FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number
0-12989
Commercial Net Lease Realty, Inc.
(Exact name of registrant as specified in its charter)
Maryland 56-1431377
(State or other jurisdiction (I.R.S. Employer
of incorporation or organiza- Identification No.)
tion)
400 E. South Street, #500
Orlando, Florida 32801
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number
(including area code) (407) 422-1574
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
27,050,619 shares of Common Stock, $.01 par value, outstanding as of November
13, 1997.
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
CONTENTS
Part I Page
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of
Earnings 2
Condensed Consolidated Statements of
Stockholders' Equity 3
Condensed Consolidated Statements of
Cash Flows 4
Notes to Condensed Consolidated
Financial Statements 5-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11-15
Part II
Other Information 16-18
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
September 30, December 31,
ASSETS 1997 1996
------------- --------
Real estate leased to others:
Accounted for using the operating
method, net of accumulated
depreciation $366,079 $269,031
Accounted for using the direct
financing method 114,804 92,413
Investment in partnership 3,854 -
Cash and cash equivalents 5,322 1,410
Receivables 545 812
Due from related parties 237 -
Prepaid expenses 409 335
Loan costs, net of accumulated
amortization of $1,697 and
$1,055 1,959 2,185
Accrued rental income 6,303 4,421
Other assets 1,395 346
-------- --------
$500,907 $370,953
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $152,127 $116,956
Accrued interest payable 629 390
Accounts payable and accrued
expenses 437 161
Real estate taxes payable 41 -
Due to related parties 50 93
Rents paid in advance 668 779
-------- --------
Total liabilities 153,952 118,379
-------- --------
Commitments and contingencies
(Notes 7 and 8)
Stockholders' equity:
Common stock, $.01 par value.
Authorized 50,000,000 shares;
issued and outstanding
27,050,119 and 20,763,672
shares, respectively 271 208
Excess stock, $0.01 par value.
Authorized 50,000,000 shares;
none issued and outstanding - -
Capital in excess of par value 347,307 254,299
Accumulated dividends in excess
of net earnings (623) (1,933)
-------- --------
Total stockholders' equity 346,955 252,574
-------- --------
$500,907 $370,953
======== ========
See accompanying notes to condensed consolidated
financial statements.
1
<PAGE>
<TABLE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---------- ---------- ---------- -------
<S> <C>
Revenues:
Rental income from
operating leases $ 9,934 $ 6,685 $ 27,059 $ 17,334
Earned income from
direct financing
leases 3,111 2,257 8,623 5,735
Contingent rental
income 191 184 560 541
Interest and other 54 50 131 121
---------- ---------- ---------- ----------
13,290 9,176 36,373 23,731
---------- ---------- ---------- ----------
Expenses:
General operating
and administrative 290 258 954 930
Advisory fees to
related party 523 376 1,507 1,027
Interest 3,509 2,473 8,603 5,535
State taxes 109 56 275 148
Depreciation and
amortization 1,374 944 3,867 2,498
---------- ---------- ---------- ----------
5,805 4,107 15,206 10,138
---------- ---------- ---------- ----------
Net earnings before
equity in earnings
of unconsolidated
partnership and
gain on sale of
land and buildings 7,485 5,069 21,167 13,593
Gain on sale of land
and buildings 126 45 397 45
Equity in earnings of
unconsolidated
partnership 11 - 11 -
---------- ---------- ---------- ---------
Net earnings $ 7,622 $ 5,114 $ 21,575 $ 13,638
========== ========== ========== ==========
Earnings per share
of common stock $ 0.32 $ 0.31 $ 0.94 $ 0.88
========== ========== ========== ==========
Weighted average
number of shares
outstanding 23,826,352 16,426,715 23,033,721 15,479,183
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
2
<PAGE>
<TABLE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY Nine Months Ended September 30,
1997
and Year Ended December 31, 1996
(dollars in thousands, except per share data)
<CAPTION>
Accumulated
dividends
Capital in in excess
Number Common excess of of net
of shares stock par value earnings Total
--------- ------- ---------- ------------- ------
<S> <C>
