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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-12989
COMMERCIAL NET LEASE REALTY, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
56-1431377
(I.R.S. Employment Identification No,)
400 E. South Street, Orlando, Florida 32801
(Address of principal executive offices, including zip code)
(407) 423-7348
(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.
29,184,762 shares of Common Stock,$.01 par value,outstanding as of May 11 ,1998.
<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 Cash Flows................3
Notes to Condensed Consolidated Financial Statements...........5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................11
Part II
Other Information ..................................................15
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Real estate:
Accounted for using the operating method,
net of accumulated depreciation $409,621 $400,977
Accounted for using the direct financing method 115,059 118,747
Investment in partnership 3,919 3,925
Cash and cash equivalents 10,629 2,160
Receivables 666 515
Due from related parties 370 12
Prepaid expenses 391 287
Debt costs, net of accumulated amortization
of $2,067 and $1,868 2,746 1,762
Accrued rental income 7,850 7,063
Other assets 1,502 1,566
--------- --------
$552,753 $537,014
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit $ 14,000 $115,100
Mortgages payable 56,329 56,736
Notes payable, net of unamortized discount of $270 in 1998 99,730 -
Accrued interest payable 464 765
Accounts payable and accrued expenses 2,955 1,392
Rents paid in advance 850 877
--------- --------
Total liabilities 174,328 174,870
--------- --------
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $.01 par value. Authorized 90,000,000 shares;
issued and outstanding 29,184,762 and 27,953,627 shares,
respectively 292 280
Excess stock, $0.01 par value. Authorized 90,000,000 shares;
none issued and outstanding - -
Capital in excess of par value 382,074 361,793
Retained earnings (deficit) (3,941) 71
--------- --------
Total stockholders' equity 378,425 362,144
--------- --------
$552,753 $537,014
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1998 1997
------------ -----------
<S> <C> <C>
Revenues:
Rental income from operating leases $ 11,338 $ 8,139
Earned income from direct financing leases 3,233 2,676
Contingent rental income 198 165
Interest and other 606 36
---------- ----------
15,375 11,016
---------- ----------
Expenses:
General operating and administrative 1,762 539
Advisory fees to related party - 472
Interest 3,000 2,363
Depreciation and amortization 1,572 1,168
Expenses incurred in acquiring advisor from related party 4,692 -
---------- ----------
11,026 4,542
---------- ----------
Earnings before equity in earnings of unconsolidated
partnership and gain on sale of real estate 4,349 6,474
Equity in earnings of unconsolidated partnership 91 -
Gain on sale of real estate - 271
---------- ----------
Net earnings $ 4,440 $ 6,745
========== ==========
Net earnings per share of common stock:
Basic $ 0.16 $ 0.31
========== ==========
Diluted $ 0.15 $ 0.31
========== ==========
Weighted average number of shares outstanding:
Basic 28,476,268 21,859,116
========== ==========
Diluted 28,716,516 22,008,594
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(dollars in thousands)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1998 1997
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 4,440 $ 6,745
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 1,371 951
Amortization 201 217
Gain on sale of real estate - (271)
Expenses incurred in acquiring advisor from related party 4,692 -
Equity in earnings of unconsolidated partnership (91) -
Decrease in real estate leased to others using the
direct financing method 304 258
Increase in accrued rental income (787) (690)
Decrease (increase) in receivables (4) 125
Increase in due from related party (358) -
Decrease (increase) in prepaid expenses (104) 9
Decrease in other assets 67 11
Increase (decrease) in accrued interest payable (301) 47
Increase in accounts payable and
accrued expenses 538 187
Increase (decrease) in rents paid in advance (27) 249
---------- --------
Net cash provided by operating activities 9,941 7,838
---------- --------
Cash flows from investing activities:
Additions to real estate accounted for using the
operating method (5,926) (51,679)
Additions to real estate accounted for using the direct
financing method - (9,631)
Proceeds from the sale of real estate - 551
Increase in other assets (749) (2,173)
Other - (78)
---------- ---------
Net cash used in investing activities (6,675) (63,010)
---------- ---------
Cash flows from financing activities:
Proceeds from line of credit 4,500 62,900
Repayment of line of credit (105,600) (39,369)
Proceeds from notes payable 99,729 -
Repayment of mortgages payable (407) -
Payment of debt costs (838) -
Proceeds from issuance of common stock 17,293 39,778
Payment of stock issuance costs (959) (1,995)
Payment of dividends (8,452) (6,229)
Other (63) 16
---------- ---------
Net cash provided by financing activities 5,203 55,101
---------- ---------
Net increase (decrease) in cash and cash equivalents 8,469 (71)
Cash and cash equivalents at beginning of quarter 2,160 1,410
---------- ---------
Cash and cash equivalents at end of quarter $ 10,629 $ 1,339
========== =========
Supplemental schedule of non-cash investing and
financing activities:
Issued 220,000 shares of common stock in connection
with acquisition of the Company's advisor $ 3,933 $ -
========= =========
Net assets acquired in connection with the acquisition
of the Company's advisor $ 12 $ -
========= =========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
And SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Quarter Ended March 31, 1998 and 1997
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 statement
of the results for the interim periods presented. Operating results for
the quarter ended March 31, 1998, may not be indicative of the results
that may be expected for the year ending December 31, 1998. Amounts as
of December 31, 1997, 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, 1997.
