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 June 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.
23,394,456 shares of Common Stock, $.01 par value, outstanding as of August
14, 1997.
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
CONTENTS
Part I Page
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of
Earnings 2
Condensed Consolidated Statements of
Stockholders' Equity 3
Condensed Consolidated Statements of
Cash Flows 4
Notes to Condensed Consolidated
Financial Statements 5-9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10-13
Part II
Other Information 14-16
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
<S> <C> --------- ----------
Real estate leased to others:
Accounted for using the operating
method, net of accumulated
depreciation $349,473 $269,031
Accounted for using the direct
financing method 112,437 92,413
Cash and cash equivalents 807 1,410
Receivables 471 812
Due from related party 90 -
Prepaid expenses 397 335
Loan costs, net of accumulated
amortization of $1,521 and
$1,055 1,788 2,185
Accrued rental income 5,678 4,421
Other assets 2,352 346
-------- --------
$473,493 $370,953
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $181,610 $116,956
Accrued interest payable 446 390
Accounts payable and accrued
expenses 303 161
Real estate taxes payable 39 -
Due to related parties 104 93
Rents paid in advance 29 779
-------- --------
Total liabilities 182,531 118,379
-------- --------
Commitments and contingencies (Notes 6 and 7)
Stockholders' equity:
Common stock, $.01 par value.
Authorized 50,000,000 shares;
issued and outstanding
23,394,456 and 20,763,672
shares, respectively 234 208
Excess stock, $0.01 par value.
Authorized 50,000,000 shares;
none issued and outstanding - -
Capital in excess of par value 291,955 254,299
Accumulated dividends in excess
of net earnings (1,227) (1,933)
-------- --------
Total stockholders' equity 290,962 252,574
-------- --------
$473,493 $370,953
======== ========
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
1
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C>
Revenues:
Rental income from
operating leases $ 8,986 $ 5,603 $ 17,125 $ 10,649
Earned income from
direct financing
leases 2,836 1,797 5,512 3,478
Contingent rental
income 204 199 369 357
Interest and other 41 32 77 71
----------- ----------- ----------- -----------
12,067 7,631 23,083 14,555
----------- ----------- ----------- -----------
Expenses:
General operating and
administrative 209 289 664 672
Advisory fees to
related party 512 343 984 651
Interest 2,731 1,602 5,094 3,062
State taxes 82 57 166 92
Depreciation and
amortization 1,325 806 2,493 1,554
----------- ----------- ----------- -----------
4,859 3,097 9,401 6,031
----------- ----------- ----------- -----------
Net earnings before
gain on sale of
land and building 7,208 4,534 13,682 8,524
----------- ----------- ----------- -----------
Gain on sale of land
and building - - 271 -
----------- ----------- ----------- -----------
Net earnings $ 7,208 $ 4,534 $ 13,953 $ 8,524
=========== =========== =========== ===========
Earnings per share of
common stock $ 0.31 $ 0.29 $ 0.62 $ 0.57
=========== =========== =========== ===========
Weighted average number
of shares outstanding 23,394,077 15,688,672 22,630,837 15,000,210
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
2
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 30, 1997
and Year Ended December 31, 1996
(dollars in thousands, except per share data)
<TABLE>
<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 - - - 13,953 13,953
Dividends declared
and paid ($0.60
per share of
common stock) - - - (13,247) (13,247)
Issuance of common
stock 2,630,784 26 39,764 - 39,790
Stock issuance
costs - - (2,108) - (2,108)
----------- -------- ---------- --------- ----------
Balance at
June 30, 1997 23,394,456 $ 234 $291,955 $ (1,227) $290,962
=========== ======== ========== ========= ==========
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
3
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
------------ ------------
<S> <C>
Cash flows from operating activities:
Net earnings $ 13,953 $ 8,524
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 2,045 1,240
Amortization 448 314
Gain on sale of land and building (271) -
Decrease in real estate leased to others
using the direct financing method 540 314
Increase in accrued rental income (1,257) (976)
Decrease in receivables 202 61
Increase in prepaid expenses (62) (5)
Decrease in other assets 11 21
Increase in accrued interest payable 56 199
Increase (decrease) in accounts payable
and accrued expenses 12 (61)
