Exhibit 13
Annual Report to Shareholders
1999 ANNUAL REPORT - PAGE 5
<TABLE>
HISTORICAL FINANCIAL HIGHLIGHTS
(dollars in thousands, except per share data)
<CAPTION>
1999 1998 1997 1996 1995
------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Gross Revenues $ 76,543 $ 64,773 $ 50,135 $ 33,369 $ 20,580
Net Earnings $ 35,311 $ 32,441 $ 30,385 $ 19,839 $ 12,707
Total Assets $ 749,789 $ 685,595 $ 537,014 $ 370,953 $ 219,257
Total Long-Term Debt $ 350,971 $ 292,907 $ 171,836 $ 116,956 $ 82,600
Total Equity $ 391,362 $ 383,890 $ 362,144 $ 252,574 $ 135,842
Cash Dividends Paid to
Stockholders $ 37,495 $ 35,672 $ 28,381 $ 18,868 $ 13,529
Weighted Average Shares
Basic 30,331,327 29,169,371 24,070,697 16,798,918 11,663,672
Diluted 30,408,219 29,397,154 24,220,792 16,838,719 11,671,197
Per Share Information:
Net Earnings
Basic $ 1.16 $ 1.11 $ 1.26 $ 1.18 $ 1.09
Diluted $ 1.16 $ 1.10 $ 1.25 $ 1.18 $ 1.09
Dividends $ 1.24 $ 1.23 $ 1.20 $ 1.18 $ 1.16
Other Data:
Funds from operations (1) $ 46,044 $ 42,517 $ 34,230 $ 22,570 $ 14,443
Cash flows provided
by (used in):
Operating activities $ 47,876 $ 41,260 $ 34,010 $ 22,216 $ 14,140
Investing activities $ (64,436) $ (145,643) $ (167,002) $ (144,247) $ (67,518)
Financing activities $ 18,447 $ 103,665 $ 133,742 $ 123,140 $ 52,609
Equity Market
Capitalization ($ mil) $ 300.7 $ 391.2 $ 499.7 $ 329.6 $ 148.7
<FN>
(1) 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 $9,824 and $5,501 of expenses incurred in acquiring CNL Realty Advisors,
Inc. from a related party in 1999 and 1998, respectively, because this
transaction is considered to be non-recurring. 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 REITs, and therefore,
may not be comparable to such other REITs. </FN> </TABLE>
[PICTURE 1] Photograph of an exterior view of the Pier 1 Imports located in
Sanford, Florida.
[PICTURE 2] Photograph of an exterior view of the Sears Homelife located in
Clearwater, Florida.
1999 ANNUAL REPORT - PAGE 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
[PICTURE 3] Artist's digital rendering based on original blueprints of Ponce
Inlet Lighthouse, Ponce Inlet, Florida.
INTRODUCTION
Commercial Net Lease Realty, Inc., a Maryland corporation, is a fully
integrated, self-administered real estate investment trust ("REIT") formed in
1984 that acquires, owns, manages and indirectly develops high-quality,
freestanding properties that are generally leased to major retail businesses
under long-term commercial net leases. As of December 31, 1999, Commercial Net
Lease Realty, Inc. and its subsidiaries (the "Company") owned 270 properties
(the "Properties") that are leased to major retail businesses, including
Academy, Barnes & Noble, Bed Bath & Beyond, Best Buy, Borders, Eckerd, Food 4
Less, Good Guys, Heilig-Meyers, Hi-Lo Automotive, OfficeMax, Sears Homelife
Centers, The Sports Authority and Waccamaw/HomePlace.
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.
1999 ANNUAL REPORT - PAGE 15
For the years ended December 31, 1999, 1998 and 1997, the Company generated
$47,876,000, $41,260,000 and $34,010,000, respectively, in net cash provided by
operating activities. The increase in cash from operations for each of the years
ended December 31, 1999, 1998 and 1997, is primarily a result of changes in
revenues and expenses as discussed in "Results of Operations."
The Company's leases typically provide that the tenant bears responsibility for
substantially all property costs and expenses associated with ongoing
maintenance and operation, including utilities, property taxes and insurance. In
addition, the Company's leases generally provide that the tenant is responsible
for roof and structural repairs. Certain of the Company's Properties are subject
to leases under which the Company retains responsibility for certain costs and
expenses associated with the Property. Because many of the Properties which are
subject to leases that place these responsibilities on the Company are recently
constructed, management anticipates that capital demands to meet obligations
with respect to these Properties will be minimal for the foreseeable future and
can be met with funds from operations and working capital. The Company may be
required to use bank borrowings or other sources of capital in the event of
unforeseen significant capital expenditures.
Indebtedness. In September 1999, the Company entered into an amended and
restated loan agreement for a $200,000,000 revolving credit facility (the
"Credit Facility") which amended certain provisions of the Company's existing
loan agreement. 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 principal balance is due in full upon expiration of the Credit Facility on
July 30, 2000, which can be extended for an additional 12 month period at the
option of the Company. As of December 31, 1999, $108,700,000 was outstanding and
approximately $91,300,000 was available for future borrowings under the Credit
Facility. The Company expects to use the Credit Facility primarily to invest in
the acquisition and development of freestanding, retail properties, either
directly or through investment interests.
In December 1995, the Company entered into a long-term, fixed rate mortgage and
security agreement for $13,150,000. Upon its maturity in December 1999, the
Company repaid the outstanding principal balance of $13,150,000 using funds
available from its Credit Facility.
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 mortgage
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 mortgage is collateralized by a first lien on and an assignment of
rents and leases of certain of the Company's Properties. As of December 31,
1999, the outstanding principal balance was $34,189,000 and the aggregate
carrying value of the Properties totaled $74,468,000.
In June 1996, the Company acquired three Properties each subject to a mortgage
totaling $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 five
years. As of December 31, 1999, the outstanding principal balances for the
Mortgages totaled $5,890,000 and the aggregate carrying value of these three
properties totaled $8,020,000.
Payments of principal on the mortgage debt and on advances outstanding under the
Credit
1999 ANNUAL REPORT - PAGE 16
[PICTURE 4] Artist's digital rendering based on original blueprints of Ponce
Inlet Lighthouse, Ponce Inlet, Florida.
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 April of 1997, the Company filed a shelf
registration statement with the Securities and Exchange Commission which permits
the issuance by the Company of up to $300,000,000 in debt and equity securities
(which includes approximately $36,846,000 of unissued debt and equity securities
under the Company's previous $200,000,000 shelf registration statement). During
the year ended December 31, 1997, the Company issued a total of 7,158,033 shares
of common stock pursuant to four prospectus supplements to these shelf
registration statements and received gross proceeds totaling $111,056,000. In
connection with the four offerings, the Company incurred stock issuance costs
totaling $3,954,000 consisting primarily of underwriters' commissions and fees,
legal and accounting fees and printing expenses. Net proceeds from the
offerings, were used to pay down the Company's Credit Facility.
During the year ended December 31, 1998, the Company issued a total of 988,172
shares of common stock pursuant to three prospectus supplements to its
$300,000,000 shelf registration statement, and received gross
1999 ANNUAL REPORT - PAGE 17
[PICTURE 5] Photograph of an exterior view of the CompUSA located in Miami,
Florida.
[PICTURE 6] Photograph of an exterior view of the Food Lion located in
Keystone Heights, Florida.
proceeds totaling $16,962,000. In connection with the three offerings, the
Company incurred stock issuance costs totaling $933,000 consisting primarily of
underwriters' commissions and fees, legal and accounting fees and printing
expenses. Proceeds from the offerings were used to pay down the Company's Credit
Facility.
During the year ended December 31, 1998, the Company received investment grade
debt ratings from Standard and Poor's, Moody's Investor Service and Fitch IBCA
on its senior, unsecured debt. In March 1998, the Company filed a prospectus
supplement to its $300,000,000 shelf registration and issued $100,000,000 of
7.125% Notes due 2008 (the "2008 Notes"). The 2008 Notes are senior obligations
of the Company, ranked equally with the Company's other unsecured senior
indebtedness and are subordinated to all of the Company's secured indebtedness.
The 2008 Notes were sold at a discount for an aggregate purchase price of
$99,729,000. In connection with the debt offering, the Company incurred debt
issuance costs totaling $1,208,000, consisting primarily of underwriting
discounts and commissions, legal and accounting fees, rating agency fees and
printing expenses. The net proceeds from the debt offering were used to pay down
outstanding indebtedness of the Company's Credit Facility.
In September 1998, the Company filed a shelf registration statement with the
Securities and Exchange Commission which permits the issuance by the Company of
up to $300,000,000 in debt and equity securities (which includes approximately
$112,000,000 of unissued debt and equity securities under the Company's previous
$300,000,000 shelf registration statement).
In June 1999, the Company filed a prospectus supplement to its $300,000,000
shelf registration statement and issued $100,000,000 of 8.125% Notes due 2004
(the "2004 Notes"). The 2004 Notes are senior obligations of the Company, ranked
equally with the Company's other unsecured senior indebtedness and are
subordinated to all secured indebtedness of the Company. The 2004 Notes were
sold at a discount for an aggregate purchase price of $99,608,000 with interest
payable semi-annually commencing on December 15, 1999. The discount of $392,000
is being amortized as interest expense over the term of the debt obligation
using the effective interest method. In connection with the debt offering, the
Company entered into a treasury rate lock agreement which fixed a treasury rate
of 5.1854% on a notional amount of $92,000,000. Upon issuance of the 2004 Notes,
the Company terminated the treasury rate lock agreement resulting in a gain of
$2,679,000. The gain has been deferred and is being amortized as an adjustment
to interest expense over the term of the 2004 Notes using the effective interest
method. The effective rate of the 2004 Notes, including the effects of the
discount and the
1999 ANNUAL REPORT - PAGE 18
treasury rate lock gain, is 7.547%. In connection with the debt offering, the
Company incurred debt issuance costs totaling $970,000, consisting primarily of
underwriting discounts and commissions, legal and accounting fees, rating agency
fees and printing expenses. Debt issuance costs have been deferred and are being
amortized over the term of the 2004 Notes using the effective interest method.