Balance at
December 31, 1995 11,663,672 $117 $138,629 $(2,904) $135,842
Net earnings - - - 19,839 19,839
Dividends declared
and paid ($1.18
per share of
common stock) - - - (18,868) (18,868)
Issuance of common
stock 9,100,000 91 123,284 - 123,375
Stock issuance costs - - (7,614) - (7,614)
---------- ---- -------- ------- --------
Balance at
December 31, 1996 20,763,672 208 254,299 (1,933) 252,574
Net earnings - - - 21,575 21,575
Dividends declared
and paid ($0.90
per share of
common stock) - - - (20,265) (20,265)
Issuance of common
stock 6,286,447 63 96,153 - 96,216
Stock issuance costs - - (3,145) - (3,145)
---------- ---- -------- ------- --------
Balance at
September 30, 1997 27,050,119 $271 $347,307 $ (623) $346,955
========== ==== ======== ======= ========
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
3
<PAGE>
<TABLE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended
September 30,
1997 1996
-------- ------
<S> <C>
Cash flows from operating activities:
Net earnings $ 21,575 $ 13,638
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 3,243 1,998
Amortization 624 501
Gain on sale of land and buildings (397) (46)
Equity in earnings of unconsolidated
partnership (11) -
Decrease in net investment in direct
financing leases 847 527
Increase in accrued rental income (1,969) (1,554)
Decrease (increase) in receivables 128 (103)
Increase in prepaid expenses (74) (4)
Decrease (increase)in other assets (108) 10
Increase in accrued interest payable 239 295
Increase in accounts payable and
accrued expenses 22 1
Increase in real estate taxes payable 41 22
Increase (decrease) in due to related
parties (37) 65
Increase (decrease) in rents paid in
advance (111) 346
-------- --------
Net cash provided by operating
activities 24,012 15,696
-------- --------
Cash flows from investing activities:
Additions to land and buildings on
operating leases (118,665) (87,921)
Investment in direct financing leases (25,177) (26,644)
Proceeds from sale of land and buildings 18,093 423
Investment in partnership (855) -
Increase in other assets (707) (126)
Other (346) 116
-------- --------
Net cash used in investing
activities (127,657) (114,152)
-------- --------
Cash flows from financing activities:
Proceeds from loan 126,800 139,450
Repayment of loans (91,629) (129,696)
Payment of loan costs (511) (1,371)
Proceeds from issuance of common stock 96,216 120,225
Payment of stock issuance costs (3,062) (7,025)
Payment of dividends (20,265) (12,639)
Other 8 (5)
-------- --------
Net cash provided by financing
activities 107,557 108,939
-------- --------
Net increase in cash and cash equivalents 3,912 10,483
Cash and cash equivalents at beginning
of period 1,410 301
-------- --------
Cash and cash equivalents at end of period $ 5,322 $ 10,784
======== ========
Supplemental Schedule of Non-Cash
Investing Activities:
Contribution of land and building to
unconsolidated partnership $ 2,930 $ -
======== =======
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
4
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 1997 and 1996
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and
do not include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and nine months ended September 30, 1997, may not be
indicative of the results that may be expected for the year ending
December 31, 1997. Amounts as of December 31, 1996, included in the
financial statements, have been derived from audited financial
statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in the Form 10-K of
Commercial Net Lease Realty, Inc. (the "Company") for the year ended
December 31, 1996.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Earnings per share are calculated based upon the weighted average
number of shares outstanding during each period. Stock options
outstanding are not included since their inclusion would not result in
a material dilution of earnings per share.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, Earnings Per Share.
The Statement, which is effective for fiscal years ending after
December 15, 1997, provides for a revised computation of earnings per
share. The Company will adopt this Standard in 1997 and does not expect
compliance with such Standard to have a material effect, if any, on the
Company's earnings per share.
