UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-12989
COMMERCIAL NET LEASE REALTY, INC.
(Exact name of registrant as specified in its charter
Maryland 56-1431377
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 East South Street, Suite 500
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 423-7348
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Sities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
------------- ------------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant as of March 9, 1998, was $475,609,877.
The number of shares of common stock outstanding as of March 9, 1998,
was 28,877,762.
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DOCUMENTS INCORPORATED BY REFERENCE:
1. Registrant incorporates by reference portions of the Commercial Net
Lease Realty, Inc. Annual Report to Shareholders for the year ended December 31,
1997 (Items 5, 6, 7 and 8 of Part II).
2. Registrant incorporates by reference portions of the Commercial Net
Lease Realty, Inc. Proxy Statement for the 1998 Annual Meeting of Shareholders
(Items 10, 11, 12 and 13 of Part III).
<PAGE>
PART I
Item 1. Business
Commercial Net Lease Realty, Inc., a Maryland corporation (the
"Registrant" or the "Company"), is a real estate investment trust (a "REIT")
formed in 1984 that acquires, develops, owns and manages a diversified portfolio
of high-quality, freestanding properties leased to major retail businesses
generally under full-credit, long-term commercial net leases.
The Company's strategy is to invest in single-tenant, freestanding
retail properties with purchase prices of generally up to $7.5 million, which
typically are located along intensive commercial corridors near traffic
generators, such as regional malls, business developments and major
thoroughfares. Management believes that these types of properties when leased to
high-quality tenants with significant market presence provide attractive
opportunities for a stable current return and the potential for capital
appreciation. In management's view, these types of properties also provide the
Company with flexibility in use and tenant selection when the Properties are
re-let.
The Company will hold its properties until it determines that the sale
or other disposition of the properties is advantageous in view of the Company's
investment objectives. In deciding whether to sell properties, the Company will
consider factors such as potential capital appreciation, net cash flow and
federal income tax considerations.
Properties
During the year ended December 31, 1997, the Company borrowed
$152,600,000 under its credit facility to acquire 47 properties and three
buildings which were developed by the tenant on land parcels owned by the
Company. As of December 31, 1997, the Company owned 236 properties (the
"Properties") that are leased to major businesses, including Academy, Babies "R"
Us, Barnes & Noble, Best Buy, Borders, Burger King, CompUSA, Computer City,
Denny's, Dick's Clothing & Sporting Goods, Eckerd, Food 4 Less, Food Lion,
Golden Corral, Good Guys, Hardee's, Hi-Lo Automotive, HomePlace, International
House of Pancakes, Kash N' Karry, Levitz, Linens 'n Things, Luria's, Marshalls,
Office Depot, OfficeMax, Oshman's, Pier 1 Imports, Robb & Stucky, Scotty's,
Sears, Sports Authority, SuperValu and Waccamaw. The Company's Property
portfolio was 100 percent leased at December 31, 1997.
The Properties are leased under net leases pursuant to which the tenant
typically will bear responsibility for substantially all property costs and
expenses associated with ongoing maintenance and operation. The leases of each
of the Company's Properties require payment of base rent plus, generally, either
percentage rent based on the tenant's gross sales or contractual increases in
base rent.
During 1997, two of the Company's lessees, Eckerd Corporation and
Barnes & Noble Superstores, Inc., each accounted for more than ten percent of
the Company's total rental income (including the Company's share of rental
income from nine properties owned by the Company's unconsolidated partnership).
As of December 31, 1997, Eckerd Corporation and Barnes & Noble Superstores, Inc.
leased 43 Properties and 13 Properties, respectively (including four properties
and one property, respectively, under leases with the Company's unconsolidated
partnership). It is anticipated that, based on the minimum rental payments
required by the leases, Eckerd Corporation and Barnes & Noble Superstores, Inc.
will each continue to account for more than ten percent of the Company's total
rental income in 1998. Any failure of these lessees could materially affect the
Company's income.
Three of the Company's tenants, HomePlace, Luria's and Levitz (the
"Tenants"), have each filed a voluntary petition for bankruptcy under Chapter 11
of the U.S. Bankruptcy Code. As a result, each of the Tenants has the right to
reject or affirm one or more of its leases with the Company. As of December 31,
1997, HomePlace, Luria's and Levitz leased five, three and one Properties,
respectively, which accounted for 4.5 percent of the Company's total rental and
earned income for the year ended December 31, 1997. In February 1998, Luria's
rejected each of its three leases with the Company.
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Investment in Subsidiaries
In November 1995, the Company formed two wholly owned subsidiaries, Net
Lease Realty I, Inc. and Net Lease Realty II, Inc. and in June 1997, the Company
formed two wholly-owned subsidiaries, Net Lease Realty III, Inc. and Net Lease
Realty IV, Inc. Net Lease Realty I, Inc. and Net Lease Realty IV, Inc. were
formed to facilitate the acquisition of certain properties. Net Lease Realty II,
Inc. was utilized to facilitate the acquisition of CNL Realty Advisors, Inc.,
the Company's advisor, and Net Lease Realty III, Inc. is the general partner of
and holds a 20 percent interest in Net Lease Institutional Realty, L.P. Each of
the wholly-owned subsidiaries is a qualified real estate investment trust
subsidiary as defined under Internal Revenue Code Section 856(i)(2).
Investment in Partnership
In September 1997, Net Lease Realty III, Inc., a wholly-owned
subsidiary of the Company, entered into a limited partnership arrangement, Net
Lease Institutional Realty L.P. (the "Partnership"), with the Northern Trust
Company, as Trustee of the Retirement Plan for the Chicago Transit Authority
Employees ("CTA") to acquire, own and manage nine properties. Net Lease Realty
III, Inc. is the sole general partner (the "General Partner") with a 20 percent
interest in the Partnership, and CTA is the sole limited partner (the "Limited
Partner") with an 80 percent interest in the Partnership. Pursuant to the
Partnership agreement, the General Partner is responsible for the management of
the Partnership's properties. Net income and losses of the Partnership are to be
allocated to the partners in accordance with their respective percentage
interest in the Partnership. The Partnership secured a $12 million non-recourse
mortgage on the Partnership's nine properties in September 1997 at 7.37%
interest rate.
As of December 31, 1997, the Partnership owned nine properties (the
"Partnership Properties") leased to six major retail tenants. Generally, the
leases of the Partnership Properties provide for initial terms of 15 to 20 years
with annual base rent ranging from $182,600 to $730,400 and building sites
ranging from 11,000 to 54,300 square feet. All of the Partnership Properties are
leased under net leases pursuant to which the tenant typically will bear the
responsibility for substantially all property costs and expenses related to on
going maintenance and operation, including utilities, property taxes and
insurance.
Advisory Services
From July 10, 1992 through December 31, 1997, the Company and CNL
Realty Advisors, Inc. (the "Advisor") were party to an advisory agreement (the
"Advisory Agreement"), pursuant to which the Advisor provided certain
management, advisory and acquisition services. In accordance with the terms of
the Advisory Agreement, the Advisor received an annual fee, payable monthly,
equal to (i) seven percent of funds from operations, as defined below, up to
$10,000,000, (ii) six percent of funds from operations in excess of $10,000,000
but less than $20,000,000 and (iii) five percent of funds from operations in
excess of $20,000,000. For the purposes of the Advisory Agreement, funds from
operations means net income of the Company before advisory fee excluding
depreciation and amortization expense, extraordinary gains and losses,
nonrecurring items of income and expense and non-cash lease accounting
adjustments. Under the Advisory Agreement, the Advisor generally was responsible
for administering the day-to-day investment operations of the Company, including
investment analysis and development, acquisitions, due diligence, and asset
management and accounting services. These duties included collecting rental
payments, inspecting and managing the Properties, assisting the Company in
responding to tenant inquiries and notices, providing information to the Company
about the status of the leases and the Properties, maintaining the Company's
accounting books and records, and preparing and filing various reports, returns
or statements with various regulatory agencies. In addition, the Advisor served
as the Company's consultant in connection with policy decisions to be made by
the Board of Directors, managed the Company's Properties and rendered other
services as the Board of Directors deemed appropriate.
Historically, the Company did not have a large enough asset base to
provide the economies of scale needed to efficiently support the extensive
general and administrative expenses of an in-house management team. As a result,
the Advisor had incurred the full expense of a management and acquisition team
while receiving advisory and acquisition fees that have offset this expense. In
1997, however, due to the Company's historical and anticipated growth,
management believed that the efficiencies derived from being externally advised
had diminished and that it would be more cost effective to become
self-administered. As a result, on May 15, 1997, the Board of Directors of the
Company unanimously approved an agreement and plan of merger with the Advisor,
which when approved
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by the stockholders of the Company on December 18, 1997 at the 1997 annual
meeting of stockholders, resulted in the Company becoming a self-administered
and self-managed real estate investment trust (the "Advisor Transaction"). The
Advisor Transaction was completed on January 1, 1998. The Agreement and Plan of
Merger provided for the merger of the Advisor into a wholly owned subsidiary of
the Company pursuant to which all of the outstanding common stock of the Advisor
was exchanged for 220,000 shares of common stock of the Company and the right,
based upon the Company's continued growth in assets for a period of up to five
years, to receive up to 1,980,000 additional shares of the Company's common
stock. In addition, upon the consummation of the Advisor Transaction, all
personnel employed by the Advisor became employees of the Company. Following
consummation of the Advisor Transaction, the Advisory Agreement (as defined
above) and the obligation of the Company to pay any fees thereunder was
terminated. For a complete description of the Advisor Transaction, see the
Company's Proxy Statement dated November 13, 1997 for the Company's 1997 annual
meeting of stockholders.
Competition
The Company generally competes with other REIT's, real estate limited
partnerships and other investors, including but not limited to, insurance
companies, pension funds and financial institutions, in the acquisition,
leasing, financing and disposition of investments in net-leased retail
properties.
Employees
Reference is made to Item 10. Directors and Executive Officers of the
Registrant for a listing of the Company's Executive Officers.
Item 2. Properties
As of December 31, 1997, the Company owned 236 Properties located in 36
states that are leased to 48 major retail tenants. Reference is made to the
Schedule of Real Estate and Accumulated Depreciation filed with this Report for
a listing of the Properties and their respective costs.
Description of Properties
Land. The Company's Property sites range from approximately 12,000 to
583,000 square feet depending upon building size and local demographic factors.
Sites purchased by the Company are in locations zoned for commercial use which
have been reviewed for traffic patterns and volume. Land costs range from
approximately $36,500 to $6,200,000.
Buildings. The buildings generally are rectangular, single-story
structures constructed from various combinations of stucco, steel, wood, brick
and tile. Building sizes range from approximately 1,000 to 82,000 square feet.
Building costs range from approximately $195,000 to $7,082,000 for each
Property, depending upon the size of the building and the site and the area in
which the Property is located. Generally, the Properties owned by the Company
are freestanding, with paved parking areas.
Leases. Although there are variations in the specific terms of the
leases, the following is a summarized description of the general structure of
the Company's leases. Generally, the leases of the Properties owned by the
Company provide for initial terms of 15 to 20 years. As of December 31, 1997,
the average remaining lease term was approximately 14 years. The Properties are
generally leased under net leases pursuant to which the tenant typically will
bear responsibility for substantially all property costs and expenses associated
with ongoing maintenance and operation, including utilities, property taxes and
insurance. In addition, the majority of the Company's leases provide that the
tenant is responsible for roof and structural repairs. The leases of the
Properties provide for annual base rental payments (payable in monthly
installments) ranging from $21,000 to $1,032,000. Generally, the leases provide
for either percentage rent or contractual increases in annual rent. Leases which
provide for contractual increases in annual rent generally have increases which
range from six to 12 percent after every five years of the lease term. In
addition, for those leases which provide for the payment of percentage rent,
such rent
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is generally one to eight percent of the tenants' annual gross sales, less the
amount of annual base rent payable in that lease year. As of December 31, 1997,
leases representing approximately 83 percent of annual base rent include
contractual increases, leases representing approximately 31 percent of annual
base rent include percentage rent provisions and leases representing
approximately 22 percent of annual base rent include both contractual and
percentage rent provisions.
Generally, the leases of the Properties provide for two, three or four
five-year renewal options subject to the same terms and conditions as the
initial lease. Some of the leases also provide that, in the event the Company
wishes to sell the Property subject to that lease, the Company first must offer
the lessee the right to purchase the Property on the same terms and conditions,
and for the same price, as any offer which the Company has received for the sale
of the Property.
During 1997, two of the Company's lessees, Eckerd Corporation
(drugstore) and Barnes & Noble Superstores, Inc. (bookstore) each accounted for
more than ten percent of the Company's total rental income (including the
Company's share of rental income from the Partnership Properties. As of December
31, 1997, Eckerd Corporation and Barnes & Noble Superstores, Inc. leased 43 and
13 Properties, respectively (including four properties and one property,
respectively, under leases with the Partnership).
As of December 31, 1997, two of the Company's lessees, Eckerd
Corporation and Barnes & Noble Superstores, Inc., leased Properties representing
11.6% and 10.6%, respectively, of total assets. For information regarding the
results of operations and financial condition of these two entities, refer to
their Annual Reports on Forms 10-K as filed with the Securities and Exchange
Commission for the year ended February 1, 1997.
The Company generally competes with other REIT's, real estate limited
partnerships and other investors, including but not limited to, insurance
companies, pension funds and financial institutions in the acquisition leasing
financing and disposition of investments in net-leased retail properties.
Investments in real property create a potential for environmental
liability on the part of the owner of such property from the presence or
discharge of hazardous substances on the property. It is the Company's policy,
as a part of its acquisition due diligence process, to obtain a Phase I
environmental site assessment for each property and where warranted, a Phase II
environmental site assessment. Phase I assessments involve site reconnaissance
and review of regulatory files identifying potential areas of concern, whereas
Phase II assessments involve some degree of soil and/or groundwater testing. The
Company may acquire a property whose environmental site assessment indicates
that a problem or potential problem exists, subject to a determination of the
level of risk and potential cost of remediation. In such cases, the Company
requires the seller and/or tenant to (i) remediate the problem prior to the
Company's acquiring the property, (ii) indemnify the Company for environmental
liabilities or (iii) agree to other arrangements deemed appropriate by the
Company to address environmental conditions at the property. The Company has 14
properties currently under some level of environmental remediation. The seller
or the tenant is generally contractually responsible for the cost of the
environmental remediation for each of these properties.
The Company's principal executive offices are located at 400 E. South
Street, Suite 500, Orlando, Florida 32801.
Item 3. Legal Proceedings
The Company is a defendant in a law suit filed on December 20, 1994, in
the Circuit Court, Knox County, Tennessee, and in the Circuit Court, Greene
County, Tennessee, by the surviving spouse of a patron of the Company's Property
in Tusculum, Tennessee. The plaintiff is alleging that the Company was negligent
in the design and control of the parking lot on the Company's Property and is
seeking damages of $2,500,000. Management intends to vigorously contest these
claims and to seek full indemnification from the tenant. Management believes
that, if the Company were to be held liable for any damages, such damages would
be covered by insurance.
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The Company is not a party to any other pending legal proceedings
which, in the opinion of the Company and its general counsel, is likely to have
a material adverse effect upon the Company's business or financial condition.
5
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PART II
Item 4. Submission of Matters to a Vote of Security Holders
On December 18, 1997, the Company held its Annual Meeting of
Shareholders (the "Annual Meeting"). At the Annual Meeting, the following
nominees were elected to the Board of Directors of the Company: Messrs. Edward
Clark (22,295,249 voted for and 1,763,157 abstained), Willoughby T. Cox, Jr.
(22,298,014 voted for and 1,760,392 abstained), Clifford R. Hinkle (22,299,014
voted for and 1,758,849 abstained), Ted B. Lanier (22,276,413 voted for and
1,791,993 abstained), Robert A. Bourne (22,299,853 voted for and 1,758,553
abstained), James M. Seneff, Jr. (22,306,303 voted for and 1,752,103 abstained).
In addition, the Shareholders voted to approve the Merger of CNL Realty
Advisors, Inc. with and into Net Lease Realty II, Inc., a wholly-owned
subsidiary of the Company (16,961,917 voted for, 216,667 voted against and
231,533 abstained) and to approve authorization of 90,000,000 shares of common
stock (23,400,061 voted for, 425,126 voted against and 173,540 abstained).
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information responsive to this Item is contained in the section
captioned "Share Price and Dividend Data" on page 27 of the Registrant's Annual
Report to Shareholders for the year ended December 31, 1997; the information in
such section is filed as an exhibit to this report and the cited portion of
which is incorporated herein by reference.
Item 6. Selected Financial Data
Information responsive to this Item is contained in the section
captioned "Historical Financial Highlights" on page four of the Registrant's
Annual Report to Shareholders for the year ended December 31, 1997; the
information in such section is filed as an exhibit to this report and the cited
portion of which is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Information responsive to this Item is contained in the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages six through 11 of the Registrant's Annual Report
to Shareholders for the year ended December 31, 1997; the information in such
section is filed as an exhibit to this report and the cited portion of which is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
Certain information responsive to this Item is contained in the section
captioned "Consolidated Quarterly Financial Data" on page 26 of the Registrant's
Annual Report to Shareholders for the year ended December 31, 1997; the
information in such section is filed as an exhibit to this report and the cited
portion of which is incorporated herein by reference. The financial statements
of the Registrant, together with the report thereon of KPMG Peat Marwick LLP,
appearing in the Annual Report to Shareholders for the year ended December 31,
1997, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the Registrant's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14(a); information responsible
to this Item is contained in the sections thereof captioned "Proposal I:
Election of Directors - Nominees" and "Proposal I: Election of Directors -
Executive Officers" and "Security Ownership," and the information in such
sections is incorporated herein by reference.
Item 11. Executive Compensation
Reference is made to the Registrant's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14(a); information responsive
to this Item is contained in the section thereof captioned "Proposal I: Election
of Directors - Compensation of Directors" and "Proposal I: Executive
Compensation," and the information in such sections is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the Registrant's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14(a); information responsive
to this Item is contained in the section thereof captioned "Security Ownership,"
and the information in such section is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to the Registrant's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14(a); information responsive
to this Item is contained in the section thereof captioned "Certain
Transactions," and the information in such section is incorporated herein by
reference.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Earnings for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Report of Independent Auditors' on Supplementary Information
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 1997
Notes to Schedule III - Real Estate and Accumulated
Depreciation as of December 31, 1997
All other schedules are omitted because they are not
applicable or because the required information is shown in the
financial statements or the notes thereto.
3. Exhibits
3.1 Articles of Incorporation of the Registrant (filed as
Exhibit 3.3(i) to the Registrant's Registration Statement
No. 1-11290 on Form 8-B, and incorporated herein by ref-
erence).
3.2 Bylaws of the Registrant, (filed as Exhibit 3(ii) to Amend-
ment No. 2 to the Registrant's Registration No. 33-83110 on
Form S-3, and incorporated herein by reference).
3.3 Articles of Amendment to the Articles of Incorporation
of the Registrant (filed as Exhibit 3.3 to the Registrant's
Form 10-Q for the quarter ended June 30, 1996, and incor-
porated 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 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).
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10.1 Letter Agreement dated July 10, 1992, amending Stock Purchase
Agreement dated January 23, 1992 (filed as Exhibit 10.34 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992, and incorporated herein by reference).