The net proceeds of the debt offering were used to pay down outstanding
indebtedness of the Company's Credit Facility.
During the year ended December 31, 1999, the Company announced the authorization
by the Company's board of directors to acquire up to $25,000,000 of the
Company's outstanding common stock either through open market transactions or
through privately negotiated transactions. As of December 31, 1999, the Company
had acquired and retired 244,200 of such shares for a total cost of $2,339,000.
The acquisition of these shares was funded primarily through asset disposition.
Effective July 10, 1998, the shareholders approved an amendment to the Company's
Articles of Incorporation to authorize the issuance of up to 15,000,000 shares
of preferred stock, par value $0.01 per share, which may be issued in various
classes with different characteristics as determined by the Board of Directors.
Property Acquisitions and Commitments. During the year ended December 31, 1999,
the Company borrowed $40,600,000 under its Credit Facility and used net proceeds
of $41,555,000 from the sale of 41 properties (i) to acquire 36 Properties (two
of which were land only parcels upon which buildings are currently under
construction) at a cost of $60,284,000, (ii) to purchase five buildings
constructed by the tenants on land parcels owned by the Company at a cost of
$6,537,000 and (iii) to complete construction of ten
[PICTURE 7] Photograph of an exterior view of the Linens `N Things located in
Freehold, New Jersey.
buildings by the Company on previously acquired land parcels (the "Acquisition
Properties")at a total cost of $15,323,000. The Acquisition Properties are
leased to tenants including Academy, Bed Bath & Beyond, Border's, Eckerd, Good
Guys, Jo-Ann Etc., Kash n' Karry, Lucky, OfficeMax, Party City, Pier I Imports,
Skytel, Target, Upton's, Vons and Wal-Mart.
The Company generally 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 Statement, all of the leases relating to the 36 Properties
acquired during 1999 have been classified as operating leases. Also pursuant to
the requirements of this Statement, the leases relating to the five buildings
which were developed by tenants on land parcels owned by the Company and the
leases relating to the ten buildings developed by the Company on land parcels
owned by the Company have been classified as operating leases.
The Company owns two 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 $4,206,000, of which $109,000 of
costs had been incurred at December 31, 1999. The lease agreements provide for
rent to commence upon completion of construction of the buildings.
In addition to the two buildings under construction as of December 31, 1999, the
Company may elect to acquire or develop additional properties, either directly
or indirectly through investment interests, in the future. Such property
acquisitions and development are expected to be the primary demand for
additional capital in the future. The Company
1999 ANNUAL REPORT - PAGE 19
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, disposition of assets or a combination of the
foregoing. Subject to the constraints imposed by the Company's Credit Facility
and long-term, fixed rate financing, the Company may enter into additional
financing arrangements.
During 1997, the Company sold one of its properties and an undeveloped portion
of land of one of its properties for a total of $1,883,000 and received net
sales proceeds of $1,816,000. In addition, the Company sold four of its
properties to the Partnership at the Company's original cost of $17,542,000. The
Company recognized a gain on the sale of these five properties and undeveloped
portion of land of $651,000 for financial reporting purposes. The Company
reinvested the proceeds to acquire additional properties and structured the
transactions to qualify as tax-free like-kind exchange transactions for federal
income tax purposes.
During 1998, the Company sold six of its Properties for a total of $6,130,000
and received net sales proceeds of $5,947,000. The Company recognized a gain on
the sale of these six Properties of $1,355,000 for financial reporting purposes.
The Company reinvested the proceeds to acquire additional Properties and
structured the transactions to qualify as tax-free like-kind exchange
transactions for federal income tax purposes.
During 1999, the Company sold 45 of its properties for a total of $50,541,000
and received net sales proceeds of $49,732,000. The Company recognized a net
gain on the sale of these 45 properties of $6,724,000 for financial reporting
purposes. The Company reinvested the proceeds from 41 of these properties to
acquire additional Properties
[PICTURE 8] Artist's digital rendering based on original blueprints of Ponce
Inlet Lighthouse, Ponce Inlet, Florida.
1999 ANNUAL REPORT - PAGE 20
and structured the transactions to qualify as tax-free like-kind exchange
transactions for federal income tax purposes.
Investment in Unconsolidated Subsidiary. In May 1999, the Company transferred
its build-to-suit development operation to a 95 percent owned, taxable
unconsolidated subsidiary ("Services"). The Company contributed $5.7 million of
real estate and other assets to Services in exchange for 5,700 shares of
non-voting common stock. The Company also entered into a secured line of credit
agreement with Services for a $30,000,000 revolving credit facility. The credit
facility is secured by a first mortgage on Services' properties. In addition,
the Company entered into a loan agreement with a wholly-owned subsidiary of
Services for a $20,000,000 revolving credit facility. The Company borrowed
$27,597,000 under its Credit Facility to fund the amounts drawn against under
these revolving credit facilities.
Investment in Unconsolidated 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 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.
Merger Transaction. On December 18, 1997, the Company's stockholders voted to
approve an agreement and plan of merger with CNL
[PICTURE 9] Photograph of Fresnel Lens in Point Arena Lighthouse, Point Arena,
California.
Realty Advisors, Inc. (the "Advisor"), whereby the stockholders of the Advisor
agreed to exchange 100 percent of the outstanding shares of common stock of the
Advisor for up to 2,200,000 shares (the "Share Consideration") of the Company's
common stock (the "Merger"). As a result, the Company became a fully integrated,
self-administered REIT effective January 1, 1998. Ten percent of the Share
Consideration (220,000 shares) was paid January 1, 1998, and the balance (the
"Share Balance") of the Share Consideration is to be paid over time, within five
years from the date of the merger, based upon the Company's completed property
acquisitions and completed development projects in accordance with the Merger
agreement. In the event of a change in control of the Company, any remaining
Share Balance will be immediately issued and paid to stockholders of the
Advisor. The market value of the common shares issued on January 1, 1998 was
$3,933,000 of which $12,000 was allocated to the net tangible assets acquired
and the difference of $3,921,000 was accounted for as expenses incurred in
acquiring the Advisor from a related party. In addition, in connection with the
Merger, the Company incurred costs totaling $771,000 consisting primarily of
legal and accounting fees, directors' compensation and fairness opinions. For
accounting purposes, the Advisor was not
1999ANNUAL REPORT - PAGE 21
[PICTURE 10] Photograph of Fresnel Lens in Point Arena Lighthouse, Point Arena,
California.
[PICTURE 11] Photograph of an exterior view of the Borders located in Ft.
Lauderdale, Florida.
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. Since the effective date of the
Merger, the Company has issued 855,922 shares of the Share Balance. The market
value of the Share Balance issued was $10,634,000, all of which was charged to
operations. In addition, in connection with the property acquisitions during the
quarter ended December 31, 1999, on January 1, 2000, an additional 54,308 shares
of the Share Balance became issuable to the stockholders of the Advisor. The
market value of the 54,308 shares at the date the shares became issuable totaled
$526,000, all of which is to be charged to operations during the year ended
December 31, 2000. Pursuant to the agreement and plan of merger, the Company is
required to issue the shares within 90 days after the shares become issuable. To
the extent the remaining Share Balance is paid over time, the market value of
the common shares issued will also be charged to operations. Upon consummation
of the Merger on January 1, 1998, all employees of the Advisor became employees
of the Company and any obligation to pay fees under the advisor agreement
between the Company and the Advisor was terminated.
Management believes that the Company's current capital resources (including cash
on hand), coupled with the Company's borrowing capacity, are sufficient to meet
its liquidity needs for the foreseeable future.
Dividends. One of the Company's primary objectives, consistent with its policy
of retaining sufficient cash for reserves and working capital purposes and
maintaining its status as a REIT, is to distribute a substantial portion of its
funds available from operations to its stockholders in the form of dividends.
During the years ended December 31, 1999, 1998 and 1997, the Company declared
and paid dividends to its stockholders of $37,495,000, $35,672,000 and
$28,381,000, respectively, or $1.24, $1.23 and $1.20 per share of common stock,
respectively. For the years ended December 31, 1999, 1998 and 1997, 90.5%, 88.9%
and 91.4%, respectively, of such dividends were considered to be ordinary
income, 7.5%, 11.1% and 8.6%, respectively, were considered return of capital
and 1.96% of the 1999 dividend was considered capital gain (representing 0.55%
of capital gain-20% and 1.41% of unrecaptured section 1250 gain) for federal
income tax purposes. In January 2000, the Company declared dividends to its
stockholders of $9,378,000 or $0.31 per share of common stock, payable in
February 2000.
1999 ANNUAL REPORT - PAGE 22
[PICTURE 12] Photograph of an exterior view of the Michaels located in
Grapevine, Texas.
[PICTURE 13] Photograph of an exterior view of the Marshalls located in
Freehold, New Jersey.
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998. As
of December 31, 1999 and 1998, the Company owned 270 and 285 wholly-owned
Properties, respectively, 267 and 281, respectively, of which were leased to
operators of major retail businesses. In addition, during the year ended
December 31, 1999, the Company sold 44 properties which were leased during 1999
and one property which was vacant. During the year ended December 31, 1998, the
Company sold six properties which were leased during 1998. The Properties are
leased on a long-term basis, generally 10 to 20 years, with renewal options for
an additional 10 to 20 years. As of December 31, 1999, the weighted average
remaining lease term of the Properties was approximately 14 years. During the
years ended December 31, 1999 and 1998, the Company earned $72,275,000 and
$61,750,000, respectively, in rental income from operating leases, earned income
from direct financing leases and contingent rental income ("Rental Income"). The
17 percent increase in Rental Income during 1999, as compared to 1998, was
attributable to income earned on the 36 Properties acquired and the 15 buildings
upon which construction was completed during 1999. In addition, Rental Income
increased during 1999 as a result of the fact that the 55 Properties acquired
and 15 buildings upon which construction was completed during 1998 were
operational for a full fiscal year in 1999. The increase in Rental Income was
partially offset by a decrease in Rental Income relating to the sale of the 44
leased properties. Due to the fact that the increase in Rental Income from the
36 Properties acquired and the 15 buildings upon which construction was
completed in 1999 was offset by the decrease in Rental Income relating to the
sale of the 44 leased properties in 1999, the Company expects the Rental Income
in 2000 to remain consistent with the Rental Income in 1999.
