for the year ended December 31, 1998. The Company had made an election to be taxed as a 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 1998 ANNUAL REPORT - PAGE 17 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, 1998, 1997 and 1996, 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, on potential capital appreciation of the Properties and on operating expenses of the Company. Management of the Company currently knows of no trends that will have a material adverse effect on liquidity, capital resources or results of operations. The Year 2000 problem concerns the inability of information and non-information technology systems to properly recognize and process date-sensitive information beyond January 1, 2000. The Company's information technology system consists of a network of personal computers and servers built using hardware and software from mainstream suppliers. The Company's non-information technology systems are primarily facility related and include building security systems, elevators, fire suppressions, HVAC, electrical systems and other utilities. The Company has no internally generated programmed software coding to correct, as substantially all of the software utilized by the Company is purchased or licensed from external providers. In early 1998, the Company formed a Year 2000 committee (the "Y2K Team") for the purpose of identifying, understanding and addressing the various issues associated with the Year 2000 problems. The Y2K Team consists of members from the Company and its affiliates, including representatives from senior management, information systems, telecommunications, legal, office management, accounting and property [Picture 12] Photograph of a construction site located in Land O'Lakes, Florida. [Picture 13] Photograph of an exterior view of the Sears Homelife located in Clearwater, Florida. [Picture 14] Photograph of an exterior view of the Pier 1 Imports located in Memphis, Tennessee. 1998 ANNUAL REPORT - PAGE 18 management. The Y2K Team's initial step in assessing the Company's Y2K readiness consists of identifying any systems that are date-sensitive and, accordingly, could have potential Y2K problems. The Y2K Team is in the process of conducting inspections, interviews and tests to identify which of the Company's systems could have a potential Y2K problem. The Company's information system is comprised of hardware and software applications from mainstream suppliers; accordingly, the Y2K Team is in the process of contacting the respective vendors and manufacturers to verify the Y2K compliance of their products. In addition, the Y2K Team has also requested and is evaluating documentation from other companies with which the Company has a material third party relationship, including the Company's tenants, major vendors, financial institutions and the Company's transfer agent. The Company depends on its tenants for rents and cash flows, its financial institutions for availability of cash and financing and its transfer agent to maintain and track investor information. Although the Company continues to receive positive responses from its third party relationships regarding their Y2K compliance, the Company cannot be assured that the tenants, financial institutions, transfer agent and other vendors have adequately considered the impact of the Year 2000. The Company is not able to measure the effect on the Company's operations of any third party's failure to adequately address the impact of the Year 2000. The Company has identified and has implemented upgrades for certain hardware equipment. In addition, the Company has identified certain software applications which will require upgrades to become Year 2000 compliant. The Company expects all of these upgrades as well as any other necessary remedial measures on the information technology systems used in the business activities and operations of the Company to be completed by September 30, 1999, although, the Company cannot be assured that the upgrade solutions provided by the vendors have addressed all possible Year 2000 issues. The Company does not expect the aggregate cost of the Year 2000 remedial measures to exceed $50,000. Based upon the progress the Company has made in addressing its Year 2000 issues and its plan and timeline to complete its compliance program, the Company does not foresee significant risks associated with its Year 2000 compliance at this time. The Company plans to address its significant Year 2000 issues prior to being affected by them; therefore, it has not developed a comprehensive contingency plan. However, if the Company identifies significant risks related to its Year 2000 compliance or if its progress deviates from the anticipated timeline, the Company will develop contingency plans as deemed necessary at that time. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement, which is effective for all fiscal quarters of fiscal years beginning after June 1, 1999, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. The Statement requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company is currently reviewing the Statement to see what impact, if any, it will have on the Company's consolidated financial statements. [Picture 15] Photograph of an exterior view of the OfficeMax located in Lynchburg, Virginia. [Picture 16] Photograph of an exterior view of the PETsMART located in Chicago, Illinois. [Picture 17] Photograph of an exterior view of the Shop `n Save located in Homestead, Pennsylvania. 1998 ANNUAL REPORT - PAGE 19 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 20 properties currently under some level of environmental remediation. The seller or the tenant is contractually responsible for the cost of the environmental remediation for each of these properties. Market Risk. The Company is exposed to interest changes primarily as a result of its variable rate Credit Facility and its long term, fixed-rate debt used to finance the Company's development and acquisition activities and for general corporate purposes. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows at both fixed and variable rates on its long-term debt and is currently a party to an interest rate cap agreement on a portion of its variable rate Credit Facility, which provides for a fixed LIBOR rate of 6.9% per annum on a notional amount of $30 million. The information in the chart summarizes the Company's market risks associated with its debt obligations outstanding as of December 31, 1998. The table presents principal cash flows and related interest rates by year of expected maturity. The variable interest rate shown represents the weighted average rate for the Credit Facility at the end of the period. As the table incorporates only those exposures that exist as of December 31, 1998, it does not consider those exposures or positions which could arise after that date. Moreover, because firm commitments are not presented in the table below, the information presented therein has limited predictive value. As a result, the Company's ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the Company's hedging strategies at that time and interest rates. MARKET RISK DISCLOSURE TABLE
|-------------------Maturity Date------------------------| Fair 1999 2000 2001 2002 2003 Thereafter Total Value -------- -------- ------- -------- -------- ---------- -------- -------- Variable rate Credit Facility $138.100 - - - - - $138,100 $138,100 Average interest rate 7.14% - - - - - 7.14% Fixed rate mortgages $ 14,984 $ 1,980 $ 2,136 $2,306 $ 2,543 $ 31,114 $ 55,063 $ 55,063 Average interest rate 7.40% 7.61% 7.60% 7.60% 7.60% 7.70% 7.60% Fixed rate Notes - - - - - $100,000 $100,000 $ 92,232 Average interest rate - - - - - 7.163% 7.163%
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. 1998 ANNUAL REPORT - PAGE 20 FINANCIAL STATEMENTS INDEPENDENT AUDITORS' 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Orlando, Florida January 15, 1999 [Picture 18] Photograph of an exterior view of the Barnes & Noble located in Lakeland, Florida. [Picture 19] Photograph of an exterior view of the Best Buy located in Brandon, Florida. [Picture 20] Photograph of an exterior view of The Sports Authority located in Sarasota, Florida. 1998 ANNUAL REPORT - PAGE 21 [Picture 21] Photograph of a construction site located in East Ridge, Tennessee. COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
December 31, ASSETS 1998 1997 - ------ ----------- ----------- Real estate: Accounted for using the operating method, net of accumulated depreciation $ 519,948 $ 400,977 Accounted for using the direct financing method 138,809 118,747 Investment in partnership 3,850 3,925 Cash and cash equivalents 1,442 2,160 Receivables 3,532 527 Accrued rental income 10,395 7,063 Debt costs, net of accumulated amortization of $2,559 and $1,868 2,282 1,762 Other assets 5,337 1,853 ========== ========== $ 685,595 $ 537,014 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Line of credit payable $ 138,100 $ 115,100 Mortgages payable 55,063 56,736 Notes payable, net of unamortized discount of $256 99,744 - Accrued interest payable 2,646 765 Accounts payable and accrued expenses 5,343 1,392 Rents received in advance 809 877 ---------- ---------- Total liabilities 301,705 174,870 ---------- ---------- Commitments and contingencies (Note 16) Stockholders' equity: Preferred stock, $0.01 par value. Authorized 15,000,000 shares at December 31, 1998; none issued and outstanding - - Common stock, $0.01 par value. Authorized 90,000,000 shares; issued and outstanding 29,521,089 and 27,953,627 shares at December 31, 1998 and 1997, respectively 295 280 Excess stock, $0.01 par value. Authorized 105,000,000 and 90,000,000 shares at December 31, 1998 and 1997, respectively; none issued and outstanding - - Capital in excess of par value 386,755 361,793 Retained earnings (deficit) (3,160) 71 ----------- ----------- Total stockholders' equity 383,890 362,144 ----------- ----------- $ 685,595 $ 537,014 =========== =========== See accompanying notes to consolidated financial statements.
1998 ANNUAL REPORT - PAGE 22 [Picture 22] Photograph of a construction site located in East Ridge, Tennessee. COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands, except per share data)
Year Ended December 31, 1998 1997 1996 -------------- -------------- ----------- Revenues: Rental income from operating leases $ 48,127 $ 37,384 $ 24,418 Earned income from direct financing leases 12,815 11,779 8,069 Contingent rental income 808 759 722 Development and asset management fees from related parties 2,362 - - Interest and other 661 213 160 ------------ ------------- ------------- 64,773 50,135 33,369 ------------- ------------- ------------- Expenses: General operating and administrative 7,735 1,448 1,191 Real estate expenses 599 165 187 Advisory fees to related party - 2,110 1,466 Interest 13,460 11,478 7,206 Depreciation and amortization 6,759 5,302 3,553 Expenses incurred in acquiring advisor from related party 5,501 - - ------------ ------------ -------------- 34,054 20,503 13,603 ------------ ------------ -------------- Earnings before equity in earnings of unconsolidated partnership and gain on sale of real estate 30,719 29,632 19,766 Equity in earnings of unconsolidated partnership 367 102 - Gain on sale of real estate 1,355 651 73 ------------ ------------ ------------- Net earnings $ 32,441 $ 30,385 $ 19,839 ============ ============ ============= Net earnings per share of common stock: Basic $ 1.11 $ 1.26 $ 1.18 ============ ============ ============= Diluted $ 1.10 $ 1.25 $ 1.18 ============ ============ ============= Weighted average number of shares outstanding: Basic 29,169,371 24,070,697 16,798,918 ============ ============ ============= Diluted 29,397,154 24,220,792 16,838,917 ============ ============ ============= See accompanying notes to consolidated financial statements.