2. Leases:
The Company generally leases its land and buildings to operators of
major retail businesses. The leases are accounted for under the
provisions of Statement of Financial Accounting Standards No. 13,
Accounting for Leases. As of September 30, 1997, 139 of the leases have
been classified as operating leases and 86 leases have been classified
as direct
5
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED Nine Months Ended
September 30, 1997 and 1996
2. Leases - Continued:
financing leases. For the leases classified as direct financing leases,
the building portions of the leases are accounted for as direct
financing leases while the land portions of 56 of these leases are
accounted for as operating leases. Substantially all leases have
initial terms of 15 to 20 years (expiring between 2000 and 2020) and
provide for minimum rentals. In addition, the majority of the leases
provide for contingent rentals and/or scheduled rent increases over the
terms of the leases. The tenant is also generally required to pay all
property taxes and assessments, substantially maintain the interior and
exterior of the building and carry insurance coverage for public
liability, property damage, fire and extended coverage. The lease
options generally allow tenants to renew the leases for two to four
successive five-year periods subject to substantially the same terms
and conditions as the initial lease.
3. Real Estate Leased to Others:
Accounted for Using the Operating Method - Land and buildings on
operating leases consisted of the following at (dollars in thousands):
September 30, December 31,
1997 1996
----------- -----------
Land $183,568 $138,520
Buildings and
improvements 193,574 138,589
-------- --------
377,142 277,109
Accumulated depreci-
ation (11,063) (8,078)
-------- --------
$366,079 $269,031
======== ========
Some leases provide for scheduled rent increases throughout the lease
term. Such amounts are recognized on a straight-line basis over the
terms of the leases. For the nine months ended September 30, 1997 and
1996, the Company recognized $2,012,000 and $1,554,000 respectively, of
such income, $727,000 and $621,000 of which was recognized for the
quarters ended September 30, 1997 and 1996, respectively.
6
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED Nine Months Ended
September 30, 1997 and 1996
3. Real Estate Leased to Others - Continued:
The following is a schedule of future minimum lease payments to be
received on noncancellable operating leases at September 30, 1997
(dollars in thousands):
1997 $ 9,413
1998 37,796
1999 38,010
2000 38,435
2001 39,106
Thereafter 461,873
--------
$624,633
Since lease renewal periods are exercisable at the option of the
tenant, the above table only presents future minimum lease payments due
during the initial lease terms. In addition, this table does not
include any amounts for future contingent rentals which may be received
on the leases based on a percentage of the tenant's gross sales.
Accounted for Using the Direct Financing Method - The following lists
the components of real estate leased to others using the direct
financing method at (dollars in thousands):
September 30, December 31,
1997 1996
------------- ------------
Minimum lease
payments to be
received $251,988 $207,838
Estimated residual
values 34,915 28,309
Less unearned income (172,099) (143,734)
-------- --------
Real estate leased
to others using
the direct
financing method $114,804 $ 92,413
======== ========
7
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED Nine Months Ended
September 30, 1997 and 1996
3. Real Estate Leased to Others - Continued:
The following is a schedule of future minimum lease payments to be
received on direct financing leases at September 30, 1997 (dollars in
thousands):
1997 $ 3,475
1998 13,904
1999 13,953
2000 14,071
2001 14,109
Thereafter 192,476
-------
$251,988
The above table does not include future minimum lease payments for
renewal periods or contingent rental payments that may become due in
future periods (see Real Estate Leased to Others - Accounted for Using
the Operating Method).
4. Investment in Partnership:
In September 1997, the Company contributed cash, land and building to
Net Lease Institutional Realty, L.P. (the "Partnership") for a 20
percent interest in the Partnership. The Company accounts for its 20
percent interest in the Partnership under the equity method of
accounting.