10.2 Advisory Agreement between Registrant and CNL Realty Advisors,
Inc. effective as of April 1, 1993 and renewed January 1, 1997
(filed as Exhibit 10.04 to Amendment No. 1 to the Registrant's
Registration Statement No. 33-61214 on Form S-2, and incor-
porated herein by reference).
10.3 1992 Commercial Net Lease Realty, Inc. Stock Option Plan
(filed as Exhibit No. 10(x) to the Registrant's Registration
Statement No. 33-83110 on Form S-3, and incorporated herein by
reference).
10.4 Second Amended and Restated Line of Credit and Security
Agreement, dated December 7, 1995, among Registrant, certain
lenders listed therein and First Union National Bank of
Florida, as the Agent, relating to a $100,000,000 loan (filed
as Exhibit 10.14 to the Registrant's Current Report on Form
8-K dated January 18, 1996, and incorporated herein by
reference).
10.5 Secured Promissory Note, dated December 14, 1995, among
Registrant and Principal Mutual Life Insurance Company
relating to a $13,150,000 loan (filed as Exhibit 10.15 to the
Registrant's Current Report on Form 8-K dated January 18,
1996, and incorporated herein by reference).
10.6 Mortgage and Security Agreement, dated December 14, 1995,
among Registrant and Principal Mutual Life Insurance Company
relating to a $13,150,000 loan (filed as Exhibit 10.16 to the
Registrant's Current Report on Form 8-K dated January 18,
1996, and incorporated herein by reference).
10.7 Loan Agreement, dated January 19, 1996, among Registrant and
Principal Mutual Life Insurance Company relating to a
$39,450,000 loan (filed as Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995, and incorporated herein by reference).
10.8 Secured Promissory Note, dated January 19, 1996, among
Registrant and Principal Mutual Life Insurance Company
relating to a $39,450,000 loan (filed as Exhibit 10.13 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference).
10.9 Third Amended and Restated Line of Credit and Security
Agreement, dated September 3, 1996, by and among Registrant,
certain lenders and First Union National Bank of Florida, as
the Agent, relating to a $150,000,000 loan (filed as Exhibit
10.11 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, and incorporated herein
by reference).
10.10 Second Renewal and Modification Promissory Note, dated
September 3, 1996, by and among Registrant and First Union
National Bank of Florida, as the Agent, relating to
$150,000,000 loan (filed as Exhibit 10.12 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, and incorporated herein by reference).
10.11 Agreement and Plan of Merger dated May 15, 1997, by and among
Commercial Net Lease Realty, Inc. and Net Lease Realty II,
Inc. and CNL Realty Advisors, Inc. and the Stockholders of CNL
Realty Advisors, Inc. (filed as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated May 16, 1997,
and incorporated herein by reference).
10.12 Fourth Amended and Restated Line of Credit and Security
Agreement, dated August 6, 1997, by and among Registrant,
certain lenders and First Union National Bank, as the Agent,
relating to a $200,000,000 loan (filed as Exhibit 10 to the
Registrant's Current Report on Form 8-K dated September 12,
1997, and incorporated herein by reference).
13 Annual Report to Shareholders for the year ended December 31,
1997 (previously filed).
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23 Consent of Independent Accountants dated March 16, 1998
(previously filed).
(b) The Registrant filed one report on Form 8-K on December 19, 1997, for
the purpose of incorporating certain items by reference into its
registration statement on Form S-3 dated December 19, 1997, and one
report on form 8-K on December 22, 1997, reporting the approval by the
stockholders of the Registrant of the Agreement and Plan of Merger by
and among the Registrant, Net Lease Realty II, Inc. and the
Stockholders of CNL Realty Advisors, Inc.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 16th day of
March, 1998.
COMMERCIAL NET LEASE REALTY, INC.
By: /s/ James M. Seneff, Jr.
---------------------------
JAMES M. SENEFF, JR.
Chairman of the Board of Directors
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- -----
/s/ James M. Seneff, Jr. Chairman of the Board of March 16, 1998
- -------------------------- Directors Chief Executive
James M. Seneff, Jr. Officer (Principal
Executive Officer)
/s/ Robert A. Bourne Vice Chairman of the Board March 16, 1998
- ------------------------- of Directors
Robert A. Bourne
/s/ Edward Clark Director March 16, 1998
- --------------------------
Edward Clark
/s/ Willoughby T. Cox, Jr. Director March 16, 1998
- --------------------------
Willoughby T. Cox, Jr.
/s/ Clifford R. Hinkle Director March 16, 1998
- --------------------------
Clifford R. Hinkle
/s/ Ted B. Lanier Director March 16, 1998
- --------------------------
Ted B. Lanier
/s/ Gary M. Ralston President March 16, 1998
- --------------------------
Gary M. Ralston
/s/ Kevin B. Habicht Chief Financial Officer March 16, 1998
- -------------------------- (Principal Financial and
Kevin B. Habicht Accounting Officer),
Secretary & Treasurer
<PAGE>
Report of Independent Auditors' on Supplementary Information
The Board of Directors
Commercial Net Lease Realty, Inc.:
Under date of January 16, 1998, we reported on the consolidated
balance sheets of Commercial Net Lease Realty, Inc. as of December
31, 1997 and 1996, and the related consolidated statements of
earnings, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1997, as contained in
the 1997 annual report to stockholders. These consolidated
financial statements and our report thereon are both included in
Item 14(a)1 of Form 10-K and incorporated by reference in the
annual report on Form 10-K for the year 1997. In connection with
our audit of the aforementioned consolidated financial statements,
we also audited the related consolidated financial statement
schedule at December 31, 1997. This consolidated financial
statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule,
when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth herein.
/s/ KPMG Peat Marwick LLP
Orlando, Florida
January 16, 1998
<PAGE>
<TABLE>
<CAPTION>
Initial Cost to Company
-------------------------------
Encumbrances Building and
(1) Land Improvements
- --------------------------- -------------------- ---------------- -----------------
<S> <C> <C> <C>
Properties the Company
has Invested in Under
Under Operating Leases:
Academy:
Houston, TX - 1,074,232 -
Houston, TX - 699,165 -
N. Richland Hills, TX - 1,307,655 -
Houston, TX - 3,086,610 -
Houston, TX - 795,005 -
Baton Rouge, LA - 1,547,501 -
Babies "R" Us:
Arlington, TX - 830,689 2,611,867
Barnes & Noble:
Lakeland, FL - 1,070,902 1,516,983
Brandon, FL 1,574,542 (k) 1,476,407 1,527,150
Denver, CO - 3,244,785 2,722,087
Houston, TX - 3,307,562 2,396,024
Cary, NC - 2,778,458 2,650,008
Plantation, FL - 3,616,357 -
Lafayette, LA - 1,204,279 2,301,983
Oklahoma City, OK - 1,688,556 2,311,487
Daytona, FL - 2,587,451 2,052,643
Freehold, NJ - 2,917,219 2,260,663
Dayton, OH - 1,412,614 3,223,467
Redding, CA - 497,179 1,625,702
Best Buy:
Corpus Christi, TX 1,268,679 (j) 818,448 896,395
Brandon, FL - 2,985,156 2,772,137
Evanston, IL - 1,850,996 -
Cuyahoga Falls, OH - 3,708,980 2,359,377
Rockville, MD - 6,233,342 3,418,783
Fairfax, VA - 3,052,477 3,218,018
St. Petersburg, FL - 4,031,744 2,959,316
Blockbuster:
Dallas, TX - 346,548 1,963,773
Conyers, GA - 320,029 556,282
Borders Books & Music:
Wilmington, DE 4,766,983 (k) 3,030,769 6,061,538
Richmond, VA 2,504,467 (k) 2,177,310 2,599,587
Ft. Lauderdale, FL - 3,164,984 3,934,577
Bangor, ME - 1,546,915 2,486,761
Altamonte Spgs, FL - 1,947,198 -
Burger King:
Asheboro, NC - 420,508 815,190
Galliano, LA - 249,001 1,130,506
John's Island, SC - 385,517 698,309
Lake Charles, LA - 272,381 965,713
Lancaster, OH - 220,846 582,815
Natchez, MS - 206,717 653,530
Tappahannock, VA - 289,840 572,779
Warren, MI - 298,817 785,031
Manchester, NH - 619,037 428,757
Rochester, NH - 216,652 779,450
Columbus, OH - 357,114 407,093
Coon Rapids, MN - 322,658 544,936
Opeleousas, LA - 460,374 824,510
St. Paul, MN - 225,297 542,847
Checkers:
Orlando, FL - 256,568 -
CompUSA:
Mission Viejo, CA - 2,706,352 1,368,966
Computer City:
Miami, FL 2,401,168 (k) 2,713,192 1,866,676
Baton Rouge, LA - 609,069 913,603
Anchorage, AK - 928,321 1,662,584
Richmond, VA - 888,772 1,948,036
Dave's:
Maple Heights, OH - 1,034,758 2,874,414
Denny's:
Duncan, SC - 219,703 -
Greensboro, NC - 265,915 493,407
Greenville, SC - 344,817 400,895
Houston, TX - 289,036 572,985
Landrum, SC - 155,429 -
Mooresville, NC - 307,299 -
Santee, SC - 244,284 312,045
Topeka, KS - 414,686 -
Winter Springs, FL - 555,232 -
Dick's Clothing:
Taylor, MI - 1,920,032 3,526,868
White Marsh, MD - 2,680,532 3,916,889
Eckerd:
San Antonio, TX 642,231 (k) 440,985 -
Dallas, TX 618,752 (k) 541,493 -
Garland, TX 497,889 (k) 239,014 -
Arlington, TX 526,927 (k) 368,964 -
Millville, NJ 653,548 (k) 417,603 -
Atlanta, GA 584,047 (k) 445,593 -
Mantua, NJ 679,434 (k) 344,022 -
Amarillo, TX 604,575 (k) 329,231 -
Amarillo, TX 785,743 (k) 650,864 -
Glassboro, NJ 745,401 (k) 534,243 -
Kissimmee , FL 868,354 (k) 715,480 -
Colleyville, TX 959,730 (k) 756,472 -
Tampa, FL - 604,682 -
Douglasville, GA - 413,439 995,209
Lafayette, LA - 967,528 -
Moore, OK - 414,738 -
Midwest City, OK - 1,080,637 1,103,351
Tallhassee, FL - 691,523 -
Irving, TX - 1,000,222 -
Snellville, GA - 486,272 1,320,087
Jasper, FL - 291,147 -
Williston, FL - 622,403 -
Pantego, TX - 1,016,062 1,448,911
Conyers, GA - 574,666 998,900
Norman, OK - 1,065,562 -
Chattanooga , TN - 474,267 -
Stone Mountain, GA - 638,643 1,111,064
Arlington, TX - 1,962,500 -
Leavenworth, KS - 650,170 -
Augusta, GA - 568,606 1,326,748
Riverdale, GA - 1,088,896 1,707,448
Morrow, GA - 550,457 1,248,422
Food 4 Less:
Lemon Grove, CA - 3,695,816 -
Golden Corral:
Woodstock, GA (e) - 200,680 328,450
Edenton, NC - 36,578 318,481
Rockledge, FL (e) - 120,593 340,889
Gilmer, TX (e) - 116,815 296,454
Bonham, TX (e) - 128,451 344,170
Center, TX (e) - 103,187 308,859
Leitchfield, KY (e) - 73,660 306,642
Marietta, GA (e) - 156,190 346,509
Silsbee, TX (e) - 132,802 302,052
Atlanta, TX (e) - 88,457 368,317
Vernon, TX (e) - 105,798 328,943
Abbeville, LA (e) - 98,577 362,416
Fredricksburg, TX - 169,984 321,189
Clanton, AL (e) - 113,017 296,921
Pleasanton, TX (e) - 139,694 316,070
Bowie, TX (e) - 57,824 311,544
Jacksonville, TX - 115,276 318,196
Lake Placid, FL (e) - 115,113 305,074
Ennis, TX - 153,701 366,639
Melbourne, FL (e) - 193,447 341,351
Franklin, LA (e) - 105,840 396,831
Franklin, VA - 100,808 424,164
Minden, LA (e) - 86,120 402,364
Durant, OK - 140,862 411,135
The Good Guys:
Foothill Ranch, CA - 1,456,113 2,505,022
Valencia,CA - 1,622,252 2,895,298
Riverside, CA - 1,722,736 2,761,220
Hardee's:
Chalkville, AL - 170,834 457,167
Columbia, TN - 226,300 -
Gulf Shores, AL - 348,281 595,164
Horn Lake, MS - 302,787 -
Johnson City, TN - 215,567 -
Mobile, AL - 336,696 -
Petal, MS - 277,104 415,193
Rock Hill, SC - 216,777 466,450
Tusculum, TN - 182,349 507,293
Warrior, AL - 177,659 -
West Point, MS - 173,386 -
Hi-Lo Automotive:
Mesquite, TX - 233,420 513,523
Arlington, TX - 295,331 571,609
Ft. Worth, TX - 197,037 512,296
Garland, TX - 239,570 512,023
Houston, TX - 261,318 531,968
Dallas, TX - 281,347 543,937
Bastrop, TX - 197,905 383,144
Eagle Pass, TX - 256,745 455,841
Lake Worth, TX - 252,141 539,510
McAllen, TX - 265,177 605,397
Nacogdoches, TX - 190,324 522,232
San Antonio, TX - 200,510 643,741
Temple, TX - 177,451 587,755
Universal City, TX - 247,264 570,677
HomePlace:
Altamonte Spgs, FL - 2,906,409 4,877,225
White Marsh, MD - 3,625,792 -
Ft. Myers, FL - 1,956,579 4,045,196
Bowie, MD - 1,965,508 -
International House of Pancakes:
Stafford, TX 500,126 (k) 382,084 -
Sunset Hills, MO 528,585 (k) 271,853 -
Las Vegas, NV 594,295 (k) 519,947 -
Ft. Worth, TX 552,880 (k) 430,896 -
Arlington, TX 530,916 (k) 404,512 -
Matthews, NC 543,010 (k) 380,043 -
Phoenix, AZ 546,664 (k) 483,374 -
Just for Feet:
Albuquerque, NM - 1,441,777 2,335,475
Kroger:
Columbus, OH - 780,838 520,559
Linens 'n Things:
Freehold, NJ 2,931,484 (j) 1,753,766 2,208,651
Luria's:
Coral Gables, FL - 1,782,346 -
South Miami, FL - 1,379,229 -
Tampa, FL - 2,127,503 1,521,730
Marshalls:
Freehold, NJ 3,431,576 (j) 2,052,946 2,585,432
Office Depot:
Arlington, TX 1,052,484 (k) 596,024 1,411,432
OfficeMax:
Corpus Christi, TX 1,439,600 (j) 893,270 978,344
Dallas, TX 1,482,890 (k) 1,118,500 1,709,891
Cincinnati, OH 1,110,461 (k) 543,489 1,574,551
Evanston, IL 1,900,778 (k) 1,867,831 1,757,618
Altamonte Spgs, FL - 1,689,793 3,050,160
Pompano Beach, FL - 2,266,908 1,904,803
Cutler Ridge, FL - 989,370 1,479,119
Sacramento, CA - 1,144,167 2,961,206
Salinas, CA - 1,353,217 1,829,325
Redding, CA - 667,174 2,181,563
Kelso, WA - 1,379,460 -
Oshman's Sporting Goods:
Dallas, TX - 1,311,440 -
Petco:
Grand Forks, ND - 306,629 909,671
Pier 1 Imports:
Dallas, TX - 189,010 1,071,054
Memphis, TN - 713,319 821,770
Sanford, FL - 737,901 -
Pizza Hut:
Orlando, FL - 220,632 258,483
Rally's:
Toledo, OH - 125,882 319,770
Robb & Stucky:
Ft. Myers, FL - 2,246,406 6,390,295
Roger & Marv's:
Kenosha, WI - 1,917,607 3,431,363
Ro-Jack's Food Store:
Warwick, RI - 1,699,330 -
Scotty's:
Orlando, FL - 1,157,268 2,077,131
Orlando, FL - 1,044,796 2,011,952
Sears Homelife:
Clearwater, FL 2,745,218 (j) 1,184,438 2,526,207
Orlando, FL 1,575,546 (k) 820,397 2,184,721
Pensacola, FL 1,820,864 633,125 1,595,405
Raleigh, NC 2,284,515 1,848,026 1,753,635
Tampa, FL 2,414,819 1,454,908 2,045,833
Shop & Save:
Homestead, PA - 1,139,419 -
Penn Hills, PA - 1,043,297 1,243,131
Sports Authority:
Memphis, TN - 2,459,381 -
SuperValu:
Huntington, WV - 1,254,238 760,602
Top's:
Lacey, WA - 2,777,449 7,082,150
Wacammaw:
Fairfax, VA - 2,156,801 -
Waremart:
Eureka, CA - 3,135,036 5,470,607
Wendy's Old Fashioned
Hamburger:
Fenton, MO - 307,068 496,410
Longwood, FL - 333,335 194,926
Unallocated costs
relating to construction
in progress
=============== ================ =================
48,669,181 201,028,076 209,113,098
=============== ================ =================
Properties the Company has
Invested in Under Direct
Financing Leases:
Academy:
Houston, TX - - 1,924,740
Houston, TX - - 1,867,519
N. Richland Hills, TX - - 2,253,408
Houston, TX - - 2,112,335
Houston, TX - - 1,910,697
Baton Rouge, LA - - 2,405,466
Barnes & Noble:
Plantation, FL - - 3,498,559
Best Buy:
Evanston, IL - - 3,400,057
Borders:
Altamonte Spgs, FL - - 3,267,579
Checkers:
Orlando, FL - - 286,910
Denny's:
Landrum, SC - - 374,684
Mooresville, NC - - 535,309
Duncan, SC - - 628,571
Akron, OH - 137,424 733,450
Topeka, KS - - 498,921
Winter Springs, FL - - 620,148
Eckerd:
San Antonio, TX - - 783,974
Dallas, TX - - 638,684
Garland, TX - - 710,634
Arlington, TX - - 636,070
Millville, NJ - - 828,942
Atlanta. GA - - 668,390
Mantua, NJ - - 951,795
Vineland, NJ 707,459 (k) 286,231 1,063,142
Amarillo, TX - - 849,071
Amarillo, TX - - 869,846
Amarillo, TX 513,506 (k) 158,851 855,348
Glassboro, NJ - - 887,497
Kissimmee , FL - - 933,852
Colleyville, TX - - 1,076,066
Alice,TX 521,052 (k) 189,187 804,963
Tampa, FL - - 1,090,532
Lafayette, LA - - 949,128
Moore, OK - - 879,296
Tallhassee, FL - - 1,274,147
East Point, GA - 336,610 1,173,529
Irving, TX - - 1,228,436
Ft. Worth, TX - 399,592 2,529,969
Williston, FL - - 355,757
Jasper, FL - - 347,474
Oklahoma City, OK - (m) 1,365,125
Oklahoma City, OK - (m) 1,419,093
Norman, OK - - 1,225,477
Chattanooga , TN - - 1,344,240
Food 4 Less:
Lemon Grove, CA - - 4,068,179
Food Lion:
Keystone Hts, FL 1,014,283 (k) 88,604 1,845,988
Chattanooga, TN 1,068,267 (k) 336,488 1,701,072
Lynchburg, VA 1,333,443 (j) 128,216 1,674,167
Martinsburg, WV 1,044,497 (k) 448,648 1,543,573
Good Guys:
Stockton, CA 1,864,093 (k) 580,609 2,974,868
Portland, OR - 817,574 2,630,652
Hardee's:
Mobile, AL - - 479,107
Warrior, AL - - 470,556
Horn Lake, MS - - 555,975
West Point, MS - - 517,424
Columbia, TN - - 584,927
Johnson City, TN - - 570,690
Iuka, MS - 130,258 505,363
Biscoe, NC - 60,301 479,984
Aynor, SC - 44,871 521,192
Hi-Lo Automotive:
Copperas Cove, TX - 116,637 476,331
Ft. Worth, TX - 92,779 607,971
Baton Rouge, LA - 89,954 508,146
Lake Jackson, TX - 120,313 609,300
Edinberg, TX - 97,056 418,926
Pantego, TX - 154,368 505,323
Ft. Worth, TX - 91,373 548,238
Pharr, TX - 94,576 472,880
Baton Rouge, LA - 122,349 527,930
Houston, TX - 37,508 596,069
HomePlace:
Arlington, TX - 752,840 4,045,374
Bowie, MD - - 4,262,338
International House of Pancakes:
Stafford, TX - - 571,832
Sunset Hills, MO - - 736,345
Las Vegas, NV - - 613,582
Ft. Worth, TX - - 623,641
Arlington, TX - - 608,132
Matthews, NC - - 655,668
Phoenix, AZ - - 559,307
Kash N' Karry:
Brandon, FL - 1,234,519 3,255,257
Levitz:
Tempe, AZ - 634,444 2,225,991
Luria's:
South Miami, FL - - 1,756,808
Coral Gables, FL - - 1,692,012
Oshman's Sporting Goods:
Dallas, TX - - 2,658,976
Ro-Jack's Food Store:
Warwick, RI - - 2,978,154
Shop & Save:
Homestead, PA - - 2,578,098
Wacammaw:
Fairfax, VA - - 3,356,493
=============== ================ ===============
8,066,600 7,782,180 113,631,669
=============== ================ ===============
</TABLE>
<TABLE>
COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
Costs Capitalized
Subsequent to Gross Amount at Which
Acquisition Carried at Close of Period (b)
--------------------------- -------------------------------------------------------
Improve- Carrying Building and
ments Costs Land Improvements Total
- ----------------------------------- -------------- ---------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Properties the Company
has Invested in Under
Under Operating Leases:
Academy:
Houston, TX - - 1,074,232 (c) 1,074,232
Houston, TX - - 699,165 (c) 699,165
N. Richland Hills, TX - - 1,307,655 (c) 1,307,655
Houston, TX - - 2,098,895 (c) 2,098,895
Houston, TX - - 795,005 (c) 795,005
Baton Rouge, LA - - 1,547,501 (c) 1,547,501
Babies "R" Us:
Arlington, TX - - 830,689 2,611,867 3,442,556
Barnes & Noble:
Lakeland, FL - - 1,070,902 1,516,983 2,587,885
Brandon, FL - - 1,476,407 1,527,150 3,003,557
Denver, CO - - 3,244,785 2,722,087 5,966,872
Houston, TX - - 3,307,562 2,396,024 5,703,586
Cary, NC - - 2,778,458 2,650,008 5,428,466
Plantation, FL - - 3,616,357 (c) 3,616,357
Lafayette, LA - - 1,204,279 2,301,983 3,506,262
Oklahoma City, OK - - 1,688,556 2,311,487 4,000,043
Daytona, FL - - 2,587,451 2,052,643 4,640,094
Freehold, NJ - - 2,917,219 2,260,663 5,177,882
Dayton, OH - - 1,412,614 3,223,467 4,636,081
Redding, CA - - 497,179 1,625,702 2,122,881
Best Buy:
Corpus Christi, TX 12,222 - 818,448 908,617 1,727,065
Brandon, FL - - 2,985,156 2,772,137 5,757,293
Evanston, IL - - 1,850,996 (c) 1,850,996
Cuyahoga Falls, OH - - 3,708,980 2,359,377 6,068,357
Rockville, MD - - 6,233,342 3,418,783 9,652,125
Fairfax, VA - - 3,052,477 3,218,018 6,270,495
St. Petersburg, FL - - 4,031,744 2,959,316 6,991,060
Blockbuster:
Dallas, TX 39,243 - 346,548 2,003,016 2,349,564
Conyers, GA - - 320,029 556,282 876,311
Borders Books & Music:
Wilmington, DE - - 3,030,769 6,061,538 9,092,307
Richmond, VA - - 2,177,310 2,599,587 4,776,897
Ft. Lauderdale, FL - - 3,164,984 3,934,577 7,099,561
Bangor, ME - - 1,546,915 2,486,761 4,033,676
Altamonte Spgs, FL - - 1,947,198 (c) 1,947,198
Burger King:
Asheboro, NC - - 420,508 815,190 1,235,698
Galliano, LA - - 249,001 1,130,506 1,379,507
John's Island, SC - - 385,517 698,309 1,083,826
Lake Charles, LA - - 272,381 965,713 1,238,094
Lancaster, OH - - 220,846 582,815 803,661
Natchez, MS - - 206,717 653,530 860,247
Tappahannock, VA - - 289,840 572,779 862,619
Warren, MI - - 298,817 785,031 1,083,848
Manchester, NH - - 619,037 428,757 1,047,794
Rochester, NH - - 216,652 779,450 996,102
Columbus, OH - - 357,114 407,093 764,207
Coon Rapids, MN - - 322,658 544,936 867,594
Opeleousas, LA - - 460,374 824,510 1,284,884
St. Paul, MN - - 225,297 542,847 768,144
Checkers:
Orlando, FL - - 256,568 (c) 256,568
CompUSA:
Mission Viejo, CA - - 2,706,352 1,368,966 4,075,318
Computer City:
Miami, FL - - 2,713,192 1,866,676 4,579,868
Baton Rouge, LA - - 609,069 913,603 1,522,672
Anchorage, AK - - 928,321 1,662,584 2,590,905
Richmond, VA - - 888,772 1,948,036 2,836,808
Dave's:
Maple Heights, OH - - 1,034,758 2,874,414 3,909,172
Denny's:
Duncan, SC - - 219,703 (c) 219,703
Greensboro, NC - - 265,915 493,407 759,322
Greenville, SC - - 344,817 400,895 745,712
Houston, TX - - 289,036 572,985 862,021
Landrum, SC - - 155,429 (c) 155,429
Mooresville, NC - - 307,299 (c) 307,299
Santee, SC - - 244,284 312,045 556,329
Topeka, KS - - 414,686 (c) 414,686
Winter Springs, FL - - 555,232 (c) 555,232
Dick's Clothing:
Taylor, MI - - 1,920,032 3,526,868 5,446,900
White Marsh, MD - - 2,680,532 3,916,889 6,597,421
Eckerd:
San Antonio, TX - - 440,985 (c) 440,985
Dallas, TX - - 541,493 (c) 541,493
Garland, TX - - 239,014 (c) 239,014
Arlington, TX - - 368,964 (c) 368,964
Millville, NJ - - 417,603 (c) 417,603
Atlanta, GA - - 445,593 (c) 445,593
Mantua, NJ - - 344,022 (c) 344,022
Amarillo, TX - - 329,231 (c) 329,231
Amarillo, TX - - 650,864 (c) 650,864
Glassboro, NJ - - 534,243 (c) 534,243
Kissimmee , FL - - 715,480 (c) 715,480
Colleyville, TX - - 756,472 (c) 756,472
Tampa, FL - - 604,682 (c) 604,682
Douglasville, GA - - 413,439 995,209 1,408,648
Lafayette, LA - - 967,528 (c) 967,528
Moore, OK - - 414,738 (c) 414,738
Midwest City, OK - - 1,080,637 1,103,351 2,183,988
Tallhassee, FL - - 691,523 (c) 691,523
Irving, TX - - 1,000,222 (c) 1,000,222
Snellville, GA - - 486,272 1,320,087 1,806,359
Jasper, FL - - 291,147 (c) 291,147
Williston, FL - - 622,403 (c) 622,403
Pantego, TX - - 1,016,062 1,448,911 2,464,973
Conyers, GA - - 574,666 998,900 1,573,566
Norman, OK - - 1,065,562 (c) 1,065,562
Chattanooga , TN - - 474,267 (c) 474,267
Stone Mountain, GA - - 638,643 1,111,064 1,749,707
Arlington, TX 167,830 - 1,962,500 (g) 1,962,500
Leavenworth, KS 86,279 - 650,170 (g) 650,170
Augusta, GA - - 568,606 1,326,748 1,895,354
Riverdale, GA - - 1,088,896 1,707,448 2,796,344
Morrow, GA - - 550,457 1,248,422 1,798,879
Food 4 Less:
Lemon Grove, CA - - 3,695,816 (c) 3,695,816
Golden Corral:
Woodstock, GA (e) - - 200,680 328,450 529,130
Edenton, NC - - 36,578 318,481 355,059
Rockledge, FL (e) - - 120,593 340,889 461,482
Gilmer, TX (e) - - 116,815 296,454 413,269
Bonham, TX (e) - - 128,451 344,170 472,621
Center, TX (e) - - 103,187 308,859 412,046
Leitchfield, KY (e) - - 73,660 306,642 380,302
Marietta, GA (e) - - 156,190 346,509 502,699
Silsbee, TX (e) - - 132,802 302,052 434,854
Atlanta, TX (e) - - 88,457 368,317 456,774
Vernon, TX (e) - - 105,798 328,943 434,741
Abbeville, LA (e) - - 98,577 362,416 460,993
Fredricksburg, TX - - 169,984 321,189 491,173
Clanton, AL (e) - - 113,017 296,921 409,938
Pleasanton, TX (e) - - 139,694 316,070 455,764
Bowie, TX (e) - - 57,824 311,544 369,368
Jacksonville, TX - - 115,276 318,196 433,472
Lake Placid, FL (e) - - 115,113 305,074 420,187
Ennis, TX - - 153,701 366,639 520,340
Melbourne, FL (e) - - 193,447 341,351 534,798
Franklin, LA (e) - - 105,840 396,831 502,671
Franklin, VA - - 93,719 424,164 517,883
Minden, LA (e) - - 86,120 402,364 488,484
Durant, OK - - 140,862 411,135 551,997
The Good Guys:
Foothill Ranch, CA - - 1,456,113 2,505,022 3,961,135
Valencia,CA - - 1,622,252 2,895,298 4,517,550
Riverside, CA - - 1,722,736 2,761,220 4,483,956
Hardee's:
Chalkville, AL - - 170,834 457,167 628,001
Columbia, TN - - 226,300 (c) 226,300
Gulf Shores, AL - - 348,281 595,164 943,445
Horn Lake, MS - - 302,787 (c) 302,787
Johnson City, TN - - 215,567 (c) 215,567
Mobile, AL - - 336,696 (c) 336,696
Petal, MS - - 277,104 415,193 692,297
Rock Hill, SC - - 216,777 466,450 683,227
Tusculum, TN - - 182,349 507,293 689,642
Warrior, AL - - 177,659 (c) 177,659
West Point, MS - - 173,386 (c) 173,386
Hi-Lo Automotive:
Mesquite, TX - - 233,420 513,523 746,943
Arlington, TX - - 295,331 571,609 866,940
Ft. Worth, TX - - 197,037 512,296 709,333
Garland, TX - - 239,570 512,023 751,593
Houston, TX - - 261,318 531,968 793,286
Dallas, TX - - 281,347 543,937 825,284
Bastrop, TX - - 197,905 383,144 581,049
Eagle Pass, TX - - 256,745 455,841 712,586
Lake Worth, TX - - 252,141 539,510 791,651
McAllen, TX - - 265,177 605,397 870,574
Nacogdoches, TX - - 190,324 522,232 712,556
San Antonio, TX - - 200,510 643,741 844,251
Temple, TX - - 177,451 587,755 765,206
Universal City, TX - - 247,264 570,677 817,941
HomePlace:
Altamonte Spgs, FL - - 2,906,409 4,877,225 7,783,634
White Marsh, MD 2,401,918 - 3,625,792 (g) 3,625,792
Ft. Myers, FL - - 1,956,579 4,045,196 6,001,775
Bowie, MD - - 1,965,508 (c) 1,965,508
International House of Pancakes:
Stafford, TX - - 340,561 (c) 340,561
Sunset Hills, MO - - 271,853 (c) 271,853
Las Vegas, NV - - 519,947 (c) 519,947
Ft. Worth, TX - - 430,896 (c) 430,896
Arlington, TX - - 404,512 (c) 404,512
Matthews, NC - - 380,043 (c) 380,043
Phoenix, AZ - - 483,374 (c) 483,374
Just for Feet:
Albuquerque, NM - - 1,441,777 2,335,475 3,777,252
Kroger:
Columbus, OH - - 780,838 520,559 1,301,397
Linens 'n Things:
Freehold, NJ - - 1,753,766 2,208,651 3,962,417
Luria's:
Coral Gables, FL - - 1,782,346 (c) 1,782,346
South Miami, FL - - 1,379,229 (c) 1,379,229
Tampa, FL - - 2,127,503 1,521,730 3,649,233
Marshalls:
Freehold, NJ - - 2,052,946 2,585,432 4,638,378
Office Depot:
Arlington, TX - - 596,024 1,411,432 2,007,456
OfficeMax:
Corpus Christi, TX 76,664 - 893,270 1,055,008 1,948,278
Dallas, TX - - 1,118,500 1,709,891 2,828,391
Cincinnati, OH - - 543,489 1,574,551 2,118,040
Evanston, IL - - 1,867,831 1,757,618 3,625,449
Altamonte Spgs, FL - - 1,689,793 3,050,160 4,739,953
Pompano Beach, FL - - 2,266,908 1,904,803 4,171,711
Cutler Ridge, FL - - 989,370 1,479,119 2,468,489
Sacramento, CA - - 1,144,167 2,961,206 4,105,373
Salinas, CA - - 1,353,217 1,829,325 3,182,542
Redding, CA - - 667,174 2,181,563 2,848,737
Kelso, WA 1,079,000 - 1,379,460 (g) 1,379,460
Oshman's Sporting Goods:
Dallas, TX - - 1,311,440 (c) 1,311,440
Petco:
Grand Forks, ND - - 306,629 909,671 1,216,300
Pier 1 Imports:
Dallas, TX 20,710 - 189,010 1,091,764 1,280,774
Memphis, TN - - 713,319 821,770 1,535,089
Sanford, FL - - 737,901 (f) 737,901
Pizza Hut:
Orlando, FL - - 220,632 258,483 479,115
Rally's:
Toledo, OH - - 125,882 319,770 445,652
Robb & Stucky:
Ft. Myers, FL - - 2,246,406 6,390,295 8,636,701
Roger & Marv's:
Kenosha, WI - - 1,917,607 3,431,363 5,348,970
Ro-Jack's Food Store:
Warwick, RI - - 1,699,330 (c) 1,699,330
Scotty's:
Orlando, FL - - 1,157,268 2,077,131 3,234,399
Orlando, FL - - 1,044,796 2,011,952 3,056,748
Sears Homelife:
Clearwater, FL 10,555 - 1,184,438 2,536,762 3,721,200
Orlando, FL - - 820,397 2,184,721 3,005,118
Pensacola, FL - - 633,125 1,595,405 2,228,530
Raleigh, NC - - 1,848,026 1,753,635 3,601,661
Tampa, FL - - 1,454,908 2,045,833 3,500,741
Shop & Save:
Homestead, PA - - 1,139,419 (c) 1,139,419
Penn Hills, PA - - 1,043,297 1,243,131 2,286,428
Sports Authority:
Memphis, TN 66,860 - 2,459,381 (g) 2,459,381
SuperValu:
Huntington, WV - - 1,254,238 760,602 2,014,840
Top's:
Lacey, WA - - 2,777,449 7,082,150 9,859,599
Wacammaw:
Fairfax, VA - - 2,156,801 (c) 2,156,801
Waremart:
Eureka, CA - - 3,135,036 5,470,607 8,605,643
Wendy's Old Fashioned
Hamburger:
Fenton, MO - - 307,068 496,410 803,478
Longwood, FL - - 333,335 194,926 528,261
Unallocated costs
relating to construction
in progress 208,295
============== ========== ================= ================= ================
4,169,576 - 199,991,749 209,272,492 409,264,241
============== ========== ================= ================= ================
Properties the Company has
Invested in Under Direct
Financing Leases:
Academy:
Houston, TX - - - (c) (c)
Houston, TX - - - (c) (c)
N. Richland Hills, TX - - - (c) (c)
Houston, TX - - - (c) (c)
Houston, TX - - - (c) (c)
Baton Rouge, LA - - - (c) (c)
Barnes & Noble:
Plantation, FL - - - (c) (c)
Best Buy:
Evanston, IL - - - (c) (c)
Borders:
Altamonte Spgs, FL - - - (c) (c)
Checkers:
Orlando, FL - - - (c) (c)
Denny's:
Landrum, SC - - - (c) (c)
Mooresville, NC - - - (c) (c)
Duncan, SC - - - (c) (c)
Akron, OH - - (d) (d) (d)
Topeka, KS - - - (c) (c)
Winter Springs, FL - - - (c) (c)
Eckerd:
San Antonio, TX - - - (c) (c)
Dallas, TX - - - (c) (c)
Garland, TX - - - (c) (c)
Arlington, TX - - - (c) (c)
Millville, NJ - - - (c) (c)
Atlanta. GA - - - (c) (c)
Mantua, NJ - - - (c) (c)
Vineland, NJ - - (d) (d) (d)
Amarillo, TX - - - (c) (c)
Amarillo, TX - - - (c) (c)
Amarillo, TX - - (d) (d) (d)
