UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 0-12989
COMMERCIAL NET LEASE REALTY, INC.
(exact name of registrant as specified in its charter)
Maryland 56-1431377
(State or other jurisdiction of (I.R.S. Employment Identification
incorporation or organization) No.)
450 South Orange Avenue, Orlando, Florida 32801
(Address of principal executive offices, including zip code)
(407) 265-7348
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
30,395,897 shares of Common Stock, $0.01 par value, outstanding as of October
31, 2000.
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
CONTENTS
Part I
Item 1. Financial Statements: Page
Condensed Consolidated Balance Sheets..............................1
Condensed Consolidated Statements of Earnings......................2
Condensed Consolidated Statements of Cash Flows....................3
Notes to Condensed Consolidated Financial Statements...............5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........14
Part II
Other Information..........................................................15
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
ASSETS
<S> <C> <C>
Real estate:
Accounted for using the operating method, net
of accumulated depreciation and amortization
of $27,756 and $22,023, respectively $ 540,774 $ 546,193
Accounted for using the direct financing
method 122,963 125,491
Investment in unconsolidated subsidiary 790 4,502
Investment in unconsolidated partnership 3,862 3,844
Mortgages and accrued interest receivable 16,615 16,241
Mortgages and other receivables from
unconsolidated subsidiary 62,684 27,597
Cash and cash equivalents 3,346 3,329
Receivables 1,740 2,119
Accrued rental income 15,355 13,182
Debt costs, net of accumulated amortization of
$3,421 and $2,894, respectively 2,755 2,964
Other assets 4,847 4,327
------------- -------------
Total assets $ 775,731 $ 749,789
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit payable $ 117,800 $ 108,700
Mortgages payable 37,861 40,429
Notes payable, net of unamortized discount of
$650 and $592, respectively, and unamortized
interest rate hedge gain of $2,077 and
$2,434, respectively 221,427 201,842
Accrued interest payable 3,431 2,744
Accounts payable and accrued expenses 1,220 1,717
Other liabilities 3,615 2,995
------------- -------------
Total liabilities 385,354 358,427
------------- -------------
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized
15,000,000 shares; none issued or outstanding - -
Common stock, $0.01 par value. Authorized
90,000,000 shares; issued and outstanding
30,395,897 and 30,255,939 shares at September
30, 2000 and December 31, 1999, respectively 304 303
Excess stock, $0.01 par value. Authorized
105,000,000 shares; none issued or outstanding - -
Capital in excess of par value 397,830 396,403
Accumulated dividends in excess of net earnings (7,757) (5,344)
------------- -------------
Total stockholders' equity 390,377 391,362
------------- -------------
$ 775,731 $ 749,789
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases $ 14,776 $ 14,552 $ 44,989 $ 42,811
Earned income from direct
financing leases 3,285 3,366 9,905 10,504
Contingent rental income 247 238 768 671
Development and asset management
fees from related parties 95 560 285 2,021
Interest from unconsolidated
subsidiary and other mortgages
receivable 1,591 152 3,880 638
Other 174 115 512 320
---------- ---------- ---------- ----------
20,168 18,983 60,339 56,965
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative 1,223 1,202 3,709 5,406
Real estate expenses 120 92 312 268
Interest 6,768 5,663 19,647 15,797
Depreciation and amortization 2,204 2,230 6,746 6,283
Expenses incurred in acquiring
advisor from related party 297 794 1,063 8,961
---------- ---------- ---------- ----------
10,612 9,981 31,477 36,715
---------- ---------- ---------- ----------
Earnings before equity in earnings
of unconsolidated subsidiary and
unconsolidated partnership, and
gain on sale of real estate 9,556 9,002 28,862 20,250
Equity in earnings of
unconsolidated subsidiary (1,096) (299) (3,372) (552)
Equity in earnings of
unconsolidated partnership 95 93 283 279
Gain on sale of real estate - - - 5,784
---------- ---------- ---------- ----------
Net earnings $ 8,555 $ 8,796 $ 25,773 $ 25,761
========== ========== ========== ==========
Net earnings per share of common stock:
Basic $ 0.28 $ 0.29 $ 0.85 $ 0.85
========== ========== ========== ==========
Diluted $ 0.28 $ 0.29 $ 0.85 $ 0.85
========== ========== ========== ==========
Weighted average number of shares outstanding:
Basic 30,408,187 30,425,097 30,346,450 30,279,232
========== ========== ========== ==========
Diluted 30,434,763 30,448,811 30,382,827 30,367,306
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Nine Months Ended
September 30,
2000 1999
-------- --------
Cash flows from operating activities:
Net earnings $ 25,773 $ 25,761
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 6,746 6,283
Amortization of notes payable discount 68 34
Amortization of deferred interest rate hedge
gain (357) (129)
Gain on sale of real estate - (5,784)
Expenses incurred in acquiring advisor from
related party 1,063 8,961
Equity in earnings of unconsolidated
subsidiary, net of deferred intercompany
profits 3,712 930
Distributions (equity in earnings) from
unconsolidated partnership net of equity
in earnings (distributions) (20) 2
Decrease in real estate leased to others
using the direct financing method 1,514 1,333
Decrease in leasehold interests 1,454 -
Decrease in mortgages and accrued interest
receivable 565 261
Decrease in receivables 279 1,162
Increase in accrued rental income (2,309) (2,919)
Increase in other assets (322) (236)
Increase in accrued interest payable 687 249
Increase (decrease) in accounts payable and
accrued expenses (432) 574
Increase (decrease) in other liabilities 639 (132)
-------- --------
Net cash provided by operating activities 39,060 36,350
-------- --------
Cash flows from investing activities:
Proceeds from the sale of real estate 838 40,103
Additions to real estate accounted for using the
operating method (2,898) (72,611)
Additions to real estate accounted for using the
direct financing method - (1,901)
Increase in mortgages receivable (492) (3,952)
Mortgage payments received 1,659 101
Increase in mortgages and other receivables from
unconsolidated subsidiary (35,768) (23,053)
Increase in other assets (561) (262)
Other (94) 377
-------- --------
Net cash used in investing activities (37,316) (61,198)
-------- --------
Cash flows from financing activities:
Proceeds from line of credit payable 51,300 61,100
Repayment of line of credit payable (42,200) (109,40)
Repayment of mortgages payable (2,568) (1,362)
Proceeds from notes payable 19,874 99,608
Proceeds from termination of interest rate hedge - 2,679
Payment of debt costs (303) (1,334)
Proceeds from issuance of common stock 416 2,018
Payment of dividends (28,186) (28,069)
Other (60) (239)
-------- --------
Net cash provided by (used in) financing
activities (1,727) 25,001
-------- --------
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(dollars in thousands)
Nine Months Ended
September 30,
2000 1999
-------- --------
Net increase in cash and cash equivalents 17 153
Cash and cash equivalents at beginning of period 3,329 1,442
-------- --------
Cash and cash equivalents at end of period $ 3,346 $ 1,595
======== ========
Supplemental schedule of non-cash investing and
financing activities:
Issued 105,399 and 720,476 shares of common stock,
respectively, in connection with the acquisition
of the Company's advisor $ 1,063 $ 8,961
======== ========
Mortgage note accepted in connection with sale
of real estate $ 1,425 $ 3,538
======== ========
Real estate and other assets contributed to
unconsolidated subsidiary in exchange for:
Non-voting common stock $ - $ 5,700
======== ========
Mortgage receivable $ - $ 8,064
======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles. The financial statements reflect all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim periods presented. Operating results for the quarter and nine
months ended September 30, 2000, may not be indicative of the results that
may be expected for the year ending December 31, 2000. Amounts as of
December 31, 1999, included in the financial statements, have been derived
from the audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in the Form 10-K of
Commercial Net Lease Realty, Inc. for the year ended December 31, 1999.
The consolidated financial statements include the accounts of Commercial
Net Lease Realty, Inc. and its wholly-owned subsidiaries (the "Company").
All significant intercompany accounts and transactions have been eliminated
in consolidation.
