-----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, RwBBG9tChFw2wdJ/c+Ao5VV4xCYowm4cFl1TXlnut1L7Xphcn8LsveOlR2kdAqE2 YRQsL7Zpf191K1EP8xTQlw== 0000751364-99-000023.txt : 19990518 0000751364-99-000023.hdr.sgml : 19990518 ACCESSION NUMBER: 0000751364-99-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCIAL NET LEASE REALTY INC CENTRAL INDEX KEY: 0000751364 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 561431377 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11290 FILM NUMBER: 99626356 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-Q 1 COMMERCIAL NET LEASE REALTY, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 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 (State or other jurisdiction of incorporation or organization) 56-1431377 (I.R.S. Employment Identification No.) 455 South Orange Avenue, Orlando, Florida 32801 (Address of principal executive offices, including zip code) (407) 265-7348 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____. Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 30,319,562 shares of Common Stock, $0.01 par value, outstanding as of May 12, 1999. CONTENTS Part I Page Item 1. Financial Statements: Condensed Consolidated Balance Sheets............................ 1 Condensed Consolidated Statements of Earnings.................... 2 Condensed Consolidated Statements of Cash Flows.................. 3 Notes to Condensed Consolidated Financial Statements............. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................12 Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................................17 Part II Other Information........................................................18 COMMERCIAL NET LEASE REALTY, INC and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) ASSETS March 31, December 31, 1999 1998 ----------- ------------ Real estate: Accounted for using the operating method, net of accumulated depreciation $ 552,938 $ 519,948 Accounted for using the direct financing method 130,990 138,809 Investment in partnership 3,848 3,850 Mortgages receivable 6,490 - Cash and cash equivalents 581 1,442 Receivables 3,250 3,532 Accrued rental income 10,186 10,395 Debt costs, net of accumulated amortization of $2,699 and $2,559 2,150 2,282 Other assets 3,160 5,337 ----------- ----------- Total assets $ 713,593 $ 685,595 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Line of credit payable $ 161,100 $ 138,100 Mortgages payable 54,618 55,063 Notes payable, net of unamortized discount of $251 and $256, respectively 99,749 99,744 Accrued interest payable 832 2,646 Accounts payable and accrued expenses 4,971 5,343 Rents received in advance 1,241 809 ----------- ----------- Total liabilities 322,511 301,705 ----------- ----------- Commitments and contingencies (Note 9) Stockholders' equity: Preferred stock, $0.01 par value. Authorized 15,000,000 shares at March 31, 1999 and December 31, 1998; none issued and outstanding - - Common stock, $0.01 par value. Authorized 90,000,000 shares; issued and outstanding 30,033,278 and 29,521,089 shares at March 31, 1999 and December 31, 1998, respectively 300 295 Excess stock, $0.01 par value. Authorized 105,000,000 shares at March 31, 1999 and December 31, 1998; none issued and outstanding - - Capital in excess of par value 393,379 386,755 Accumulated dividends in excess of net earnings (2,597) (3,160) ----------- ----------- Total stockholders' equity 391,082 383,890 ----------- ----------- $ 713,593 $ 685,595 =========== =========== See accompanying notes to condensed consolidated financial statements. COMMERCIAL NET LEASE REALTY, INC and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands, except per share data) Quarter Ended March 31, 1999 1998 ----------- ----------- Revenues: Rental income from operating leases $ 13,855 $ 11,338 Earned income from direct financing leases 3,644 3,233 Contingent rental income 133 198 Development and asset management fees from related parties 1,044 423 Interest and other 154 183 ----------- ----------- 18,830 15,375 ----------- ----------- Expenses: General operating and administrative 2,339 1,598 Real estate expenses 98 164 Interest 4,777 3,000 Depreciation and amortization 1,993 1,572 Expenses incurred in acquiring advisor from related party 4,928 4,692 ----------- ----------- 14,135 11,026 ----------- ----------- Earnings before equity in earnings of unconsolidated partnership and gain on sale of real estate 4,695 4,349 Equity in earnings of unconsolidated partnership 92 91 Gain on sale of real estate 5,043 - ----------- ----------- Net earnings $ 9,830 $ 4,440 =========== =========== Net earnings per share of common stock: Basic $ 0.33 $ 0.16 =========== =========== Diluted $ 0.32 $ 0.15 =========== =========== Weighted average of shares outstanding: Basic 