Glassboro, NJ - - - (c) (c)
Kissimmee , FL - - - (c) (c)
Colleyville, TX - - - (c) (c)
Alice,TX - - (d) (d) (d)
Tampa, FL - - - (c) (c)
Lafayette, LA - - - (c) (c)
Moore, OK - - - (c) (c)
Tallhassee, FL - - - (c) (c)
East Point, GA - - (d) (d) (d)
Irving, TX - - - (c) (c)
Ft. Worth, TX - - (d) (d) (d)
Williston, FL - - - (c) (c)
Jasper, FL - - - (c) (c)
Oklahoma City, OK - - (m) (c) (c)
Oklahoma City, OK - - (m) (c) (c)
Norman, OK - - - (c) (c)
Chattanooga , TN - - - (c) (c)
Food 4 Less:
Lemon Grove, CA - - - (c) (c)
Food Lion:
Keystone Hts, FL - - (d) (d) (d)
Chattanooga, TN - - (d) (d) (d)
Lynchburg, VA - - (d) (d) (d)
Martinsburg, WV - - (d) (d) (d)
Good Guys:
Stockton, CA - - (d) (d) (d)
Portland, OR - - (d) (d) (d)
Hardee's:
Mobile, AL - - - (c) (c)
Warrior, AL - - - (c) (c)
Horn Lake, MS - - - (c) (c)
West Point, MS - - - (c) (c)
Columbia, TN - - - (c) (c)
Johnson City, TN - - - (c) (c)
Iuka, MS - - (d) (d) (d)
Biscoe, NC - - (d) (d) (d)
Aynor, SC - - (d) (d) (d)
Hi-Lo Automotive:
Copperas Cove, TX - - (d) (d) (d)
Ft. Worth, TX - - (d) (d) (d)
Baton Rouge, LA - - (d) (d) (d)
Lake Jackson, TX - - (d) (d) (d)
Edinberg, TX - - (d) (d) (d)
Pantego, TX - - (d) (d) (d)
Ft. Worth, TX - - (d) (d) (d)
Pharr, TX - - (d) (d) (d)
Baton Rouge, LA - - (d) (d) (d)
Houston, TX - - (d) (d) (d)
HomePlace:
Arlington, TX - - (d) (d) (d)
Bowie, MD - - - (c) (c)
International House of Pancakes:
Stafford, TX - - - (c) (c)
Sunset Hills, MO - - - (c) (c)
Las Vegas, NV - - - (c) (c)
Ft. Worth, TX - - - (c) (c)
Arlington, TX - - - (c) (c)
Matthews, NC - - - (c) (c)
Phoenix, AZ - - - (c) (c)
Kash N' Karry:
Brandon, FL - - (d) (d) (d)
Levitz:
Tempe, AZ - - (d) (d) (d)
Luria's:
South Miami, FL - - - (c) (c)
Coral Gables, FL - - - (c) (c)
Oshman's Sporting Goods:
Dallas, TX - - - (c) (c)
Ro-Jack's Food Store:
Warwick, RI - - - (c) (c)
Shop & Save:
Homestead, PA - - - (c) (c)
Wacammaw:
Fairfax, VA - - - (c) (c)
============== ==========
- -
============== ==========
</TABLE>
<TABLE>
Life on Which
Depreciation in
Date Latest Income
Accumulated of Con- Date Statement is
Depreciation struction Acquired Computed
- ----------------------------------- --------------- ---------- ---------- -----------------
<S> <C> <C> <C> <C>
Properties the Company
has Invested in Under
Under Operating Leases:
Academy:
Houston, TX - 1994 05/95 (c)
Houston, TX - 1995 06/95 (c)
N. Richland Hills, TX - 1996 08/95 (h) (c)
Houston, TX - 1996 02/96 (h) (c)
Houston, TX - 1996 06/96 (h) (c)
Baton Rouge, LA - 1997 08/96 (h) (c)
Babies "R" Us:
Arlington, TX 98,489 1996 06/96 40 years
Barnes & Noble:
Lakeland, FL 112,733 1995 07/94 (h) 40 years
Brandon, FL 113,699 1995 08/94 (h) 40 years
Denver, CO 221,282 1994 09/94 40 years
Houston, TX 134,785 1995 10/94 (h) 40 years
Cary, NC 128,048 1996 05/95 (h) 40 years
Plantation, FL - 1996 05/95 (h) (c)
Lafayette, LA 97,834 1996 06/95 (h) 40 years
Oklahoma City, OK 114,021 1996 06/95 (h) 40 years
Daytona, FL 99,183 1996 09/95 (h) 40 years
Freehold, NJ 108,637 1995 01/96 40 years
Dayton, OH 50,367 1996 05/97 40 years
Redding, CA 22,015 1997 06/97 40 years
Best Buy:
Corpus Christi, TX 92,987 1967 11/93 40 years
Brandon, FL 60,640 1996 02/97 40 years
Evanston, IL - 1994 02/97 (c)
Cuyahoga Falls, OH 31,950 1970 06/97 40 years
Rockville, MD 39,174 1995 07/97 40 years
Fairfax, VA 30,169 1995 08/97 40 years
St. Petersburg, FL 21,578 1997 09/97 40 years
Blockbuster:
Dallas, TX 186,430 1985 04/94 40 years
Conyers, GA 7,533 1997 06/97 40 years
Borders Books & Music:
Wilmington, DE 458,689 1994 12/94 40 years
Richmond, VA 166,446 1995 06/95 40 years
Ft. Lauderdale, FL 180,900 1995 02/96 40 years
Bangor, ME 94,980 1996 06/96 40 years
Altamonte Spgs, FL - 1997 09/97 (c)
Burger King:
Asheboro, NC 112,089 1986 07/92 40 years
Galliano, LA 155,445 1991 07/92 40 years
John's Island, SC 96,017 1988 07/92 40 years
Lake Charles, LA 132,786 1988 07/92 40 years
Lancaster, OH 80,137 1987 07/92 40 years
Natchez, MS 89,860 1986 07/92 40 years
Tappahannock, VA 78,757 1987 07/92 40 years
Warren, MI 107,942 1987 07/92 40 years
Manchester, NH 49,234 1980 05/93 40 years
Rochester, NH 89,503 1987 05/93 40 years
Columbus, OH 45,826 1982 06/93 40 years
Coon Rapids, MN 61,343 1990 06/93 40 years
Opeleousas, LA 92,814 1989 06/93 40 years
St. Paul, MN 61,107 1986 06/93 40 years
Checkers:
Orlando, FL - 1988 07/92 (c)
CompUSA:
Mission Viejo, CA 88,410 1994 02/94 (h) 40 years
Computer City:
Miami, FL 172,795 1994 04/94 40 years
Baton Rouge, LA 45,741 1995 12/95 40 years
Anchorage, AK 76,441 1995 02/96 40 years
Richmond, VA 77,372 1996 05/96 40 years
Dave's:
Maple Heights, OH 62,878 1985 02/97 40 years
Denny's:
Duncan, SC - 1992 05/93 (c)
Greensboro, NC 56,657 1992 05/93 40 years
Greenville, SC 46,034 1985 05/93 40 years
Houston, TX 65,795 1985 05/93 40 years
Landrum, SC - 1992 05/93 (c)
Mooresville, NC - 1992 05/93 (c)
Santee, SC 35,832 1992 05/93 40 years
Topeka, KS - 1989 06/93 (c)
Winter Springs, FL - 1994 01/94 (c)
Dick's Clothing:
Taylor, MI 114,244 1996 08/96 40 years
White Marsh, MD 126,878 1996 08/96 40 years
Eckerd:
San Antonio, TX - 1993 12/93 (c)
Dallas, TX - 1994 01/94 (c)
Garland, TX - 1994 02/94 (c)
Arlington, TX - 1994 02/94 (c)
Millville, NJ - 1994 03/94 (c)
Atlanta, GA - 1994 03/94 (c)
Mantua, NJ - 1994 06/94 (c)
Amarillo, TX - 1994 12/94 (c)
Amarillo, TX - 1994 12/94 (c)
Glassboro, NJ - 1994 12/94 (c)
Kissimmee , FL - 1995 04/95 (c)
Colleyville, TX - 1995 06/95 (c)
Tampa, FL - 1995 12/95 (c)
Douglasville, GA 47,825 1996 01/96 40 years
Lafayette, LA - 1995 01/96 (c)
Moore, OK - 1995 01/96 (c)
Midwest City, OK 50,348 1996 03/96 40 years
Tallhassee, FL - 1996 06/96 (c)
Irving, TX - 1996 12/96 (c)
Snellville, GA 33,180 1996 12/96 40 years
Jasper, FL - 1994 01/97 (c)
Williston, FL - 1995 01/97 (c)
Pantego, TX 19,621 1997 06/97 40 years
Conyers, GA 13,527 1997 06/97 40 years
Norman, OK - 1997 06/97 (c)
Chattanooga , TN - 1997 09/97 (c)
Stone Mountain, GA 8,102 1997 09/97 40 years
Arlington, TX - (g) 11/97 (g)
Leavenworth, KS - (g) 11/97 (g)
Augusta, GA 1,382 1997 12/97 40 years
Riverdale, GA 1,779 1997 12/97 40 years
Morrow, GA 1,300 1997 12/97 40 years
Food 4 Less:
Lemon Grove, CA - 1996 07/95 (h) (c)
Golden Corral:
Woodstock, GA (e) 128,940 1984 11/84 35 years
Edenton, NC 125,075 1984 11/84 35 years
Rockledge, FL (e) 132,800 1984 12/84 35 years
Gilmer, TX (e) 115,501 1984 12/84 35 years
Bonham, TX (e) 134,079 1984 12/84 35 years
Center, TX (e) 120,334 1984 12/84 35 years
Leitchfield, KY (e) 119,460 1984 12/84 35 years
Marietta, GA (e) 134,992 1984 12/84 35 years
Silsbee, TX (e) 117,686 1984 12/84 35 years
Atlanta, TX (e) 143,117 1985 01/85 35 years
Vernon, TX (e) 124,528 1985 03/85 35 years
Abbeville, LA (e) 137,200 1985 04/85 35 years
Fredricksburg, TX 121,593 1985 04/85 35 years
Clanton, AL (e) 112,406 1985 05/85 35 years
Pleasanton, TX (e) 119,655 1985 05/85 35 years
Bowie, TX (e) 117,942 1985 05/85 35 years
Jacksonville, TX 120,460 1985 05/85 35 years
Lake Placid, FL (e) 115,492 1985 05/85 35 years
Ennis, TX 135,132 1985 07/85 35 years
Melbourne, FL (e) 125,812 1985 07/85 35 years
Franklin, LA (e) 146,260 1985 07/85 35 years
Franklin, VA 114,777 1987 02/87 40 years
Minden, LA (e) 88,853 1989 03/89 40 years
Durant, OK 86,573 1989 08/89 40 years
The Good Guys:
Foothill Ranch, CA 62,962 1995 12/96 40 years
Valencia,CA 63,335 1995 02/97 40 years
Riverside, CA 43,144 1995 05/97 40 years
Hardee's:
Chalkville, AL 47,721 1992 10/93 40 years
Columbia, TN - 1993 10/93 (c)
Gulf Shores, AL 62,125 1993 10/93 40 years
Horn Lake, MS - 1993 10/93 (c)
Johnson City, TN - 1993 10/93 (c)
Mobile, AL - 1993 10/93 (c)
Petal, MS 43,339 1993 10/93 40 years
Rock Hill, SC 48,690 1993 10/93 40 years
Tusculum, TN 52,953 1993 10/93 40 years
Warrior, AL - 1992 10/93 (c)
West Point, MS - 1993 10/93 (c)
Hi-Lo Automotive:
Mesquite, TX 41,137 1994 10/94 40 years
Arlington, TX 44,099 1993 11/94 40 years
Ft. Worth, TX 39,521 1993 11/94 40 years
Garland, TX 39,498 1993 11/94 40 years
Houston, TX 41,043 1994 11/94 40 years
Dallas, TX 40,941 1994 12/94 40 years
Bastrop, TX 21,658 1994 09/95 40 years
Eagle Pass, TX 25,768 1994 09/95 40 years
Lake Worth, TX 30,497 1995 09/95 40 years
McAllen, TX 34,222 1995 09/95 40 years
Nacogdoches, TX 29,521 1995 09/95 40 years
San Antonio, TX 36,389 1994 09/95 40 years
Temple, TX 33,224 1989 09/95 40 years
Universal City, TX 32,259 1995 09/95 40 years
HomePlace:
Altamonte Spgs, FL 35,563 1997 09/97 40 years
White Marsh, MD - (g) 10/97 (g)
Ft. Myers, FL 4,214 1997 12/97 40 years
Bowie, MD - 1997 12/97 (c)
International House of Pancakes:
Stafford, TX - 1992 10/93 (c)
Sunset Hills, MO - 1993 10/93 (c)
Las Vegas, NV - 1993 12/93 (c)
Ft. Worth, TX - 1993 12/93 (c)
Arlington, TX - 1993 12/93 (c)
Matthews, NC - 1993 12/93 (c)
Phoenix, AZ - 1993 12/93 (c)
Just for Feet:
Albuquerque, NM 31,626 1997 06/97 40 years
Kroger:
Columbus, OH 11,387 1982 02/97 40 years
Linens 'n Things:
Freehold, NJ 184,500 1994 08/94 40 years
Luria's:
Coral Gables, FL - 1994 06/96 (c)
South Miami, FL - 1988 06/96 (c)
Tampa, FL 57,382 1994 06/96 40 years
Marshalls:
Freehold, NJ 215,974 1994 08/94 40 years
Office Depot:
Arlington, TX 138,122 1991 01/94 40 years
OfficeMax:
Corpus Christi, TX 108,276 1967 11/93 40 years
Dallas, TX 171,106 1993 12/93 40 years
Cincinnati, OH 137,099 1994 07/94 40 years
Evanston, IL 112,536 1995 06/95 40 years
Altamonte Spgs, FL 143,236 1995 01/96 40 years
Pompano Beach, FL 90,724 1972 02/96 40 years
Cutler Ridge, FL 55,775 1995 06/96 40 years
Sacramento, CA 74,203 1996 12/96 40 years
Salinas, CA 40,016 1995 02/97 40 years
Redding, CA 29,542 1997 06/97 40 years
Kelso, WA - (g) 09/97 (g)
Oshman's Sporting Goods:
Dallas, TX - 1994 03/94 (c)
Petco:
Grand Forks, ND 972 1996 12/97 40 years
Pier 1 Imports:
Dallas, TX 101,631 1980 04/94 40 years
Memphis, TN 11,128 1997 09/96 (h) 40 years
Sanford, FL - (f) 06/97 (f)
Pizza Hut:
Orlando, FL 54,552 1974 08/93 20.9 years
Rally's:
Toledo, OH 45,347 1989 07/92 38.8 years
Robb & Stucky:
Ft. Myers, FL 6,657 1997 12/97 40 years
Roger & Marv's:
Kenosha, WI 70,372 1992 02/97 40 years
Ro-Jack's Food Store:
Warwick, RI - 1992 02/97 (c)
Scotty's:
Orlando, FL 131,096 1995 06/95 40 years
Orlando, FL 128,595 1995 06/95 40 years
Sears Homelife:
Clearwater, FL 290,797 1992 05/93 40 years
Orlando, FL 251,018 1992 05/93 40 years
Pensacola, FL 60,271 1994 06/96 40 years
Raleigh, NC 66,248 1995 06/96 40 years
Tampa, FL 77,287 1992 06/96 40 years
Shop & Save:
Homestead, PA - 1994 02/97 (c)
Penn Hills, PA 27,194 1991 02/97 40 years
Sports Authority:
Memphis, TN - (g) 12/97 (g)
SuperValu:
Huntington, WV 16,638 1971 02/97 40 years
Top's:
Lacey, WA 154,922 1992 02/97 40 years
Wacammaw:
Fairfax, VA - 1995 12/95 (c)
Waremart:
Eureka, CA 119,670 1965 02/97 40 years
Wendy's Old Fashioned
Hamburger:
Fenton, MO 82,859 1985 07/92 33 years
Longwood, FL 34,179 1982 07/92 31.4 years
Unallocated costs
relating to construction
in progress
===============
12,296,997
===============
Properties the Company has
Invested in Under Direct
Financing Leases:
Academy:
Houston, TX (c) 1994 05/95 (c)
Houston, TX (c) 1995 06/95 (c)
N. Richland Hills, TX (c) 1996 08/95 (h) (c)
Houston, TX (c) 1996 02/96 (h) (c)
Houston, TX (c) 1996 06/96 (h) (c)
Baton Rouge, LA (c) 1997 08/96 (h) (c)
Barnes & Noble:
Plantation, FL (c) 1996 05/95 (h) (c)
Best Buy:
Evanston, IL (c) 1994 02/97 (c)
Borders:
Altamonte Spgs, FL (c) 1997 09/97 (c)
Checkers:
Orlando, FL (c) 1988 07/92 (c)
Denny's:
Landrum, SC (c) 1992 05/93 (c)
Mooresville, NC (c) 1992 05/93 (c)
Duncan, SC (c) 1992 05/93 (c)
Akron, OH (d) 1992 05/93 (d)
Topeka, KS (c) 1989 06/93 (c)
Winter Springs, FL (c) 1994 01/94 (c)
Eckerd:
San Antonio, TX (c) 1993 12/93 (c)
Dallas, TX (c) 1994 01/94 (c)
Garland, TX (c) 1994 02/94 (c)
Arlington, TX (c) 1994 02/94 (c)
Millville, NJ (c) 1994 03/94 (c)
Atlanta. GA (c) 1994 03/94 (c)
Mantua, NJ (c) 1994 06/94 (c)
Vineland, NJ (d) 1994 11/94 (d)
Amarillo, TX (c) 1994 12/94 (c)
Amarillo, TX (c) 1994 12/94 (c)
Amarillo, TX (d) 1994 12/94 (d)
Glassboro, NJ (c) 1994 12/94 (c)
Kissimmee , FL (c) 1995 04/95 (c)
Colleyville, TX (c) 1995 06/95 (c)
Alice,TX (d) 1995 06/95 (d)
Tampa, FL (c) 1995 12/95 (c)
Lafayette, LA (c) 1995 01/96 (c)
Moore, OK (c) 1995 01/96 (c)
Tallhassee, FL (c) 1996 06/96 (c)
East Point, GA (d) 1996 12/96 (d)
Irving, TX (c) 1996 12/96 (c)
Ft. Worth, TX (d) 1996 12/96 (d)
Williston, FL (c) 1995 01/97 (c)
Jasper, FL (c) 1994 01/97 (c)
Oklahoma City, OK (c) 1997 06/97 (c)
Oklahoma City, OK (c) 1997 06/97 (c)
Norman, OK (c) 1997 06/97 (c)
Chattanooga , TN (c) 1997 09/97 (c)
Food 4 Less:
Lemon Grove, CA (c) 1996 07/95 (h) (c)
Food Lion:
Keystone Hts, FL (d) 1993 05/93 (d)
Chattanooga, TN (d) 1993 10/93 (d)
Lynchburg, VA (d) 1994 01/94 (d)
Martinsburg, WV (d) 1994 08/94 (d)
Good Guys:
Stockton, CA (d) 1991 07/94 (d)
Portland, OR (d) 1996 05/96 (d)
Hardee's:
Mobile, AL (c) 1993 10/93 (c)
Warrior, AL (c) 1992 10/93 (c)
Horn Lake, MS (c) 1993 10/93 (c)
West Point, MS (c) 1993 10/93 (c)
Columbia, TN (c) 1993 10/93 (c)
Johnson City, TN (c) 1993 10/93 (c)
Iuka, MS (d) 1993 10/93 (d)
Biscoe, NC (d) 1993 10/93 (d)
Aynor, SC (d) 1993 10/93 (d)
Hi-Lo Automotive:
Copperas Cove, TX (d) 1994 10/94 (d)
Ft. Worth, TX (d) 1993 10/94 (d)
Baton Rouge, LA (d) 1994 10/94 (d)
Lake Jackson, TX (d) 1994 10/94 (d)
Edinberg, TX (d) 1993 10/94 (d)
Pantego, TX (d) 1993 10/94 (d)
Ft. Worth, TX (d) 1993 11/94 (d)
Pharr, TX (d) 1993 11/94 (d)
Baton Rouge, LA (d) 1994 12/94 (d)
Houston, TX (d) 1982 09/95 (d)
HomePlace:
Arlington, TX (d) 1996 06/96 (d)
Bowie, MD (c) 1997 12/97 (c)
International House of Pancakes:
Stafford, TX (c) 1992 10/93 (c)
Sunset Hills, MO (c) 1993 10/93 (c)
Las Vegas, NV (c) 1993 12/93 (c)
Ft. Worth, TX (c) 1993 12/93 (c)
Arlington, TX (c) 1993 12/93 (c)
Matthews, NC (c) 1993 12/93 (c)
Phoenix, AZ (c) 1993 12/93 (c)
Kash N' Karry:
Brandon, FL (d) 1997 10/96 (h) (d)
Levitz:
Tempe, AZ (d) 1994 01/95 (d)
Luria's:
South Miami, FL (c) 1988 06/96 (c)
Coral Gables, FL (c) 1994 06/96 (c)
Oshman's Sporting Goods:
Dallas, TX (c) 1994 03/94 (c)
Ro-Jack's Food Store:
Warwick, RI (c) 1992 02/97 (c)
Shop & Save:
Homestead, PA (c) 1994 02/97 (c)
Wacammaw:
Fairfax, VA (c) 1995 12/95 (c)
</TABLE>
<TABLE>
COMMERCIAL NET LEASE REALTY, INC.