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 potential dilutive common share
equivalents.
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 March 31, 1998, 152 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 leases are accounted for
as direct financing leases while the land portions of 55 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.
<PAGE>
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,
1998 1997
--------- ------------
Land $200,620 $199,992
Buildings and improvements 217,961 209,272
--------- ---------
418,581 409,264
Less accumulated depreciation (13,638) (12,297)
--------- ---------
404,943 396,967
Construction in progress 4,678 4,010
--------- ---------
$409,621 $400,977
========= =========
Some leases provide for scheduled rent increases throughout the lease
term. Such amounts are recognized on a straight-line basis over the
terms of the leases. For the quarters ended March 31, 1998 and 1997,
the Company recognized $802,000 and $704,000, 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, 1998 (dollars
in thousands):
1998 $ 29,996
1999 40,319
2000 40,743
2001 41,385
2002 41,051
Thereafter 449,929
--------
$643,423
========
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):
March 31, December 31,
1998 1997
--------- ------------
Minimum lease payments
to be received $247,721 $258,715
Estimated residual values 35,118 35,981
Less unearned income (167,780) (175,949)
--------- ---------
Real estate leased to others using
the direct financing method $115,059 $118,747
========= =========
The following is a schedule of future minimum lease payments to be
received on direct financing leases at March 31, 1998 (dollars in
thousands):
1998 $ 10,515
1999 14,068
2000 14,187
2001 14,224
2002 14,296
Thereafter 180,431
--------
$247,721
========
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).
<PAGE>
4. Line of Credit:
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. As of March 31, 1998 and
December 31, 1997, the outstanding principal balance was $14,000,000
and $115,100,000, respectively, plus accrued interest of $74,000 and
$552,000, respectively.
For the quarter ended March 31, 1998, interest cost incurred on the
Credit Facility was $1,977,000, of which $223,000 was capitalized, and
$1,754,000 which was charged to operations. For the quarter ended March
31, 1997, interest cost incurred on the Credit Facility was $1,265,000,
all of which was charged to operations.
5. Notes Payable:
In March 1998, the Company filed a prospectus supplement to its
$300,000,000 shelf registration statement and issued $100,000,000 of
7.125% Notes due 2008 (the "Notes"). The Notes are senior, unsecured
obligations of the Company and are subordinated to all secured
indebtedness of the Company. The Notes were sold at a discount for an
aggregate purchase price of $99,729,000 with interest payable
semiannually commencing on September 15, 1998. The Notes are redeemable
at the option of the Company, in whole or in part, at a redemption
price equal to the sum of (i) the principal amount of the Notes being
redeemed plus accrued interest thereon through the redemption date and
(ii) the Make-Whole Amount, as defined in the Supplemental Indenture
No. 1 dated March 25, 1998 for the Notes.
In connection with the debt offering, the Company incurred debt
issuance costs totaling $1,180,000, consisting primarily of
underwriting discounts and commissions, legal and accounting fees,
rating agency fees and printing expenses. Debt issuance costs have been
deferred and are being amortized over the term of the Notes using the
effective interest method. The net proceeds from the debt offering were
used to pay down outstanding indebtedness of the Company's Credit
Facility.
6. Employee Benefit Plan:
Effective January 1, 1998, the Company adopted a defined contribution
plan (the "Retirement Plan") covering substantially all of the
employees of the Company. The Retirement Plan permits participants to
defer up to a maximum of 15% of their Compensation, as defined in the
Retirement Plan. The Company matches 50% of the participants'
contributions up to a maximum of 6% of a participant's annual
compensation. The Company's contribution to the Retirement Plan for the
quarter ended March 31, 1998, totaled $13,000.