30,038,818 28,476,268 =========== =========== Diluted 30,253,944 28,716,516 =========== =========== See accompanying notes to condensed consolidated financial statements. COMMERCIAL NET LEASE REALTY, INC and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Quarter Ended March 31, 1999 1998 --------- ---------- Cash flows from operating activities: Net earnings $ 9,830 $ 4,440 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 1,847 1,371 Amortization 146 201 Amortization of notes payable discount 5 - Gain on sale of real estate (5,043) - Expenses incurred in acquiring advisor from related party 4,928 4,692 Distributions (equity in earnings)from unconsolidated partnership, net of equity in earnings (distributions) 1 (91) Decrease in real estate leased to others using the direct financing method 448 304 Increase in accrued interest receivable (38) - Decrease (increase) in receivables 1,016 (362) Increase in accrued rental income (900) (787) Increase in other assets (167) (37) Decrease in accrued interest payable (1,814) (301) Increase in accounts payable and accrued expenses 402 538 Increase (decrease) in rents received in advance 432 (27) -------- --------- Net cash provided by operating activities 11,093 9,941 -------- --------- Cash flows from investing activities: Proceeds from the sale of real estate 36,406 - Additions to real estate accounted for using the operating method (57,369) (5,926) Additions to real estate accounted for using the direct financing method (1,901) - Increase in mortgages receivable (3,952) Increase in other assets (61) (749) Other (64) - -------- -------- Net cash used in investing activities (26,941) (6,675) -------- -------- Cash flows from financing activities: Proceeds from line of credit payable 26,300 4,500 Repayment of line of credit payable (3,300) (105,600) Repayment of mortgages payable (445) (407) Proceeds from notes payable - 99,729 Payment of debt costs (50) (838) Proceeds from issuance of common stock 1,709 17,293 Payment of stock issuance costs 65 (959) Payment of dividends (9,267) (8,452) Other (25) (63) -------- --------- Net cash provided by financing activities 14,987 5,203 -------- --------- Net increase (decrease) in cash and cash equivalents (861) 8,469 Cash and cash equivalents at beginning of quarter 1,442 2,160 -------- --------- Cash and cash equivalents at end of quarter $ 581 $ 10,629 ======== ========= Supplemental schedule of non-cash investing and financing activities: Issued 372,000 and 220,000 shares of common stock in 1999 and 1998, respectively, in connection with the acquisition of the Company's advisor $ 4,928 $ 3,933 ======== ========= Net assets acquired in connection with the acquisition of the Company's advisor $ - $ 12 ======== ========= Mortgage note accepted in connection with sale of real estate $ 2,500 $ - ======== ========= See accompanying notes to condensed consolidated financial statements. COMMERCIAL NET LEASE REALTY, INC. And SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Quarters Ended March 31, 1999 and 1998 1. Basis of Presentation: --------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. The financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Operating results for the quarter ended March 31, 1999, may not be indicative of the results that may be expected for the year ending December 31, 1999. Amounts as of December 31, 1998, included in the financial statements, have been derived from the audited financial statements as of that date. These unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Form 10-K of Commercial Net Lease Realty, Inc. for the year ended December 31, 1998. The consolidated financial statements include the accounts of Commercial Net Lease Realty, Inc. and its wholly-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Basic earnings per share are calculated based upon the weighted average number of common shares outstanding during each period and diluted earnings per share are calculated based upon weighted average number of common shares outstanding plus dilutive potential common shares. 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. 