Increase in real estate taxes payable 39 20
Increase (decrease) in due to
related party (39) 45
Decrease in rents paid in advance (750) (22)
------------ ------------
Net cash provided by operating
activities 14,927 9,674
------------ ------------
Cash flows from investing activities:
Additions to real estate leased to
others using the operating method (82,467) (64,697)
Additions to real estate leased to others
using the direct financing method (20,564) (26,623)
Proceeds from sale of land and building 551 -
Increase in other assets (1,768) (92)
Other (369) 116
------------ ------------
Net cash used in investing
activities (104,617) (91,296)
------------ ------------
Cash flows from financing activities:
Proceeds from loans 104,400 118,450
Repayment of loans (39,746) (76,740)
Payment of loan costs (68) (748)
Proceeds from issuance of common stock 39,869 52,325
Payment of stock issuance costs (2,164) (3,253)
Payment of dividends (13,247) (7,932)
Other 43 (4)
------------ ------------
Net cash provided by financing
activities 89,087 82,098
------------ ------------
Net increase (decrease) in cash and cash
equivalents (603) 476
Cash and cash equivalents at beginning
of period 1,410 301
------------ ------------
Cash and cash equivalents at end of
period $ 807 $ 777
============ ============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
4
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 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 six months ended June 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 June 30, 1997, 138 of the leases have
been classified as operating leases and 84 leases have been classified
as direct
5
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Six Months Ended June 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 54 of these leases are
accounted for as operating leases. Substantially all leases have
initial terms of 15 to 20 years (expiring between 1997 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):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> --------- ----------
Land $173,915 $138,520
Buildings and
improvements 185,576 138,589
--------- ----------
359,491 277,109
Accumulated depreci-
ation (10,018) (8,078)
--------- ----------
$349,473 $269,031
========= ==========
</TABLE>
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 six months ended June 30, 1997 and 1996,
the Company recognized $1,285,000 and $976,000 respectively, of such
income, $581 and $502 of which was recognized for the quarters ended
June 30, 1997 and 1996, respectively.
6
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Six Months Ended June 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 June 30, 1997 (dollars in
thousands):
1997 $ 18,042
1998 36,102
1999 36,316
2000 36,741
2001 37,427
Thereafter 428,746
--------
$593,374
========
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):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> --------- -----------
Minimum lease
payments to be
received $250,007 $207,838
Estimated residual
values 34,253 28,309
Less unearned income (171,823) (143,734)
-------- ----------
Real estate leased to
others using the
direct financing
method $112,437 $ 92,413
======== ==========
</TABLE>
7
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Six Months Ended June 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 June 30, 1997 (dollars in
thousands):
1997 $ 6,825
1998 13,654
1999 13,703
2000 13,822
2001 13,859
Thereafter 188,144
--------
$250,007
========
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. Notes Payable:
In September 1996, the Company entered into an amended and restated loan
agreement for a $150,000,000 revolving credit facility (the "Credit
Facility") which expires on June 30, 1998 and provides for an interest
rate equal to 160 basis points above LIBOR or the lender's prime rate,
whichever the Company selects. As of June 30, 1997 and December 31,
1996, the outstanding principal balance was $124,100,000 and
$58,700,000, respectively, plus accrued interest of $251,000 and
$192,000, respectively.
5. Related Party Transactions:
During the six months ended June 30, 1997, the Company acquired 20
properties and three buildings which were developed by the tenant on
land parcels owned by the Company from unrelated, third parties for
purchase prices totalling $86,907,000. In connection with the
acquisition of these 20 properties and three buildings, the Company paid
CNL Realty Advisors, Inc. $1,738,000 in acquisition fees and expense
reimbursement fees (representing 1.5% and 0.5%, respectively, of the
cost of the properties).