1998 ANNUAL REPORT - PAGE 23 [Picture 23] Photograph of a construction site located in East Ridge, Tennessee. COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1998, 1997 and 1996 (dollars in thousands, except per share data)
Capital in excess Retained Number of Common of par earnings shares stock value (deficit) Total ------------- --------- ----------- ------------ --------- Balance at December 31, 1995 11,663,672 $ 117 $ 138,629 $ (2,904) $ 135,842 Net earnings - - - 19,839 19,839 Dividends declared and paid ($1.18 per share of common stock) - - - (18,868) (18,868) Issuance of common stock 9,100,000 91 123,284 - 123,375 Stock issuance costs - - (7,614) - (7,614) ------------- ------------ ------------ ------------- ----------- Balance at December 31, 1996 20,763,672 208 254,299 (1,933) 252,574 Net earnings - - - 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 Net earnings - - - 32,441 32,441 Dividends declared and paid ($1.23 per share of common stock) - - - (35,672) (35,672) Issuance of common stock in connection with acquisition of advisor 277,813 3 4,739 - 4,742 Issuance of common stock 1,289,649 12 21,171 - 21,183 Stock issuance costs - - (948) - (948) ------------- ------------ ------------ ------------- ----------- Balance at December 31, 1998 29,521,089 $ 295 $ 386,755 $ (3,160) $ 383,890 ============= ============ ============ ============= =========== See accompanying notes to consolidated financial statements.
1998 ANNUAL REPORT - PAGE 24 [Picture 24] Photograph of a construction site located in East Ridge, Tennessee. COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Year Ended December 31, 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net earnings $ 32,441 $ 30,385 $ 19,839 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 6,049 4,477 2,804 Amortization 710 825 748 Amortization of notes payable discount 15 - - Gain on sale of real estate (1,355) (651) (73) Expenses incurred in acquiring advisor from related party 5,501 - - Distributions (equity in earnings) from unconsolidated partnership, net of equity in earnings (distributions) 9 (102) - Decrease in real estate accounted for using the direct financing method 1,393 1,166 751 Decrease (increase) in receivables (2,723) 146 (279) Increase in accrued rental income (3,346) (2,729) (2,227) Increase in other assets (2) (5) (170) Increase in accrued interest payable 1,881 375 262 Increase (decrease) in accounts payable and accrued expenses 755 25 (35) Increase (decrease) in rents received in advance (68) 98 596 ---------- ----------- ------------ Net cash provided by operating activities 41,260 34,010 22,216 ---------- ----------- ----------- Cash flows from investing activities: Proceeds from the sale of real estate 5,947 19,402 759 Additions to real estate accounting for using the operating method (117,943) (154,688) (108,597) Additions to real estate accounted for using the direct financing method (29,572) (29,439) (36,335) Investment in partnership - (855) - Increase in other assets (4,084) (660) (185) Other 9 (762) 111 ---------- ---------- ---------- Net cash used in investing activities (145,643) (167,002) (144,247) ---------- ---------- ----------
1998 ANNUAL REPORT - PAGE 25 [Picture 25] Photograph of a construction site located in East Ridge, Tennessee. COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - continued (dollars in thousands)
Year Ended December 31, 1998 1997 1996 ---------- ---------- ---------- Cash flows from financing activities: Proceeds from line of credit payable 143,600 152,600 128,700 Repayment of line of credit payable (120,600) (96,200) (139,450) Proceeds from mortgages payable - - 39,450 Repayment of mortgages payable (1,673) (1,520) (1,208) Proceeds from notes payable 99,729 - - Payment of debt costs (1,165) (417) (1,389) Proceeds from issuance of common stock 21,183 111,520 123,375 Payment of stock issuance costs (1,144) (3,875) (7,467) Payment of dividends (35,672) (28,381) (18,868) Other (593) 15 (3) ---------- --------- --------- Net cash provided by financing activities 103,665 133,742 123,140 ---------- --------- --------- Net increase (decrease) in cash and cash equivalents (718) 750 1,109 Cash and cash equivalents at beginning of year 2,160 1,410 301 ---------- ----------- ----------- Cash and cash equivalents at end of year $ 1,442 $ 2,160 $ 1,410 ========== =========== =========== Supplemental disclosure of cash flow information: Interest paid, net of amount capitalized $ 11,478 $ 11,017 $ 6,857 ========== =========== =========== Supplemental schedule of non-cash investing and financing activities: Issued 277,813 shares of common stock in connection with acquisition of the Company's advisor $ 4,742 $ - $ - ========== =========== =========== Net assets acquired in connection with the acquisition of the Company's advisor $ 12 $ - $ - ========== =========== =========== 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.