2. Leases: ------ The Company generally leases its land and buildings to operators of major retail businesses. As of March 31, 1999, 183 of the leases have been classified as operating leases and 85 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 49 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: ----------- Accounted for Using the Operating Method - Land and buildings on operating ---------------------------------------- leases consisted of the following at (dollars in thousands): March 31, December 31, 1999 1998 ------------- ------------- Land $ 274,427 $ 258,545 Buildings and improvements 285,482 269,225 ------------ ------------ 559,909 527,770 Less accumulated depreciation (16,882) (17,335) ------------ ------------ 543,027 510,435 Construction in progress 9,911 9,513 ------------ ------------ $ 552,938 $ 519,948 ============ ============ 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 quarters ended March 31, 1999 and 1998, the Company recognized $913,000 and $802,000, respectively, of such income. The following is a schedule of future minimum lease payments to be received on non-cancellable operating leases at March 31, 1999 (dollars in thousands): 1999 $ 40,122 2000 54,007 2001 54,871 2002 54,636 2003 54,683 Thereafter 561,779 ======== $820,098 ======== Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the initial lease terms. In addition, this table does not include any amounts for future contingent rentals which may be received on the leases based on a percentage of the tenant's gross sales. Accounted for Using the Direct Financing Method - The following lists the ------------------------------------------------ components of net investment in direct financing leases at (dollars in thousands): March 31, December 31, 1999 1998 ----------- ------------- Minimum lease payments to be received $ 266,121 $ 283,185 Estimated residual values 40,689 43,154 Less unearned income (175,820) (187,530) ----------- ----------- Real estate leased to others using the direct financing method $ 130,990 $ 138,809 =========== =========== The following is a schedule of future minimum lease payments to be received on direct financing leases at March 31, 1999 (dollars in thousands): 1999 $ 11,818 2000 15,851 2001 15,883 2002 15,939 2003 15,952 Thereafter 190,678 -------- $266,121 ======== The above table does not include future minimum lease payments for renewal periods or contingent rental payments that may become due in future periods (see Real Estate: Accounted for Using the Operating Method). 4. 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 expires on July 30, 1999. As of March 31, 1999 and December 31, 1998, the outstanding principal balance was $161,100,000 and $138,100,000, respectively, plus accrued interest of $350,000 and $361,000, respectively. For the quarters ended March 31, 1999 and 1998, interest cost incurred on the Credit Facility was $2,297,000 and $1,977,000, respectively, of which $324,000 and $223,000, respectively, was capitalized, and $1,973,000 and $1,754,000, respectively, was charged to operations. 5. Earnings Per Share: ------------------ The following details the amounts used in computing earnings per share for the quarters ended March 31: 1999 1998 ---------- ---------- Basic Earnings Per Share: Net earnings $9,830,000 $4,440,000 ========== ========== Weighted average number of shares outstanding 29,591,214 28,476,268 Merger contingent shares 447,604 - ---------- ---------- Weighted average number of shares outstanding used in basic earnings per share 30,038,818 28,476,268 ========== ========== Basic earnings per share $ 0.33 $ 0.16 ========== ========== Diluted Earnings Per Share: Net earnings $9,830,000 $4,440,000 ========== ========== Weighted average number of shares 29,591,214 28,476,268 outstanding Effect of dilutive securities: Stock options 4,508 240,248 Merger contingent shares 658,222 - ---------- ---------- Weighted average number of shares outstanding used in diluted earnings per share 30,253,944 28,716,516 ========== ========== Diluted earnings per share $ 0.32 $ 0.15 ========== ========== For the quarter ended March 31, 1999, options on 1,661,269 shares of common stock were not included in computing diluted earnings per share because their effects were antidilutive. 6. 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 percent 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 effective January 1, 1998. Since the effective date of the Merger, the Company has issued 650,000 shares incurring expenses of $10,429,000, all of which were charged to operations. In addition, in connection with the property acquisitions during the quarter ended March 31, 1999, on April 1, 1999, 286,284 shares became issuable to the stockholders of the Advisor. The market value of the issuable shares is $3,238,588, all of which will be charged to operations during the quarter ended June 30, 1999. 7. 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 $55,000 in asset management fees during each of the quarters ended March 31, 1999 and 1998. During the quarters ended March 31, 1999 and 1998, the Company provided certain development services for an affiliate of a member of the board of directors. In connection therewith, the Company received $990,000 and $386,000, respectively, in development fees relating to these services. In March 1999, the Company sold 38 of its properties to an affiliate of a member of the board of directors for a total of $36,568,000 and received net proceeds of $36,173,000, resulting in a gain of $5,363,000 for financial reporting purposes. 