During the six months ended June 30, 1997, the Company acquired eight
properties for purchase prices totalling $14,808,000 from affiliates of
CNL Realty Advisors, Inc. who had developed the properties. The
purchase prices paid by the Company for these eight properties equalled
the affiliates' cost including development costs. The affiliates'
cost
8
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Six Months Ended June 30, 1997 and 1996
5. Related Party Transactions - Continued:
consisted of the land purchase price, construction costs, various soft
costs including legal costs, survey fees and architect fees and
developer fees aggregating $817,500 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.
6. Commitments and Contingencies:
As of June 30, 1997, the Company had entered into agreements to purchase
15 additional properties for an estimated aggregate amount of
$49,242,000. In connection with the acquisition of 12 of these
properties, the Company was contingently liable for $3,233,000 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 $1,805,000 relating to its
obligations under a purchase agreement to acquire one property.
As of June 30, 1997, the Company owned two land parcels which are leased
to tenants who are obligated to develop a building on the respective
land parcels. The Company has agreed to acquire the completed buildings
for an aggregate amount of up to $3,147,000, upon which time rental
income will increase for each of the properties.
7. Subsequent Events:
In July 1997, the Company declared dividends to its shareholders of
$7,018,000 or $.30 per share of common stock, payable in August 1997.
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 basis points above LIBOR.
9
<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 June 30, 1997, the Company owned 222 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
borrowings from banks or other lenders, or the sale of Properties, as well as
undistributed funds from operations. For the six months ended June 30, 1997
and 1996, the Company generated $14,927,000 and $9,674,000, respectively, in
net cash provided by operating activities. The increase in cash from
operations for the six months ended June 30, 1997, as compared to the six
months ended June 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 borrowings 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
10
<PAGE>
Liquidity and Capital Resources - Continued
basis points above LIBOR. As of June 30, 1997, $124,100,000 was outstanding
under the Credit Facility. The Credit Facility will be used primarily to
invest in free standing 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
connection with the offering, the Company incurred stock issuance costs
totalling $2,108,000, consisting primarily of underwriters' commissions and
fees, legal and accounting fees and printing expenses. Proceeds from the
offering were used to pay down the Company's credit facility. 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 (which includes approximately
$37,000,000 of unissued debt and equity securities under the Company's
existing $200,000,000 shelf registration statement).
Property Acquisitions and Commitments. During the six months ended June
30, 1997, the Company borrowed $104,400,000 under its credit facility to
acquire 28 Properties (seven Eckerd drugstores, two OfficeMax office supply
stores, two Barnes & Noble bookstores, one Pier 1 Imports home furnishings
store, one Blockbuster video store, one Just For Feet shoe store, two Good
Guys consumer electronics stores, three Best Buy consumer electronics stores,
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 June 30, 1997, the Company owned two land parcels which are leased
to tenants who are obligated to develop a building on the respective land
parcels. The Company has agreed to acquire the completed buildings for an
aggregate amount of up to $3,147,000, at which time rental income will
increase for each of the Properties.
As of June 30, 1997, the Company had entered into agreements to purchase
15 additional properties for an estimated aggregate amount of $49,242,000.
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.
11
<PAGE>
Liquidity and Capital Resources - Continued
In addition to the 15 properties under contract and the two buildings
under construction as of June 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, resulting in a gain of
$271,000 for financial reporting purposes. The Company reinvested the
proceeds to acquire an additional property and structured the transaction to
qualify as a like-kind exchange transaction for federal income tax purposes.
Management believes that the Company's current capital resources
(including cash on hand), coupled with the Company's borrowing capacity, are
sufficient to meet its liquidity needs for the foreseeable future.
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 six months ended June
30, 1997 and 1996, the Company declared and paid dividends to its stockholders
of $13,247,000 and $7,932,000, respectively, or $.60 and $58., respectively,
per share of common stock. In July 1997, the Company declared dividends to
its shareholders of $7,018,000 or $.30 per share of common stock, payable in
August 1997.