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." The 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
triple net leases and (ii) fee income from development, property management and
asset management services. During the years ended
1999 ANNUAL REPORT - PAGE 23
December 31, 1999, 1998 and 1997, the Company generated $73,119,000, $62,067,000
and $50,135,000, respectively, from its triple net lease segment. For the years
ended December 31, 1999 and 1998, the Company generated revenues totaling
$3,174,000 and $2,706,000, respectively, from its fee income segment. Prior to
January 1, 1998, the Company did not provide services for development, property
management and asset management.
During 1999, one of the Company's lessees, Eckerd Corporation, 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, 1999, Eckerd Corporation leased
51 Properties (including four properties under leases with the Company's
unconsolidated partnership). It is anticipated that, based on the minimum rental
payments required by the leases, Eckerd Corporation will continue to account for
more than ten percent of the Company's total rental income in 2000. Any failure
of this lessee to make its lease payments when they are due could materially
affect the Company's earnings.
During the years ended December 31, 1999 and 1998, the Company earned $1,883,000
and $2,362,000, respectively, in development and asset management fees from
related parties. The decrease in fees earned during 1999 is attributable to the
transfer of the Company's build-to-suit development operation to Services in May
1999.
During the years ended December 31, 1999 and 1998, the Company's operating
expenses, excluding interest and including depreciation and amortization, were
$25,070,000 and $20,594,000, respectively (32.8% and 31.8%, respectively, of
total revenues). The increase in the dollar amount of operating expenses for the
year ended December 31, 1999, was primarily attributable to the increase in the
charges related to the costs incurred in acquiring the Company's Advisor from a
related party. Operating expenses for the years ended December 31, 1999 and
1998, excluding the costs relating to the acquisition of the Advisor, were
$15,246,000 and $15,093,000, respectively, (19.9% and 23.3%, respectively, of
total revenues). The increase in the dollar amount of operating expenses for the
year ended December 31, 1999, as compared to the year ended December 31, 1998 is
also attributable to the increase in depreciation expense as a result of the
depreciation of the additional Properties acquired during 1999 and a full year
of depreciation on the Properties acquired during 1998. The increase in
depreciation expense was partially offset by a decrease in depreciation expense
related to the sale of 45 properties during the year ended December 31, 1999. In
addition, the increase in the dollar amount of operating expenses for the year
ended December 31, 1999 was partially offset by a decrease in general operating
and administrative expenses attributable to the transfer of the Company's
build-to-suit development operation to Services. In accordance with generally
accepted accounting principles, certain costs relating to the development of
Properties for the Company's own use have been capitalized.
The Company recognized $21,920,000 and $13,460,000, in interest expense for the
years ended December 31, 1999 and 1998, respectively. Interest expense increased
for the year ended December 31, 1999 primarily as a result of the higher average
interest rate and borrowing levels on the Company's Credit Facility and the
issuance of the Notes in March 1998 and the 2004 Notes in June 1999.
During 1999, the Company sold 45 of its properties for a total of $50,541,000
and received net sales proceeds of $49,732,000.
1999 ANNUAL REPORT - PAGE 24
The Company recognized a net gain on the sale of these 45 properties of
$6,724,000 for financial reporting purposes. The Company reinvested the proceeds
from 41 of these properties to acquire additional Properties and structured the
transactions to qualify as tax-free like-kind exchange transactions for federal
income tax purposes.
During 1998, the Company sold six of its properties for a total of $6,130,000
and received net sales proceeds of $5,947,000. The Company recognized a gain on
the sale of these six properties of $1,355,000 for financial reporting purposes.
The Company reinvested the proceeds to acquire additional properties and
structured the transactions to qualify as tax-free like-kind exchange
transactions for federal income tax purposes.
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997. As
of December 31, 1998 and 1997, the Company owned 285 and 237 wholly-owned
Properties,
[PICTURE 14] Photograph of an exterior view of The Sports Authority located
in Sarasota, Florida.
respectively, 281 and 237, respectively, of which were leased to operators of
major retail businesses. In addition, during the year ended December 31, 1998,
the Company leased six properties which were sold during 1998. During the year
ended December 31, 1997, the Company leased one property which was contributed
to the Partnership during 1997 and five properties which were sold during 1997.
In connection therewith, during the years ended December 31, 1998 and 1997, the
Company earned $61,750,000 and $49,922,000, respectively, in Rental Income. The
23.7 % increase in Rental Income during 1998, as compared to 1997, is primarily
attributable to income earned on the 55 Properties acquired and the 15 buildings
upon which construction was completed during 1998. In addition, Rental Income
increased during 1998 as a result of the fact that the 47 Properties acquired
and three buildings upon which construction was completed during 1997 were
operational for a full fiscal year in 1998. The increase in Rental Income was
partially offset by a decrease in Rental Income relating to five Properties
which became vacant during the year ended December 31, 1998. The Properties are
leased on a long-term basis, generally 10 to 20 years, with renewal options for
an additional 10 to 20 years. As of December 31, 1998, the weighted average
remaining lease term of the Properties was approximately 15 years.
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." The 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
1999 ANNUAL REPORT - PAGE 25
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 triple net leases and (ii) fee income from development,
property management and asset management services. During the years ended
December 31, 1999, 1998 and 1997, the Company generated $62,067,000, $50,135,000
and $33,369,000, respectively, from its triple net lease segment. For the year
ended December 31, 1998, the Company generated revenues totaling $2,706,000 from
its fee income segment. Prior to January 1, 1998, the Company did not provide
services for development, property management and asset management.
During 1998, one of the Company's lessees, Eckerd Corporation, 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, 1998, Eckerd Corporation leased
52 Properties (including four properties under leases with the Company's
unconsolidated partnership).
During the year ended December 31, 1998, the Company earned $2,362,000 in
development and asset management fees from related parties. No development and
asset management fees were earned during 1997. The Company began providing
development and asset management services on January 1, 1998 in connection with
the Merger of the Company's Advisor.
[PICTURE 15] Artist's digital rendering based on original blueprints of
Ponce Inlet Lighthouse, Ponce Inlet, Florida.
During the years ended December 31, 1998 and 1997, the Company's operating
expenses, excluding interest and including depreciation and amortization, were
$20,594,000 and $9,025,000, respectively (31.8% and 18.0%, respectively, of
total revenues). The increase in operating expenses for the year ended December
31, 1998, is primarily attributable to a $5,501,000 charge related to the costs
incurred in acquiring the Advisor from a related party. Operating expenses for
the year ended December 31, 1998, excluding the costs relating to the
acquisition of the Advisor, were $15,093,000 (23.3% of gross operating
revenues). The increase for the year ended December 31, 1998 is also
attributable to the increase in depreciation as a result of the depreciation of
the additional Properties acquired during 1998 and a full year of depreciation
on the Properties acquired during 1997. Real estate expenses also increased
primarily as a result of costs incurred on the five Properties that became
vacant during 1998. In addition, during the year ended December 31, 1997, the
Company paid an advisory fee to the Advisor. The increase in general and
administrative expense for the year ended December 31, 1998, was largely a
result of the administrative overhead assumed in connection with the Merger of
the Company's Advisor on January 1, 1998, (in lieu of paying advisory,
acquisition and development fees to the Advisor) and due to the increase in the
Company's asset size and operations. In accordance with generally accepted
accounting principles, certain costs relating to development of Properties for
the Company's own use have been capitalized.
The Company recognized $13,460,000 and $11,478,000 in interest expense for the
years ended December 31, 1998 and 1997, respectively. Interest expense increased
for the year ended December 31, 1998 primarily as a result of interest expense
related to the Notes
1999 ANNUAL REPORT - PAGE 26
[MAP 1] The Company owns properties in each of the dark blue shaded states.
Alabama
Alaska
Arkansas
Arizona
California
Colorado
Delaware
Florida
Georgia
Illinois
Kansas
Kentucky
Louisiana
Maine
Maryland
Michigan
Mississippi
Missouri
New Jersey
New Mexico
Nevada
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
Tennessee
Texas
Virginia
Washington
West Virginia
Wisconsin
[PICTURE 16] Photograph of an exterior view of The Good Guys located in
Stockton, California.
[PICTURE 17] Photograph of an exterior view of the PETsMART located in
Chicago, Illinois.
issued in March 1998. However, the increase was partially offset by a decrease
in the average interest rates and average borrowing levels of the Company's
Credit Facility.
During 1998, the Company sold six of its Properties for a total of $6,130,000
and received net sales proceeds of $5,947,000. The Company recognized a gain on
the sale of these six Properties of $1,355,000 for financial reporting purposes.
The Company reinvested the proceeds to acquire additional properties and
structured the transactions to qualify as tax-free like-kind exchange
transactions for federal income tax purposes.
During 1997, the Company sold one of its properties and an undeveloped portion
of land of one of its properties for a total of $1,883,000 and received net
sales proceeds of $1,816,000. In addition, the Company sold four of its
properties to the Partnership at the Company's original cost of $17,542,000. The
Company recognized a gain on the sale of these five properties and undeveloped
portion of land of $651,000 for financial reporting purposes. The Company
reinvested the proceeds to acquire additional properties and structured the
transactions to qualify as tax-free like-kind exchange transactions for federal
income tax purposes.
Year 2000 Readiness Disclosure. The Year 2000 compliance issues concern the
ability of information and non-information technology systems to properly
recognize and process date-sensitive information beyond January 1, 2000. The
failure to accurately recognize the year 2000 could result in a variety of
problems from data miscalculations to the failure of entire systems.