Basic earnings per share are calculated based upon the weighted average
number of common shares outstanding during each period and diluted earnings
per share are calculated based upon weighted average number of common
shares outstanding plus dilutive potential common shares.
In December 1999, the Securities and Exchange Commission (the "SEC")
published Staff Accounting Bulletin 101, "Revenue Recognition." The
Bulletin expressed the SEC's position regarding revenue recognition in
financial statements, including income statement presentation and
disclosures. The implementation date of the Bulletin, as amended, is no
later than the fourth quarter of fiscal years beginning after December 15,
1999. The Company does not believe the implementation of this Bulletin will
have a material effect on the Company's financial position or results of
operations.
2. Leases:
------
The Company generally leases its real estate to operators of major retail
businesses. As of September 30, 2000, 181 of the leases have been
classified as operating leases and 83 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 47 of these leases are
accounted for as operating leases. Substantially all leases have initial
terms of 10 to 20 years (expiring between 2001 and 2020) and provide for
minimum rentals. In addition, the majority of the leases provide for
contingent rentals and/or scheduled rent increases over the terms of the
leases. The tenant is also generally required to pay all property taxes and
assessments, substantially maintain the interior and exterior of the
building and carry insurance coverage for public liability, property
damage, fire and extended coverage. The lease options generally allow
tenants to renew the leases for two to four successive five-year periods
subject to substantially the same terms and conditions as the initial
lease.
3. Line of Credit Payable:
----------------------
In September 1999, the Company entered into an amended and restated loan
agreement for a $200,000,000 revolving credit facility (the "Credit
Facility"). In May 2000, the Company exercised its option to extend the
revolving credit maturity date to July 30, 2001. As of September 30, 2000
and December 31, 1999, the outstanding principal balance was $117,800,000
and $108,700,000, respectively, plus accrued interest of $484,000 and
$135,000, respectively.
4. Notes Payable:
-------------
In September 2000, the Company filed a prospectus supplement to its
$300,000,000 shelf registration statement and issued $20,000,000 of 8.5%
Notes due 2010 (the "Notes"). The Notes are senior, unsecured obligations
of the Company and are subordinated to all secured indebtedness of the
Company. The Notes were sold at a discount for an aggregate purchase price
of $19,874,000 with interest payable semi-annually commencing on March 20,
2001. The discount of $126,000 is being amortized as interest expense over
the term of the debt obligation using the effective interest method.
The Notes are redeemable at the option of the Company, in whole or in part,
at a redemption price equal to the sum of (i) the principal amount of the
Notes being redeemed plus accrued interest thereon through the redemption
date and (ii) the Make-Whole Amount, as defined in the Supplemental
Indenture No. 3 dated September 20, 2000 for the Notes.
In connection with the debt offering, the Company incurred debt issuance
costs totaling $225,000 consisting primarily of underwriting discounts and
commissions, legal and accounting fees and rating agency fees. Debt
issuance costs have been deferred and are being amortized over the term of
the Notes using the effective interest method. The net proceeds from the
debt offering were used to pay down outstanding indebtedness of the
Company's Credit Facility.