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
<CAPTION>
(a) Transactions in real estate and accumulated depreciation during 1997, 1996 and 1995, are summarized as follows:
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Land and Buildings:
Balance at the Beginning of Period 277,109,358 161,454,129 109,852,431
Acquisitions 156,011,944 116,563,622 51,601,698
Sale of land and buildings (19,846,879) (908,393) -
----------- ----------- -----------
Balance at the Close of Period 413,274,423 277,109,358 161,454,129
=========== =========== ===========
Accumulated Depreciation:
Balance at the Beginning of Period 8,078,562 5,497,390 3,761,369
Sale of land and buildings (258,942) (222,940) -
Depreciation expense 4,477,377 2,804,112 1,736,021
----------- ------------ ----------
Balance at the Close of Period 12,296,997 8,078,562 5,497,390
============ ============ ===========
</TABLE>
(b) As of December 31, 1997, all of the leases are treated as operating leases
for federal income tax purposes. As of December 31, 1997, the aggregate
cost of the properties owned by the Company and its subsidaries for federal
income tax purposes was $534,688,369.
(c) For financial reporting purposes, the portion of the lease relating to the
building has been recorded as a direct financing lease; therefore,
depreciation is not applicable.
(d) For financial reporting purposes, the lease for the land and building has
been recorded as a direct financing lease; therefore, depreciation is not
applicable.
(e) The tenant of this property, Golden Corral Corporation, has subleased this
property. Golden Corral Corporation continues to be responsible for
complying with all the terms of the lease agreement and is continuing to
pay rent on this property to the Company.
(f) The Company owns only land for this property. Pursuant to the lease
agreement, the Company is to purchase the building once construction is
complete.
(g) The Company owns only land for this property. The building is under
construction; therefore, no depreciation was taken.
(h) Date acquired represents acquisition date of land. Pursuant to the lease
agreement, the Company purchased the buildings from the tenants upon
completion of construction, generally within 12 months from the acquisition
of the land.
(i) During the years ended December 31, 1997, 1996 and 1995, the Company (i)
incurred acquisition fees and expense reimbursement fees totalling
$2,552,205, $2,278,306 and $937,363, respectively, paid to CNL Realty
Advsisors, Inc. and (ii) acquired land and buildings purchased from
affiliates of CNL Realty Advisors, Inc. for an aggregate cost of
$39,322,795, $37,712,514, and $17,968,518, respectively. Such amounts are
included in land and buildings on operating leases and net investments in
direct financing leases.
(j) Property is encumbered as a part of the Company's $13,150,000 long term,
fixed rate mortgage and security agreement.
(k) Property is encumbered as a part of the Company's $39,450,000 long term,
fixed rate mortgage and security agreement.
(l) Encumbered properties for which the portion of the lease relating to the
land is accounted for as an operating lease and the portion of the lease
relating to the building is accounted for as a direct financing lease, the
total amount of the encumberance is listed with the land portion of the
property.
(m) The Company owns only the building for this property. The land is subject
to a ground lease between the Company and an unrelated third party.
EXHIBITS
EXHIBIT INDEX
Exhibit Number Page
-------------- ----
3.1 Articles of Incorporation of the Registrant (filed as
Exhibit 3.3(i) to the Registrant's Registration Statement
No. 1-11290 on Form 8-B, and incorporated herein by
reference).
3.2 Bylaws of the Registrant, (filed as Exhibit 3(ii) to
Amendment No. 2 to the Registrant's Registration No. 33-
83110 on Form S-3, and incorporated herein by reference).
3.3 Articles of Amendment to the Articles of Incorporation of
the Registrant (filed as Exhibit 3.3 to the Registrant's
Form 10-Q for the quarter ended June 30, 1996, and
incorporated herein by reference).
3.4 Articles of Amendment to the Articles of Incorporation of
the Registrant (filed as Exhibit 3.4 to the Registrant's
Current Report on Form 8-K dated February 18, 1998, and
filed with the Securities and Exchange Commission on
February 19, 1998, and incorporated herein by reference).
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).
10.1 Letter Agreement dated July 10, 1992, amending Stock
Purchase Agreement dated January 23, 1992 (filed as Exhibit
10.34 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1992, and incorporated herein by
reference).
10.2 Advisory Agreement between Registrant and CNL Realty
Advisors, Inc. effective as of April 1, 1993 and renewed
January 1, 1997 (filed as Exhibit 10.04 to Amendment No. 1
to the Registrant's Registration Statement No. 33-61214 on
Form S-2, and incorporated herein by reference).
10.3 1992 Commercial Net Lease Realty, Inc. Stock Option Plan
(filed as Exhibit No. 10(x) to the Registrant's Registration
Statement No. 33-83110 on Form S-3, and incorporated herein
by reference).
10.4 Second Amended and Restated Line of Credit and Security
Agreement, dated December 7, 1995, among Registrant, certain
lenders listed therein and First Union National Bank of
Florida, as the Agent, relating to a $100,000,000 loan
(filed as Exhibit 10.14 to the Registrant's Current Report
on Form 8-K dated January 18, 1996, and incorporated herein
by reference).
10.5 Secured Promissory Note, dated December 14, 1995, among
Registrant and Principal Mutual Life Insurance Company
relating to a $13,150,000 loan (filed as Exhibit 10.15 to
the Registrant's Current Report on Form 8-K dated January
18, 1996, and incorporated herein by reference).
10.6 Mortgage and Security Agreement, dated December 14, 1995,
among Registrant and Principal Mutual Life Insurance Company
relating to a $13,150,000 loan (filed as Exhibit 10.16 to
the Registrant's Current Report on Form 8-K dated January
18, 1996, and incorporated herein by reference).
10.7 Loan Agreement, dated January 19, 1996, among Registrant and
Principal Mutual Life Insurance Company relating to a
$39,450,000 loan (filed as Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995, and incorporated herein by reference).
10.8 Secured Promissory Note, dated January 19, 1996, among
Registrant and Principal Mutual Life Insurance Company
relating to a $39,450,000 loan (filed as Exhibit 10.13 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995, and incorporated herein by
reference).
10.9 Third Amended and Restated Line of Credit and Security
Agreement, dated September 3, 1996, by and among Registrant,
certain lenders and First Union National Bank of Florida, as
the Agent, relating to a $150,000,000 loan (filed as Exhibit
10.11 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, and incorporated
herein by reference).
10.10 Second Renewal and Modification Promissory Note, dated
September 3, 1996, by and among Registrant and First Union
National Bank of Florida, as the Agent, relating to
$150,000,000 loan (filed as Exhibit 10.12 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, and incorporated herein by
reference).
10.11 Agreement and Plan of Merger dated May 15, 1997, by and
among Commercial Net Lease Realty, Inc. and Net Lease Realty
II, Inc. and CNL Realty Advisors, Inc. and the Stockholders
of CNL Realty Advisors, Inc. (filed as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated May 16, 1997,
and incorporated herein by reference).
10.12 Fourth Amended and Restated Line of Credit and Security
Agreement, dated August 6, 1997, by and among Registrant,
certain lenders and First Union National Bank, as the Agent,
relating to a $200,000,000 loan (filed as Exhibit 10 to the
Registrant's Current Report on Form 8-K dated September 12,
1997, and incorporated herein by reference).
13 Annual Report to Shareholders for the year ended December
31, 1997 (previously filed).
23 Consent of Independent Accountants dated March 16, 1998
(previously filed).
(b) The Registrant filed one report on Form 8-K on December 19,
1997, for the purpose of incorporating certain items by
reference into its registration statement on Form S-3 dated
December 19, 1997, and one report on form 8-K on December
22, 1997, reporting the approval by the stockholders of the
Registrant of the Agreement and Plan of Merger by and among
the Registrant, Net Lease Realty II, Inc. and the
Stockholders of CNL Realty Advisors, Inc.
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
1997 ANNUAL REPORT - PAGE 4
TABLE OF CONTENTS
- -----------------
Company Profile 1
To Our Shareholders 2
Historical Financial Highlights 4
Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Diversification of Assets 11
Independent Auditors' Report 12
Consolidated Balance Sheets 13
Consolidated Statements of Earnings 14
Consolidated Statements of Stockholders' Equity 15
Consolidated Statements of Cash Flows 16
Consolidated Notes to Financial Statements 17
Consolidated Quarterly Financial Data 26
Share Price and Dividend Data 27
People - Service - Relationships 28
Directors and Executive Officers 32
Shareholder Information 31
1996 ANNUAL REPORT - PAGE 1
<TABLE>
HISTORICAL FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
-------------------------------
<CAPTION>
[Picture 1] Candid photograph of Denise Reyes, employee of the Company
1997 1996 1995 1994 1993
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gross Revenues $ 50,135 $ 33,369 $ 20,580 $ 12,289 $ 5,069
Net Earnings $ 30,385 $ 19,839 $ 12,707 $ 8,915 $ 3,522
Total Assets $ 537,014 $ 370,953 $ 219,257 $ 152,211 $ 91,619
Total Long-Term
Debt $ 171,836 $ 116,956 $ 82,600 $ 14,800 $ -
Total Equity $ 362,144 $ 252,574 $ 135,842 $ 136,665 $ 91,145
Cash Dividends
Paid to Stock-
holders $ 28,381 $ 18,868 $ 13,529 $ 9,897 $ 3,156
Weighted Average
Shares
Basic 24,070,697 16,798,918 11,663,672 8,606,138 3,711,807
Diluted 24,220,792 16,838,719 11,693,772 8,613,672
Per Share
Information:
Net Earnings
Basic $ 1.26 $ 1.18 $ 1.09 $ 1.04 $ 0.95
Diluted $ 1.25 $ 1.18 $ 1.09 $ 1.04
Dividends $ 1.20 $ 1.18 $ 1.16 $ 1.14 $ 1.10
Other Data
Funds from oper-
ations (1) $ 34,230 $ 22,570 $ 14,443 $ 9,992 $ 3,884
Cash Flows from:
Operating
activities $ 34,010 $ 22,216 $ 14,140 $ 9,505 $ 3,750
Investing
activities $ (167,002) $(144,247) $ (67,518) $ (79,081) $(48,609)
Financing
activities $ 133,742 $ 123,140 $ 52,609 $ 50,799 $ 64,236
Equity Market
Capitalization
($ mil) $499.7 $329.6 $148.7 $142.9 $105.4
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company has recently adopted the NAREIT definition of funds from
operations and has restated funds from operations for prior years in
accordance with this definition. Funds from operations are net earnings
excluding depreciation, gains and losses on the sale of real estate and
nonrecurring items of income and expense of the Company, and the
Company's share of these items from the Company's unconsolidated
partnership. For
purposes of this table, funds from operations exclude nonrecurring NYSE
initial listing expenses of $111,638 in 1993. Funds from operations are
generally considered by industry analysts to be the most appropriate
measure of performance and do not necessarily represent cash provided
by operating activities in accordance with generally accepted
accounting principles and are not necessarily indicative of cash
available to meet cash needs. Management considers funds from
operations an appropriate measure of performance of an equity REIT
because it is predicated on cash flow analysis. The Company's
computation of funds from operations may differ from the methodology
for calculating funds from operations utilized by other equity REIT's
and, therefore, may not be comparable to such other REIT's.
1997 ANNUAL REPORT - PAGE 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
Commercial Net Lease Realty, Inc., a Maryland corporation, is a real estate
investment trust ("REIT") formed in 1984 that acquires, develops, owns and
manages high-quality, freestanding properties leased to major retail
businesses under long-term commercial net leases. As of December 31, 1997,
Commercial Net Lease Realty, Inc. and its subsidiaries (the "Company") owned
236 properties (the "Properties") that are leased to major retail businesses,
including Academy, Babies "R" Us, Barnes & Noble, Best Buy, Borders, Burger
King, CompUSA, Computer City, Denny's, Dick's Clothing & Sporting Goods,
Eckerd, Food 4 Less, Food Lion, Golden Corral, Good Guys, Hardee's, Hi-Lo
Automotive, HomePlace, International House of Pancakes, Kash N' Karry, Levitz,
Linens 'n Things, Luria's, Marshalls, Office Depot, OfficeMax, Oshman's, Pier
1 Imports, Robb & Stucky, Scotty's, Sears Homelife Centers, Sports Authority,
Waccamaw and eight independently operated grocery stores leased to or
partially guaranteed by SuperValu, Inc.
LIQUIDITY AND CAPITAL RESOURCES
General.
Historically, the Company's only need for funds has been for the payment of
operating expenses and dividends, for property acquisitions and 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 the public or private offering of the
Company's debt or equity securities, secured or unsecured borrowings
[Picture 2] Candid photograph of a meeting between James M. Seneff and Gary M.
Ralston, employees of the Company
from banks or other lenders, or the sale of Properties, as well as
undistributed funds from operations. For the years ended December 31, 1997,
1996 and 1995, the Company generated $34,010,000, $22,216,000 and $14,140,000,
respectively, in net cash provided by operating activities. The increase in
cash from operations for each of the years ended December 31, 1997, 1996 and
1995, 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 September 1996, the Company entered into an amended and restated loan
agreement for a $150,000,000 revolving credit facility. The credit facility
amended the Company's $100,000,000 credit facility by (i) increasing the
borrowing capacity from $100,000,000 to $150,000,000, (ii) extending the
expiration date to June 30, 1998 (and for up to two additional 12 month
periods at the option of the Company), and (iii) lowering the interest rate
from 170 basis points above LIBOR to 160 basis points above LIBOR or the
lender's prime rate, whichever the Company selects. In August 1997, the
Company entered into an amended and restated loan agreement for a $200,000,000
revolving credit facility (the "Credit Facility") which amended the company's
$150,000,000 credit facility by (i) increasing the borrowing capacity from
$150,000,000 to $200,000,000, (ii) extending the expiration date to June 30,
1999 (and for up to two additional 12 month periods at the option of the
Company), and (iii) lowering the interest rate from 160 basis points above
LIBOR to 150 points above LIBOR or the lender's prime rate, whichever the
Company selects.
[Picture 3] Candid photograph of Kevin Habicht, employee of the Company
In connection with the Credit Facility, the Company is required to pay a
commitment fee of 20 basis points per annum on the unused commitment. The
Credit Facility is collateralized by an assignment of the rents and leases of
certain of the Company's Properties. As of December 31, 1997, $115,100,000
was outstanding under the Credit Facility. The Company expects to use the
Credit Facility primarily to invest in freestanding, retail properties,
although up to $25,000,000 of the available credit may be used for working
capital ($15,000,000 of which may be used for the issuance of standby letters
of credit).
As a means to reduce its exposure to rising interest rates on the Company's
variable rate Credit Facility, the Company was a party to three interest rate
cap agreements during the three years ended December 31, 1997. As of December
31, 1997, two of the interest rate cap agreements had expired and one remained
effective, providing for a fixed LIBOR rate of 6.9% per annum on a notional
amount of $30 million. This agreement is effective through December 1999.
In December 1995, the Company entered into a long-term, fixed rate mortgage
and security agreement for $13,150,000. The loan provides for a four-year
mortgage with interest payable monthly and principal payable at maturity on
December 15, 1999, and bears interest at a rate of 6.75% per annum. The
mortgage is secured by a first lien on and assignment of rents and leases of
certain of the Company's Properties. As of December 31, 1997, the outstanding
principal balance was $13,150,000.
In January 1996, the Company entered into a long-term, fixed rate mortgage and
security agreement for $39,450,000. The loan is a ten-year loan with
principal and interest payable monthly, based on a 17-year amortization, with
the balance due in February 2006 and bears interest at a rate of 7.435% per
annum. The loan is secured by a first lien on and an assignment of rents and
leases of
1997 ANNUAL REPORT - PAGE 7
certain of the Company's Properties. As of December 31, 1997, the outstanding
principal balance was $37,066,000.
In June 1996, the Company acquired three Properties each subject to a mortgage
totalling $6,864,000 (collectively the "Mortgages"). The Mortgages bear
interest at a weighted average rate of 8.6% and have a weighted average
maturity of 7.3 years. As of December 31, 1997, the outstanding principal
balances for the Mortgages totalled $6,520,000.
Payments of principal on the mortgage debt and on advances outstanding under
the Credit Facility are expected to be met from the proceeds of renewing or
refinancing the Credit Facility, proceeds from public or private offerings of
the Company's debt or equity securities, secured or unsecured borrowings from
banks or other lenders or proceeds from the sale of one or more of its
Properties.
Debt and Equity Securities.
In July 1995, the Company filed a shelf registration statement with the
Securities and Exchange Commission that permits the issuance of debt and
equity securities of up to $200,000,000. In January 1996, the Company filed
a prospectus supplement to the shelf registration and issued 4,025,000 shares
of common stock, including the underwriters' over- allotment of 525,000
shares, and received gross proceeds of $52,325,000. In September 1996, the
Company filed a prospectus supplement to the shelf registration and issued
4,850,000 shares of common stock and received gross proceeds of $67,900,000.
In addition, in October 1996, the Company issued an additional 225,000 shares
of common stock in connection with the underwriters' over- allotment option
and received gross proceeds of $3,150,000. In connection with these
offerings, the Company incurred stock issuance costs totalling $7,614,000,
consisting primarily of underwriters' commissions and fees, legal and
accounting fees and printing expenses. 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 December 1997,
the Company filed a prospectus supplement to the shelf registration and issued
882,353 shares of common stock and received gross proceeds of $15,000,000. In
connection with the four 1997 offerings, the Company incurred stock issuance
costs totalling $3,953,000 consisting primarily of underwriters' commissions
and fees, legal and accounting fees and printing expenses. Net proceeds from
the offerings were generally used to pay down the outstanding indebtedness
under the Company's Credit Facility.
In February 1998, the Company filed a prospectus supplement to the shelf
registration and issued 688,172 shares of common stock at $14.4375 per share.
Net proceeds of the offering were approximately $11,350,000, after deducting
offering expenses and underwriter's discounts. Proceeds of the offering were
used to pay down the outstanding indebtedness of the Company's Credit
Facility. Subsequent to the February 1998 offering, the Company had
$216,722,000 remaining on its shelf registration.
Property Acquisitions and Commitments.