5. Notes Payable:
In August 1997, the Company entered into an amended and restated loan
agreement for a $200,000,000 revolving credit facility (the "Credit
Facility") which expires on June 30, 1999. The Credit Facility amended
the Company's $150,000,000 credit facility by increasing the borrowing
capacity from $150,000,000 to $200,000,000 and lowering the interest
rate from 160 basis points above LIBOR to 150 basis points above LIBOR
or the lender's prime rate, whichever the Company selects. As of
September 30, 1997 and December 31, 1996, the outstanding principal
balance was $95,000,000 and $58,700,000, respectively, plus accrued
interest of $435,000 and $192,000, respectively.
6. Related Party Transactions:
During the nine months ended September 30, 1997, the Company acquired
26 properties and three buildings which were developed by the tenant on
land parcels owned by the Company
8
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED Nine Months Ended
September 30, 1997 and 1996
6. Related Party Transactions - Continued:
from unrelated, third parties for purchase prices totalling
$121,745,000. In connection with the acquisition of 25 of these
properties and the three buildings, the Company paid CNL Realty
Advisors, Inc. $2,409,000 in acquisition fees and expense reimbursement
fees (representing 1.5% and 0.5%, respectively, of the cost of the
properties).
During the nine months ended September 30, 1997, the Company acquired
ten properties for purchase prices totalling $18,352,000 from
affiliates of CNL Realty Advisors, Inc. who had developed the
properties. The purchase prices paid by the Company for these ten
properties equalled the affiliates' cost including development costs.
The affiliates' cost consisted of the land purchase price, construction
costs, various soft costs including legal costs, survey fees and
architect fees and developer fees aggregating $962,500 paid to
affiliates of CNL Realty Advisors, Inc.
In January 1997, the Company sold its property in Foley, Alabama, for
$570,000 and received net proceeds of $551,000, resulting in a gain of
$271,000 for financial reporting purposes. In connection with the sale
of this property, the Company paid CNL Realty Advisors, Inc. $11,400 in
disposition fees.
In addition, the Company sold four of its properties to the Partnership
at the Company's original cost of $17,542,000. The Company recognized a
gain on the sale of these properties of $126,000 for financial
reporting purposes.
7. Commitments and Contingencies:
As of September 30, 1997, the Company had entered into agreements to
purchase eight additional properties for an estimated aggregate amount
of $40,648,000. In connection with the acquisition of five of these
properties, the Company was contingently liable for $1,527,000 related
to bank letters of credit which guarantee the Company's obligation
under the purchase agreements to acquire these properties. In addition,
the Company was contingently liable for $13,395,000 relating to its
obligations under a purchase agreement to acquire two properties.
As of September 30, 1997, the Company owned one land parcel which is
leased to a tenant who is obligated to develop a building on the land
parcel. The Company has agreed to acquire the completed building for an
aggregate amount of up to $798,000, upon which time rental income will
increase for the property.
9
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED Nine Months Ended
September 30, 1997 and 1996
7. Commitments and Contingencies - Continued:
As of September 30, 1997, the Company owned one land parcel subject to
a lease agreement with a tenant whereby the Company has agreed to
construct a building on the land parcel for approximately $1,300,000.
Pursuant to the lease agreement, rent will commence on the property
upon completion of construction of the building.
8. Subsequent Events:
In October 1997, the Company declared dividends to its shareholders of
$8,115,000 or $.30 per share of common stock, payable in November 1997.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
Commercial Net Lease Realty, Inc. (the "Company") is an equity real
estate investment trust that acquires, owns and manages high-quality,
freestanding properties leased to major retail businesses under long-term
commercial net leases. As of September 30, 1997, the Company owned, either
directly or through a partnership interest, 234 properties (the "Properties")
each of which is leased to major retail businesses.