The Company and its affiliates generally provide all services requiring the use
of information and some non-information technology systems. The information
technology systems of the Company consist of a network of personal computers and
servers built using hardware and software from
1999 ANNUAL REPORT - PAGE 27
mainstream suppliers. The non-information technology systems of the Company are
primarily facility related and include building security systems, elevators,
fire suppressions, HVAC, electrical systems and other utilities. In early 1998,
the Company and its affiliates formed a Year 2000 committee (the "Y2K Team")
that assessed the readiness of any systems that were date sensitive and
completed upgrades for the hardware equipment and software that was not Year
2000 compliant, as necessary. The cost for these upgrades and other remedial
measures was the responsibility of the Company. The Company has not incurred,
and does not expect that it will incur, any costs in connection with the Year
2000 remedial measures. In addition, the Y2K team requested and received
certifications of compliance from other companies with which the Company has
material third party relationships.
In assessing the risks presented by the Year 2000 compliance issues, the Y2K
Team identified potential worst case scenarios involving the failure of the
information and non-information technology systems used by the Company's
transfer agent, financial institutions and tenants. As of February 28, 2000, the
Company did not experience material disruption or other significant problems in
its information and non-information technology systems. In addition, as of the
same date, the Company is not aware of any material Year 2000 compliance issues
relating to information and non-information technology systems of third parties
with which the Company maintains material relationships, including those of the
Company's transfer agent, financial institutions and tenants. Additionally, the
Company's interactions with the systems of its transfer agent, financial
institutions and tenants, have functioned normally. The Company continues to
monitor its systems and to maintain contact with third parties with which the
Company has
[PICTURE 18] Photograph of an exterior view of the Barnes & Noble located in
Houston, Texas.
material relationships with respect to Year 2000 compliance and any Year 2000
issues that may arise at a later date. The Company will develop contingency
plans relating to ongoing Year 2000 issues at the time that such issues are
identified and such plans are deemed necessary.
Based on the information provided to the Y2K Team, the upgrades and remedial
measures by the Company and its affiliates, and the normal functioning to date
of information and non-information technology systems used by the Company and
those third parties, the Company does not foresee significant risks associated
with its Year 2000 compliance at this time. In addition, the Company does not
expect to incur any material additional costs in connection with the Year 2000
compliance efforts. However, there can be no assurance that the Company or any
third parties will not have ongoing Year 2000 compliance issues that may have
adverse effects on the Company.
Investment Considerations. Two of the Company's tenants, Just For Feet 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 its lease with the Company. As of December 31,
1999, Just For Feet and Levitz continued to lease one Property each, which
combined, accounted for one percent of the Company's Rental Income for the year
ended December 31, 1999.
The Company had made an election to be taxed as a 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
1999 ANNUAL REPORT - PAGE 28
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, 1999, 1998 and
1997, 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, on potential capital appreciation of the
Properties and on operating expenses of the Company.
Management of the Company currently knows of no trends that will have a material
adverse effect on liquidity, capital resources or results of operations;
however, certain factors exist that could contribute to trends that may
adversely effect the Company in the future. Such factors include the following:
changes in general economic conditions, changes in real estate market
conditions, interest rate fluctuations, an increase in internet retailing, the
ability of the Company to locate suitable tenants for its Properties and the
ability of tenants to make payments under their respective leases.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. The Statement requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value.
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133, an Amendment of FASB Statement No. 133." Statement No. 137 defers the
effective date of Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" for one year. Statement No. 133, as amended, is now
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company is currently reviewing the Statement, as amended, to see what
impact, if any, it will have on the Company's consolidated financial statements.
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 is no later than the second 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.
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
1999 ANNUAL REPORT - PAGE 29
[PICTURE 19] Photograph of an exterior view of the Robb & Stucky located in Ft.
Myers, Florida.
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 17 properties currently under some level of environmental
remediation. The seller or the tenant is contractually responsible for the cost
of the environmental remediation for each of these properties.
Quantitative and Qualitative Disclosures About Market Risk. The Company is
exposed to interest changes primarily as a result of its variable rate Credit
Facility and its long term, fixed-rate debt used to finance the Company's
development and acquisition activities and for general corporate purposes. The
Company's interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cash flows and to lower its overall
borrowing costs. To achieve its objectives, the Company borrows at both fixed
and variable rates on its long-term debt.
The information in the table summarizes the Company's market risks associated
with its debt obligations outstanding as of December 31, 1999 and 1998. The
table presents principal cash flows and related interest rates by year of
expected maturity for debt obligations outstanding as of December 31, 1999. The
variable interest rates shown represent the weighted average rates for the
Credit Facility at the end of the periods.
As the table incorporates only those exposures that exist as of December 31,
1999 and 1998, it does not consider those exposures or positions which could
arise after those dates. Moreover, because firm commitments are not presented in
the table below, the information presented therein has limited predictive value.
As a result, the Company's ultimate realized gain or loss with respect to
interest rate fluctuations will depend on the exposures that arise during the
period, the Company's hedging strategies at that time and interest rates. As of
December 31, 1999, the Company did not have any interest rate derivative
instruments outstanding.
1999 ANNUAL REPORT - PAGE 30
[PICTURE 20] Background photograph of lighthouse and surrounding landscape in
Portland, Maine.
<TABLE>
MARKET RISK DISCLOSURE TABLE
<CAPTION>
|--------------------------------Maturity Date----------------------------|
(dollars in thousands)
2000 2001 2002 2003 2004 Thereafter
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Variable rate credit
facility $ 108,700 $ - $ - $ - $ - $ -
Average interest rate 7.29% - - - - -
Fixed rate mortgages $ 2,031 $ 2,195 $ 2,369 $ 2,612 $ 2,851 $ 28,371
Average interest rate 7.61% 7.61% 7.61% 7.60% 7.59% 7.71%
Fixed rate notes - - - - $ 100,000 $ 100,000
Average interest rate - - - - 7.547% 7.163%
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
(dollars in thousands) (dollars in thousands)
------------------------------------ ------------------------------------
Weighted Weighted
Average Average
Interest Fair Interest Fair
Total Rate Value Total Rate Value
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Variable rate credit
facility $ 108,700 7.29% $ 108,700 $ 138,100 7.14% $ 138,100
Fixed rate mortgages $ 40,429 7.62% $ 40,429 $ 55,063 7.60% $ 55,063
Fixed rate notes (1) $ 200,000 7.36% $ 185,840 100,000 7.16% $ 92,232
<FN>
(1) The Company issued $100,000,000 of notes in June 1999.
</FN>
</TABLE>
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.
1999 ANNUAL REPORT - PAGE 32
[PICTURE 21] Artist's digital rendering based on original blueprints of
Ponce Inlet Lighthouse, Ponce Inlet, Florida.
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Orlando, Florida
January 14, 2000
<PAGE>
1999 ANNUAL REPORT - PAGE 33
<TABLE>
COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<CAPTION>
December 31,
1999 1998
----------- ------------
ASSETS
------
<S> <C> <C>
Real estate:
Accounted for using the operating method, net of accumulated
depreciation and amortization $ 546,193 $ 519,948
Accounted for using the direct financing method 125,491 138,809
Investment in unconsolidated subsidiary 4,502 -
Investment in unconsolidated partnership 3,844 3,850
Mortgages receivable 16,241 -
Mortgages and other receivables from unconsolidated subsidiary 27,597 -
Cash and cash equivalents 3,329 1,442
Receivables 2,119 3,532
Accrued rental income 13,182 10,395
Debt costs, net of accumulated amortization of $2,894 and $2,559 2,964 2,282
Other assets 4,327 5,337
=========== ============
Total assets $ 749,789 $ 685,595
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Line of credit payable $ 108,700 $ 138,100
Mortgages payable 40,429 55,063
Notes payable, net of unamortized discount of $592 and $256,
respectively, and unamortized interest rate hedge gain of $2,434
in 1999 201,842 99,744
Accrued interest payable 2,744 2,646
Accounts payable and accrued expenses 1,717 5,343
Other liabilities 2,995 809
----------- ------------
Total liabilities 358,427 301,705
----------- ------------
Commitments and contingencies (Note 19)
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 30,255,939 and 29,521,089 shares at December 31,
1999 and 1998, respectively 303 295
Excess stock, $0.01 par value. Authorized 105,000,000 shares; none
issued or outstanding - -
Capital in excess of par value 396,403 386,755
Accumulated dividends in excess of net earnings (5,344) (3,160)
----------- ------------
Total stockholders' equity 391,362 383,890
----------- ------------
$ 749,789 $ 685,595
=========== ============
See accompanying notes to consolidated financial statements.