5. Earnings Per Share:
------------------
The following represents the calculations of earnings per share and the
weighted average number of shares of dilutive potential common stock for:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
----------- ----------- ----------- -----------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Net earnings $ 8,555,000 $ 8,796,000 $25,773,000 $25,761,000
=========== =========== =========== ===========
Weighted average number of
shares outstanding 30,284,202 29,680,089 30,271,330 29,646,606
Merger contingent
shares 123,985 745,008 75,120 632,626
----------- ----------- ----------- -----------
Weighted average number of
shares outstanding used in
basic earnings per share 30,408,187 30,425,097 30,346,450 30,279,232
=========== =========== =========== ===========
Basic earnings per share $ 0.28 $ 0.29 $ 0.85 $ 0.85
=========== =========== =========== ===========
Diluted Earnings Per Share:
Net earnings $ 8,555,000 $ 8,796,000 $25,773,000 $25,761,000
=========== =========== =========== ===========
Weighted average number of
shares outstanding 30,284,202 29,680,089 30,271,330 29,646,606
Effect of dilutive securities:
Stock options 403 1,854 488 5,511
Merger contingent shares 150,158 766,868 111,009 715,189
----------- ----------- ----------- -----------
Weighted average number of
shares outstanding used in
diluted earnings per share 30,434,763 30,448,811 30,382,827 30,367,306
=========== =========== =========== ===========
Diluted earnings per share $ 0.28 $ 0.29 $ 0.85 $ 0.85
=========== =========== =========== ===========
</TABLE>
The following represents the number of options of common stock which were
not included in computing diluted earnings per share because their effects
were antidilutive:
Quarter Ended Nine Months Ended
September 30, September 30,
--------- --------- --------- ---------
2000 1999 2000 1999
--------- --------- --------- ---------
Antidilutive potential
common stock 1,943,558 1,642,159 1,756,048 859,000
========= ========= ========= =========
6. Related Party Transactions:
--------------------------
In connection with the mortgages and other receivables from the Company's
unconsolidated subsidiary, Commercial Net Lease Realty Services, Inc.
("Services"), the Company received $3,138,000 and $844,000 in interest and
fees during the nine months ended September 30, 2000 and 1999,
respectively. In addition, Services paid the Company $305,000 and $93,000
in expense reimbursements for accounting services provided by the Company
during the nine months ended September 30, 2000 and 1999, respectively.
In April 2000, the Company entered into the Modification of Amended and
Restated Secured Revolving Line of Credit and Security Agreement with
Services, which amended Services' existing credit agreement with the
Company by (i) increasing the borrowing capacity from $30,000,000 to
$50,000,000, and (ii) extending the expiration date to July 30, 2001. In
addition, the Company entered into the Modification of Secured Revolving
Line of Credit and Security Agreement with a wholly-owned subsidiary of
Services, which amended its existing $20,000,000 revolving credit facility
with the Company by extending the expiration date to July 30, 2001.
In September 2000, a wholly-owned subsidiary of Services entered into a
$6,000,000 loan agreement with an affiliate in which certain officers of
the Company own an equity interest. The loan is collateralized by
substantially all of the assets of the affiliate.
7. Segment Information:
-------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. While the Company does
not have more than one reportable segment as defined by the Statement, the
Company has identified two primary sources of revenue: (i) rental and
earned income from the triple net leases and (ii) fee income from
development, property management and asset management services.
The following tables represent the revenues, expenses and asset allocation
for the two segments and the Company's consolidated totals at (dollars in
thousands):
<TABLE>
<CAPTION>
Rental and Fee Consolidated
Earned Income Income Corporate Totals
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
September 30, 2000 and for
the quarter then ended
----------------------
Revenues $ 18,857 $ 1,311 $ - $ 20,168
General operating and
administrative expenses 1,008 45 170 1,223
Real estate expenses 120 - - 120
Interest expense 6,768 - - 6,768
Depreciation and amortization 2,170 29 5 2,204
Expenses incurred in
acquiring advisor from
related party - - 297 297
Equity in earnings of
unconsolidated subsidiary - (1,096) - (1,096)
Equity in earnings of
unconsolidated partnership 95 - - 95
------------ ------------ ------------ ------------
Net earnings $ 8,886 $ 141 $ (472) $ 8,555
============ ============ ============ ============
Assets $ 775,562 $ 86 $ 83 $ 775,731
============ ============ ============ ============
Additions to long-lived
assets:
Real estate $ 1,675 $ - $ - $ 1,675
============ ============ ============ ============
Other $ 61 $ 3 $ 1 $ 65
============ ============ ============ ============
September 30, 1999 and for
the quarter then ended