1998 ANNUAL REPORT - PAGE 26 [Picture 26] Photograph of a construction site located in East Ridge, Tennessee. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND NATURE OF BUSINESS - Commercial Net Lease Realty, Inc., a Maryland corporation, is a fully integrated real estate investment trust formed in 1984. Commercial Net Lease Realty, Inc. acquires, owns, develops and manages high-quality, freestanding properties that are generally leased to major retail businesses under long-term commercial net leases. PRINCIPLES OF CONSOLIDATION - In August 1998, Commercial Net Lease Realty, Inc. acquired 100% of the common stock of a newly-formed entity, Net Lease Funding, Inc., to facilitate the development of certain properties. The consolidated financial statements include the accounts of Commercial Net Lease Realty, Inc. and its five 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. The cost of properties developed by the Company includes direct and indirect costs of construction, property taxes, interest and other miscellaneous costs incurred during the development period of projects until such time as the project becomes operational. Land and buildings are generally leased to others on a net lease basis, whereby the tenant is 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 method. 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 inception of the lease generally represents the cost of the property) (Note 3). Unearned income is deferred and amortized into 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, accumulated depreciation and any accrued rental income for operating leases and the net investment for direct financing leases 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. 1998 ANNUAL REPORT - PAGE 27 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 fair value. DEBT COSTS - Debt costs incurred in connection with the Company's $200,000,000 line of credit and mortgages payable have been deferred and are being amortized over the terms of the loan commitments using the straight-line method which approximates the effective interest method. The premium paid for the interest rate cap agreement of $257,000 has been recorded as a prepaid expense and is being amortized as interest expense over the term of the agreement using a method which approximates the effective interest method. Debt costs incurred in connection with the issuance of the Company's notes payable have been deferred and are being amortized over the term of the debt obligation using the effective interest method. LINE OF CREDIT, MORTGAGES AND NOTES 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 based upon its nature, terms and variable interest rate. The Company believes that the carrying value of its mortgages payable at December 31, 1998, approximates fair value, based upon current market prices of similar issues. At December 31, 1998, the fair value of the Company's notes payable was $92,232,000 based upon the quoted market price. 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, 1998, 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 plus dilutive potential common shares (See Note 10). 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 1998 presentation. These reclassifications had no effect on stockholders' equity or net earnings. NEW ACCOUNTING STANDARDS - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement, which is effective for all fiscal quarters of fiscal years beginning after June 1, 1999, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. The Statement requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company is currently reviewing the Statement to see what impact, if any, it will have on the Company's consolidated financial statements . [Picture 27] Photograph of a construction site located in East Ridge, Tennessee. 1998 ANNUAL REPORT - PAGE 28 [Picture 28] Photograph of a construction site located in East Ridge, Tennessee. 2. LEASES: The Company generally leases its land and buildings to operators of major retail businesses. As of December 31, 1998, 181 of the leases have been classified as operating leases and 100 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 59 of these leases are accounted for as operating leases. Substantially all leases have initial terms of 10 to 20 years (expiring between 2000 and 2020) and provide for minimum rentals. In addition, the majority of the leases provide for contingent rentals and/or scheduled rent increases over the terms of the leases. The tenant is also generally required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building and carry insurance coverage for public liability, property damage, fire and extended coverage. The lease options generally allow tenants to renew the leases for two to four successive five-year periods subject to substantially the same terms and conditions as the initial lease. 3. REAL ESTATE: ACCOUNTING FOR USING THE OPERATING METHOD - Land and buildings on operating leases consisted of the following at December 31 (dollars in thousands): 1998 1997 --------- --------- Land $258,545 $ 199,992 Buildings and improvements 269,225 209,272 --------- --------- 527,770 409,264 Less accumulated depreciation (17,335) (12,297) --------- --------- 510,435 396,967 Construction in progress 9,513 4,010 --------- --------- $519,948 $ 400,977 ======== ========= 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, 1998, 1997 and 1996, the Company recognized $3,403,000, $2,786,000 and $2,285,000, respectively, of such income. At December 31, 1998 and 1997, the balance of accrued rental income was $10,395,000, net of allowance of $515,000, and $7,063,000, net of allowance of $310,000, respectively. The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 1998 (dollars in thousands): 1999 $ 50,984 2000 51,517 2001 52,368 2002 52,214 2003 52,486 Thereafter 538,123 --------- $ 797,692 ========= 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. 1998 ANNUAL REPORT - PAGE 29 ACCOUNTING FOR USING THE DIRECT FINANCING METHOD - The following lists the components of net investment in direct financing leases at December 31 (dollars in thousands): 1998 1997 ---------- ---------- Minimum lease payments to be received $ 283,185 $ 258,715 Estimated residual values 43,154 35,981 Less unearned income (187,530) (175,949) ---------- ---------- Net investment in direct financing leases $ 138,809 $ 118,747 ========== ========== The following is a schedule of future minimum lease payments to be received on direct financing leases at December 31, 1998 (dollars in thousands): 1999 $ 16,653 2000 16,773 2001 16,810 2002 16,882 2003 16,900 Thereafter 199,167 ----------- $ 283,185 =========== 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 - 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 (dollars in thousands): December 31, 1998 1997 ------- ----------- Real estate leased to others: Accounted for using the operating method, net of accumulated depreciation $ 25,060 $ 25,381 Accounted for using the direct financing method 5,096 5,155 Other assets 763 793 Note payable 11,536 11,911 Other liabilities 160 154 Partners' capital 19,223 19,264 For the period September 19, 1997 For the year (date of inception) ended December 31, through December 31, 1998 1997 ----------------- ------------------- Revenues $ 3,276 $ 933 Net income 1,834 514 For the years ended December 31, 1998 and 1997, the Company recognized income of $367,000 and $102,000, respectively, from the Partnership. [Picture 29] Photograph of a construction site located in East Ridge, Tennessee. 