Liquidity and Capital Resources
General. Historically, the Company's only demand for funds has been for
the payment of operating expenses and dividends, for property acquisitions and
for the payment of interest on its outstanding indebtedness. Generally, cash
needs for items other than property acquisitions have been met from operations
and property acquisitions have been funded by equity offerings, bank borrowings
and, to a lesser extent, from internally generated funds. Potential future
sources of capital include proceeds from public or private offerings of the
Company's debt or equity securities, secured or unsecured borrowing from banks
or other lenders, or the sale of Properties, as well as undistributed funds from
operations. For the nine months ended September 30, 1997 and 1996, the Company
generated $24,012,000 and $15,696,000, respectively, in net cash provided by
operating activities. The increase in cash from operations for the nine months
ended September 30, 1997, as compared to the nine months ended September 30,
1996, is primarily a result of changes in revenues and expenses as discussed in
"Results of Operations."
The Company's leases typically provide that the tenant bears
responsibility for substantially all property costs and expenses associated with
ongoing maintenance and operation, including utilities, property taxes and
insurance. In addition, the Company's leases generally provide that the tenant
is responsible for roof and structural repairs. Certain of the Company's
Properties are subject to leases under which the Company retains responsibility
for certain costs and expenses associated with the Property. Because many of the
Properties which are subject to leases that place these responsibilities on the
Company are recently constructed, management anticipates that capital demands to
meet obligations with respect to these Properties will be minimal for the
foreseeable future and can be met with funds from operations and working
capital. The Company may be required to use bank borrowing or other sources of
capital in the event of unforeseen significant capital expenditures.
Indebtedness. In August 1997, the company entered into an amended and
restated loan agreement for a $200,000,000 revolving credit facility (the
"Credit Facility"). The Credit Facility amended the Company's $150,000,000
credit facility by increasing the borrowing capacity from $150,000,000 to
$200,000,000 and lowering the interest rate from 160 basis points above LIBOR to
150
11
<PAGE>
Liquidity and Capital Resources - Continued
basis points above LIBOR. As of September 30, 1997, $95,000,000 was outstanding
under the Credit Facility. The Credit Facility will be used primarily to invest
in freestanding retail properties, although $25,000,000 of the available credit
may be used for the issuance of standby letters of credit or working capital.
Debt and Equity Securities. In February 1997, the Company filed a
prospectus supplement to its $200,000,000 shelf registration and issued
2,300,000 shares of common stock and received gross proceeds of $34,787,000. In
addition, in March 1997, the Company issued an additional 330,000 shares of
common stock in connection with the underwriters' overallotment option and
received gross proceeds of $4,991,000. In April 1997, the Company filed a shelf
registration statement with the Securities and Exchange Commission which permits
the issuance by the Company of up to $300,000,000 in debt and equity securities.
In September 1997, the Company filed two prospectus supplements to its
$300,000,000 shelf registration and issued 3,645,680 shares of common stock and
received gross proceeds of $56,278,000. In connection with the February offering
and two September offerings, the Company incurred stock issuance costs totalling
$3,114,000 consisting primarily of underwriters' commissions and fees, legal and
accounting fees and printing expenses. Proceeds from the offerings were used to
pay down the Company's Credit Facility.
Property Acquisitions and Commitments. During the nine months ended
September 30, 1997, the Company borrowed $126,800,000 under its Credit Facility
to acquire 36 Properties (nine Eckerd drugstores, six Best Buy consumer
electronics stores, three OfficeMax office supply stores, two Barnes & Noble
bookstores, two Good Guys consumer electronics stores, one Pier 1 Imports home
furnishings store, one Blockbuster video store, one Borders bookstore, one Just
For Feet shoe store, one HomePlace home furnishings store, one Kroger grocery
store and eight independently operated grocery stores leased to or partially
guaranteed by SuperValu, Inc., and three buildings (one Academy sporting goods
store, one Kash N' Karry grocery store and one Pier 1 Imports home furnishings
store) which were developed by the tenant on land parcels owned by the Company.
As of September 30, 1997, the Company owned one land parcel which is
leased to a tenant who is obligated to develop a building on the land parcel.