----------------------
Revenues $ 18,390 $ 593 $ - $ 18,983
General operating and
administrative expenses 1,053 106 43 1,202
Real estate expenses 92 - - 92
Interest expense 5,663 - - 5,663
Depreciation and amortization 2,215 8 7 2,230
Expenses incurred in
acquiring advisor from
related party - - 794 794
Equity in earnings of
unconsolidated subsidiary - (299) - (299)
Equity in earnings of
unconsolidated partnership 93 - - 93
------------ ------------ ------------ ------------
Net earnings $ 9,460 $ 180 $ (844) $ 8,796
============ ============ ============ ============
Assets $ 743,814 $ 39 $ 133 $ 743,986
============ ============ ============ ============
Additions to long-lived
assets:
Real estate $ 5,287 $ - $ - $ 5,287
============ ============ ============ ============
Other $ 4 $ - $ - $ 4
============ ============ ============ ============
September 30, 2000 and for
the nine months then ended
--------------------------
Revenues $ 57,351 $ 2,988 $ - $ 60,339
General operating and
administrative expenses 2,857 137 715 3,709
Real estate expenses 312 - - 312
Interest expense 19,647 - - 19,647
Depreciation and amortization 6,655 78 13 6,746
Expenses incurred in acquiring
advisor from related party - - 1,063 1,063
Equity in earnings of
unconsolidated subsidiary - (3,372) - (3,372)
Equity in earnings of
unconsolidated partnership 283 - - 283
------------ ------------ ------------ ------------
Net earnings $ 28,163 $ (599) $ (1,791) $ 25,773
============ ============ ============ ============
Assets $ 775,562 $ 86 $ 83 $ 775,731
============ ============ ============ ============
Additions to long-lived
assets:
Real estate $ 2,898 $ - $ - $ 2,898
============ ============ ============ ============
Other $ 129 $ 5 $ 1 $ 135
============ ============ ============ ============
September 30, 1999 and for
the nine months then ended
--------------------------
Revenues $ 54,551 $ 2,414 $ - $ 56,965
General operating and
administrative expenses 4,109 823 474 5,406
Real estate expenses 268 - - 268
Interest expense 15,797 - - 15,797
Depreciation and amortization 6,221 43 19 6,283
Expenses incurred in acquiring
advisor from related party - - 8,961 8,961
Equity in earnings of
unconsolidated subsidiary - (552) - (552)
Equity in earnings of
unconsolidated partnership 279 - - 279
Gain on sale of real estate 5,784 - - 5,784
------------ ------------ ------------ ------------
Net earnings $ 34,219 $ 996 $ (9,454) $ 25,761
============ ============ ============ ============
Assets $ 743,814 $ 39 $ 133 $ 743,986
============ ============ ============ ============
Additions to long-lived
assets:
Real estate $ 74,512 $ - $ - $ 74,512
============ ============ ============ ============
Other $ 131 $ 158 $ 78 $ 367
============ ============ ============ ============
</TABLE>
8. Subsequent Events:
-----------------
In October 2000, the Company entered into an amended and restated loan
agreement for a $200,000,000 revolving credit facility which amended
certain provisions of the Company's existing Credit Facility and which
expires on October 31, 2003.
In October 2000, the Company declared dividends to its shareholders of
$9,575,000 or $0.315 per share of common stock, payable in November 2000.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
------------
Commercial Net Lease Realty, Inc. is a fully integrated, self-administrated real
estate investment trust that acquires, owns, manages and indirectly, through
investment interests, develops high-quality, freestanding properties that are
generally leased to major retail businesses under long-term commercial net
leases. As of September 30, 2000, Commercial Net Lease Realty, Inc. and its
subsidiaries (the "Company") owned, either directly or through a partnership
interest, 277 properties (the "Properties") substantially all of which are
leased to major retail businesses.
Liquidity and Capital Resources
-------------------------------
General. Historically, the Company's only demand for funds has been for the
payment of operating expenses and dividends, for property acquisitions and
development, either directly or through investment interests, and for the
payment of interest on its outstanding indebtedness. Generally, cash needs for
items other than property acquisitions and development have been met from
operations, and property acquisitions and development have been funded by equity
and debt offerings, bank borrowings, the sale of Properties and, to a lesser
extent, from internally generated funds. Potential future sources of capital
include proceeds from the public or private offering of the Company's debt or
equity securities, secured or unsecured borrowings from banks or other lenders,
proceeds from the sale of Properties, as well as undistributed funds from
operations. For the nine months ended September 30, 2000 and 1999, the Company
generated $39,060,000 and $36,350,000 respectively, in net cash provided by
operating activities. The increase in cash from operations for the nine months
ended September 30, 2000, as compared to the nine months ended September 30,
1999, is primarily the 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.