7. Earnings Per Share:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," which provides for
a revised computation of earnings per share effective for fiscal years
ending after December 15, 1997.
The following represents the amounts used in computing earnings per
share and the effect on the weighted average number of shares of
dilutive potential common stock for the quarters ended March 31:
1998 1997
---------- ----------
Net earnings - basic and diluted $4,440,000 $6,745,000
========== ==========
Weighted average number of shares
outstanding used in basic EPS 28,476,268 21,859,116
Effect of dilutive securities
stock options 240,248 149,478
---------- ----------
Weighted average number of shares and
dilutive potential shares used in
diluted EPS 28,716,516 22,008,594
========== ==========
<PAGE>
8. Merger Transaction:
On December 18, 1997, the Company's stockholders voted to approve an
agreement and plan of merger with CNL Realty Advisors, Inc. (the
"Advisor"), whereby the stockholders of the Advisor agreed to exchange
100% of the outstanding shares of common stock of the Advisor for up to
2,200,000 shares (the "Share Consideration") of the Company's common
stock (the "Merger"). As a result, the Company became a fully
integrated, self-administered real estate investment trust ("REIT")
effective January 1, 1998. Ten percent of the Share Consideration
(220,000 shares) was paid January 1, 1998, and the balance (the "Share
Balance") of the Share Consideration is to be paid over time to the
extent the Company expands its operations after the Merger. The market
value of the common shares issued on January 1, 1998 was $3,933,000 of
which $12,000 was allocated to the net tangible assets acquired and the
difference of $3,921,000 was accounted for as expenses incurred in
acquiring the Advisor from a related party. In addition, in connection
with the Merger, the Company incurred costs totaling $771,000
consisting primarily of legal and accounting fees, directors'
compensation and fairness opinions. For accounting purposes, the
Advisor was not considered a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations," and therefore, the market
value of the common shares issued in excess of the fair value of the
net tangible assets acquired was charged to operations rather than
capitalized as goodwill. To the extent the Share Balance is paid over
time, the market value of the common shares issued will also be charged
to operations. Upon consummation of the Merger on January 1, 1998, all
employees of the Advisor became employees of the Company, and any
obligation to pay fees under the advisor agreement between the Company
and the Advisor was terminated.
9. 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 the quarter ended March
31, 1998.
During the quarter ended March 31, 1998, the Company provided certain
development services for an affiliate of a member of the board of
directors. In connection therewith, the Company received $386,000 in
development fees relating to these services.
10. Commitments and Contingencies:
As of March 31, 1998, the Company had entered into agreements to
purchase two additional properties for an estimated aggregate purchase
price of $5,247,000. In connection with the acquisition of one of these
properties, the Company became contingently liable for $100,000 related
to a bank letter of credit which guarantees the Company's obligation
under a purchase agreement to acquire this property.
As of March 31, 1998, the Company owned and leased one land parcel 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 amount of
up to $653,000, at which time rental income is to increase for the
property.
As of March 31, 1998, the Company owned five land parcels subject to
lease agreements with tenants whereby the Company has agreed to
construct a building on each of the respective land parcels for
aggregate construction costs of approximately $10,100,000, of which
$3,609,000 of costs had been incurred at March 31, 1998. Pursuant to
the lease agreements, rent is to commence on the properties upon
completion of construction of the buildings.
11. Subsequent Event:
In April 1998, the Company declared dividends to its shareholders of
$9,047,000 or $.31 per share of common stock, payable in May 1998.
<PAGE>
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, 1998, the Company owned,
either directly or through a partnership interest, 249 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 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 quarters ended March 31, 1998 and 1997, the Company
generated $9,941,000 and $7,838,000, respectively, in net cash provided by
operating activities. The increase in cash from operations for the quarter ended
March 31, 1998, as compared to the quarter ended March 31, 1997, 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.
In January 1998, one of the Company's tenants, HomePlace, filed a voluntary
petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a
result, the tenant has the right to reject or affirm its leases with the
Company. As of March 31, 1998, HomePlace leased five Properties which accounted
for five percent of the Company's total rental and earned income for the quarter
ended March 31,1998. In May 1998, HomePlace rejected two of its five leases with
the Company.
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, 1998, $14,000,000 was outstanding under the Credit
Facility. The Company expects to use the Credit Facility to invest in
freestanding retail properties.