The Company has agreed to acquire the completed building for an aggregate amount
of up to $798,000, at which time rental income will increase for the Property.
As of September 30, 1997, the Company owned one land parcel subject to
a lease agreement with a tenant whereby the Company has agreed to construct a
building on the land parcel for approximately $1,300,000. Pursuant to the lease
agreement, rent will commence on the property upon completion of construction of
the building.
12
<PAGE>
Liquidity and Capital Resources - Continued
As of September 30, 1997, the Company had entered into agreements to
purchase eight additional properties for an estimated aggregate amount of
$40,648,000. The purchase of these properties is subject to conditions relating
to completion of development activities, review of title and obtaining title
insurance, engineering and environmental inspections and other matters.
In addition to the eight properties under contract and the two
buildings under construction as of September 30, 1997, the Company is currently
negotiating the acquisition of a number of prospective properties. The Company
may elect to acquire these prospective properties or other additional properties
(or interests therein) in the future. Such property acquisitions are expected to
be the primary demand for additional capital in the future. The Company
anticipates that it may engage in equity or debt financing, through either
public or private offerings of its securities for cash, issuance of such
securities in exchange for assets, or a combination of the foregoing. Subject to
the constraints imposed by the Company's $200,000,000 Credit Facility and
long-term, fixed rate financing, the Company may enter into additional financing
arrangements.
In January 1997, the Company sold its property in Foley, Alabama, for
$570,000 and received net sales proceeds of $551,000. In addition, in September
1997, the Company sold four of its properties to Net Lease Institutional Realty,
L.P. at the Company's original cost of $17,542,000. The Company recognized a
gain on the sale of these five properties of $397,000 for financial reporting
purposes. The Company reinvested the proceeds to acquire additional properties
and structured the transactions to qualify as a like-kind exchange transactions
for federal income tax purposes.
Investment in Partnership. In September 1997, the Company contributed
cash of $855,000 and land and building at the Company's original cost of
$2,895,000 to Net Lease Institutional Realty, L.P. (the "Partnership") for a 20
percent interest in the Partnership. The Company accounts for its 20 percent
interest in the Partnership under the equity method of accounting.
Management believes that the Company's current capital resources
(including cash on hand), coupled with the Company's borrowing capacity, are
sufficient to meet its liquidity needs for the foreseeable future.
Dividends. One of the Company's primary objectives, consistent with its
policy of retaining sufficient cash for reserves and working capital purposes,
is to distribute a substantial portion of its funds available from operations to
its stockholders in the form of dividends. For the nine months ended September
30, 1997 and 1996, the Company declared and paid dividends to its stockholders
of $20,265,000 and $12,639,000, respectively, or $.90 and $.88, respectively,
per share of common stock. In October 1997, the Company declared dividends to
its shareholders of $8,115,000 or $.30 per share of common stock, payable in
November 1997.
13
<PAGE>
Results of Operations
During the nine months ended September 30, 1997 and 1996, the Company
owned and leased 231 wholly owned Properties (including five Properties which
were sold and one Property which was contributed to the Partnership during 1997)
and 187 wholly owned Properties, respectively, to operators of major retail
businesses. In connection therewith, during the nine months ended September 30,
1997 and 1996, the Company earned $36,242,000 and $23,610,000, respectively, in
rental income from operating leases, earned income from direct financing leases
and contingent rental income, $13,236,000 and $9,126,000 of which was earned
during the quarters ended September 30, 1997 and 1996, respectively. The
increase in rental and earned income during the nine months ended September 30,
1997, is primarily a result of the facts that (i) the 40 Properties acquired and
nine buildings upon which construction was completed during 1996 were
operational for a full nine months in 1997 and (ii) the Company acquired 36
Properties and three buildings upon which construction was completed during the
nine months ended September 30, 1997. Rental and earned income are expected to
increase as the Company acquires additional properties and due to the fact that
the 36 Properties and three buildings acquired during the nine months ended
September 30, 1997, will contribute to the Company's income for a full fiscal
quarter in future quarters.