8. 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. 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 tables represent the revenues, expenses and asset allocation for the two segments and the Company's consolidated totals at March 31, 1999 and 1998, and for the quarters then ended. Rental and Consol- Earned Fee idated Income Income Corporate Totals ----------- --------- ---------- ------- 1999 ---- Revenues $ 17,715 $ 1,115 $ - $ 18,830 Operating expenses 1,539 491 309 2,339 Real estate expenses 98 - - 98 Interest expense 4,777 - - 4,777 Depreciation and amortization 1,959 26 8 1,993 Expenses incurred in acquiring advisor from related party - - 4,928 4,928 Equity in earnings of unconsolidated partnership 92 - - 92 Gain on sale of real estate 5,043 - - 5,043 ----------- ------ ------ -------- Net earnings $ 14,477 $ 598 $(5,245) $ 9,830 =========== ======= ======= ========= Assets $ 713,244 $ 266 $ 83 $ 713,593 =========== ======= ======= ========= Additions to long- lived assets: Real estate $ 24,639 $ - $ - $ 24,639 =========== ======= ======= ========= Other $ 104 $ 158 $ 28 $ 290 =========== ======= ======= ========= 1998 ---- Revenues $ 14,865 $ 510 $ - $ 15,375 Operating expenses 1,037 194 367 1,598 Real estate expenses 164 - - 164 Interest expense 3,000 - - 3,000 Depreciation and amortization 1,552 17 3 1,572 Expenses incurred in acquiring advisor from related party - - 4,692 4,692 Equity in earnings of unconsolidated partnership 91 - - 91 Gain on sale of real estate - - - - ----------- ------- ------- -------- Net earnings $ 9,203 $ 299 $(5,062) $ 4,440 =========== ======= ======= ======== Assets $ 552,583 $ 145 $ 25 $ 52,753 =========== ======= ======= ======== Additions to long- lived assets: Real estate $ 6,536 $ - $ - $ 6,536 =========== ======= ======= ======== Other $ 95 $ 145 $ 25 $ 265 =========== ======= ======= ======== 9. Commitments and Contingencies: ----------------------------- As of March 31, 1999, the Company owned and leased three land parcels to tenants which 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 $2,188,000, at which time rental income is to increase for each of the properties. As of March 31, 1999, the Company owned six 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 $9,755,000, of which $8,170,000 of costs had been incurred at March 31, 1999. Pursuant to the lease agreements, rent is to commence on the properties upon completion of construction of the buildings. During the quarter ended March 31, 1999, the Company entered into a Purchase and Sale Agreement whereby the Company acquired ten land parcels leased to major retailers and has agreed to acquire the buildings on each of the respective land parcels at the expiration of the initial term of the ground lease for an aggregate amount of approximately $23 million. The seller of the buildings holds a security interest in each of the land parcels which secures the Company's obligation to purchase the buildings under the Purchase and Sale Agreement. 10. Subsequent Events: ----------------- In April 1999, the Company declared dividends to its shareholders of $9,399,000 or $0.31 per share of common stock, payable in May 1999. In May 1999, the Company moved its build-to-suit development operation to a 95%-owned, taxable non-controlled subsidiary. The Company contributed $5.7 million of real estate and other assets to the subsidiary in exchange for 5,400 shares of 10 percent, cumulative non-voting preferred stock and 300 shares of non-voting common stock. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction - ------------ Commercial Net Lease Realty, Inc. (the "Company") is a fully integrated, self-administered real estate investment trust that acquires, owns, develops and manages high-quality, freestanding properties leased to major retail businesses under long-term commercial net leases. As of March 31, 1999, the Company owned, either directly or through a partnership interest, 281 properties (the "Properties") substantially all of which are leased to major retail businesses. Liquidity and Capital Resources - ------------------------------- General. Historically, the Company's only demand for funds has been for the payment of operating expenses and dividends, for property acquisitions and 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 quarters ended March 31, 1999 and 1998, the Company generated $11,093,000 and $9,941,000, respectively, in net cash provided by operating activities. The increase in cash from operations for the quarter ended March 31, 1999, as compared to the quarter ended March 31, 1998, is primarily a result of changes in revenues and expenses as discussed in "Results of Operations." The Company's leases