Debt and Equity Securities. In February and March of 1998, the Company issued a
total of 988,172 shares of common stock pursuant to three prospectus supplements
to its $300,000,000 shelf registration statement, and received gross proceeds
totaling $16,962,000. In connection with the three offerings, the Company
incurred stock issuance costs totaling $933,000 consisting primarily of
underwriters' commissions and fees, legal and accounting fees and printing
expenses. Proceeds from the offerings were used to pay down the Company's Credit
Facility.
During the quarter ended March 31, 1998, the Company received investment grade
ratings from Standard and Poor's, Moody's Investor Service and Fitch IBCA on its
senior, unsecured debt. In March 1998, the Company filed a prospectus supplement
to its $300,000,000 shelf registration and issued $100,000,000 of 7.125% Notes
due 2008 (the "Notes"). The Notes are senior, unsecured obligations of the
Company subordinated to all of the Company's secured indebtedness. The Notes
were sold at a discount for an aggregate purchase price of $99,729,000.
In connection with the debt offering, the Company incurred debt issuance costs
totaling $1,180,000, consisting primarily of underwriting discounts and
commissions, legal and accounting fees, rating agency fees and printing
expenses. The net proceeds from the debt offering were used to pay down
outstanding indebtedness of the Company's Credit Facility.
Property Acquisitions and Commitments. During the three months ended March 31,
1998, the Company borrowed $4,500,000 under its credit facility (i) to acquire
four properties, three of which are land only parcels currently under
construction, (ii) to purchase one building constructed by the tenant on a land
parcel owned by the Company and (iii) to complete construction of two buildings
by the Company on previously acquired land parcels. The four properties include
one OfficeMax office supply store, one Eckerd drugstore, one Pier 1 Imports home
furnishing store and one Wendy's fast food restaurant, and the three buildings
include one OfficeMax office supply store, one Pier 1 Imports home furnishing
store and one HomePlace home furnishing store.
As of March 31, 1998, the Company owned and leased one land parcel 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 amount of up to $653,000, at
which time rental income is to increase for the Property.
As of March 31, 1998, the Company owned five land parcels subject to lease
agreements with tenants whereby the Company has agreed to construct a building
on each of the land parcels for an aggregate amount of approximately
$10,100,000. Pursuant to the lease agreements, rent is to commence on the
properties upon completion of construction of the buildings.
As of March 31, 1998, the Company had entered into agreements to purchase two
additional properties for an estimated aggregate amount of $5,247,000. 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 two properties under contract and the six buildings under
construction as of March 31, 1998, 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.
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
"Advisors"), whereby the stockholders of the Advisor to exchange 100% of the
outstanding shares of common stock of the Advisor for up to 2,200,000 shares
(the "Share Consideration") of the Company's common stock (the "Merger"). As a
result, the Company became a fully integrated, self administered real estate
investment trust ("REIT") effective January 1, 1998. Ten percent of the Share
Consideration (220,000 shares) was paid January 1, 1998, and the balance (the
"Share Balance") of the Share Consideration will be paid over time to the extent
the Company expands its operations after the Merger. The market value of the
common shares issued on January 1, 1998 was $3,933,000 of which $12,000 was
allocated to the net tangible assets acquired and the difference of $3,921,000
was accounted for as costs incurred in acquiring the Advisor from a related
party. In addition, in connection with the Merger, the Company incurred costs
totaling $771,000 consisting primarily of legal and accounting fees, directors'
compensation and fairness opinions. For accounting purposes, the Advisor was not
considered a "business" for purposes of applying APB Opinion No. 16, "Business
Combinations," and therefore, the market value of the common shares issued in
excess of the fair value of the net tangible assets acquired was charged to
operations rather than capitalized as goodwill. To the extent the Share Balance
is paid over time, the market value of the common shares issued will also be
charged to operations. Upon consummation of the Merger on January 1, 1998, all
employees of the Advisor became employees of the Company and any obligation to
pay fees under the advisor agreement between the Company and the Advisor was
terminated.
Management believes that the Company's current capital resources (including cash
on hand), coupled with the Company's borrowing capacity, are sufficient to meet
its liquidity needs for the foreseeable future.
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 quarters ended March 31, 1998 and
1997, the Company declared and paid dividends to its stockholders of $8,452,000
and $6,229,000, respectively, or $.30 and $.30, respectively, per share of
common stock. In April 1998, the Company declared dividends to its shareholders
of $9,047,000 or $.31 per share of common stock, payable in May 1998.