The Company incurred $8,603,000 and $5,535,000 in interest expense for
the nine months ended September 30, 1997 and 1996, respectively, $3,509,000 and
$2,473,000 of which was incurred for the quarters ended September 30, 1997 and
1996. Interest expense increased during the quarter and nine months ended
September 30, 1997, primarily as a result of higher average borrowing levels on
the Company's Credit Facility. However, the increase was partially offset by a
decrease in the average interest rates of the Company's Credit Facility.
During the nine months ended September 30, 1997 and 1996, operating
expenses, including depreciation and amortization, were $6,603,000 and
$4,603,000, respectively (18.2% and 19.4%, respectively, of gross operating
revenues) of which $2,296,000 and $1,634,000 (17.3% and 17.8%, respectively, of
gross operating revenues) were incurred for the quarters ended September 30,
1997 and 1996, respectively. The increase in the dollar amount of operating
expenses for the quarter and nine months ended September 30, 1997, as compared
to the quarter and nine months ended September 30, 1996, is primarily
attributable to the increase in depreciation expense as a result of the
additional Properties acquired during the nine months ended September 30, 1997,
and a full quarter of depreciation expense relating to the 40 Properties and
nine buildings acquired during 1996. The increase for the nine months ended
September 30, 1997, is also attributable to an increase in amortization expense
as a result of the amortization of loan costs relating to the Company's fixed
rate financing and amendment to the Company's Credit Facility. In addition,
advisory fees increased as a result of increased funds from operations for the
quarter and nine months ended September 30, 1997.
14
<PAGE>
Results of Operations - Continued
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128, Earnings Per Share. The Statement, which
is effective for fiscal years ending after December 15, 1997, provides for a
revised computation of earnings per share. The Company will adopt this Standard
in 1997 and does not expect compliance with such Standard to have a material
effect, if any, on the Company's earnings per share.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
No material developments in legal proceedings as previously
reported in the Form 10-K for the year ended December 31,
1996.
Item 2. Changes in Securities. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as a part of this
report.
3.1 Articles of Incorporation of the Registrant
(filed as Exhibit 3.3(i) to the Registrant's
Registration Statement No. 1-11290 on Form
8- B, and incorporated herein by reference).
3.2 Bylaws of the Registrant (filed as Exhibit
3.3(ii) to Amendment No. 2 to the Registrant's
Registration Statement No. 1-11290 on Form 8-
B, and incorporated herein by reference).
3.3 Articles of Amendment to the Articles of
Incorporation of Registrant (filed as
Exhibit 3.3 to the Registrant's Form 10-Q
for the quarter ended June 30, 1996, and
incorporated herein by reference).
4 Specimen Certificate of Common Stock, par
value $.01 per share, of the Registrant
(filed as Exhibit 3.4 to the Registrant's
Registration Statement No. 1-11290 on Form
8- B, and incorporated herein by reference).
16
<PAGE>
10.1 Letter Agreement dated July 10, 1992,
amending Stock Purchase Agreement dated
January 23, 1992 (filed as Exhibit 10.34 to
the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1992,
and incorporated herein by reference).
10.2 Advisory Agreement between Registrant and CNL
Realty Advisors, Inc. effective as of April 1,
1993 (filed as Exhibit 10.04 to Amendment
No.1 to the Registrant's Registration Statement
No. 33-61214 on Form S-2, and incorporated
herein by reference).
10.3 1992 Commercial Net Lease Realty, Inc. Stock
Option Plan (filed as Exhibit No. 10(x) to the
Registrant's Registration Statement No. 33-
83110 on Form S-3, and incorporated herein
by reference).
10.4 Second Amended and Restated Line of Credit
and Security Agreement, dated December 7,
1995, among Registrant, certain lenders
listed therein and First Union National Bank
of Florida, as the Agent, relating to a
$100,000,000 loan (filed as Exhibit 10.14 to
the Registrant's Current Report on Form 8-K
dated January 18, 1996, and incorporated
herein by reference).