Results of Operations
During the six months ended June 30, 1997 and 1996, the Company owned
and leased 223 (including one property which was sold during 1997) and 182
Properties, respectively, to operators of major retail businesses. In
connection therewith, during the six months ended June 30, 1997 and 1996, the
Company earned $22,637,000 and $14,127,000, respectively, in rental income
from operating leases and earned income from direct financing leases,
$11,822,000 and $7,400,000 of which was earned during the quarters ended June
30, 1997 and 1996, respectively. The increase in rental and earned income
during the six months ended June 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 quarter in 1997
and (ii) the
12
<PAGE>
Results of Operations - Continued
Company acquired 28 Properties and three buildings upon which construction was
completed during the six months ended June 30, 1997. Rental and earned income
are expected to increase as the Company acquires additional properties and due
to the fact that the 28 Properties and three buildings acquired during the six
months ended June 30, 1997 will contribute to the Company's income for a full
fiscal quarter in future quarters.
The Company incurred $5,094,000 and $3,062,000 in interest expense for
the six months ended June 30, 1997 and 1996, respectively, $2,731,000 and
$1,602,000 of which was incurred for the quarters ended June 30, 1997 and
1996. Interest expense increased during the quarter and six months ended June
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 six months ended June 30, 1997 and 1996, operating expenses,
including depreciation and amortization, were $4,307,000 and $2,969,000,
respectively (18.7% and 20.4%, respectively, of gross operating revenues) of
which $2,128,000 and $1,495,000 (17.6% and 19.6%, respectively, of gross
operating revenues) were incurred for the quarters ended June 30, 1997 and
1996, respectively. The increase in the dollar amount of operating
expenses for the six months ended June 30, 1997, as compared to the quarter
and six months ended June 30, 1996, is primarily attributable to the increase
in depreciation expense as a result of the additional Properties acquired
during the six months ended June 30, 1997, and a full quarter of depreciation
expense relating to the 40 Properties and nine buildings acquired during 1996.
The increase is also attributable to an increase in amortization expense as a
result of the amortization of loan costs relating to the Company's 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
six months ended June 30, 1997.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, Earnings Per Share.
The Statementwhich 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.
13
<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).
14
<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).
15
PAGE
<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).
10.10 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 here
in 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).
(b) The Registrant filed one report on Form 8-K on April 21,
1997, for the purpose of incorporating certain items by
reference into its $300,000,000 shelf registration statement
and one report on Form 8-K on May 16, 1997, reporting that
the Special Committee of the Board of Directors of the
Registrant recommended that the Board of Directors of the
Registrant approve the Agreement and Plan of Merger by and
among the Registrant, Net Lease Realty II, Inc., CNL Realty
Advisors, Inc. and the stockholders of CNL Realty Advisors,
Inc.
16
<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 August, 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 June 30, 1997, and its statement
of earnings for the six months then ended and is qualified in its entirety by
reference to the Form 10-Q of Commercial Net Lease Realty, Inc. for the six
months ended June 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 807,000
<SECURITIES> 0
<RECEIVABLES> 561,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 359,491,000
<DEPRECIATION> 10,018,000
<TOTAL-ASSETS> 473,493,000
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 234,000
<OTHER-SE> 290,728,000
<TOTAL-LIABILITY-AND-EQUITY> 473,493,000
<SALES> 0
<TOTAL-REVENUES> 23,083,000
<CGS> 0
<TOTAL-COSTS> 4,307,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,094,000
<INCOME-PRETAX> 13,953,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,953,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,953,000
<EPS-PRIMARY> .62
<EPS-DILUTED> .62
<FN>
<F1>Due to the nature of its industry, commercial Net Lease Reatly, Inc. has an
unclassified balance sheet, therefore, no values are shown above for current
assets and current liabilities.
</FN>
</TABLE>