During the year ended December 31, 1997, the Company borrowed $152,600,000
under its Credit Facility to acquire 47 Properties and three buildings (the
"Acquisition Properties") which were developed by the tenant on land parcels
owned by the Company. The Acquisition Properties include 14 Eckerd
drugstores, six Best Buy consumer electronic stores, three OfficeMax office
supply stores, two Barnes & Noble bookstores, one Borders bookstore, two Good
Guys consumer electronic stores, four HomePlace home furnishing stores, one
Pier 1 Imports home furnishings store, one Robb & Stucky furniture store, one
Blockbuster video store, one Just For Feet shoe store, one Kroger grocery
store, one Petco pet supply store, one Sports Authority sporting goods store
and eight independently operated grocery stores leased to or partially
guaranteed by SuperValu, Inc. The three buildings included one Academy
sporting goods store, one Pier 1 Imports home furnishings store and one Kash
N' Karry grocery store.
[Picture 4] Portrait photograph of Mez Birdie, employee of the Company
[Sidebar 1]
SERVICE
BUILDING RELATIONSHIPS THROUGH SERVICE
- --------------------------------------
"To serve people through Commercial Net Lease Realty is an opportunity that
comes once in a lifetime, and we don't take it lightly," says Mez Birdie, his
voice filled with pride and determination. "As vice president of asset
management, my job is to ensure that we are the consummated Land Servant, by
providing services above and beyond our customers' expectations. We care
about building a relationship before we care about making a transaction.
Mez's responsibilities include property management, lease administration and
leasing and disposition. While most retailers expect Commercial Net Lease
Realty to own and build stores within budgets and timeframes, Mez points out
that most don't' expect the additional services that have earned the company
its national reputation for going the extra mile.
For example, when the company bought properties leased to Sears, Mez assisted
Sears in reducing their store insurance premiums by 25 percent. "We did this
because we wanted to serve the tenant in the best possible way," says Mez.
"We don't just collect rent," says Mez. "We also provide service, and the end
result is always positive for our shareholders. When retailers want to
expand, why wouldn't they come to us and say, 'Be our Land Servant for more
stores.' Satisfied customers are a key part of creating value for
shareholders," says Mez.
Mez, like his fellow associates, owns stock in the company. "What better way
to show commitment than by putting your money where your mouth is," says Mez.
1997 ANNUAL REPORT - PAGE 8
[Picture 5] Strip of three candid photographs, each of John Awsumb,
employee of the Company
[Picture 6] Photograph of an exterior view of the OfficeMax located in
Altamonte Springs, Florida
The Company leases the Acquisition Properties to major retail tenants and
accounts for the leases under the provisions of the Statement of Financial
Accounting Standards No. 13, "Accounting for Leases." Pursuant to the
requirements of this provision, 37 of the leases relating to the 47 Properties
acquired during 1997 have been classified as operating leases and 10 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 eight of these leases
are accounted for as operating leases. Also pursuant to the requirements of
this provision, one of the leases relating to the three buildings which were
developed by the tenant on land parcels owned by the Company have been
classified as operating leases and two leases have been classified as direct
financing leases.
In connection with the acquisition and lease relating to the land parcel of
the Pier 1 Imports Property, the tenant is obligated to develop a building on
the respective land parcel. The Company has agreed to acquire the completed
building for an amount of up to $798,000, at which time rental income will
increase for the Property. The Company owns five land parcels subject to
lease agreements with tenants whereby the Company has agreed to construct a
building on each respective land parcel for an aggregate amount of
approximately $10,000,000 for the five buildings. Pursuant to the lease
agreements, rent is to commence on the properties upon completion of
construction of the buildings.
As of December 31, 1997, the Company had entered into agreements to purchase
three additional properties for an estimated aggregate amount of $7,847,000.
In connection with the acquisition of two of these properties, the Company was
contingently liable for $350,000 related to bank letters of credit which
guarantee the Company's obligation under the purchase agreements to acquire
these properties. The purchase of these properties is subject to conditions
relating to completion of development activities, review of title and
obtaining title insurance, engineering and environmental inspections and other
matters.
In addition to the three properties under contract and the building being
developed by the tenant as of December 31, 1997, the Company is currently
negotiating the acquisition of prospective properties. The Company may elect
to acquire these prospective properties or other additional properties (or
interests therein) in the future. Such property acquisitions are expected to
be the primary demand for additional capital in the future. The Company
anticipates that it may engage in equity or debt financing, through either
public or private offerings of its securities for cash, issuance of such
securities in exchange for assets, or a combination of the foregoing. Subject
to the constraints imposed by the Credit Facility and long-term, fixed rate
financing, the Company may enter into additional financing arrangements.
During 1996, the Company sold its properties in Marble Falls and Gonzales,
Texas for a total of $790,000 and received net proceeds of $759,000, resulting
in a gain of $73,000 for financial statement purposes. The Company reinvested
the proceeds to acquire two additional Properties and structured the
transactions to qualify as like-kind exchange transactions for federal income
tax purposes.
In January 1997, the company sold its property in Foley, Alabama, for $570,000
and received net sales proceeds of $551,000. In addition, in September 1997,
the Company sold four of its properties to Net Lease Institutional Realty,
L.P. (see "Investment in Partnership") at the Company's original cost of
$17,542,000. In addition, the Company sold an undeveloped portion of land of
one of its Properties for $1,313,000 and received net proceeds of
$1,265,000. The Company recognized a gain on the sale of these five
properties and the portion of the land parcel of $651,000 for financial
reporting purposes. The Company reinvested the proceeds to acquire additional
properties and structured the transactions to qualify as like-kind exchange
transactions 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.
Investment in Partnership.
In September 1997, the Company entered into a partnership arrangement, Net
Lease Institutional Realty, L.P. (the "Partnership"), with the Northern Trust
Company, as Trustee of the Retirement Plan for the Chicago Transit Authority
Employees ("CTA"). The Company is the sole general partner (the "General
Partner") with a 20 percent interest in the Partnership and CTA is the sole
limited partner (the "Limited Partner") with an 80 percent limited partnership
interest. The Partnership owns and leases nine properties to major retail
tenants under long-term commercial net leases. Net income and losses of the
Partnership are to be allocated to the partners in accordance with their
respective percentage interest in the Partnership. The Company accounts for
its 20 percent interest in the Partnership under the equity method of
accounting.
Dividends.
One of the Company's primary objectives, consistent with its policy of
retaining sufficient cash for reserves and working capital purposes, is to
distribute a
1997 ANNUAL REPORT - PAGE 9
substantial portion of its funds available from operations to its stockholders
in the form of dividends. During the years ended December 31, 1997, 1996
and 1995, the Company declared and paid dividends to its stockholders of
$28,381,000, $18,868,000, and $13,529,000, respectively, or $1.20, $1.18 and
$1.16 per share of common stock, respectively. For the years ended December
31, 1997, 1996 and 1995, 91.4%, 89.8% and 79.3%, respectively, of such
dividends were considered to be ordinary income and 8.6%, 10.2% and 20.7%,
respectively, were considered return of capital for federal income tax
purposes. In January 1998, the Company declared dividends to its
stockholders of $8,452,000 or $.30 per share of common stock, payable in
February 1998.
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996.
During the years ended December 31, 1997 and 1996, the Company owned and
leased 242 (including five properties which were sold and one property
which was contributed to the Partnership during 1997) and 197 (including two
properties which were sold during 1996) Properties, respectively, to operators
of major retail businesses. The Properties are leased on a long-term basis,
generally 15 to 20 years, with renewal options for an additional 10 to 20
years. As of December 31, 1997, the average remaining initial lease term of
the Properties was approximately 14 years. During the years ended December
31, 1997 and 1996, the Company earned $49,163,000 and $32,487,000,
respectively, in rental income from operating leases and earned income from
direct financing leases. The 51 percent increase in rental and earned income
during 1997, as compared to 1996, is primarily attributable to income earned
on the 47 Properties acquired and the three buildings upon which
construction was completed during 1997. In addition, rental and earned
income increased during 1997 as a result of the fact that the 40 Properties
acquired and nine buildings upon which construction was completed during 1996
were operational for a full fiscal year in 1997. Rental and earned income is
expected to increase in 1998 as the Company acquires additional properties and
due to the fact that the 47 Properties acquired and three buildings upon which
construction was completed in 1997 will contribute to the Company's income for
a full fiscal year.
During 1997, two of the Company's lessees, Eckerd Corporation and Barnes &
Noble Superstores, Inc., each accounted for more than ten percent of the
Company's total rental income (including the Company's share of rental income
from nine properties owned by the Company's unconsolidated partnership). As
of December 31, 1997, Eckerd Corporation and Barnes & Noble Superstores, Inc.
leased 43 Properties and 13 Properties, respectively (including four
properties and one property, respectively, under leases with the Company's
unconsolidated partnership). It is anticipated that, based on the minimum
rental payments required by the leases, Eckerd Corporation and Barnes & Noble
Superstores, Inc. will each continue to account for more than ten percent of
the Company's total rental income in 1998. Any failure of these lessees could
materially affect the Company's earnings.
The Company incurred $11,478,000 and $7,206,000, in interest expense for the
years ended December 31, 1997 and 1996, respectively. Interest expense
increased for the year ended December 31, 1997 as a result of higher average
borrowing levels. As a means to reduce its exposure to variable rate debt, the
Company entered into interest rate cap agreements as described above in
"Liquidity and Capital Resources."
During the years ended December 31, 1997 and 1996, the Company's operating
expenses, including depreciation and amortization, were $9,025,000 and
$6,397,000, respectively (18.0% and 19.2%, respectively, of gross operating
revenues). The increase in the dollar amount of operating expenses for the
year ended December 31, 1997, is primarily attributable to the increase in
depreciation as a result of the depreciation of the additional Properties
acquired during 1997 and a full year of depreciation on the Properties
acquired during 1996. The increase is also attributable to (i) an increase
in amortization expense as a result of the amortization of loan costs relating
to the Company's amendment to the Company's Credit Facility, (ii) an increase
in advisory fees as a result of increased funds from operations for the year
ended December 31, 1997, and (iii) an increase in state tax expense primarily
as a result of the acquisition of additional Properties and an increase in
capital resulting from the equity offerings during the year ended December 31,
1996 and 1997.
[Picture 7] Portrait and strip of two candid photographs of Yvonne Adams,
employee of the Company
[Sidebar 2]
PEOPLE
GOING THE EXTRA MILE WITH A SMILE
- ---------------------------------
When asked what contribution she brings to the Commercial Net Lease Realty
team, Yvonne Adams - without a moment's hesitation - says, "A smile. The more
you smile, the easier life is." As she says this, she is, of course, smiling.
A member of the team since 1994, Yvonne is an administrative assistant
responsible for distribution of site information and closing documents. She
is also responsible for training new administrative assistants. "I joined the
Commercial Net Lease Realty team because I wanted to be where the action is,"
she says. "I see plenty of action and also interaction. We've assembled a
great group of people who know how to serve. This is really a team effort."
Yvonne especially appreciates the affirmation she receives from her manager,
even for her daily tasks: "When you hear 'good job!', you strive harder to do
an even better job," she says. Also inspiring her efforts is the fact that
she is an employee/owner. Her plans are to grow and reinvest her dividends
over time. In the meantime, she'll grow her investment through simple hard
work: "I'm no longer working just for Commercial Net Lease Realty, but also
for myself. When I do a good job, it's great to know that all shareholders
will benefit."
1997 ANNUAL REPORT - PAGE 10
[Picture 8] Photograph of an exterior view of The Good Guys! located in
Stockton, California
[Picture 9] Photograph of an exterior view of Linens 'n Things located in
Freehold, New Jersey
In January 1997, the company sold its property in Foley, Alabama, for $570,000
and received net sales proceeds of $551,000. In addition, in September 1997,
the Company sold four of its properties to Net Lease Institutional Realty,
L.P. at the Company's original cost of $17,542,000. In addition, the Company
sold an undeveloped portion of land of one is its Properties for $1,313,000
and received net proceeds of $1,265,000. The Company recognized a gain on the
sale of these five properties and the portion of the land parcel of $651,000
for financial reporting purposes. The Company reinvested the proceeds to
acquire additional properties and structured the transactions to qualify as
like-kind exchange transactions for federal income tax purposes.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995.
During the years ended December 31, 1996 and 1995, the Company owned and
leased 197 (including two properties which were sold during 1996) and 157
Properties, respectively, to operators of major retail businesses. The
Properties are leased on a long-term basis, generally 15 to 20 years, with
renewal options for an additional 10 to 20 years. As of December 31, 1996,
the average remaining initial lease term of the Properties was approximately
14 years. During the years ended December 31, 1996 and 1995 the Company
earned $32,487,000 and $19,723,000, respectively, in rental income from
operating leases and earned income from direct financing leases. The 65
percent increase in rental and earned income during 1996, as compared to 1995,
is primarily attributable to income earned on the 40 Properties acquired and
the nine buildings upon which construction was completed during 1996. In
addition, rental and earned income increased during 1996 as a result of the
fact that the 29 Properties acquired and four buildings upon which
construction was completed during 1995 were operational for a full fiscal year
in 1996. Rental and earned income is expected to increase in 1997 as the
Company acquires additional properties and due to the fact that the 40
Properties acquired and nine buildings upon which construction was completed
in 1996 will contribute to the Company's income for a full fiscal year.
During 1996, one of the Company's lessees, Barnes & Noble Superstores, Inc.,
accounted for more than ten percent of the Company's total rental income.
As of December 31, 1996, Barnes & Noble Superstores, Inc. was the lessee under
leases relating to 11 Properties. It is anticipated that, based on the
minimum rental payments required by the lease, Barnes & Noble Superstores,
Inc. will continue to account for more than ten percent of the Company's total
rental income in 1997. Any failure of this lessee could materially affect the
Company's income.
The Company incurred $7,206,000 and $3,834,000 in interest expense for the
years ended December 31, 1996 and 1995, respectively. Interest expense
increased for the year ended December 31, 1996, as a result of higher average
borrowing levels. However, the increase in interest expense in 1996 was
partially offset by the Company's long-term, fixed rate financing and a
decrease in the average interest rates under the Company's credit facility.
As a means to reduce its exposure to variable rate debt, the Company entered
into interest rate cap agreements as described above in "Liquidity and Capital
Resources."
During the years ended December 31, 1996 and 1995, the Company's operating
expenses, including depreciation and amortization, were $6,397,000 and
$4,039,000, respectively (19.2% and 19.6%, respectively, of gross operating
revenues). The increase in the dollar amount of operating expenses for the
year ended December 31, 1996, is primarily attributable to the increase in
depreciation as a result of the depreciation of the additional Properties
acquired during 1996 and a full year of depreciation on the Properties
acquired during 1995. 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 long-term 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 year ended December 31, 1996.
In December 1996, the Company sold two of its Properties to an unrelated,
third party for $790,000, resulting in an aggregate gain of $73,000. No such
sales occurred during the year ended December 31, 1995.
Investment Considerations.
Three of the Company's tenants, HomePlace, Luria's and Levitz (the "Tenants"),
have each filed a voluntary petition for bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code. As a result, each of the Tenants has the right to
reject or affirm one or more of its leases with the Company. As of December
31, 1997, HomePlace, Luria's and Levitz leased five, three and one Properties,
respectively, which accounted for 4.5 percent of the Company's rental, earned
and contingent rental income for the year ended December 31, 1997.
The Company had made an election to be taxed as a real estate investment
trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code
of 1986, as amended, and related regulations. As a REIT, for federal income
tax purposes, the Company generally will not be subject to federal
income tax on income that it distributes to its stockholders. If the
Company fails to qualify as a REIT in any taxable year, it will be subject to
federal income tax on its taxable income at regular corporate rates and will
not be permitted to qualify for treatment as a REIT for federal income tax
purposes for four years following the year during which qualification is lost.
Such an event could materially affect the Company's income. However, the
Company believes that it was organized and operated in such a manner as to
qualify for treatment as a REIT for the years ended December 31, 1997, 1996
and 1995, and intends to continue to operate the Company so as to remain
qualified as a REIT for federal income tax purposes.
Inflation has had a minimal effect on income from operations. Management
expects that increases in retail sales volumes due to inflation and real
sales growth should result in an increase in rental income over time.
Continued inflation also may cause capital appreciation of the Company's
Properties; however, inflation and changing prices also may have an adverse
impact on the operating margins of retail businesses and on potential capital
appreciation of the Properties.
Management of the Company currently knows of no trends that will have a
material adverse effect on liquidity, capital resources or results of
operations.
1997 ANNUAL REPORT - PAGE 11
The Company is in the process of assessing and addressing the impact of the
Year 2000 on its computer software packages. The Company's hardware and
software are believed to be Year 2000 compliant. Accordingly, the Company
does not expect this matter to materially impact how it conducts business nor
its future results of operations or financial position. However, the Company
cannot be assured that all of its tenants and vendors have considered the
impact of the Year 2000.
Investments in real property create a potential for environmental liability on
the part of the owner of such property from the presence or discharge of
hazardous substances on the property. It is the Company's policy, as a part
of its acquisition due diligence process, to obtain a Phase I environmental
site assessment for each property and where warranted, a Phase II
environmental site assessment. Phase I assessments involve site
reconnaissance and review of regulatory files identifying potential areas of
concern, whereas Phase II assessments involve some degree of soil and/or
groundwater testing. The Company may acquire a property whose environmental
site assessment indicates that a problem or potential problem exists, subject
to a determination of the level of risk and potential cost of remediation. In
such cases, the Company requires the seller and/or tenant to (i) remediate
the problem prior to the Company's acquiring the property, (ii) indemnify the
Company for environmental liabilities or (iii) agree to other arrangements
deemed appropriate by the Company to address environmental conditions at the
property. The Company has 14 properties currently under some level of
environmental remediation. The seller or the tenant is generally
contractually responsible for the cost of the environmental remediation for
each of these properties.
This information contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include the following: changes in general economic
conditions, changes in real estate market conditions, continued availability
of proceeds from the Company's debt or equity capital, the ability of the
Company to locate suitable tenants for its Properties and the ability of
tenants to make payments under their respective leases.