10.5 Secured Promissory Note, dated December 14,
1995, among Registrant and Principal Mutual
Life Insurance Company relating to a
$13,150,000 loan (filed as Exhibit 10.15 to
the Registrant's Current Report on Form 8-K
dated January 18, 1996, and incorporated
herein by reference).
10.6 Mortgage and Security Agreement, dated
December 14, 1995, among Registrant and
Principal Mutual Life Insurance Company
relating to a $13,150,000 loan (filed as
Exhibit 10.16 to the Registrant's Current
Report on Form 8-K dated January 18, 1996, and
incorporated herein by reference).
10.7 Loan Agreement, dated January 19, 1996,
among Registrant and Principal Mutual Life
Insurance Company relating to a $39,450,000
loan (filed as Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995, and
incorporated herein by reference).
17
<PAGE>
10.8 Secured Promissory Note, dated January 19,
1996, among Registrant and Principal Mutual
Life Insurance Company relating to a
$39,450,000 loan (filed as Exhibit 10.13 to
the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995, and
incorporated herein by reference).
10.9 Third Amended and Restated Line of Credit
and Security Agreement, dated September 3,
1996, by and among Registrant, certain
lenders and First Union National Bank of
Florida, as the Agent, relating to a
$150,000,000 loan (filed as Exhibit 10.11 to
the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30,
1996, and incorporated herein by reference).
10 Second Renewal and Modification Promissory
Note, date September 3, 1996, by and among
Registrant and First Union National Bank of
Florida, as the Agent, relating to a
$150,000,000 loan (filed as Exhibit 10.12 to
the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30,
1996, and incorporated herein by reference).
10.11 Agreement and Plan of Merger dated May 15,
1997, by and among Commercial Net Lease
Realty, Inc. and Net Lease Realty II, Inc. and
CNL Realty Advisors, Inc. and the Stockholders
of CNL Realty Advisors, Inc. (filed as Exhibit
10.1 to the Registrant's Current Report on
Form 8-K dated May 16, 1997, and incorporated
herein by reference).
10.12 Fourth Amended and Restated Line of Credit
and Security Agreement, dated August 6,
1997, by and among Registrant, certain
lenders and First Union National Bank, as
the Agent, relating to a $200,000,000 loan
(filed as Exhibit 10 to the Registrant's
Current Report on Form 8-K dated September
12, 1997, and incorporated herein by
reference).
(b) The Registrant filed two reports on Form 8-K on
September 12, 1997, and September 18, 1997, for the
purpose of incorporating certain items by reference
into its registration statement on Form S-3 dated
September 13, 1997, and September 18, 1997,
respectively.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED this 14th day of November, 1997.
COMMERCIAL NET LEASE REALTY, INC.
By: /s/ Gary M. Ralston
-------------------
Gary M. Ralston
President
By: /s/ Kevin B. Habicht
--------------------
Kevin B. Habicht
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of Commercial Net Lease Realty, Inc. at September 30, 1997, and its
statement of earnings for the nine months then ended and is qualified in its
entirety by reference to the Form 10-Q of Commercial Net Lease Realty, Inc. for
the nine months ended September 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,322,000
<SECURITIES> 0
<RECEIVABLES> 782,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 377,142
<DEPRECIATION> 11,063
<TOTAL-ASSETS> 500,907
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 271,000
<OTHER-SE> 346,684
<TOTAL-LIABILITY-AND-EQUITY> 500,907
<SALES> 0
<TOTAL-REVENUES> 36,373,000
<CGS> 0
<TOTAL-COSTS> 6,603,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,603,000
<INCOME-PRETAX> 21,575,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 21,575,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,575,000
<EPS-PRIMARY> .94
<EPS-DILUTED> .94
<FN>
<F1>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.
</FN>
</TABLE>