In April 2000, the Company entered into the Modification of Amended and Restated
Secured Revolving Line of Credit and Security Agreement with the Company's
unconsolidated subsidiary, Commercial Net Lease Realty Services, Inc.
("Services"), which amended Services' existing credit agreement with the Company
by (i) increasing the borrowing capacity from $30,000,000 to $50,000,000, and
(ii) extending the expiration date to July 30, 2001. In addition, the Company
entered into the Modification of Secured Revolving Line of Credit and Security
Agreement with a wholly-owned subsidiary of Services, which amended its existing
$20,000,000 revolving credit facility with the Company by extending the
expiration date to July 30, 2001.
In October 2000, the Company entered into an amended and restated loan agreement
for a $200,000,000 revolving credit facility which amended certain provisions of
the Company's existing Credit Facility and which expires on October 31, 2003.
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.
Debt Securities. In September 2000, the Company filed a prospectus supplement to
its $300,000,000 shelf registration statement and issued $20,000,000 of 8.5%
Notes due 2010 (the "Notes"). The Notes are senior, unsecured obligations of the
Company and are subordinated to all secured indebtedness of the Company. The
Notes were sold at a discount for an aggregate purchase price of $19,874,000
with interest payable semi-annually commencing on March 20, 2001. The discount
of $126,000 is being amortized as interest expense over the term of the debt
obligation using the effective interest method.
The Notes are redeemable at the option of the Company, in whole or in part, at a
redemption price equal to the sum of (i) the principal amount of the Notes being
redeemed plus accrued interest thereon through the redemption date and (ii) the
Make-Whole Amount, as defined in the Supplemental Indenture No. 3 dated
September 20, 2000 for the Notes.
In connection with the debt offering, the Company incurred debt issuance costs
totaling $225,000 consisting primarily of underwriting discounts and
commissions, legal and accounting fees and rating agency fees. Debt issuance
costs have been deferred and are being amortized over the term of the Notes
using the effective interest method. The net proceeds from the debt offering
were used to pay down outstanding indebtedness of the Company's Credit Facility.
Dividends. One of the Company's primary objectives, consistent with its policy
of retaining sufficient cash for reserves and working capital purposes and
maintaining its status as a real estate investment trust, is to distribute a
substantial portion of its funds available from operations to its stockholders
in the form of dividends. For the nine months ended September 30, 2000 and 1999,
the Company declared and paid dividends to its stockholders of $28,186,000 and
$28,069,000, respectively, or $0.93 per share of common stock. In October 2000,
the Company declared dividends to its shareholders of $9,575,000 or $0.315 per
share of common stock, payable in November 2000.
Results of Operations
---------------------
As of September 30, 2000 and 1999, the Company owned 268 and 272 wholly-owned
Properties, respectively, 264 and 269, respectively, substantially all of which
were leased to operators of major retail businesses. In addition, during the
nine months ended September 30, 2000, the Company sold one property which was
leased during 2000. During the nine months ended September 30, 1999, the Company
sold 41 properties which were leased during 1999 and one property which was
vacant. During the nine months ended September 30, 2000 and 1999, the Company
earned $55,662,000 and $53,986,000, respectively, in rental income from
operating leases, earned income from direct financing leases and contingent
rental income ("Rental Income"), $18,308,000 and $18,156,000 of which was earned
during the quarters ended September 30, 2000 and 1999, respectively. The
increase in Rental Income during the nine months and quarter ended September 30,
2000, is primarily a result of the facts that (i) the 36 Properties acquired and
15 buildings upon which construction was completed during 1999 were operational
for a full nine months in 2000 and (ii) the Company received non-recurring
additional rental income of $1,332,000 related to the termination of leases on
three of its properties.