1998 ANNUAL REPORT - PAGE 30 [Picture 30] Photograph of a construction site located in East Ridge, Tennessee. 5. LINE OF CREDIT PAYABLE: In August 1997, the Company entered into an amended and restated loan agreement for a $200,000,000 revolving credit facility (the "Credit Facility") which 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 July 30, 1999, and (iii) lowering the interest rate from 160 basis points above LIBOR to a tiered rate structure with a maximum rate of 140 basis points above LIBOR (based upon the Company's investment grade rating) 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 principal balance is due in full upon termination of the Credit Facility on July 30, 1999, which can be extended for two additional 12 month periods at the option of the Company. Interest incurred on prime rate advances on the Credit Facility is payable quarterly. LIBOR rate advances have maturity periods of one, two, three or six months, whichever the Company selects, with interest payable at the end of the selected maturity period. All unpaid interest is due in full upon termination of the Credit Facility. As of December 31, 1998 and 1997, the outstanding principal balance was $138,100,000 and, $115,100,000, respectively, plus accrued interest of $361,000 and $552,000, 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, 1998. During the three years ended December 31, 1998, the Company was a party to two 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, 1998, one 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 cost of buildings constructed by the Company for its own use includes capitalized interest on the Credit Facility. For the years ended December 31, 1998 and 1997, interest cost incurred was $4,886,000 and $7,240,000, respectively, of which $1,112,000 and $133,000, respectively, was capitalized, and $3,774,000 and $7,107,000, respectively, which was charged to operations. For the year ended December 31, 1996, interest cost incurred was $3,278,000, all of which was charged to operations. 6. MORTGAGES PAYABLE: 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 in December 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, 1998, the aggregate carrying value of these properties totaled $16,539,000. The outstanding principal balance as of December 31, 1998 and 1997, was $13,150,000, plus accrued interest of $42,000. The Company intends to use available funds from its Credit Facility to pay the $13,150,000 principal balance of this loan upon its maturity in December 1999. 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 mortgage 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 mortgage is secured by a first lien on and assignments of rents and leases of certain of the Company's properties. As of December 31, 1998, the aggregate carrying value of these properties totaled $72,841,000. The outstanding principal balance as of December 31, 1998 and 1997, was $35,680,000 and $37,066,000, respectively, plus accrued interest of $125,000 and $130,000, respectively. In June 1996, the Company acquired three properties each subject to a mortgage totaling $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 6.4 years, with principal and interest payable monthly. As of December 31, 1998 and 1997, the outstanding balances for the 1998 ANNUAL REPORT - PAGE 31 Mortgages totaled $6,233,000 and $6,520,000, plus accrued interest of $39,000 and $41,000, respectively. As of December 31, 1998, the aggregate carrying value of these three properties totaled $8,155,000. 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): 1999 $ 14,984 2000 2,005 2001 2,170 2002 2,342 2003 2,583 ---------- $ 24,084 ========== 7. NOTES PAYABALE: In March 1998, the Company filed a prospectus supplement to its $300,000,000 shelf registration statement and issued $100,000,000 of 7.125% Notes due 2008 (the "Notes"). The Notes are senior, unsecured obligations of the Company and are subordinated to all secured indebtedness of the Company. The Notes were sold at a discount for an aggregate purchase price of $99,729,000 with interest payable semiannually commencing on September 15, 1998 (effective interest rate of 7.163%). The discount of $271,000 is being amortized as interest expense over the term of the debt obligation using the effective interest method. The Notes are redeemable at the option of the Company, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the Notes being redeemed plus accrued interest thereon through the redemption date and (ii) the Make-Whole Amount, as defined in the Supplemental Indenture No. 1 dated March 25, 1998 for the Notes. In connection with the debt offering, the Company incurred debt issuance costs totaling $1,208,000, consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. Debt issuance costs have been deferred and are being amortized over the term of the Notes using the effective interest method. The net proceeds from the debt offering were used to pay down outstanding indebtedness of the Company's Credit Facility. 8. EMPLOYEE BENEFIT PLAN: Effective January 1, 1998, the Company adopted a defined contribution retirement plan (the "Retirement Plan") covering substantially all of the employees of the Company. The Retirement Plan permits participants to defer up to a maximum of 15% of their Compensation, as defined in the Retirement Plan, subject to limits established by the Internal Revenue Code. The Company matches 50% of the participants' contributions up to a maximum of 6% of a participant's annual compensation. The Company's contribution to the Retirement Plan for the year ended December 31, 1998, totaled $60,000. 9. DIVIDENDS: The following presents the characterization for tax purposes of dividends paid to stockholders for the years ended December 31: 1998 1997 1996 ------- ------- -------- Ordinary income $ 1.09 $ 1.10 $ 1.06 Capital gain - - - Return of capital .14 .10 .12 ------- ------- -------- $ 1.23 $ 1.20 $ 1.18 ======= ======= ======== On January 15, 1999, the Company declared dividends of $9,267,000 or 31 cents per share of common stock, payable on February 15, 1999 to stockholders of record on January 29, 1999. [Picture 31] Photograph of a construction site located in East Ridge, Tennessee. 1998 ANNUAL REPORT - PAGE 32 [Picture 32] Photograph of a construction site located in East Ridge, Tennessee. 10. 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:
1998 1997 1996 ----------- ---------- ----------- Basic Earnings Per Share: Net earnings $32,441,000 $30,385,000 $19,839,000 =========== =========== =========== Weighted average number of shares outstanding 29,124,583 24,070,697 16,798,918 Merger contingent shares 44,788 - - ----------- ---------- ----------- Weighted average number of shares used in basic earnings per share 29,169,371 24,070,697 16,798,918 =========== ========== =========== Basic earnings per share $ 1.11 $ 1.26 $ 1.18 =========== ========== =========== Diluted Earnings Per Share: Net earnings $32,441,000 $30,385,000 $19,839,000 =========== =========== =========== Weighted average number of shares outstanding 29,124,583 24,070,697 16,798,918 Effect of dilutive securities: Stock options 150,679 150,095 39,999 Merger contingent shares 121,892 - - ----------- ---------- ----------- Weighted average number of shares used in diluted earnings per share 29,397,154 24,220,792 16,838,917 ========== ========== =========== Diluted earnings per share $ 1.10 $ 1.25 $ 1.18 =========== ========== ===========
For the year ended December 31, 1998, options on 1,145,700 shares of common stock were not included in computing diluted earnings per share because their effects were antidilutive. 11. STOCK OPTION PLAN: The Company's stock option plan (the "Plan") provides compensation and incentive to persons ("Key Employees" and "Outside Directors of the Company") whose services are considered essential to the Company's continued growth and success. As of December 31, 1996, the Plan had 1,200,000 shares of common stock reserved for issuance. Pursuant to the Plan, the shares 1998 ANNUAL REPORT - PAGE 33 of common stock reserved for issuance automatically increased to 2,000,000 shares in connection with the equity offering during September 1997. The following summarizes transactions in the Plan for the years ended December 31:
1998 1997 1996 ----------------------- ---------------------- ---------------------- Weighted Weighted Weighted Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares Price Shares Price Shares Price ----------- --------- --------- -------- --------- ---------- Outstanding January 1 1,145,100 $ 13.52 956,600 $ 13.21 578,100 $ 13.36 Granted 654,000 17.38 210,000 14.92 390,000 13.01 Exercised (14,500 12.88 (11,500) 13.52 - - Surrendered (74,000 16.03 (10,000) 13.94 (11,500) 13.54 ----------- ---------- ---------- Outstanding December 31 1,710,600 14.89 1,145,100 13.52 956,600 13.21 =========== ========== ========== Exercisable December 31 855,933 13.38 681,767 13.29 403,533 13.29 =========== =========== ========== Available for grant December 31 167,900 821,900 231,900 =========== ========== ==========
The weighted-average remaining contractual life of the 1,710,600 options outstanding at December 31, 1998 was 7.5 years, with exercise prices ranging from $11.25 to $17.875. 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):
1998 1997 1996 ------------ ------------ ----------- Net earnings as reported $ 32,441 $ 30,385 $ 19,839 ============ ============ =========== Pro forma net earnings $ 32,187 $ 30,220 $ 19,681 ============ ============ =========== Earnings per share as reported: Basic $ 1.11 $ 1.26 $ 1.18 ============ ============ =========== Diluted $ 1.10 $ 1.25 $ 1.18 ============ ============ =========== Pro forma earnings per share: Basic $ 1.10 $ 1.26 $ 1.17 ============ ============ =========== Diluted $ 1.09 $ 1.25 $ 1.17 ============ ============ ===========
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 1998, 1997 and 1996: (i) risk free rates of 5.73% and 5.90% for 1998 grants, 6.85% and 7.04% for 1997 grants and 6.17% and 6.95% for 1996 grants, (ii) expected volatility of 17.4% for 1998, 13.6% for 1997 and 12.9% for 1996, (iii) dividend yields of 7.9%, 7.7% and 8.6%, respectively, and (iv) expected lives of ten years for grants in 1998, 1997 and 1996. [Picture 33] Photograph of a construction site located in East Ridge, Tennessee. 1998 ANNUAL REPORT - PAGE 34 [Picture 34] Photograph of a construction site located in East Ridge, Tennessee. 12. MERGER TRANSACTION: On December 18, 1997, the Company's stockholders voted to approve an agreement and plan of merger with CNL Realty Advisors, Inc. (the "Advisor"), whereby the stockholders of the Advisor agreed 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 a fully integrated, self-administered real estate investment trust ("REIT") effective January 1, 1998. Ten percent of the Share Consideration (220,000 shares) was paid January 1, 1998, and the balance (the "Share Balance") of the Share Consideration is to be paid over time based on the Company's completed property acquisitions and completed development projects in accordance with the Merger agreement. 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 expenses incurred in acquiring the Advisor from a related party. In addition, in connection with the Merger, the Company incurred costs totaling $771,000 consisting primarily of legal and accounting fees, directors' compensation and fairness opinions. 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. During the year ended December 31, 1998, the Company issued 57,813 shares of the Share Balance in connection with the property acquisitions during the nine months ended September 30, 1998. The market value of the shares at the date the shares became issuable totaled $809,000, all of which was charged to operations during the year ended December 31, 1998. In addition, in connection with the property acquisitions during the quarter ended December 31, 1998, on January 1, 1999, an additional 371,938 shares of the Share Balance became issuable to the stockholders of the Advisor. The market value of the shares at the date the shares became issuable totaled $4,928,000, all of which is to be charged to operations during the year ended December 31, 1999. Pursuant to the agreement and plan of merger, the Company is required to issue the shares within 90 days after the shares become issuable. To the extent the remaining 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 employees of the Advisor became employees of the Company, and any obligation to pay fees under the advisor agreement between the Company and the Advisor was terminated. 13. RELATED PARTY TRANSACTIONS: The Company manages Net Lease Institutional Realty, L.P. (the "Partnership"), in which the Company holds a 20 percent equity interest. Pursuant to a management agreement, the Partnership paid the Company $218,000 in asset management fees during the year ended December 31, 1998. During the year ended December 31, 1998, the Company provided certain development services for an affiliate of a member of the board of directors. In connection therewith, the Company received $2,144,000 in development fees relating to these services. Prior to the Merger, certain directors and officers of the Company held similar positions with CNL Realty Advisors, Inc., the Company's advisor. 