</TABLE>
1999 ANNUAL REPORT - PAGE 34
<TABLE>
COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands, except per share data)
<CAPTION>
Year Ended December 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases $ 57,514 $ 48,127 37,384
Earned income from direct financing leases 13,858 12,815 11,779
Contingent rental income 903 808 759
Development and asset management fees from related parties 1,883 2,362 -
Interest and other 2,385 661 213
---------- ---------- ----------
76,543 64,773 50,135
---------- ---------- ----------
Expenses:
General operating and administrative 6,180 7,735 1,448
Real estate expenses 432 599 165
Advisory fees to related party - - 2,110
Interest 21,920 13,460 11,478
Depreciation and amortization 8,634 6,759 5,302
Expenses incurred in acquiring advisor from related party 9,824 5,501 -
---------- ---------- ----------
46,990 34,054 20,503
---------- ---------- ----------
Earnings before equity in earnings of unconsolidated
subsidiary and unconsolidated partnership, and gain on
sale of real estate 29,553 30,719 29,632
Equity in earnings of unconsolidated subsidiary (1,337) - -
Equity in earnings of unconsolidated partnership 371 367 102
Gain on sale of real estate 6,724 1,355 651
---------- ---------- ----------
Net earnings $ 35,311 $ 32,441 $ 30,385
========== ========== ==========
Net earnings per share of common stock:
Basic $ 1.16 $ 1.11 $ 1.26
========== ========== ==========
Diluted $ 1.16 $ 1.10 $ 1.25
========== ========== ==========
Weighted average number of shares outstanding:
Basic 30,331,327 29,169,371 24,070,697
========== ========== ==========
Diluted 30,408,219 29,397,154 24,220,792
========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
1999 ANNUAL REPORT - PAGE 35
<TABLE>
COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
(dollars in thousands, except per share data)
<CAPTION>
Retained
earnings
(accumulated
dividends
Capital in in excess
Number of Common excess of of net
shares stock par value earnings) Total
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
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
Net earnings - - - 32,441 32,441
Dividends declared and paid ($1.23 per (35,672)
share of common stock) - - - (35,672)
Issuance of common stock in connection
with acquisition of advisor 277,813 3 4,739 - 4,742
Issuance of common stock 1,289,649 12 21,171 - 21,183
Stock issuance costs - - (948) - (948)
---------- ---------- ---------- ----------- ----------
Balance at December 31, 1998 29,521,089 295 386,755 (3,160) 383,890
Net earnings - - - 35,311 35,311
Dividends declared and paid ($1.24 per
share of common stock) - - - (37,495) (37,495)
Issuance of common stock in connection
with acquisition of advisor 798,109 8 9,816 - 9,824
Issuance of common stock 180,941 2 2,178 - 2,180
Purchase and retirement of common stock (244,200) (2) (2,329) - (2,331)
Stock issuance costs - - (17) - (17)
---------- ---------- ---------- ----------- ----------
Balance at December 31, 1999 30,255,939 $ 303 $ 396,403 $ (5,344) $ 391,362
========== ========== ========== =========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
1999 ANNUAL REPORT - PAGE 36
<TABLE>
COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<CAPTION>
Year Ended December 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 35,311 $ 32,441 $ 30,385
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 8,634 6,759 5,302
Amortization of notes payable discount 56 15 -
Amortization of deferred interest rate hedge gain (245) - -
Gain on sale of real estate (6,724) (1,355) (651)
Expenses incurred in acquiring advisor from related party 9,824 5,501 -
Equity in earnings of unconsolidated subsidiary, net of deferred
intercompany profits 1,198 - -
Distributions (equity in earnings) from unconsolidated partnership, net
of equity in earnings (distributions) 4 9 (102)
Decrease in real estate leased to others using the direct financing
method 1,805 1,393 1,166
Decrease in accrued mortgage interest receivable 474 - -
Decrease (increase) in receivables 1,508 (2,723) 146
Increase in accrued rental income (3,928) (3,346) (2,729)
Increase in other assets (43) (2) (5)
Increase in accrued interest payable 98 1,881 375
Increase in accounts payable and accrued expenses 288 755 25
Increase (decrease) in other liabilities (384) (68) 98
----------- ----------- -----------
Net cash provided by operating activities 47,876 41,260 34,010
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from the sale of real estate 43,125 5,947 19,402
Additions to real estate accounted for using the operating method (76,063) (117,943) (154,688)
Additions to real estate accounted for using the direct financing method (1,901) (29,572) (29,439)
Investment in unconsolidated partnership - - (855)
Increase in mortgages receivable (3,952) - -
Mortgage payments received 1,191 - -
Increase in mortgages and other receivables from unconsolidated subsidiary (31,728) - -
Mortgage payments received from unconsolidated subsidiary 4,859 - -
Increase in other assets (148) (4,084) (660)
Other 181 9 (762)
----------- ----------- -----------
Net cash used in investing activities (64,436) (145,643) (167,002)
----------- ----------- -----------
</TABLE>
1999 ANNUAL REPORT - PAGE 37
<TABLE>
COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(dollars in thousands)
<CAPTION>
Year Ended December 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from line of credit payable 87,000 143,600 152,600
Repayment of line of credit payable (116,400) (120,600) (96,200)
Repayment of mortgages payable (14,984) (1,673) (1,520)
Proceeds from notes payable 99,608 99,729 -
Proceeds from termination of interest rate hedge 2,679 - -
Payment of debt costs (1,365) (1,165) (417)
Proceeds from issuance of common stock 2,180 21,183 111,520
Payment of stock issuance costs (54) (1,144) (3,875)
Repurchase of common stock (2,331) - -
Payment of dividends (37,495) (35,672) (28,381)
Other (391) (593) 15
----------- ----------- -----------
Net cash provided by financing activities 18,447 103,665 133,742
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,887 (718) 750
Cash and cash equivalents at beginning of year 1,442 2,160 1,410
----------- ------------ -----------
Cash and cash equivalents at end of year $ 3,329 $ 1,442 $ 2,160
=========== =========== ===========
Supplemental disclosure of cash flow information:
Interest paid, net of amount capitalized $ 22,553 $ 11,478 $ 11,017
=========== =========== ===========
Supplemental schedule of non-cash investing and financing activities:
Issued 798,109 and 277,813 shares of common stock in 1999 and 1998,
respectively, in connection with the acquisition of the Company's advisor $ 9,824 $ 4,742 $ -
=========== =========== ===========
Net assets acquired in connection with the acquisition of the Company's
advisor $ - $ 12 $ -
=========== =========== ===========
Mortgage notes accepted in connection with sales of real estate $ 6,618 $ - $ -
=========== =========== ===========
Mortgage notes accepted as payment for mortgage receivable from
unconsolidated subsidiary $ 6,755 $ - $ -
=========== =========== ===========
Mortgage note issued in connection with the acquisition of real estate $ 350 $ - $ -
=========== =========== ===========
Real estate and other assets contributed to unconsolidated subsidiary in
exchange for:
Non-voting common stock $ 5,700 $ - $ -
=========== =========== ===========
Mortgage receivable $ 8,064 $ - $ -
=========== =========== ===========
Capital lease obligation incurred for the lease of the Company's office
space $ 2,570 $ - $ -
=========== =========== ===========
Contribution of land and building to unconsolidated partnership $ - $ - $ 2,930
=========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
1999 ANNUAL REPORT - PAGE 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND NATURE OF BUSINESS - Commercial Net Lease Realty,
Inc., a Maryland corporation, is a fully integrated real estate
investment trust formed in 1984. Commercial Net Lease Realty, Inc.
acquires, owns, manages and indirectly, through an investment in an
unconsolidated subsidiary, develops high-quality, freestanding
properties that are generally 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 five
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 real estate at cost, including acquisition and closing costs. The
cost of properties developed by the Company includes direct and
indirect costs of construction, property taxes, interest and other
miscellaneous costs incurred during the development period of projects
until such time as the project becomes operational.
Real estate is generally leased to others on a net lease basis, whereby
the tenant is 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 method. 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 inception of the lease generally represents the
cost of the property) (Note 3). Unearned income is deferred
and amortized into 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 - Leases accounted for using the operating
method are recorded at the cost of the real estate. 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). Leasehold
interests are amortized on the straight-line method over the
terms of their respective leases. 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.
For tenants required to report sales on a quarterly basis, the Company
recognizes contingent rental income based on the tenant's actual gross
sales. For tenants required to reports sales on an annual basis, the
Company recognizes contingent rental income based on projected gross
sales. Effective April 1, 2000, in accordance with the Securities and
Exchange Commission's Staff Accounting Bulletin 101, "Revenue
Recognition," the Company will recognize contingent rental income for
all tenants based on the tenant's actual gross sales.
When real estate is sold, the related cost, accumulated depreciation or
amortization and any accrued rental income for operating leases and the
net investment for direct financing leases are removed from the
accounts and gains and losses from the sales are reflected in income.
Management reviews its real estate for impairment whenever events or
changes in circumstances indicate that the carrying value 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 real
estate, with the carrying cost of the individual real estate. 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 UNCONSOLIDATED SUBSIDIARY - In May 1999, the Company
contributed real estate and other assets to Commercial Net Lease Realty
Services, Inc. ("Services"), an unconsolidated subsidiary whose
officers and directors consist of certain officers and directors of the
Company. In connection with the contribution, the Company received a 95
percent, non-controlling interest in Services. The Company accounts for
its 95 percent interest in Services under the equity method of
accounting. The Company is entitled to receive 95 percent of the
dividends paid by Services.
INVESTMENT IN UNCONSOLIDATED PARTNERSHIP - In September 1997, the
Company contributed cash and real estate to Net Lease Institutional
Realty, L.P. (the "Partnership") for a 20 percent interest in the
Partnership.
1999 ANNUAL REPORT - PAGE 39
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 fair value.
Cash accounts maintained on behalf of the Company in demand deposits at
commercial banks and money market funds may exceed federally insured
levels; however, the Company has not experienced any losses in such
accounts. The Company limits investment of temporary cash investments
to financial institutions with high credit standing; therefore,
management believes it is not exposed to any significant credit risk on
cash and cash equivalents.
DEBT COSTS - Debt costs incurred in connection with the Company's
$200,000,000 line of credit and mortgages payable have been deferred
and are being amortized over the terms of the loan commitments using
the straight-line method which approximates the effective interest
method. Debt costs incurred in connection with the issuance of the
Company's notes payable have been deferred and are being amortized over
the term of the debt obligations using the effective interest method.
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, 1999, 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 real estate.
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 plus dilutive potential common shares. (See Note 12).
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.
NEW ACCOUNTING STANDARD - In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities."
The Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives)
and for hedging activities. The Statement requires that an entity
recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value.
In June 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133, an Amendment of FASB Statement No. 133."
Statement No. 137 defers the effective date of Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" for one
year. Statement No. 133, as amended, is now effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company
is currently reviewing the Statement, as amended, to see what impact,
if any, it will have on the Company's consolidated financial
statements.