During the nine months ended September 30, 2000 and 1999, the Company earned
$441,000 and $2,113,000, respectively, in development and asset management fees,
$151,000 and $609,000 of which was earned during the quarters ended September
30, 2000 and 1999, respectively. In May 1999, the Company transferred its
build-to-suit development operation to Commercial Net Lease Realty Services,
Inc., a 95 percent owned, taxable unconsolidated subsidiary. Development fees
earned by Services during the quarter and nine months ended September 30, 2000
and during the quarter ended September 30, 1999, are included in the Company's
equity in earnings of unconsolidated subsidiary. In addition, during the quarter
ended September 30, 1999, the Company earned $506,000 of asset management fees
from an affiliate of Services.
During the nine months ended September 30, 2000 and 1999, the Company earned
$3,880,000 and $638,000, respectively, in interest income, $1,591,000 and
$152,000 of which was earned during the quarters ended September 30, 2000 and
1999, respectively. The increase in interest earned during 2000 is attributable
to the interest earned on the mortgages receivable and the mortgages and other
receivables from Services issued during 1999.
During the nine months ended September 30, 2000 and 1999, operating expenses,
excluding interest and including depreciation and amortization, were $11,830,000
and $20,918,000, respectively, (19.6% and 36.7%, respectively, of total
revenues) $3,844,000 and $4,318,000 (19.1% and 22.7%, respectively, of total
revenues) of which was incurred during the quarters ended September 30, 2000 and
1999, respectively. The decrease in operating expenses for the nine months ended
September 30, 2000, as compared to the nine months ended September 30, 1999, is
attributable to the decrease in charges related to the costs incurred in
acquiring the Company's external advisor from a related party and the decrease
in general operating and administrative expenses as a result of the transfer of
the Company's build-to-suit development operation to Services. The decrease in
operating expenses was partially offset by an increase in depreciation and
amortization expense as a result of a full quarter and nine months of
depreciation and amortization expense relating to the 36 Properties and 15
buildings acquired during 1999. The increase in depreciation and amortization
expense was partially offset by a decrease in depreciation and amortization
expense related to the sale of 42 properties during the nine months September
30, 1999. The decrease in operating expenses for the quarter ended September 30,
2000, as compared to the quarter ended September 30, 1999 is attributable to the
decrease in charges related to the costs incurred in acquiring the Company's
external advisor from a related party and a decrease in depreciation and
amortization expense as a result of the loan costs related to the Company's
Credit Facility being fully amortized as of the maturity date of the Credit
Facility in July 2000.
The Company recognized $19,647,000 and $15,797,000 in interest expense for the
nine months ended September 30, 2000 and 1999, respectively, $6,768,000 and
$5,663,000 of which was incurred during the quarters ended September 30, 2000
and 1999, respectively. Interest expense increased during the quarter and nine
months ended September 30, 2000, primarily as a result of the higher average
interest rate on the Company's Credit Facility and the interest incurred related
to the issuance of the $20,000,000 in notes payable in September 2000. However,
the increase was partially offset by the maturity of a $13,150,000 mortgage
payable in December 1999.
In May 1999, Services was formed to enable the Company to perform additional
development, leasing and disposition services. The Company accounts for its
investment in Services under the equity method, and therefore, recognizes 95
percent of the income or loss of Services as equity in earnings of
unconsolidated subsidiary. The net losses incurred by Services for the quarter
and nine months ended September 30, 2000 are primarily due to the nature of the
development, leasing and real estate disposition business which provides for
revenue recognition upon completion of construction, leasing or disposition of
the real estate, while many of the related expenses are recognized as incurred.
Investment Considerations. 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 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.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in quantitative and qualitative disclosures
about market risk as previously reported in the Form 10-K for the year ended
December 31, 1999.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
No material developments in legal proceedings as previously reported on
the Form 10-K for the year ended December 31, 1999.
Item 2. Changes in Securities and Use of Proceeds. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders. Not
applicable.
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as a part of this report.
3.1 First Amended and Restated Articles of Incorporation of
the Registrant (filed as Exhibit 3.1 to the Registrant's
Registration Statement No. 333-64511 on Form S-3, and
incorporated herein by reference).