1998 ANNUAL REPORT - PAGE 35 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 was 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 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 the tenant on land parcels owned by the Company in 1997, from unrelated, third parties, the Company paid the Advisor $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 and 1996, the Company acquired 15 properties for purchase prices totaling $39,323,000 and 13 properties for purchase prices totaling $34,313,000, respectively, from affiliates of the Advisor who had developed the properties. The purchase prices paid by the Company for these properties equaled 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 and $1,453,000 in 1996 paid to an affiliate of the Advisor. In addition, during 1997, the Company purchased five land parcels from unrelated, third parties on which buildings were being developed by an affiliate of the Advisor. The Company paid developers fees totaling $376,000 to an affiliate of the Advisor who was developing the five properties. No acquisition fees or expense reimbursement fees were paid to the Advisor in connection with the acquisition of these 33 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 September 1997, 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. Prior to the Merger, the Company and the Advisor had entered into an advisory agreement (the "Advisory Agreement"), which provided for the Advisor to perform services in connection with the day to day operations of the Company. In connection therewith, the Advisor received 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 and $1,466,000 in advisory fees for the years ended December 31, 1997and 1996, respectively. [Picture 35] Photograph of a construction site located in East Ridge, Tennessee. 1998 ANNUAL REPORT - PAGE 36 [Picture 36] Photograph of a construction site located in East Ridge, Tennessee. 14. SEGMENT INFORMATION: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. This Statement is effective for fiscal years beginning after December 15, 1997. While the Company does not have more than one reportable segment as defined by the Statement, the Company has identified two primary sources of revenue: (i) rental and earned income from the triple net leases and (ii) fee income from development, property management and asset management services. The following table represents the revenues, expenses and asset allocation for the two segments and the Company's consolidated totals at December 31, 1998, and for the year then ended.
Rental and Earned Income Fee Consolidated Income Corporate Totals -------------- ------------- ------------- -------------- Revenues $ 62,067 $ 2,706 $ - $ 64,773 Property expenses 599 - - 599 Operating expenses 5,558 1,137 1,040 7,735 Interest expense 13,460 - - 13,460 Depreciation and 6,730 19 10 6,759 amortization Expenses incurred in acquiring advisor from - - 5,501 5,501 related party Equity in earnings of unconsolidated 367 - - 367 partnership Gain on sale of real estate 1,355 - - 1,355 Net earnings 37,442 1,550 (6,551) 32,441 Assets 685,432 108 55 685,595 Additions to long-lived assets: Real estate 150,730 - - 150,730 Other 1,133 108 55 1,296
Prior to 1998, the Company did not provide services generating fee income from development, property management and asset management services. 1998 ANNUAL REPORT - PAGE 37 15. 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): 1998 1997 1996 --------- --------- -------- Barnes & Noble Superstores, Inc. $ (a) $ 5,951 $ 5,204 Eckerd Corporation 7,170 5,149 (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. 16. COMMITMENTS AND CONTINGENCIES: As of December 31, 1998, the Company had entered into agreements to purchase 33 additional properties for an estimated aggregate purchase price of $63,123,000. In connection with the acquisition of 23 of these properties, the Company became contingently liable for $5,000,000 related to a bank letter of credit which guarantees the Company's obligation under a purchase agreement to acquire these properties. As of December 31, 1998, the Company owned and leased four land parcels to tenants which were obligated to develop a building on the respective land parcels. The Company has agreed to acquire the completed buildings for an amount of up to $3,939,000, at which time rental income is to increase for each of the properties. As of December 31, 1998, the Company owned 11 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 aggregate construction costs of approximately $15,458,000, of which $8,417,000 of costs had been incurred at December 31, 1998. Pursuant to the lease agreements, rent is to commence on the properties upon completion of construction of the buildings. The Company is a co-defendant in a lawsuit filed by a property owner for alleged breach of a ground lease. The suit asks for damages of $7,500,000 and/or specific performance of the ground lease. Management believes it will prevail in this suit and intends to vigorously defend its position. In the ordinary course of its business, the Company is a party to various other legal actions which the Company believes are routine in nature and incidental to the operation of the business of the Company. The Company believes that the outcome of the proceedings will not have a material adverse effect upon its operations or financial condition. [Picture 37] Photograph of a construction site located in East Ridge, Tennessee. 1998 ANNUAL REPORT - PAGE 38 [Picture 38] Background photograph of a construction site located in Land O' Lakes, Florida. CONSOLIDATED QUARTERLY FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
First Second Third Fourth 1998 Quarter Quarter Quarter Quarter Year - --------------------------------- --------- --------- --------- --------- --------- Rent and other revenue $ 15,375 $ 15,251 $ 15,821 $ 18,326 $ 64,773 Depreciation and amortization expense 1,572 1,655 1,708 1,824 6,759 Interest expense 3,000 2,868 3,307 4,285 13,460 Advisor acquisition expense 4,692 - - 809 5,501 Other expenses 1,762 1,356 2,234 2,982 8,334 Net earnings 4,440 9,463 9,951 8,587 32,441 Net earnings per share (1): Basic 0.16 0.32 0.34 0.29 1.11 Diluted 0.15 0.32 0.34 0.29 1.10 1997 - --------------------------------- Rent and other revenue $ 11,016 $ 12,067 $ 13,290 $ 13,762 $ 50,135 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 Advisor acquisition expense - - - - - 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 (1): Basic 0.31 0.31 0.32 0.32 1.26 Diluted 0.31 0.31 0.32 0.32 1.25 (1) Calculated independently for each period, and consequently, the sum of the quarters may differ from the annual amount.