DIVERSIFICATION OF ASSETS
[Pie Chart 1]
LINE OF TRADE DIVERSIFICATION
- -----------------------------
Percentage of
Line of Trade Pie Chart
- ------------- -------------
Apparel 0.9%
Auto Supply 3.3%
Computer/Computer Software 2.9%
Home Furnishings 7.0%
Sporting Goods 7.0%
Restaurant 10.0%
Furniture 6.1%
Office Supply 6.5%
Grocers 12.1%
Consumer Electronics 11.4%
Drug Stores 11.6%
Books 15.8%
Catalog and Mail Order 2.0%
Building Materials and Hardware 1.3%
Shoes 0.6%
Music 0.7%
Miscellaneous Retail 0.8%
--------
100.0%
========
TENANT DIVERSIFICATION
----------------------
Academy Babies "R" Us Barnes & Noble
Best Buy Borders Books & Music Blockbuster Music
Burger King CompUSA Computer City
Denny's Dick's Sporting Goods Eckerd
Food 4 Less Food Lion Golden Coral
The Good Guys! Hardees Hi-Lo Automotive
HomePlace IHOP Kash N' Karry
Levitz Linens 'n Things Luria's
Marshalls OfficeMax Office Depot
Oshman's Pier 1 imports Robb & Stucky
Scotty's Sears Homelife The Sports Authority
SuperValu Waccamaw
[Map 1]
GEOGRAPHICAL DIVERSIFICATION
- ----------------------------
State # of Properties
- ------- ---------------
Alabama 5
Alaska 1
Arizona 2
California 11
Colorado 1
Delaware 1
Florida 39
Georgia 12
Illinois 2
Kansas 2
Kentucky 1
Louisiana 12
Maine 1
Maryland 4
Michigan 2
Minnesota 2
Mississippi 5
Missouri 2
New Hampshire 2
New Jersey 7
New Mexico 1
Nevada 1
North Carolina 8
North Dakota 1
Ohio 9
Oklahoma 7
Oregon 1
Pennsylvania 2
Rhode Island 1
South Carolina 7
Tennessee 7
Texas 65
Virginia 7
Washington 2
West Virginia 2
Wisconsin 1
1997 ANNUAL REPORT - PAGE 12
FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Commercial Net Lease Realty, Inc.:
We have audited the accompanying consolidated balance sheets of Commercial Net
Lease Realty, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Commercial
Net Lease Realty, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Orlando, Florida
January 16, 1998
[Picture 10] Photograph of an exterior view of the Eckerd located in
Snellville, Georgia
[Picture 11] Photograph of an exterior view of the Sears Homelife located in
Clearwater, Florida
1997 ANNUAL REPORT - PAGE 13
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
December 31,
Assets 1997 1996
- ------ --------- ---------
Real estate leased to others:
Accounted for using the operating
method, net of accumulated
depreciation $400,977 $269,031
Accounted for using the direct
financing method 118,747 92,413
Investment in partnership 3,925 -
Cash and cash equivalents 2,160 1,410
Receivables 527 812
Prepaid expenses 287 335
Loan costs, net of accumulated
amortization of $1,868 and $1,055 1,762 2,185
Accrued rental income 7,063 4,421
Other assets 1,566 346
-------- --------
$537,014 $370,953
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Line of credit $115,100 $ 58,700
Mortgages payable 56,736 58,256
Accrued interest payable 765 390
Accounts payable and accrued expenses 1,392 254
Rents paid in advance 877 779
-------- --------
Total liabilities 174,870 118,379
-------- --------
Commitments and contingencies
(Note 13)
Stockholders' equity:
Common stock, $.01 par value.
Authorized 90,000,000 and
50,000,000 shares, respect-
ively; issued and outstanding
27,953,627 and 20,763,672 shares,
respectively 280 208
Excess stock, $0.01 par value.
Authorized 90,000,000 and
50,000,000 shares, respec-
tively; none issued and out-
standing - -
Capital in excess of par value 361,793 254,299
Retained earnings (deficit) 71 (1,933)
-------- --------
Total stockholders' equity 362,144 252,574
-------- --------
$537,014 $370,953
======== ========
See accompanying notes to consolidated financial statements.
1997 ANNUAL REPORT - PAGE 14
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands, except per share data)
Year Ended December 31,
1997 1996 1995
------------ ------------ ------------
Revenues:
Rental income from
operating leases $ 37,384 $ 24,418 $ 14,455
Earned income from
direct financing
leases 11,779 8,069 5,268
Contingent rental
income 759 722 745
Interest and other 213 160 112
----------- ----------- -----------
50,135 33,369 20,580
----------- ----------- -----------
Expenses:
General operating and
administrative 1,216 1,183 722
Advisory fees to related
party 2,110 1,466 1,001
Interest 11,478 7,206 3,834
State taxes 397 195 258
Depreciation and
amortization 5,302 3,553 2,058
----------- ----------- -----------
20,503 13,603 7,873
----------- ----------- -----------
Earnings before equity
in earnings of unconsol-
idated partnership and
gain on sale of real estate 29,632 19,766 12,707
Equity in earnings of
unconsolidated partner-
ship 102 - -
Gain on sale of real estate 651 73 -
----------- ----------- -----------
Net earnings $ 30,385 $ 19,839 $ 12,707
=========== =========== ===========
Net earnings per share of
common stock:
Basic $ 1.26 $ 1.18 $ 1.09
=========== =========== ===========
Diluted $ 1.25 $ 1.18 $ 1.09
=========== =========== ===========
Weighted average number
of shares outstanding:
Basic 24,070,697 16,798,918 11,663,672
=========== =========== ===========
Diluted 24,220,792 16,838,917 11,671,197
=========== =========== ===========
See accompanying notes to consolidated financial statements.
1997 ANNUAL REPORT - PAGE 15
<TABLE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
(dollars in thousands, except per share data)
<CAPTION>
Capital in Retained
Number Common excess of arnings
of shares stock par value deficit) Total
---------- --------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 11,663,672 $117 $138,629 $(2,082) $136,664
Net earnings - - - 12,707 12,707
Dividends declared
and paid ($1.16
per share of
common stock) - - - (13,529) (13,529)
---------- ---- -------- -------- --------
Balance at
December 31, 1995 11,663,672 117 138,629 (2,904) 135,842
Net earnings - - - 19,839 19,839
Dividends declared
and paid ($1.18
per share of
common stock) - - - (18,868) (18,868)
Issuance of common
stock 9,100,000 91 123,284 - 123,375
Stock issuance costs - - (7,614) - (7,614)
---------- ----- ------- ------- --------
Balance at
December 31, 1996 20,763,672 208 254,299 (1,933) 252,574
Net earnings - - - 30,385 30,385
Dividends declared
and paid ($1.20
per share of
common stock) - - - (28,381) (28,381)
Issuance of common
stock 7,189,955 72 111,448 - 111,520
Stock issuance costs - - (3,954) - (3,954)
---------- ---- -------- ------- --------
Balance at
December 31, 1997 27,953,627 $280 $361,793 $ 71 $362,144
========== ==== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
1997 ANNUAL REPORT - PAGE 16
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year Ended December 31,
1997 1996 1995
-------- -------- ---------
Cash flows from operating
activities:
Net earnings $ 30,385 $ 19,839 $ 12,707
Adjustments to reconcile net
earnings to net cash
provided by operating
activities:
Depreciation 4,477 2,804 1,736
Amortization 825 748 322
Gain on sale of real estate (651) (73) -
Equity in earnings of
unconsolidated partnership (102) - -
Decrease in net investment
in direct financing
leases 1,166 751 462
Increase in accrued rental
income (2,729) (2,227) (1,233)
Decrease (increase) in
receivables 146 (279) (50)
Decrease (increase) in
prepaid expenses 48 (180) 207
Decrease (increase) in
other assets (53) 10 (7)
Increase in accrued
interest payable 375 262 93
Increase (decrease) in
accounts payable and
accrued expenses 25 48 (34)
Increase (decrease) in
real estate taxes
payable - (83) 49
Increase (decrease) in
rents paid in advance 98 596 (112)
-------- -------- --------
Net cash provided by
operating activities 34,010 22,216 14,140
-------- -------- --------
Cash flows from investing
activities:
Proceeds from sale of real
estate 19,402 759 -
Additions to land and
buildings on operating
leases (154,688) (108,597) (51,402)
Investment in direct financing
leases (29,439) (36,335) (14,710)
Contribution to unconsolidated
partnership (855) - -
Increase in other assets (660) (185) (1,451)
Other (762) 111 45
-------- -------- --------
Net cash used in
investing activities (167,002) (144,247) (67,518)
-------- -------- --------
Cash flows from financing
activities:
Proceeds from line of credit 152,600 128,700 68,800
Repayment of line of credit (96,200) (139,450) (14,150)
Proceeds from mortgages payable - 39,450 13,150
Repayment of mortgages payable (1,520) (1,208) -
Payment of loan costs (417) (1,389) (899)
Proceeds from issuance of
common stock 111,520 123,375 -
Payment of stock issuance
costs (3,875) (7,467) (4)
Payment of dividends (28,381) (18,868) (13,529)
Other 15 (3) (759)
-------- -------- --------
Net cash provided by
financing activities 133,742 123,140 52,609
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 750 1,109 (769)
Cash and cash equivalents at
beginning of year 1,410 301 1,070
-------- -------- --------
Cash and cash equivalents at
end of year $ 2,160 $ 1,410 $ 301
======== ======== ========
Supplemental disclosure of
non-cash investing and financing
activities:
Contribution of land and
building to unconsolidated
partnership $ 2,930 $ - $ -
======== ======== ========
Mortgages assumed in
acquisition of three
properties $ - $ 6,864 $ -
======== ======== ========
See accompanying notes to consolidated financial statements.
1997 ANNUAL REPORT - PAGE 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Organization and Summary of Significant Accounting Policies:
Organization and Nature of Business - Commercial Net Lease
Realty, Inc., a Maryland corporation, is a real estate investment
trust formed in 1984. Commercial Net Lease Realty, Inc. owns and
manages high-quality, freestanding properties leased to major
retail businesses under long-term commercial net leases.
Principles of Consolidation - The consolidated financial
statements include the accounts of Commercial Net Lease Realty,
Inc. and its four wholly-owned subsidiaries (hereinafter referred
to as the "Company"). Each of the subsidiaries is a qualified
real estate investment trust subsidiary as defined in the
Internal Revenue Code Section 856(i)(2). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Real Estate and Lease Accounting - The Company records the
acquisition of land and buildings at cost, including acquisition
and closing costs. Land and buildings are leased to others on a
net lease basis, whereby the tenant is generally responsible for
all operating expenses relating to the property, including
property taxes, insurance, maintenance and repairs.
The leases are accounted for using either the direct financing or
the operating methods. Such methods are described below:
Direct financing method - Leases accounted for using
the direct financing method are recorded at their net
investment (which at the time of acquisition generally
represents the cost of the property) (Note 3).
Unearned income is deferred and amortized to income
over the lease terms so as to produce a constant
periodic rate of return on the Company's net investment
in the leases.
Operating method - Land and building leases accounted
for using the operating method are recorded at cost,
revenue is recognized as rentals are earned and
expenses (including depreciation) are charged to
operations as incurred. Buildings are depreciated on
the straight-line method over their estimated useful
lives (generally 35 to 40 years). When scheduled
rentals vary during the lease term, income is
recognized on a straight- line basis so as to
produce a constant periodic rent over the term of the
lease. Accrued rental income is the aggregate
difference between the scheduled rents which vary
during the lease term and the income recognized on a
straight-line basis.
When properties are sold, the related cost and accumulated
depreciation for operating leases and the net investment for
direct financing leases, plus any accrued rental income, are
removed from the accounts and gains and losses from the sales are
reflected in income.
Management reviews its properties for impairment whenever events
or changes in circumstances indicate that the carrying amount of
the assets, including accrued rental income, may not be
recoverable through operations. Management determines whether an
impairment in value occurred by comparing the estimated future
cash flows (undiscounted and without interest charges), including
the residual value of the property, with the carrying cost of the
individual property. If an impairment is indicated, a loss will
be recorded for the amount by which the carrying value of the
asset exceeds its fair value.
Investment in Partnership - In September 1997, the Company
contributed cash, land and building to Net Lease Institutional
Realty, L.P. (the "Partnership") for a 20 percent interest in the
Partnership. The Company is the sole general partner of the
Partnership and accounts for its 20 percent interest in the
Partnership under the equity method of accounting.
Cash and Cash Equivalents - The Company considers all highly
liquid investments with a maturity of three months or less when
purchased to be cash equivalents. Cash and cash equivalents
consist of cash and money market accounts. Cash equivalents are
stated at cost plus accrued interest, which approximates market
value.
Loan Costs - Loan costs have been deferred and are being
amortized over the terms of the loan commitments using the
straight-line method. The premium paid for the interest rate cap
agreement of $257,000 has been recorded as a prepaid
[Picture 12] Strip of three candid photographs: Jim Seneff,
employee of the Company, Dawn Peterson, employee
of the Company; and Kolleen Kubik and Dennis
Tracy, employees of the Company
1997 ANNUAL REPORT - PAGE 18
[Picture 13] Strip of two photographs: an exterior view of the
Barnes and Noble located in Freehold, New Jersey
and an exterior view of the Sports Authority
located in Sarasota, Florida
expense and is being amortized as interest expense over the
term of the agreement using a method which approximates the
effective interest method.
Line of Credit and Mortgages Payable - Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments," requires disclosure of the year end fair
value of significant financial instruments, including long-term
debt. The interest rate on the Company's line of credit is
variable; therefore, the carrying value of the line of credit
approximates fair value. The Company believes that the carrying
value of its mortgages payable at December 31, 1997, approximates
fair value, based upon current market prices of similar issues.
Income Taxes - The Company has made an election to be taxed as a
real estate investment trust under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended, and related
regulations. The Company generally will not be subject to
federal income taxes on amounts distributed to stockholders,
providing it distributes at least 95 percent of its real estate
investment trust taxable income and meets certain other
requirements for qualifying as a real estate investment trust.
For each of the years in the three-year period ended December 31,
1997, the Company believes it has qualified as a real estate
investment trust; accordingly, no provisions have been made for
federal income taxes in the accompanying consolidated financial
statements. Not withstanding the Company's qualification for
taxation as a real estate investment trust, the Company is
subject to certain state taxes on its income and property.
Earnings Per Share - In accordance with Statement of Financial
Accounting Standard No. 128, "Earnings Per Share," basic earnings
per share are calculated based upon the weighted average number
of common shares outstanding during each year and diluted
earnings per share are calculated based upon weighted average
number of common shares outstanding and potential dilutive common
stock (See Note 9).
Use of Estimates - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
Reclassification - Certain items in prior years' financial
statements have been reclassified to conform with the 1997
presentation.
New Accounting Standards - In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." The
Statement, which is effective for fiscal years beginning after
December 15, 1997, requires the reporting of net earnings and all
other changes to equity during the period, except those resulting
from investments by owners and distributions to owners, in a
separate statement that begins with net earnings or in the
consolidated statement of operations below net earnings.
Currently, the Company's only component of comprehensive income
is its net earnings. The Company does not believe that adoption
of this Statement will have a material effect on the Company's
financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued
Statement of Accounting Standard No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is
effective for periods beginning after December 15, 1997, requires
reporting of financial and descriptive information about
reportable operating segments. Currently, the Company is not
structured in reportable operating segments, and therefore,
disclosures to this statement are not applicable.
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 December 31, 1997, 149 of the
leases have been classified as operating leases and 87 leases
have been classified as direct financing leases. For the leases
classified as direct financing leases, the building portions of
the property leases are accounted for as direct financing
leases while the land portions of 57 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
1997 ANNUAL REPORT - PAGE 19
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 December 31
(dollars in thousands):
1997 1996
-------- --------
Land $199,992 $138,520
Buildings and
improvements 209,272 138,589
-------- --------
409,264 277,109
Less accumulated
depreciation (12,297) (8,078)
-------- --------
396,967 269,031
Construction in
progress 4,010 -
-------- --------
$400,977 $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 years ended December 31,
1997, 1996 and 1995, the Company recognized $2,786,000,
$2,285,000 and $1,233,000, respectively, of such income. At
December 31, 1997 and 1996, the balance of accrued rental income
was $7,063,000, net of allowance of $310,000, and $4,421,000,
respectively.
The following is a schedule of future minimum lease payments to
be received on noncancellable operating leases at December 31,
1997 (dollars in thousands):
1998 $ 40,244
1999 40,494
2000 40,919
2001 41,593
2002 41,305
Thereafter 457,294
--------
$661,849
========
Since lease renewal periods are exercisable at the option of the
tenant, the above table only presents future minimum lease
payments due during the initial lease terms. In addition, this
table does not include any amounts for future contingent rentals
which may be received on the leases based on a percentage of the
tenant's gross sales.
Accounted for Using the Direct Financing Method - The following
lists the components of net investment in direct financing leases
at December 31 (dollars in thousands):
1997 1996
--------- ---------
Minimum lease payments
to be received $ 258,715 $207,838
Estimated residual
values 35,981 28,309
Less unearned income (175,949) (143,734)
--------- ---------
Net investment in
direct financing
leases $ 118,747 $ 92,413
========= =========
1997 ANNUAL REPORT - PAGE 20
The following is a schedule of future minimum lease payments to
be received on direct financing leases at December 31, 1997
(dollars in thousands):
1998 $ 14,385
1999 14,463
2000 14,581
2001 14,618
2002 14,690
Thereafter 185,978
--------
$258,715
========
The above table does not include future minimum lease payments
for renewal periods or for contingent rental payments that may
become due in future periods (See Real Estate Leased to Others -
Accounted for Using the Operating Method).
4. Investment in Partnership:
In September 1997, the Company entered into a Partnership
arrangement, Net Lease Institutional Realty, L.P. (the
"Partnership"), with the Northern Trust Company, as Trustee of
the Retirement Plan for the Chicago Transit Authority Employees
("CTA"). The Company is the sole general partner with a 20
percent interest in the Partnership and CTA is the sole limited
partner with an 80 percent interest in the Partnership.
The Partnership owns and leases nine properties to major retail
tenants under long-term, commercial net leases. The following
presents the Partnership's condensed financial information at
December 31, 1997 and for the period September 19, 1997 (date of
inception) through December 31, 1997 (dollars in thousands).
Real estate leased to others:
Accounted for using the operating
method, net of accumulated
depreciation $25,381
Accounted for using the direct
financing method 5,155
Other assets 793
Note payable 11,911
Other liabilities 154
Partners' capital 19,264
Revenues 933
Net income 514
For the year ended December 31, 1997, the Company recognized
income of $102,000 from the Partnership.
5. Other Assets:
Other assets consisted of the following at December 31 (dollars
in thousands):
1997 1996
---- -----
Deposits and miscellaneous
acquisition costs $ 596 $ 237
Self administration costs 764 -
Deferred offering costs 97 61
Other 109 48
$1,566 $ 346
1997 ANNUAL REPORT - PAGE 21
6. Line of Credit:
In September 1996, the Company entered into an amended and
restated loan agreement for a $150,000,000 revolving credit
facility. The credit facility amended the Company's $100,000,000
credit facility by (i) increasing the borrowing capacity from
$100,000,000 to $150,000,000, (ii) extending the expiration date
to June 30, 1998, and (iii) lowering the interest rate from 170
basis points above LIBOR to 160 basis points above LIBOR or the
lender's prime rate, whichever the Company selects. In August
1997, the Company entered into an amended and restated loan
agreement for a $200,000,000 revolving credit facility (the
"Credit Facility") which amended the Company's $150,000,000
credit facility by (i) increasing the borrowing capacity from
$150,000,000 to $200,000,000, (ii) extending the expiration date
to June 30, 1999, and (iii) 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. In connection
with the Credit Facility, the Company is required to pay a
commitment fee of 20 basis points per annum on the unused
commitment. The Credit Facility is collateralized by an
assignment of rents and leases of certain of the Company's
properties. The principal balance is due in full upon
termination of the Credit Facility on June 30, 1999, which can be
extended for two additional 12 month periods at the option of the
Company, and interest is payable quarterly. As of December 31,
1997 and 1996, the outstanding principal balance was $115,100,000
and, $58,700,000 respectively, plus accrued interest of $552,000
and $192,000, respectively. The terms of the Credit Facility
include financial covenants which provide for the maintenance of
certain financial ratios. The Company was in compliance with
such covenants as of December 31, 1997.
During the three years ended December 31, 1997, the Company was a
party to three interest rate cap agreements as a means to reduce
its exposure to rising interest rates on the Company's variable
rate Credit Facility. As of December 31, 1997, two of the
interest rate cap agreements had expired and one remained
effective, providing for a fixed LIBOR rate of 6.9% per annum on
a notional amount of $30 million. This agreement is effective
through December 1999.