3.2 Bylaws of the Registrant (filed as Exhibit 3.3(ii) to
Amendment No. 2 to the Registrant's Registration
Statement No. 1-11290 on Form 8-B, and incorporated
herein by reference).
4.1 Specimen Certificate of Common stock, par value $0.01 per
share, of the Registrant (filed as Exhibit 3.4 to the
Registrant's Registration Statement No. 1-11290 on Form
8-B, and incorporated herein by reference).
4.2 Form of Indenture dated March 25, 1998, by and among
Registrant and First Union National Bank, Trustee, relating
to $100,000,000 of 7.125% Notes due 2008 and $100,000,000
of 8.125% Notes due 2004 (filed as Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated March 20,
1998, and incorporated herein by reference).
4.3 Form of Supplemental Indenture No. 1 dated March 25, 1998,
by and among Registrant and First Union National Bank,
Trustee, relating to $100,000,000 of 7.125% Notes due 2008
(filed as Exhibit 4.2 to the Registrant's Current Report on
Form 8-K dated March 20, 1998, and incorporated herein by
reference).
4.4 Form of 7.125% Notes due 2008 (filed as Exhibit 4.3 to the
Registrant's Current Report on Form 8-K dated March 20,
1998, and incorporated herein by reference).
4.5 Form of Supplemental Indenture No. 2 dated June 21, 1999,
by and among Registrant and First Union National Bank,
Trustee, relating to $100,000,000 of 8.125% Notes due 2004
(filed as Exhibit 4.2 to the Registrant's Current Report on
Form 8-K dated June 17, 1999, and incorporated herein by
reference).
4.6 Form of 8.125% Notes due 2004 (filed as Exhibit 4.3 to the
Registrant's Current Report on Form 8-K dated June 17,
1999, and incorporated herein by reference).
4.7 Form of Supplemental Indenture No. 3 dated September 20,
2000, by and among Registrant and First Union National
Bank, Trustee, relating to $20,000,000 of 8.5% Notes due
2010 (filed as Exhibit 4.2 to the Registrant's Current
Report on Form 8-K dated September 20, 2000, and
incorporated herein by reference).
4.8 Form of 8.5% Notes due 2010 (filed as Exhibit 4.3 to the
Registrant's Current Report on Form 8-K dated September 20,
2000, and incorporated herein by reference).
10.1 Letter Agreement dated July 10, 1992, amending Stock
Purchase Agreement dated January 23, 1992 (filed as Exhibit
10.34 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1992, and incorporated
herein by reference).
10.2 Advisory Agreement between Registrant and CNL Realty
Advisors, Inc. effective as of April 1, 1993 (filed as
Exhibit 10.04 to Amendment No. 1 to the Registrant's
Registration Statement No. 33-61214 on Form S-2, and
incorporated herein by reference).
10.3 1992 Commercial Net Lease Realty, Inc. Stock Option Plan
(filed as Exhibit No. 10(x) to the Registrant's
Registration Statement No. 33-83110 on Form S-3, and
incorporated herein by reference).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 Fifth Amended and Restated Line of Credit and Security
Agreement, dated September 23, 1999, by and among
Registrant, certain lenders and First Union National Bank,
as the Agent, relating to a $200,000,000 loan (filed as
Exhibit 10.13 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999 and
incorporated herein by reference).
10.11 Sixth Amended and Restated Line of Credit and Security
Agreement, dated October 26, 2000, by and among Registrant,
certain lenders and First Union National Bank, as the
Agent, relating to a $200,000,000 loan (filed herewith).
27 Financial Data Schedule (filed herewith).
(b) The Registrant filed one report on Form 8-K on September 20,
2000, for the purpose of incorporating certain items by reference
into its registration statement on Form S-3.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED this 13th day of November, 2000.
COMMERCIAL NET LEASE REALTY, INC.
By: /s/ Gary M. Ralston
-------------------
Gary M. Ralston
President and Director
By: /s/ Kevin B. Habicht
--------------------
Kevin B. Habicht
Chief Financial Officer and Director