1999 ANNUAL REPORT - PAGE 40
2. LEASES:
The Company generally leases its real estate to operators of major
retail businesses. As of December 31, 1999, 183 of the leases have been
classified as operating leases and 84 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 48 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. REAL ESTATE:
ACCOUNTED FOR USING THE OPERATING METHOD - Real estate on operating
leases consisted of the following at December 31 (dollars in
thousands):
1999 1998
--------- ---------
Land $ 267,479 $ 258,545
Buildings and improvements 296,219 269,225
Leasehold interests 4,409 -
--------- ---------
568,107 527,770
Less accumulated depreciation and
amortization (22,023) (17,335)
--------- ---------
546,084 510,435
Construction in progress 109 9,513
--------- ---------
$ 546,193 $ 519,948
========= =========
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, 1999, 1998 and
1997, the Company recognized $3,985,000, $3,403,000 and $2,786,000,
respectively, of such income. At December 31, 1999 and 1998, the
balance of accrued rental income was $13,182,000, net of an allowance
of $957,000, and $10,395,000, net of an allowance of $515,000,
respectively.
The following is a schedule of future minimum lease payments to be
received on noncancellable operating leases at December 31, 1999
(dollars in thousands):
2000 $ 55,447
2001 56,353
2002 56,233
2003 56,410
2004 56,193
Thereafter 517,289
-----------
$ 797,925
===========
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.
1999 ANNUAL REPORT - PAGE 41
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):
1999 1998
---------- ----------
Minimum lease payments to be received $ 245,306 $ 283,185
Estimated residual values 39,644 43,154
Less unearned income (159,459) (187,530)
---------- ----------
Net investment in direct financing leases $ 125,491 $ 138,809
========== ==========
The following is a schedule of future minimum lease payments to be
received on direct financing leases at December 31, 1999 (dollars in
thousands):
2000 $ 15,349
2001 15,382
2002 15,443
2003 15,456
2004 15,634
Thereafter 168,042
---------
$ 245,306
=========
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 - Accounted for Using the Operating
Method).
4. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY:
In May 1999, the Company transferred its build-to-suit development
operation to a 95 percent owned, taxable unconsolidated subsidiary,
Commercial Net Lease Realty Services, Inc. The Company contributed $5.7
million of real estate and other assets to Services in exchange for
5,700 shares of non-voting common stock. In connection with the
contribution, the Company received a 95 percent non-controlling
interest in Services. The Company accounts for its investment in
Services using the equity method. The Company is entitled to received
95 percent of the dividends paid by Services. The Company also entered
into a secured line of credit agreement with Services for a $30,000,000
revolving credit facility. The credit facility is secured by a first
mortgage on Services' properties. The outstanding principal balance of
the mortgage at December 31, 1999 was $19,978,000. In addition, the
Company entered into an unsecured line of credit agreement with a
wholly-owned subsidiary of Services for a $20,000,000 revolving credit
facility. The outstanding principal balance of the line of credit at
December 31, 1999 was $7,619,000.
The following presents Services' condensed financial information
(dollars in thousands):
December 31, 1999
------------------------
Real estate, net of accumulated depreciation $ 30,251
Investment in unconsolidated affiliate 5,531
Cash and cash equivalents 1,396
Other assets 3,576
----------
Total assets $ 40,754
==========
Mortgage and other payables $ 20,456
Other liabilities 15,705
----------
Total liabilities 36,161
----------
Stockholders' equity 4,593
----------
Total liabilities and stockholders' equity $ 40,754
==========
1999 ANNUAL REPORT - PAGE 42
Period May 1, 1999
(date of inception)
through
December 31, 1999
-------------------
Revenues $ 660
Net earnings (1,407)
For the year ended December 31, 1999, the Company recognized a loss of
$1,337,000 from the Subsidiary.
5. INVESTMENT IN UNCONSOLIDATED 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 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 (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
---------- ----------
<S> <C> <C>
Real estate leased to others:
Accounted for using the operating method,
net of accumulated depreciation $ 24,742 $ 25,060
Accounted for using the direct financing
method 5,030 5,096
Other assets 698 763
---------- ----------
Total assets $ 30,470 $ 30,919
========== ==========
Note payable $ 11,133 $ 11,536
Other liabilities 132 160
---------- ----------
Total liabilities 11,265 11,696
---------- ----------
Partners' capital 19,205 19,223
---------- ----------
Total liabilities and partners' capital $ 30,470 $ 30,919
========== ==========
</TABLE>
Period
September 19, 1997
For the year For the year (date of inception)
ended ended through
December 31, December 31, December 31,
1999 1998 1997
------------- ------------ -------------------
Revenues $ 3,279 $ 3,276 $ 933
Net earnings 1,857 1,834 514
For the years ended December 31, 1999, 1998 and 1997, the Company
recognized income of $371,000, $367,000 and $102,000, respectively,
from the Partnership.
6. 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") which amended certain provisions of the Company's
existing loan agreement and which expires on July 30, 2000. 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 principal balance is due in full upon termination of the Credit
Facility on July 30, 2000, which can be extended for an additional 12
month period at the option of the Company. Interest incurred on prime
rate advances on the
1999 ANNUAL REPORT - PAGE 43
Credit Facility is payable quarterly. LIBOR rate advances have maturity
periods of one, two, three or six months, whichever the Company
selects, with interest payable at the end of the selected maturity
period. All unpaid interest is due in full upon termination of the
Credit Facility. As of December 31, 1999 and 1998, the outstanding
principal balance was $108,700,000 and $138,100,000, respectively, plus
accrued interest of $135,000 and $361,000, 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, 1999.
During the three years ended December 31, 1999, the Company was a party
to an interest rate cap agreement as a means to reduce its exposure to
rising interest rates on the Company's variable rate Credit Facility.
As of December 31, 1999, the interest rate cap agreement had expired.
The cost of buildings constructed by the Company for its own use
includes capitalized interest on the Credit Facility. For the years
ended December 31, 1999, 1998 and 1997, interest cost incurred was
$7,740,000, $4,886,000 and $7,240,000, respectively, of which $487,000,
$1,112,000 and $133,000, respectively, was capitalized, and $6,619,000,
$3,774,000 and $7,107,000, respectively, which was charged to
operations.
7. MORTGAGES PAYABLE:
In December 1995, the Company entered into a long-term, fixed rate
mortgage and security agreement for $13,150,000. The loan provided for
a four-year mortgage with interest payable monthly and principal
payable at maturity in December 1999, and bore interest at a rate of
6.75% per annum. Upon its maturity in December 1999, the Company repaid
the outstanding principal balance of $13,150,000 using funds available
from its Credit Facility.
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 mortgage 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 mortgage is
collateralized by a first lien on and assignments of rents and leases
of certain of the Company's properties. As of December 31, 1999, the
aggregate carrying value of these properties totaled $74,468,000. The
outstanding principal balance as of December 31, 1999 and 1998, was
$34,189,000 and $35,680,000, respectively, plus accrued interest of
$123,000 and $125,000, respectively.
In June 1996, the Company acquired three properties each subject to a
mortgage totaling $6,864,000 (collectively, the "Mortgages"). The
Mortgages bear interest at a weighted average rate of 8.6% and have
weighted average maturity of five years, with principal and interest
payable monthly. As of December 31, 1999 and 1998, the outstanding
balances for the Mortgages totaled $5,890,000 and $6,233,000, plus
accrued interest of $37,000 and $39,000, respectively. As of December
31, 1999, the aggregate carrying value of these three properties
totaled $8,020,000.
In December 1999, the Company acquired a property subject to a mortgage
of $350,000. The mortgage bears interest at a rate of 8.5% per annum
with principal and interest payable monthly and the balance due in
December 2009. As of December 31, 1999, the outstanding principal
balance of the mortgage was $350,000.
The following is a schedule of the annual maturities of the Company's
mortgages payable for each of the next five years (dollars in
thousands):
2000 $ 2,031
2001 2,195
2002 2,369
2003 2,612
2004 2,851
----------
$ 12,058
==========
1999 ANNUAL REPORT - PAGE 44
8. NOTES PAYABLE:
In March 1998, the Company filed a prospectus supplement to its
$300,000,000 shelf registration statement and issued $100,000,000 of
7.125% Notes due 2008 (the "2008 Notes"). The 2008 Notes are senior
obligations of the Company and are ranked equally with the Company's
other unsecured senior indebtedness and are subordinated to all secured
indebtedness of the Company. The 2008 Notes were sold at a discount for
an aggregate purchase price of $99,729,000 with interest payable
semiannually commencing on September 15, 1998 (effective interest rate
of 7.163%). The discount of $271,000 is being amortized as interest
expense over the term of the debt obligation using the effective
interest method. The 2008 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 2008 Notes being redeemed plus accrued
interest thereon through the redemption date and (ii) the Make-Whole
Amount, as defined in the Supplemental Indenture No. 1 dated March 25,
1998 for the 2008 Notes. The terms of the indenture include financial
covenants which provide for the maintenance of certain financial
ratios. The Company was in compliance with such covenants as of
December 31, 1999.
In connection with the debt offering, the Company incurred debt
issuance costs totaling $1,208,000, consisting primarily of
underwriting discounts and commissions, legal and accounting fees,
rating agency fees and printing expenses. Debt issuance costs have been
deferred and are being amortized over the term of the 2008 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.
In June 1999, the Company filed a prospectus supplement to its
$300,000,000 shelf registration statement and issued $100,000,000 of
8.125% Notes due 2004 (the "2004 Notes"). The 2004 Notes are senior
obligations of the Company and are ranked equally with the Company's
other unsecured senior indebtedness and are subordinated to all secured
indebtedness of the Company. The 2004 Notes were sold at a discount for
an aggregate purchase price of $99,608,000 with interest payable
semi-annually commencing on December 15, 1999. The discount of $392,000
is being amortized as interest expense over the term of the debt
obligation using the effective interest method. In connection with the
debt offering, the Company entered into a treasury rate lock agreement
which fixed a treasury rate of 5.1854% on a notional amount of
$92,000,000. Upon issuance of the 2004 Notes, the Company terminated
the treasury rate lock agreement resulting in a gain of $2,679,000. The
gain has been deferred and is being amortized as an adjustment to
interest expense over the term of the 2004 Notes using the effective
interest method. The effective rate of the 2004 Notes, including the
effects of the discount and the treasury rate lock gain, is 7.547%. The
2004 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 2004 Notes being redeemed plus accrued interest thereon
through the redemption date and (ii) the make-whole amount, as defined
in the Supplemental Indenture No. 2 dated June 21, 1999 for the 2004
Notes. The terms of the indenture include financial covenants which
provide for the maintenance of certain financial ratios. The Company
was in compliance with such covenants as of December 31, 1999.