1998 ANNUAL REPORT - PAGE 39 [Picture 39] Background photograph of a construction site located in Land O' Lakes, Florida. 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 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 1998 Quarter Quarter Quarter Quarter Year - ---------------------------- --------- -------- --------- --------- --------- High $ 18.0000 $17.7500 $16.7500 $15.6875 $18.0000 Low 16.1250 15.4375 12.7500 12.6250 12.6250 Close 14.7500 16.1875 14.6250 13.2500 13.2500 Dividends paid per share 0.30 0.31 0.31 0.31 1.23 1997 - ---------------------------- 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
The portion of dividends paid in 1998 and 1997, which was treated as a non-taxable return of capital, was 11.1% and 8.6% respectively. On February 16, 1999, there were approximately 1,457 shareholders of record of common stock. APPENDIX Picture 1 1998 ANNUAL REPORT - PAGE 1 Picture 2 1998 ANNUAL REPORT - PAGE 8 Map 1 1998 ANNUAL REPORT - PAGE 10 Picture 3 1998 ANNUAL REPORT - PAGE 11 Picture 4 1998 ANNUAL REPORT - PAGE 11 Picture 5 1998 ANNUAL REPORT - PAGE 11 Picture 6 1998 ANNUAL REPORT - PAGE 11 Picture 7 1998 ANNUAL REPORT - PAGE 13 Picture 8 1998 ANNUAL REPORT - PAGE 13 Picture 9 1998 ANNUAL REPORT - PAGE 13 Picture 10 1998 ANNUAL REPORT - PAGE 13 Picture 11 1998 ANNUAL REPORT - PAGE 14 Picture 12 1998 ANNUAL REPORT - PAGE 17 Picture 13 1998 ANNUAL REPORT - PAGE 17 Picture 14 1998 ANNUAL REPORT - PAGE 17 Picture 15 1998 ANNUAL REPORT - PAGE 18 Picture 16 1998 ANNUAL REPORT - PAGE 18 Picture 17 1998 ANNUAL REPORT - PAGE 18 Picture 18 1998 ANNUAL REPORT - PAGE 20 Picture 19 1998 ANNUAL REPORT - PAGE 20 Picture 20 1998 ANNUAL REPORT - PAGE 20 Picture 21 1998 ANNUAL REPORT - PAGE 21 Picture 22 1998 ANNUAL REPORT - PAGE 22 Picture 23 1998 ANNUAL REPORT - PAGE 23 Picture 24 1998 ANNUAL REPORT - PAGE 24 Picture 25 1998 ANNUAL REPORT - PAGE 25 Picture 26 1998 ANNUAL REPORT - PAGE 26 Picture 27 1998 ANNUAL REPORT - PAGE 27 Picture 28 1998 ANNUAL REPORT - PAGE 28 Picture 29 1998 ANNUAL REPORT - PAGE 29 Picture 30 1998 ANNUAL REPORT - PAGE 30 Picture 31 1998 ANNUAL REPORT - PAGE 31 Picture 32 1998 ANNUAL REPORT - PAGE 32 Picture 33 1998 ANNUAL REPORT - PAGE 33 Picture 34 1998 ANNUAL REPORT - PAGE 34 Picture 35 1998 ANNUAL REPORT - PAGE 35 Picture 36 1998 ANNUAL REPORT - PAGE 36 Picture 37 1998 ANNUAL REPORT - PAGE 37 Picture 38 1998 ANNUAL REPORT - PAGE 38 Picture 39 1998 ANNUAL REPORT - PAGE 39 EX-23 4 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 Consent of Independent Accountants dated March 30, 1999 The Board of Directors Commercial Net Lease Realty, Inc. We consent to the incorporation by reference in the registration statement (No. 33-24773) on Form S-3 of Commercial Net Lease Realty, Inc. of our reports dated January 15, 1999, relating to the consolidated balance sheets of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 1998, and the related financial statement schedule, which reports appear in the December 31, 1998 annual report on Form 10-K of Commercial Net Lease Realty, Inc. /s/ KPMG LLP Orlando, Florida March 30, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the balance sheet of Commercial Net Lease Realty. Inc. at December 31, 1998, and its statement of earnings for the 12 months ended and is quallified in its entirety by reference to the Form 10-K of Commercial Net Lease Realty, Inc. for the 12 months ended December 31, 1998. 1,000 12-mos DEC-31-1998 JAN-01-1998 DEC-31-1998 1,442 0 3,532 0 0 0 537,283 17,335 685,595 0 0 0 0 295 383,595 685,595 0 64,773 0 20,594 0 0 13,460 32,441 0 32,441 0 0 0 32,441 1.11 1.10 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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