The Company capitalizes interest as a part of the cost of land
and buildings constructed for its own use. For the year ended
December 31, 1997, interest cost incurred was $11,150,000, of
which $133,000 was capitalized, and $11,017,000 which was charged
to operations. For the years ended December 31, 1996 and 1995,
interest cost incurred was $6,857,000 and $3,545,000,
respectively, all of which was charged to operations.
7. Mortgages Payable:
On December 14, 1995, the Company entered into a long-term, fixed
rate mortgage and security agreement for $13,150,000. The loan
provides for a four-year mortgage with interest payable monthly
and principal payable at maturity on December 15, 1999, and bears
interest at a rate of 6.75% per annum. The loan is secured by a
first lien on and assignment of rents and leases of certain of
the Company's properties. As of December 31, 1997 the aggregate
carrying value of these properties totalled $16,805,000. The
outstanding principal balance as of December 31, 1997 and 1996,
was $13,150,000, plus accrued interest of $42,000 and $37,000 and
respectively. In January 1996, the Company entered into a long-
term, fixed rate mortgage and security agreement for $39,450,000.
The loan provides for a ten-year loan with principal and interest
payable monthly, based on a 17-year amortization, with the
balance due in February 2006 and bears interest at a rate of
7.435% per annum. The loan is secured by a first lien on and
assignments of rents and leases of certain of the Company's
properties. As of December 31, 1997, the aggregate carrying
value of these properties totalled $73,772,000. The outstanding
principal balance as of December 31, 1997 and 1996, was
$37,066,000 and $38,352,000 respectively, plus accrued interest
of $130,000 and $119,000, respectively.
In June 1996, the Company acquired three properties each subject
to a mortgage totalling $6,864,000 (collectively, the
"Mortgages"). The Mortgages bear interest at a weighted average
rate of 8.6% and have a weighted average maturity of 7.3 years,
with principal and interest payable monthly. As of December 31,
1997 and 1996, the outstanding balances for the Mortgages
totalled $6,520,000 and $6,754,000, plus accrued interest of
$41,000 and $42,000, respectively. As of December 31, 1997, the
aggregate carrying value of these three properties totalled
$8,290,000.
The following is a schedule of the annual maturities of the
Company's outstanding term indebtedness for each of the next five
years (dollars in thousands):
1998 $ 1,673
1999 14,984
2000 2,005
2001 2,170
2002 2,342
-------
$23,174
=======
1997 ANNUAL REPORT - PAGE 22
8. Dividends:
The following presents the characterization for tax purposes of
dividends paid to stockholders for the years ended December 31:
1997 1996 1995
----- ----- -----
Ordinary income $1.10 $1.06 $ .92
Capital gain - - -
Return of capital .10 .12 .24
----- ----- -----
$1.20 $1.18 $1.16
===== ===== =====
On January 16, 1998, the Company declared dividends of $8,452,000
or 30 cents per share of common stock, payable on February 13,
1998, to stockholders of record on January 30, 1998.
9. Earnings Per Share:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings
Per Share." The Statement, which provides for a revised
computation of earnings per share was adopted by the Company for
the year ended December 31, 1997. Pursuant to the Statement, all
comparative earnings per share amounts have been restated.
The following represents the calculation of earnings per share
and the weighted average number of shares of dilutive potential
common stock for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net earnings-basic
and diluted $30,385,000 $19,839,000 $12,707,000
=========== =========== ===========
Weighted average
number of shares
outstanding used
in basic EPS 24,070,697 16,798,918 11,663,672
Effect of dilutive
securities:
Stock options 150,095 39,999 7,525
----------- ----------- -----------
Weighted average
number of shares
and dilutive
potential shares
used in diluted EPS 24,220,792 16,838,917 11,671,197
=========== =========== ===========
</TABLE>
For the year ended December 31, 1995, options on 343,100 shares
of common stock were not included in computing diluted earnings
per share because their effects were antidilutive.
1997 ANNUAL REPORT - PAGE 23
10. Stock Option Plan:
The Company's stock option plan (the "Plan") provides
compensation and incentive to persons ("Key Employees of the
Advisor" and "Outside Directors of the Company") whose services
are considered essential to the Company's continued growth and
success. As of December 31, 1995, the Plan had 600,000 shares of
common stock reserved for issuance. Pursuant to the Plan, the
shares of common stock reserved for issuance automatically
increased to 1,200,000 and 2,000,000 shares in connection with
the equity offerings during January 1996 and September 1997,
respectively. The following summarizes transactions in the Plan
for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- --------------------- ----------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
January 1 956,600 13.21 578,100 $13.36 568,100 $13.38
Granted 210,000 14.92 390,000 13.01 10,000 12.50
Exercised (11,500) 13.52 - - - -
Surrendered (10,000) 13.94 (11,500) 13.54 - -
-------- -------- --------
Outstanding,
December 31 1,145,100 13.52 956,600 13.21 578,100 13.36
========= ======== ========
Exercisable,
December 31 681,767 13.29 403,533 13.29 232,000 13.11
========= ======== ========
Available for
grant,
December 31 821,900 231,900 21,900
========= ======== ========
</TABLE>
The weighted-average remaining contractual life of the 1,145,100
options outstanding at December 31, 1997 was 7.5 years, with
exercise prices ranging from $11.25 to $15.875. One third of the
grant to each individual becomes exercisable at the end of each
of the first three years of service following the date of the
grant and the options maximum term is ten years.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
Interpretations in accounting for the Plan. Accordingly, no
compensation expense has been recorded with respect to the
options in the accompanying consolidated financial statements.
Had compensation cost for the Plan been determined based upon the
fair value at the grant dates for options granted after December
31, 1994 under the Plan consistent with the method of Financial
Accounting Standards Board Statement No. 123, "Accounting
for Stock-Based Compensation," the Company's net earnings and
earnings per share would have been reduced to the pro forma
amounts indicated below for the years ended December 31 (dollars
in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net earnings as reported $ 30,385 $ 19,839 $ 12,707
=========== =========== ===========
Pro forma net earnings $ 30,220 $ 19,681 $ 12,596
=========== =========== ===========
Earnings per share as
reported:
Basic $ 1.26 $ 1.18 $ 1.09
=========== =========== ===========
Diluted $ 1.25 $ 1.18 $ 1.09
=========== =========== ===========
Pro forma earnings
per share:
Basic $ 1.26 $ 1.17 $ 1.08
=========== =========== ===========
Diluted $ 1.25 $ 1.17 $ 1.08
=========== =========== ===========
</TABLE>
1997 ANNUAL REPORT - PAGE 24
[Picture 14] Photograph of an exterior view of the Borders Books
and Music located in Ft. Lauderdale, Florida
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following assumptions used for grants in 1997, 1996 and 1995: (i)
risk free rates of 6.85 and 7.04 percent for 1997 grants, 6.17
and 6.95 percent for 1996 grants and 7.2% for 1995 grants, (ii)
expected volatility of 13.6% for 1997 and 12.9% for 1996 and 1995
(iii) dividend yields of 7.7, 8.6 and 8.8 percent, respectively,
and (iv) expected lives of ten years for grants in 1997, 1996 and
1995.
11. Related Party Transactions:
Certain directors and officers of the Company hold similar
positions with CNL Realty Advisors, Inc. (the "Advisor"), the
Company's advisor.
During the year ended December 31, 1996, the Company acquired one
property for a purchase price of $3,400,000 from a partnership in
which an affiliate of the Advisor is a partner. The purchase
price paid by the Company for this property represented the costs
incurred by the affiliate to acquire the property, including
closing costs. In connection with the acquisition of this
property, plus 22 properties and four buildings which were
developed by the tenant on land parcels owned by the Company in
1995, 26 properties and nine buildings which were developed by
the tenant on land parcels owned by the Company in 1996 and 27
properties and three buildings which were developed by tenant on
land parcels owned by the Company in 1997, from unrelated,
third parties, the Company paid the Advisor $937,000, $2,278,000
and $2,552,000, respectively, in acquisition fees and
expense reimbursement fees (representing 1.5% and 0.5%,
respectively, of the cost of the properties).
In addition, during the years ended December 31, 1997, 1996, and
1995, the Company acquired 15 properties for purchase prices
totalling $39,323,000, 13 properties for purchase prices
totalling $34,313,000, and seven properties for purchase prices
totalling $17,969,000 respectively, from affiliates of the
Advisor who had developed the properties. The purchase prices
paid by the Company for these properties equalled the affiliates'
costs including development costs. The affiliates' costs
consisted of the land purchase prices, construction costs,
various soft costs including legal costs, survey fees and
architect fees, and developers fees aggregating $2,180,000 in
1997, $1,453,000 in 1996 and $1,106,000 in 1995 paid to an
affiliate of the Advisor. In addition, during 1997, the Company
purchased five land parcels from unrelated, third parties on
which buildings are being developed by an affiliate of the
Advisor. The Company paid developers fees totalling $376,000 to
an affiliate of the Advisor who is developing the five
properties. No acquisition fees or expense reimbursement fees
were paid to the Advisor in connection with the acquisition of
these 40 properties.
During 1996, the Company sold its properties in Marble Falls and
Gonzales, Texas for a total of $790,000 and received net proceeds
of $759,000, resulting in a gain of $73,000 for financial
reporting purposes. In connection with the sale of these
properties, the Company paid the Advisor $16,000 in disposition
fees.
In January 1997, the Company sold its property in Foley, Alabama,
for $570,000 and received net proceeds of $551,000, resulting in
a gain of $271,000 for financial reporting purposes. In
connection with the sale of this property, the Company paid the
Advisor $11,400 in disposition fees.
In 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 for financial reporting purposes on the
sale of these properties of $101,000 after elimination of the
Company's 20 percent interest in the gain on the sale.
The Company and the Advisor have entered into an advisory
agreement (the "Advisory Agreement"), which provides for the
Advisor to perform services in connection with the day to day
operations of the Company. In connection therewith, the
Advisor receives an annual fee, payable monthly, equal to (i)
seven percent of funds from operations, as defined in the
Advisory Agreement, up to $10,000,000, (ii) six percent of funds
from operations in excess of $10,000,000 but less than
$20,000,000 and (iii) five percent of funds from operations in
excess of $20,000,000. For purposes of the Advisory Agreement,
funds from operations generally includes the Company's net
earnings excluding the advisory fee, depreciation and
amortization expenses, extraordinary gains and losses and non-
cash lease accounting adjustments. Under the Advisory
Agreement, the Company incurred $2,110,000, $1,466,000 and
$1,001,000 in advisory fees for the years ended December 31,
1997, 1996, and 1995, respectively (See Note 14).
1997 ANNUAL REPORT- PAGE 25
12. Major Tenants:
The following schedule presents rental and earned income,
including contingent rent, from operators or affiliated groups of
operators representing more than ten percent of the Company's
total rental and earned income for the years ended December 31
(dollars in thousands):
1997 1996 1995
------- ------- -------
Barnes & Noble
Superstores,
Inc. $5,951 $5,204 $2,371
Denny's, Inc.
and Flagstar
Enterprises,
Inc. (a) (a) 2,075
Eckerd Corporation 5,149 (a) (a)
(a) Rental and earned income from the operator or
affiliated group of operators did not represent
more than ten percent of the Company's total
rental and earned income for the respective year.
13. Commitments and Contingencies:
As of December 31, 1997, the Company had entered into agreements
to purchase three additional properties for an estimated
aggregate amount of $7,847,000. In connection with the
acquisition of two of these properties, the Company was
contingently liable for $350,000 related to bank letters of
credit which guarantee the Company's obligation under the
purchase agreements to acquire these properties.
As of December 31, 1997, the Company owned and leased one land
parcel to a tenant which was obligated to develop a building on
the respective land parcel. The Company has agreed to acquire
the completed building for an amount of up to $798,000, at which
time rental income will increase for the property. In addition,
the Company owns 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 approximately
$10,000,000, of which $3,802,000 of costs had been incurred at
December 31, 1997. Pursuant to the lease agreements, rental
income is to commence on the properties upon completion of
construction of the buildings.
14. Subsequent Events:
On December 18, 1997, the Company's stockholders voted to approve
an agreement with CNL Realty Advisors, Inc. and the stockholders
of CNL Realty Advisors, Inc. 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 an internally managed
real estate investment trust (REIT) effective January 1, 1998.
Ten percent of the Share Consideration (220,000 shares) was paid
on 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. 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 personnel employed by the Advisor became
employees of the Company, and any obligation to pay fees under
the Advisory Agreement was terminated.
In February 1998, the Company filed a prospectus supplement to
its $300,000,000 shelf registration and issued 688,172 shares of
common stock and received gross proceeds of $12,000,000.
Proceeds from the offering were used to pay down the outstanding
indebtedness under the Company's Credit Facility.
1997 ANNUAL REPORT - PAGE 26
CONSOLIDATED QUARTERLY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter Year
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Rent and other revenue $11,287 $12,067 $13,416 $14,016 $50,786
Depreciation and
amortization expense 1,168 1,325 1,374 1,435 5,302
Interest expense 2,363 2,731 3,509 2,875 11,478
Other expenses 1,011 803 922 987 3,723
Net earnings 6,745 7,208 7,622 8,810 30,385
Net earnings per share:
Basic 0.31 0.31 0.32 0.32 1.26
Diluted (1) 0.31 0.31 0.32 0.32 1.25
1996
- ------------
Rent and other revenue $6,924 $7,631 $9,221 $9,666 $33,442
Depreciation and
amortization expense 748 806 944 1,055 3,553
Interest expense 1,460 1,602 2,473 1,671 7,206
Other expense 727 689 690 738 2,844
Net earnings 3,989 4,534 5,114 6,202 19,839
Net earnings per share:
Basic 0.28 0.29 0.31 0.30 1.18
Diluted (1) 0.28 0.32 0.31 0.30 1.18
</TABLE>
(1) Calculated independently for each period, and consequently, the sum of
the quarters may differ from the annual amount.
[Picture 15] Photograph of an exterior view of the Academy
located in Houston, Texas
[Picture 16] Candid photograph of a meeting between Alex
Dmyterko, Jim Seneff, and Gary Ralston, employees
of the Company
[Picture 17] Candid photograph of Haingo Rasolofonjoa, employee
of the Company
[Picture 18] Candid photograph of Joe Ciardiello, employee of
the Company
1997 ANNUAL REPORT - PAGE 27
SHARE PRICE AND DIVIDEND DATA
<TABLE>
<CAPTION>
The common stock of the Company currently is traded on the New York Stock Exchange ("NYSE") under
the symbol "NNN." For each calendar quarter indicated, the following table reflects the
respective high, low and closing sales prices for the common stock as quoted by the "NYSE" and
the dividends paid per share in each such period.
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter Year
- ------------ -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
High $16.1250 $ 15.3750 $ 16.7500 $18.1875 $18.1875
Low 14.3750 14.1250 15.0625 15.3125 14.1250
Close 14.7500 15.3125 15.9735 17.8750 17.8750
Dividends paid per share 0.30 0.30 0.30 0.30 1.20
1996
- ------------
High $13.3750 $14.0000 $14.2500 $16.3750 $16.3750
Low 12.7500 12.7500 13.3750 13.3750 12.7500
Close 13.2500 13.8750 13.6250 15.8750 15.8750
Dividends paid per share 0.29 0.29 0.30 0.30 1.18
</TABLE>
The portion of dividends paid in 1997 and 1996, which was treated as a non-
taxable return of capital, was 8.6% and 9.8%, respectively.
On February 13, 1998, there were approximately 1,537 shareholders of record of
common stock.
[Picture 19] Candid photograph of Chris Barry, employee of the
Company
[Picture 20] Candid photograph of Mez Birdie, employee of the
Company
[Picture 21] A strip of three candid photographs: Courtney
Hubbard, employee of the Company; Dennis Tracy,
employee of the Company; and Heather O'Brien and
Carole Jones, employees of the Company
[Picture 22] Photograph of an exterior view of the Pier 1
imports located in Memphis, Tennessee
APPENDIX
PICTURE 1 1997 ANNUAL REPORT - PAGE 6
PICTURE 2 1997 ANNUAL REPORT - PAGE 6
PICTURE 3 1997 ANNUAL REPORT - PAGE 6
PICTURE 4 1997 ANNUAL REPORT - PAGE 7
SIDEBAR 1 1997 ANNUAL REPORT - PAGE 7
PICTURE 5 1997 ANNUAL REPORT - PAGE 8
PICTURE 6 1997 ANNUAL REPORT - PAGE 8
PICTURE 7 1997 ANNUAL REPORT - PAGE 9
SIDEBAR 2 1997 ANNUAL REPORT - PAGE 9
PICTURE 8 1997 ANNUAL REPORT - PAGE 10
PICTURE 9 1997 ANNUAL REPORT - PAGE 10
PIE CHART 1 1997 ANNUAL REPORT - PAGE 11
MAP 1 1997 ANNUAL REPORT - PAGE 11
PICTURE 10 1997 ANNUAL REPORT - PAGE 12
PICTURE 11 1997 ANNUAL REPORT - PAGE 12
PICTURE 12 1997 ANNUAL REPORT - PAGE 17
PICTURE 13 1997 ANNUAL REPORT - PAGE 18
PICTURE 14 1997 ANNUAL REPORT - PAGE 24
PICTURE 15 1997 ANNUAL REPORT - PAGE 26
PICTURE 16 1997 ANNUAL REPORT - PAGE 26
PICTURE 17 1997 ANNUAL REPORT - PAGE 26
PICTURE 18 1997 ANNUAL REPORT - PAGE 26
PICTURE 19 1997 ANNUAL REPORT - PAGE 27
PICTURE 20 1997 ANNUAL REPORT - PAGE 27
PICTURE 21 1997 ANNUAL REPORT - PAGE 27
PICTURE 22 1997 ANNUAL REPORT - PAGE 27
EXHIBIT 23
Consent of Independent Accountants dated March 17, 1998
The Board of Directors
Commercial Net Lease Realty, Inc.:
We consent to the incorporation in the registration statement (No. 33-24773) on
Form S-3 of Commercial Net Lease Realty, Inc. of our reports dated January 16,
1998, relating to the consolidated balance sheets of Commercial Net Lease
Realty, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997, and the
related financial statement schedule, which report appears in the December 31,
1997 annual report on Form 10-K of Commercial Net Lease Realty, Inc.
/s/ KPMG Peat Marwick LLP
Orlando, Florida
March 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of Commercial Net Lease Realty, Inc. at December 31, 1997, and its
statement of earnings for the year then ended and is qualified in its entirety
by reference to the Form 10-K of Commercial Net Lease Realty, Inc. for the year
ended December 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,160,000
<SECURITIES> 0
<RECEIVABLES> 527,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 413,274,000
<DEPRECIATION> 12,297,000
<TOTAL-ASSETS> 537,014,000
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 280,000
<OTHER-SE> 361,864,000
<TOTAL-LIABILITY-AND-EQUITY> 537,014,000
<SALES> 0
<TOTAL-REVENUES> 50,135,000
<CGS> 0
<TOTAL-COSTS> 9,025,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,478,000
<INCOME-PRETAX> 30,385,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 30,385,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,385,000
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.25
<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>