In connection with the debt offering, the Company incurred debt
issuance costs totaling $970,000, consisting primarily of underwriting
discounts and commissions, legal and accounting fees, rating agency
fees and printing expenses. Debt issuance costs have been deferred and
are being amortized over the term of the 2004 Notes using the effective
interest method. The net proceeds of the debt offering were used to pay
down outstanding indebtedness of the Company's Credit Facility.
9. COMMON STOCK:
In November 1999, the Company announced the authorization by the
Company's board of directors to acquire up to $25,000,000 of the
Company's outstanding common stock either through open market
transactions or through privately negotiated transactions. As of
December 31, 1999, the Company had acquired and retired 244,200 of such
shares for a total cost of $2,339,000.
10. EMPLOYEE BENEFIT PLAN:
Effective January 1, 1998, the Company adopted a defined contribution
retirement plan (the "Retirement Plan") covering substantially all of
the employees of the Company. The Retirement Plan permits participants
to defer up to a maximum of 15 percent of their Compensation, as
defined in the Retirement Plan, subject to limits established by the
Internal Revenue Code. The Company matches 50 percent of the
participants' contributions up to a maximum of six percent of a
participant's annual compensation. The Company's contributions to the
Retirement plan for the years ended December 31, 1999 and 1998, totaled
$52,000 and $60,000, respectively.
1999 ANNUAL REPORT - PAGE 45
11. DIVIDENDS:
The following presents the characterization for tax purposes of
dividends paid to stockholders for the years ended December 31:
1999 1998 1997
------- ------- -------
Ordinary income $ 1.12 $ 1.09 $ 1.10
Capital gain .01 - -
Unrecaptured Section 1250 Gain .02 - -
Return of capital .09 .14 .10
------- ------- -------
$ 1.24 $ 1.23 $ 1.20
======= ======= =======
On January 14, 2000, the Company declared dividends of $9,378,000 or 31
cents per share of common stock, payable on February 15, 2000 to
stockholders of record on January 31, 2000.
12. EARNINGS PER SHARE:
<TABLE>
The following represents the calculations of earnings per share and the
weighted average number of shares of dilutive potential common stock
for the years ended December 31:
<CAPTION>
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net earnings $ 35,311,000 $ 32,441,000 $ 30,385,000
============= ============== =============
Weighted average number of
shares outstanding 29,650,912 29,124,583 24,070,697
Merger contingent shares 680,415 44,788 -
------------- -------------- -------------
Weighted average number of
shares used in basic earnings
per share 30,331,327 29,169,371 24,070,697
============= ============== =============
Basic earnings per share $ 1.16 $ 1.11 $ 1.26
============= ============== =============
Diluted Earnings Per Share:
Net earnings $ 35,311,000 $ 32,441,000 $ 30,385,000
============= ============== ==============
Weighted average number of
shares outstanding 29,650,912 29,124,583 24,070,697
Effect of dilutive securities:
Stock options - 150,679 150,095
Merger contingent shares 757,307 121,892 -
------------- -------------- -------------
Weighted average number of
shares used in diluted
earnings per share 30,408,219 29,397,154 24,220,792
============= ============== =============
Diluted earnings per share $ 1.16 $ 1.10 $ 1.25
============= ============== =============
</TABLE>
For the years ended December 31, 1999 and 1998, options on 1,668,659
and 1,145,700 shares of common stock, respectively, were not included
in computing diluted earnings per share because their effects were
antidilutive.
1999 ANNUAL REPORT - PAGE 46
13. STOCK OPTION PLAN:
<TABLE>
The Company's stock option plan (the "Plan") provides compensation and
incentive to persons ("Key Employees" and "Outside Directors of the
Company") whose services are considered essential to the Company's
continued growth and success. As of December 31, 1999, the Plan had
2,000,000 shares of common stock reserved for issuance. The following
summarizes transactions in the Plan for the years ended December 31:
<CAPTION>
1999 1998 1997
-------------------------- ------------------------ ------------------------
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 1,710,600 $ 14.89 1,145,100 $ 13.52 956,600 $ 13.21
Granted 10,000 13.69 654,000 17.38 210,000 14.92
Exercised - - (14,500) 12.88 (11,500) 13.52
Surrendered (54,675) 16.55 (74,000) 16.03 (10,000) 13.94
----------- --------- ---------
Outstanding,
December 31 1,665,925 14.83 1,710,600 14.89 1,145,100 13.52
=========== ========= =========
Exercisable,
December 31 1,208,725 14.03 855,933 13.38 681,767 13.29
=========== ========= =========
Available for grant,
December 31 308,075 167,900 821,900
=========== ========= =========
</TABLE>
The weighted-average remaining contractual life of the 1,665,925
options outstanding at December 31, 1999 was 6.4 years, 909,325 options
which had exercise prices ranging from $11.25 to $14.125 and 756,600
options which had exercise prices ranging from $14.875 to $17.875. 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):
1999 1998 1997
---------- ---------- ----------
Net earnings as reported $ 35,311 $ 32,441 $ 30,385
========== ========== ==========
Pro forma net earnings $ 35,019 $ 32,187 $ 30,220
========== ========== ==========
Earnings per share as reported:
Basic $ 1.16 $ 1.11 $ 1.26
========== =========== ==========
Diluted $ 1.16 $ 1.10 $ 1.25
========== =========== ==========
Pro forma earnings per share:
Basic $ 1.15 $ 1.10 $ 1.26
========== =========== ==========
Diluted $ 1.15 $ 1.09 $ 1.25
========== =========== ==========
1999 ANNUAL REPORT - PAGE 47
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 1999, 1998 and 1997: (i) risk free rates
of 5.1% for the 1999 grant, 5.7% and 5.9% for 1998 grants and 6.9% and
7.0% for 1997 grants, (ii) expected volatility of 24.6%, 17.4% and
13.6%, respectively, (iii) dividend yields of 10.5% , 7.9% and 7.7%,
respectively, and (iv) expected lives of ten years for grants in 1999,
1998 and 1997.
14. MERGER TRANSACTION:
On December 18, 1997, the Company's stockholders voted to approve an
agreement and plan of merger with CNL Realty Advisors, Inc. (the
"Advisor"), whereby the stockholders of the Advisor agreed to exchange
100 percent of the outstanding shares of common stock of the Advisor
for up to 2,200,000 shares (the "Share Consideration") of the Company's
common stock (the "Merger"). As a result, the Company became a fully
integrated, self-administered real estate investment trust effective
January 1, 1998. Ten percent of the Share Consideration (220,000
shares) was paid January 1, 1998, and the balance (the "Share Balance")
of the Share Consideration is to be paid over time, within five years
from the date of the Merger, based on the Company's completed property
acquisitions and completed development projects in accordance with the
Merger agreement. The market value of the common shares issued on
January 1, 1998 was $3,933,000, of which $12,000 was allocated to the
net tangible assets acquired and the difference of $3,921,000 was
accounted for as expenses incurred in acquiring the Advisor from a
related party. In addition, in connection with the Merger, the Company
incurred costs totaling $771,000 consisting primarily of legal and
accounting fees, directors' compensation and fairness opinions. For
accounting purposes, the Advisor was not considered a "business" for
purposes of applying APB Opinion No. 16, "Business Combinations," and
therefore, the market value of the common shares issued in excess of
the fair value of the net tangible assets acquired was charged to
operations rather than capitalized as goodwill.
Since the effective date of the Merger, the Company has issued 855,922
shares of the Share Balance. The market value of the Share Balance
issued was $10,634,000, all of which was charged to operations. On
January 1, 2000, in connection with the property acquisitions during
the quarter ended December 31, 1999, an additional 50,711 shares of the
Share Balance became issuable to the stockholders of the Advisor. The
market value of the 50,711 shares at the date the shares became
issuable totaled $491,000, all of which is to be charged to operations
during the year ended December 31, 2000. Pursuant to the agreement and
the plan of merger, the Company is required to issue the shares within
90 days after the shares become issuable. To the extent the remaining
Share Balance is paid over time, the market value of the common shares
issued will also be charged to operations.
Upon consummation of the Merger on January 1, 1998, all employees of
the Advisor became employees of the Company, and any obligation to pay
fees under the advisor agreement between the Company and the Advisor
was terminated.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company believes the carrying values of its line of credit payable
and the lines of credit receivable from Services and a wholly-owned
subsidiary of Services approximate fair value based upon their nature,
terms and variable interest rates. The Company believes that the
carrying value of its mortgages payable and mortgages receivable at
December 31, 1999 approximate fair value, based upon current market
prices of similar issues. At December 31, 1999, the fair value of the
Company's notes payable was $185,840,000 based upon the quoted market
price.
16. RELATED PARTY TRANSACTIONS:
The Company manages Net Lease Institutional Realty, L.P. (the
"Partnership"), in which the Company holds a 20 percent equity
interest. Pursuant to a management agreement, the Partnership paid the
Company $218,000 in asset management fees during each of the years
ended December 31, 1999 and 1998.
A wholly-owned subsidiary of Services holds a 33 1/3 percent equity
interest in WXI/SMC Real Estate LLC (the "LLC"). The Company provided
certain management services for the LLC on behalf of Services pursuant
to the LLC's Limited Liability Company Agreement and Property
Management and Development Agreement. The LLC
1999 ANNUAL REPORT - PAGE 48
paid the Company $314,000 in fees and $200,000 in expense
reimbursements during the year ended December 31, 1999 relating to
these services.
During the years ended December 31, 1999 and 1998, the Company provided
certain development services for an affiliate of a member of the
Company's board of directors. In connection therewith, the Company
earned $1,351,000 and $2,144,000, respectively, in development fees
relating to these services. The Company's receivables balance at
December 31, 1999 and 1998 includes $634,000 and $338,000,
respectively, of these development fees.