typically provide that the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. In addition, the Company's leases generally provide that the tenant is responsible for roof and structural repairs. Certain of the Company's Properties are subject to leases under which the Company retains responsibility for certain costs and expenses associated with the Property. Because many of the Properties which are subject to leases that place these responsibilities on the Company are recently constructed, management anticipates that capital demands to meet obligations with respect to these Properties will be minimal for the foreseeable future and can be met with funds from operations and working capital. The Company may be required to use bank borrowing or other sources of capital in the event of unforeseen significant capital expenditures. Two of the Company's tenants, HomePlace and Luria's, each filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in January 1998 and August 1997, respectively. As a result, the tenants have the right to reject or affirm their 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 the 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 March 31, 1999, HomePlace continued to lease three Properties which accounted for three percent of the Company's total rental and earned income for the quarter ended March 31, 1999. 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. Two of these Properties were re-leased in 1998 and one was sold in March 1999. 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"). As of March 31, 1999, $161,100,000 was outstanding and approximately $38,900,000 was available for future borrowings under the Credit Facility. The Company expects to use the Credit Facility to invest in freestanding retail properties. Property Acquisitions and Commitments. During the quarter ended March 31, 1999, the Company borrowed $26,300,000 under its credit facility (i) to acquire 26 properties, five of which are land only parcels currently under construction, (ii) to purchase two buildings constructed by the tenants on land parcels owned by the Company and (iii) to complete construction of five buildings by the Company on previously acquired land parcels. The 26 properties include seven WalMart discount stores, four Kash `N Karry grocery stores, three Academy sporting goods stores, three Lucky grocery stores, three Eckerd drug stores, three Target discount stores, one Von's grocery store, one Pier 1 Imports home furnishing store and one excess adjacent land parcel. The seven buildings include three Eckerd drug stores, two 7-11 convenience stores, one Good Guys consumer electronics store and one Pier 1 Imports home furnishing store. As of March 31, 1999, the Company owned and leased three 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 $2,188,000, at which time rental income is to increase for each of the Properties. As of March 31, 1999, the Company owned six 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 an aggregate amount of approximately $9,755,000, of which $8,170,000 of costs had been incurred at March 31, 1999. Pursuant to the lease agreements, rent is to commence on the properties upon completion of construction of the buildings. In addition to the nine buildings under construction as of March 31, 1999, the Company is currently negotiating the acquisition of a number of prospective properties. The Company may elect to acquire these prospective properties or other additional properties (or interests therein) in the future. Such property acquisitions are expected to be the primary demand for additional capital in the future. The Company anticipates that it may engage in equity or debt financing, through either public or private offerings of its securities for cash, issuance of such securities in exchange for assets, or a combination of the foregoing. Subject to the constraints imposed by the Company's Credit Facility and long-term, fixed rate financing, the Company may enter into additional financing arrangements. In March 1998, the Company sold 39 of its properties for a total of $39,368,000 and received net sales proceeds of $38,906,000. The Company recognized a net gain on the sale of these 39 properties of $5,043,000 for financial reporting purposes. The Company plans to reinvest the proceeds from 38 of these properties to acquire 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 percent 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 effective January 1, 1998. Since the effective date of the Merger, the Company has issued 650,000 shares incurring expenses of $10,429,000, all of which were charged to operations. In addition, in connection with the property acquisitions during the quarter ended March 31, 1999, on April 1, 1999, 286,284 shares became issuable to the stockholders