Results of Operations
- ---------------------
During the quarter ended March 31, 1998 and 1997, the Company owned 240 wholly
owned Properties, 237 of which were leased, and 187 wholly owned Properties, all
of which were leased, respectively, to operators of major retail businesses. In
connection therewith, during the quarter ended March 31, 1998 and 1997, the
Company earned $14,363,000 and $10,980,000, respectively, in rental income from
operating leases, earned income from direct financing leases and contingent
rental income. The increase in rental and earned income during the quarter ended
March 31, 1998, is primarily a result of the facts that (i) the 47 Properties
acquired and three buildings upon which construction was completed during 1997
were operational for a full quarter in 1998 and (ii) the Company acquired four
Properties and three buildings upon which construction was completed during the
quarter ended March 31, 1998. Rental and earned income are expected to increase
as the Company acquires additional properties and due to the fact that the four
Properties and three buildings acquired during the quarter ended March 31, 1998,
will contribute to the Company's income for a full fiscal quarter in future
quarters.
The Company expensed $3,000,000 and $2,363,000 in interest expense for the
quarter ended March 31, 1998 and 1997, respectively. Interest expense increased
during the quarter ended March 31, 1998, 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 quarter ended March 31, 1998 and 1997, operating expenses, including
depreciation and amortization, were $8,026,000 and $2,179,000, respectively
(52.2% and 19.8%, respectively, of gross operating revenues). The increase in
operating expenses for the quarter ended March 31, 1998, as compared to the
quarter ended March 31, 1997, is primarily attributable to a $4,692,000 charge
related to the costs incurred in acquiring the Advisor from a related party.
Operating expenses for the quarter ended March 31, 1998, excluding the costs
relating to the acquisition of the Advisor, were $3,334,000 (21.7% of gross
operating revenues). The increase is also attributable to the increase in
depreciation expense as a result of the additional Properties acquired during
the quarter ended March 31, 1998, and a full quarter of depreciation expense
relating to the 47 Properties and three buildings acquired during 1997. The
increase for the quarter ended March 31, 1998, is also attributable to an
increase in amortization expense as a result of the amortization of loan costs
relating to an amendment to the Company's Credit Facility. In addition, during
the quarter ended March 31, 1997, the Company paid an advisory fee to the
Advisor based upon the Company's funds from operations, as defined in the
advisor agreement between the Company and the Advisor. Pursuant to the Merger,
the Company acquired the Advisor and became internally managed. Effective
January 1, 1998, the advisory fee was replaced with the actual personnel and
other operating costs associated with being internally managed. Costs relating
to acquisitions and development activities have been capitalized in accordance
with generally accepted accounting principles.
<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,
1997.
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).
3.4 Articles of Amendment to the Articles of
Incorporation of the Registrant (filed as
Exhibit 3.4 to the Registrant's Current
Report on Form 8-K dated February 18, 1998,
and filed with the Securities and Exchange
Commission on February 19, 1998, and
incorporated herein by reference).
4.1 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).
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 $100,000,00 of 7.125% Notes due 2008
(filed as Exhibit 4.2 to the Registrant's
Current Report on Form 8-K dated March 20,
1998, and incorporated herein by reference.)
4.4 Form of 7.125% Note due 2008 (filed as
Exhibit 4.3 to the Registrant's Current
Report on Form 8-K dated March 20, 1998, and
incorporated herein by reference.)
10.1 Letter Agreement dated July 10, 1992,
amending Stock Purchase Agreement dated
January 23, 1992 (filed as Exhibit 10.34 to
the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1992,
and incorporated herein by reference).
10.2 Advisory Agreement between Registrant and
CNL Realty Advisors, Inc. effective as of
April 1, 1993 (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).
(b) The Registrant filed four reports on Form 8-K: one on
February 19, 1998, one on March 20, 1998 and two on
March 26, 1998 for the purpose of incorporating
certain items by reference into its registration
statement on Form S-3.
<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.
<PAGE>
DATED this 15th day of May, 1998.
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 March 31, 1998, and its statement
of earnings for the three months then ended and is qualified in its entirety by
reference to the Form 10-Q of Commercial Net Lease Realty, Inc. for the months
ended March 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,629,000
<SECURITIES> 0
<RECEIVABLES> 1,036,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 423,259,000
<DEPRECIATION> 13,638,000
<TOTAL-ASSETS> 552,753,000
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 292,000
<OTHER-SE> 378,133,000
<TOTAL-LIABILITY-AND-EQUITY> 552,753,000
<SALES> 0
<TOTAL-REVENUES> 15,375,000
<CGS> 0
<TOTAL-COSTS> 8,026,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,000,000
<INCOME-PRETAX> 4,440,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,440,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,440,000
<EPS-PRIMARY> .16
<EPS-DILUTED> .15
<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>