As of December 31, 1999, the Company held two mortgages totaling
$6,755,000 with affiliates of certain members of the Company's board of
directors.
In November 1999, the Company entered into a lease agreement for its
office space (the "Lease") with an affiliate of a member of the
Company's board of directors. The Lease provides for rent in the amount
of $390,000 per year, expiring in October 2014.
In connection with the revolving credit facilities between the Company
and Services and the Company and a wholly-owned subsidiary of Services,
the Company received $1,530,000 in interest and fees during the year
ended December 31, 1999. In addition, Services paid the Company
$177,000 in expense reimbursements for accounting services provided by
the Company during the year ended December 31, 1999.
Prior to the Merger, certain directors and officers of the Company held
similar positions with the Advisor.
During the year ended December 31, 1997, the Company acquired 27
properties and three buildings which were developed by the tenant on
land parcels owned by the Company, from unrelated, third parties. In
connection with the acquisition of these 27 properties and three
buildings, the Company paid the Advisor $2,552,000 in acquisition fees
and expense reimbursement fees (representing 1.5% and 0.5%,
respectively, of the cost of the properties).
In addition, during the year ended December 31, 1997, the Company
acquired 15 properties for purchase prices totaling $39,323,000 from
affiliates of the Advisor who had developed the properties. The
purchase prices paid by the Company for these properties equaled 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 paid to an affiliate of the
Advisor. In addition, during 1997, the Company purchased five land
parcels from unrelated, third parties on which buildings were being
developed by an affiliate of the Advisor. The Company paid developers
fees totaling $376,000 to an affiliate of the Advisor who was
developing the five properties. No acquisition fees or expense
reimbursement fees were paid to the Advisor in connection with the
acquisition of these 20 properties.
Prior to the Merger, the Company and the Advisor had entered into an
advisory agreement (the "Advisory Agreement"), which provided for the
Advisor to perform services in connection with the day to day
operations of the Company. In connection therewith, the Advisor
received 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 in advisory fees for the year ended December 31, 1997.
In September 1997, 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.
In March 1999, the Company sold 38 of its properties to an affiliate of
a member of the Company's board of directors for a total of $36,568,000
and received net proceeds of $36,173,000, resulting in a gain of
$5,363,000 for financial reporting purposes.
1999 ANNUAL REPORT - PAGE 49
17. 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. This Statement was effective for fiscal years
beginning after December 15, 1997. 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.
<TABLE>
The following table represents the revenues, expenses and asset
allocation for the two segments and the Company's consolidated totals
at December 31, 1999 and 1998, and for the years then ended:
<CAPTION>
Rental and
Earned Fee
Income Income Corporate Consolidated
------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
1999
----
Revenues $ 73,119 $ 3,174 $ 250 $ 76,543
General operating and
administrative expenses 4,630 1,345 205 6,180
Real estate expenses 432 - - 432
Interest expense 21,920 - - 21,920
Depreciation and amortization 8,419 185 30 8,634
Expenses incurred in acquiring
advisor from related party - - 9,824 9,824
Equity in earnings of
unconsolidated subsidiary - (1,337) - (1,337)
Equity in earnings of
unconsolidated partnership 371 - - 371
Gain on sale of real estate 6,724 - - 6,724
------------ --------- ------------ ------------
Net earnings $ 44,813 $ 307 $ (9,809) 35,311
============ ========= ============ ============
Assets $ 749,626 $ 81 $ 82 749,789
============ ========= ============ ============
Additions to long-lived assets:
Real estate $ 77,964 $ - $ - $ 77,964
============ ========= ============ ============
Other $ 218 $ 192 $ 37 $ 447
============ ========= ============ ============
</TABLE>
1999 ANNUAL REPORT - PAGE 50
<TABLE>
<CAPTION>
Rental and
Earned Fee
Income Income Corporate Consolidated
------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
1998
----
Revenues $ 62,067 $ 2,706 $ - $ 64,773
General operating and
administrative expenses 5,558 1,137 1,040 7,735
Real estate expenses 599 - - 599
Interest expense 13,460 - - 13,460
Depreciation and amortization 6,730 19 10 6,759
Expenses incurred in acquiring
advisor from related party - - 5,501 5,501
Equity in earnings of
unconsolidated partnership 367 - - 367
Gain on sale of real estate 1,355 - - 1,355
------------ --------- ------------ ------------
Net earnings $ 37,442 $ 1,550 $ (6,551) $ 32,441
============ ========= ============ ============
Assets $ 685,432 $ 108 $ 55 $ 685,595
============ ========= ============ ============
Additions to long-lived assets:
Real estate $ 150,730 $ - $ - $ 150,730
============ ========= ============ ============
Other $ 1,133 $ 108 $ 55 $ 1,296
============ ========= ============ ============
</TABLE>
Prior to 1998, the Company did not provide services generating fee
income from development, property management and asset management
services.
18. MAJOR TENANTS:
The following schedule presents rental and earned income, including
contingent rents, from operators representing more than ten percent of
the Company's total rental and earned income for the years ended
December 31 (dollars in thousands):
1999 1998 1997
------ ------ ------
Barnes & Noble
Superstores, Inc. $ (a) $ (a) $5,951
Eckerd Corporation $9,048 $7,170 $5,149
(a) Rental and earned income from the operator did not represent more
than 10 percent of the Company's total rental and earned income for the
respective year.
1999 ANNUAL REPORT - PAGE 51
19. COMMITMENTS AND CONTINGENCIES:
As of December 31, 1999, the Company owned two land parcels subject to
lease agreement with tenants whereby the Company has agreed to
construct a building on each of the respective land parcels for
aggregate construction costs of approximately $4,206,000, of which
$109,000 of costs had been incurred at December 31, 1999. Pursuant to
the lease agreements, rent is to commence on the properties upon
completion of construction of the buildings.
During the year ended December 31, 1999, the Company entered into a
purchase and sale agreement whereby the Company acquired ten land
parcels leased to major retailers and has agreed to acquire the
buildings on each of the respective land parcels at the expiration of
the initial term of the ground lease for an aggregate amount of
approximately $23 million. The seller of the buildings holds a security
interest in each of the land parcels which secures the Company's
obligation to purchase the buildings under the purchase and sale
agreement.
The Company is a co-defendant in a lawsuit filed by a property owner
for alleged breach of a ground lease. The suit asks for damages of
$7,500,000 and/or specific performance of the ground lease. Management
believes it will prevail in this suit and intends to vigorously defend
its position. The Company believes, in the unlikely event that the
Company were to be held liable, the relief granted by the court would
be specific performance of the ground lease or damages in an amount far
less than the amount sought by the plaintiff and would not materially
affect the Company's operations or financial condition.
In the ordinary course of its business, the Company is a party to
various other legal actions which the Company believes are routine in
nature and incidental to the operation of the business of the Company.
The Company believes that the outcome of the proceedings will not have
a material adverse effect upon its operations or financial condition.
1999 ANNUAL REPORT - PAGE 52
<TABLE>
CONSOLIDATED QUARTERLY FINANCIAL DATA
(dollars in thousands, except per share data)
<CAPTION>
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter Year
------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Rent and other revenue $ 18,830 $ 19,152 $ 18,983 $ 19,578 $ 76,543
Depreciation and amortization
expense 1,993 2,060 2,230 2,351 8,634
Interest expense 4,777 5,357 5,663 6,123 21,920
Advisor acquisition expense 4,928 3,239 794 863 9,824
Other expenses 2,437 1,943 1,294 938 6,612
Net earnings 9,830 7,135 8,796 9,550 35,311
Net earnings per share (1):
Basic 0.33 0.24 0.29 0.31 1.16
Diluted 0.32 0.23 0.29 0.31 1.16
1998
-------------------------------
Rent and other revenue $ 15,375 $ 15,251 $ 15,821 $ 18,326 $ 64,773
Depreciation and amortization
expense 1,572 1,655 1,708 1,824 6,759
Interest expense 3,000 2,868 3,307 4,285 13,460
Advisor acquisition expense 4,692 - - 809 5,501
Other expenses 1,762 1,356 2,234 2,982 8,334
Net earnings 4,440 9,463 9,951 8,587 32,441
Net earnings per share (1):
Basic 0.16 0.32 0.34 0.29 1.11
Diluted 0.15 0.32 0.34 0.29 1.10
(1) Calculated independently for each period, and consequently, the sum of the
quarters may differ from the annual amount.
</TABLE>
1999 ANNUAL REPORT - PAGE 53
SHARE PRICE AND DIVIDEND DATA
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 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. <TABLE> <CAPTION>
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter Year
----------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
High $ 13.9375 $ 13.8125 $ 13.1875 $ 11.5625 $ 13.9375
Low 11.1250 11.0625 10.4375 9.4375 9.4375
Close 11.1875 12.8750 10.6250 9.9375 9.9375
Dividends paid per share 0.31 0.31 0.31 0.31 1.24
1998
-----------------------------
High $ 18.0000 $ 17.7500 $ 16.7500 $ 15.6875 $ 18.0000
Low 16.1250 15.4375 12.7500 12.6250 12.6250
Close 14.7500 16.1875 14.6250 13.2500 13.2500
Dividends paid per share 0.30 0.31 0.31 0.31 1.23
</TABLE>
For federal income tax purposes, 7.5% and 11.1% of dividends paid in 1999 and
1998, respectively, were treated as a non-taxable return of capital and 1.96% of
the 1999 dividend was considered capital gain (representing 0.55% of capital
gain - 20% and 1.41% of unrecaptured section 1250 gain).
The Company intends to pay regular quarterly dividends its stockholders. Future
distributions will be declared and paid at the discretion of the board of
directors and will depend upon cash generated by operating activities, the
Company's financial condition, capital requirements, annual distribution
requirements under the REIT provisions of the Internal Revenue Code of 1986 and
such other factors as the board of directors deems relevant.
On February 18, 2000, there were approximately 1,360 shareholders of record of
common stock.
APPENDIX
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