of the Advisor. The market value of the issuable shares is $3,238,588, all of which will be charged to operations during the quarter ended June 30, 1999. Management believes that the Company's current capital resources (including cash on hand), coupled with the Company's borrowing capacity, are sufficient to meet its liquidity needs for the foreseeable future. Dividends. One of the Company's primary objectives, consistent with its policy of retaining sufficient cash for reserves and working capital purposes 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. For the quarters ended March 31, 1999 and 1998, the Company declared and paid dividends to its stockholders of $9,267,000 and $8,452,000, respectively, or $0.31 and $0.30, respectively, per share of common stock. In April 1999, the Company declared dividends to its shareholders of $9,399,000 or $0.31 per share of common stock, payable in May 1999. Results of Operations - --------------------- As of March 31, 1999 and 1998, the Company owned 272 and 240 wholly-owned Properties, respectively, 268 and 237, respectively, of which were leased to operators of major retail businesses. In addition, during the quarter ended March 31, 1999, the Company sold 38 properties which were leased during 1999 and one property which was vacant. In connection therewith, during the quarters ended March 31, 1999 and 1998, the Company earned $17,632,000 and $14,769,000, respectively, in rental income from operating leases, earned income from direct financing leases and contingent rental income ("Rental Income"). The increase in Rental Income during the quarter ended March 31, 1999, is primarily a result of the facts that (i) the 55 Properties acquired and 15 buildings upon which construction was completed during 1998 were operational for a full quarter in 1999 and (ii) the Company acquired 26 Properties and seven buildings upon which construction was completed during the quarter ended March 31, 1999. The increase in Rental Income was partially offset by a decrease in Rental Income relating to 38 leased Properties which were sold during the quarter ended March 31, 1999. Rental Income is expected to increase as the Company acquires additional properties and due to the fact that the 26 Properties and seven of the buildings acquired during the quarter ended March 31, 1999, will contribute to the Company's income for a full fiscal quarter in future quarters. During the quarters ended March 31, 1999 and 1998, the Company earned $1,044,000 and $423,000, respectively, in development and asset management fees. The Company began providing development and asset management services on January 1, 1998 in connection with the Merger of the Company's Advisor. The increase in development and asset management fees during the quarter ended March 31, 1999 is attributable to an increase in development services provided. During the quarters ended March 31, 1999 and 1998, operating expenses, excluding interest and including depreciation and amortization, were $9,358,000 and $8,026,000, respectively (49.7% and 52.2%, respectively, of total revenues). The increase in the dollar amount of operating expenses for the quarter ended March 31, 1999, as compared to the quarter ended March 31, 1998, is primarily attributable to an increase in actual personnel and other operating costs as a result of the increase in the Company's asset size and development services. In accordance with generally accepted accounting principles, certain costs relating to development activities have been capitalized. The increase for the quarter ended March 31, 1999, as compared to the quarter ended March 31, 1998, is also attributable to the increase in depreciation expense as a result of the additional Properties acquired during the quarter ended March 31, 1999, and a full quarter of depreciation expense relating to the 55 Properties and 15 buildings acquired during 1998. The increase in depreciation expense was partially offset by a decrease in depreciation expense related to the sale of 39 properties during the quarter ended March 31, 1999. The Company recognized $4,777,000 and $3,000,000 in interest expense for the quarters ended March 31, 1999 and 1998, respectively. Interest expense increased during the quarter ended March 31, 1999, 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 of the Company's Credit Facility. Year 2000 Compliance. 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 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. The Y2K Team has also requested and is evaluating the documentation from its non information technology system providers. 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 and system providers have adequately considered 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. 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. Investment Considerations. 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. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in quantitative and qualitative disclosures about market risk as previously reported in the Form 10-K for the year ended December 31, 1998. PART II. OTHER INFORMATION Item 1. Legal Proceedings. No material developments in legal proceedings as previously reported in the Form 10-K for the year ended December 31, 1998. Item 2. Changes in Securities and Use of Proceeds. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are filed as a part of this report. 3.1 Articles of Incorporation of the Registrant (filed as Exhibit 3.3(i) to the Registrant's Registration Statement No. 1-11290 on Form 8-B, and incorporated herein by reference). 3.2 Bylaws of the Registrant (filed as Exhibit 3.3(ii) to Amendment No. 2 to the Registrant's Registration Statement No. 1-11290 on Form 8-B, and incorporated herein by reference). 3.3 Articles of Amendment to the Articles of Incorporation of Registrant (filed as Exhibit 3.3 to the Registrant's Form 10-Q for the quarter ended September 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 September 30, 1992, and incorporated herein by reference). 10.2 Advisory Agreement between Registrant and CNL Realty Advisors, Inc. effective as of April 1, 1993 (filed as Exhibit 10.04 to Amendment No. 1 to the Registrant's Registration Statement No. 33-61214 on Form S-2, and incorporated herein by reference). 10.3 1992 Commercial Net Lease Realty, Inc. Stock Option Plan (filed as Exhibit No. 10(x) to the Registrant's Registration Statement No. 33-83110 on Form S-3, and incorporated herein by reference). 10.4 Second Amended and Restated Line of Credit and Security Agreement, dated December 7, 1995, among Registrant, certain lenders listed therein and First Union National Bank of Florida, as the Agent, relating to a $100,000,000 loan (filed as Exhibit 10.14 to the Registrant's Current Report on Form 8-K dated January 18, 1996, and incorporated herein by reference). 10.5 Secured Promissory Note, dated December 14, 1995, among Registrant and Principal Mutual Life Insurance Company relating to a $13,150,000 loan (filed as Exhibit 10.15 to the Registrant's Current Report on Form 8-K dated January 18, 1996, and incorporated herein by reference). 10.6 Mortgage and Security Agreement, dated December 14, 1995, among Registrant and Principal Mutual Life Insurance Company relating to a $13,150,000 loan (filed as Exhibit 10.16 to the Registrant's Current Report on Form 8-K dated January 18, 1996, and incorporated herein by reference). 10.7 Loan Agreement, dated January 19, 1996, among Registrant and Principal Mutual Life Insurance Company relating to a $39,450,000 loan (filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference). 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, date September 3, 1996, by and among Registrant and First Union National Bank of Florida, as the Agent, relating to a $150,000,000 loan (filed as Exhibit 10.12 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference). 10.11 Agreement and Plan of Merger dated May 15, 1997, by and among Commercial Net Lease Realty, Inc. and Net Lease Realty II, Inc. and CNL Realty Advisors, Inc. and the Stockholders of CNL Realty Advisors, Inc. (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated May 16, 1997, and incorporated herein by reference). 10.12 Fourth Amended and Restated Line of Credit and Security Agreement, dated August 6, 1997, by and among Registrant, certain lenders and First Union National Bank, as the Agent, relating to a $200,000,000 loan (filed as Exhibit 10 to the Registrant's Current Report on Form 8-K dated September 12, 1997, and incorporated herein by reference). 27 Financial Data Schedule (filed herewith). (b) No reports on Form 8-K were filed during the quarter ended March 31, 1999. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATED this 17th day of May, 1999. COMMERCIAL NET LEASE REALTY, INC. By: /s/ Gary M. Ralston ------------------- Gary M. Ralston President By: /s/ Kevin B. Habicht -------------------- Kevin B. Habicht Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the balance sheet of Commercial Net Lease Realty, Inc. at March 31, 1999, and its statement of earnings for the three months ended and is qualified in its entirety by reference to the Form 10-Q of Commercial Net Lease Realty, Inc. for the three months ended March 31, 1999. 3-MOS DEC-31-1999 JAN-1-1999 MAR-31-1999 581,000 0 3,250,000 0 0 0 569,820,000 16,882,000 713,593,000 0 0 300,000 0 0 390,782,000 713,593,000 0 18,830,000 0 9,358,000 0 0 4,777,000 9,830,000 0 9,830,000 0 0 0 9,830,000 .33 .32 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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