UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 0-12989
COMMERCIAL NET LEASE REALTY, INC.
(exact name of registrant as specified in its charter)
Maryland 56-1431377
(State or other jurisdiction of (I.R.S. Employment Identification No.)
incorporation or organization)
450 South Orange Avenue, Orlando, Florida 32801
(Address of principal executive offices, including zip code)
(407) 265-7348
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X
No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
30,355,096 shares of Common Stock, $0.01 par value, outstanding as of August 11,
2000.
<PAGE>
COMMERCIAL NET LEASE REALTY, INC.
and SUBSIDIARIES
CONTENTS
Part I
Item 1.Financial Statements: Page
Condensed Consolidated Balance Sheets...............................1
Condensed Consolidated Statements of Earnings.......................2
Condensed Consolidated Statements of Cash Flows.....................3
Notes to Condensed Consolidated Financial Statements................5
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................10
Item 3.Quantitative and Qualitative Disclosures About Market Risk.........13
Part II
Other Information.........................................................14
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Real estate:
Accounted for using the operating method, net of
accumulated depreciation and amortization of $25,818
and $22,023, respectively $ 541,741 $ 546,193
Accounted for using the direct financing method 123,482 125,491
Investment in unconsolidated subsidiary 1,928 4,502
Investment in unconsolidated partnership 3,852 3,844
Mortgages and accrued interest receivable 17,553 16,241
Mortgages and other receivables from unconsolidated
subsidiary 46,723 27,597
Cash and cash equivalents 2,101 3,329
Receivables 1,959 2,119
Accrued rental income 14,631 13,182
Debt costs, net of accumulated amortization of $3,297 and
$2,894, respectively 2,575 2,964
Other assets 4,945 4,327
------------ ------------
Total assets $ 761,490 $ 749,789
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit payable $ 121,500 $ 108,700
Mortgages payable 38,360 40,429
Notes payable, net of unamortized discount of $548 and
$592, respectively, and unamortized interest rate
hedge gain of $2,199 and $2,434, respectively 201,651 201,842
Accrued interest payable 3,100 2,744
Accounts payable and accrued expenses 2,176 1,717
Other liabilities 3,902 2,995
------------ ------------
Total liabilities 370,689 358,427
------------ ------------
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 15,000,000
shares; none issued or outstanding - -
Common stock, $0.01 par value. Authorized 90,000,000
shares; issued and outstanding 30,355,096 and
30,255,939 shares at June 30, 2000 and December 31,
1999, respectively 303 303
Excess stock, $0.01 par value. Authorized 105,000,000
shares; none issued or outstanding - -
Capital in excess of par value 397,399 396,403
Accumulated dividends in excess of net earnings (6,901) (5,344)
------------ ------------
Total stockholders' equity 390,801 391,362
------------ ------------
$ 761,490 $ 749,789
============ ============
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases $ 14,486 $ 14,404 $ 30,213 $ 28,259
Earned income from direct financing
leases 3,299 3,494 6,620 7,138
Contingent rental income 249 300 521 433
Development and asset management fees
from related parties 94 460 190 1,504
Interest from unconsolidated subsidiary 754 184 1,365 184
Interest - other 458 243 924 301
Other 244 67 338 163
---------- ---------- ---------- ----------
19,584 19,152 40,171 37,982
---------- ---------- ---------- ----------
Expenses:
General operating and administrative 1,236 1,865 2,486 4,204
Real estate expenses 92 78 192 176
Interest 6,233 5,357 12,879 10,134
Depreciation and amortization 2,254 2,060 4,542 4,053
Expenses incurred in acquiring advisor
from related party 275 3,239 766 8,167
---------- --------- ---------- ----------
10,090 12,599 20,865 26,734
---------- ---------- ---------- ----------
Earnings before equity in earnings of
unconsolidated subsidiary and
unconsolidated partnership, and gain on
sale of real estate 9,494 6,553 19,306 11,248
Equity in earnings of unconsolidated
subsidiary (1,015) (253) (2,276) (253)
Equity in earnings of unconsolidated
partnership 95 94 188 186
Gain on sale of real estate - 741 - 5,784
---------- ---------- ---------- ----------
Net earnings $ 8,574 $ 7,135 $ 17,218 $ 16,965
========== ========== ========== ==========
Net earnings per share of common stock:
Basic $ 0.28 $ 0.24 $ 0.57 $ 0.56
========== ========== ========== ==========
Diluted $ 0.28 $ 0.23 $ 0.57 $ 0.56
========== ========== ========== ==========
Weighted average number of shares outstanding:
Basic 30,353,348 30,369,539 30,339,649 30,205,092
========== ========== ========== ==========
Diluted 30,377,957 30,398,186 30,356,790 30,326,275
========== ========== ========== ==========
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 17,218 $ 16,965
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 4,542 4,053
Amortization of notes payable discount 44 12
Amortization of deferred interest rate hedge gain (235) (13)
Gain on sale of real estate - (5,784)
Expenses incurred in acquiring advisor from related
party 766 8,167
Equity in earnings of unconsolidated subsidiary, net
of deferred intercompany profits 2,574 253
Distributions (equity in earnings) from
unconsolidated partnership net of equity in
earnings (distributions) (10) 1
Decrease in real estate leased to others using the
direct financing method 995 883
Decrease in leasehold interests 1,455 -
Increase in mortgages and accrued interest receivable 155 183
Decrease in receivables 127 1,068
Increase in accrued rental income (1,585) (1,774)
Decrease (increase) in other assets 470 (244)
Increase in accrued interest payable 356 89
Increase (decrease) in accounts payable and accrued
expenses (288) 463
Increase in other liabilities 20 341
---------- ----------
Net cash provided by operating activities 26,604 24,663
---------- ----------
Cash flows from investing activities:
Proceeds from the sale of real estate 838 40,103
Additions to real estate accounted for using the operating
method (1,223) (67,324)
Additions to real estate accounted for using the direct
financing method - (1,901)
Increase in mortgages receivable (417) (3,952)
Mortgage payments received 653 58
Increase in mortgages and other receivables from
unconsolidated subsidiary (19,404) (4,789)
Increase in other assets (395) (351)
Other (53) 486
---------- ----------
Net cash used in investing activities (20,001) (37,670)
---------- ----------
Cash flows from financing activities:
Proceeds from line of credit payable 25,600 39,300
Repayment of line of credit payable (12,800) (105,900)
Repayment of mortgages payable (2,069) (899)
Proceeds from notes payable - 99,608
Proceeds from termination of interest rate hedge - 2,679
Payment of debt costs (14) (735)
Proceeds from issuance of common stock 279 1,863
Payment of stock issuance costs - (40)
Payment of dividends (18,775) (18,666)
Other (52) (229)
---------- ----------
Net cash provided by (used in) financing activities (7,831) 16,981
---------- ----------
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents (1,228) 3,974
Cash and cash equivalents at beginning of period 3,329 1,442
---------- ----------
Cash and cash equivalents at end of period $ 2,101 $ 5,416
========== ==========
Supplemental schedule of non-cash investing and financing activities:
Issued 77,470 and 658,222 shares of common stock,
respectively, in connection with the acquisition of the
Company's advisor $ 766 $ 8,167
========== ==========
Mortgage note accepted in connection with sale of real estate $ 1,425 $ 3,538
========== ==========
Real estate and other assets contributed to unconsolidate
subsidiary in exchange for:
Non-voting common stock $ - $ 5,700
========== ==========
Mortgage receivable $ - $ 8,064
========== ==========
</TABLE>
<PAGE>
1. Basis of Presentation:
---------------------
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and do
not include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements reflect
all adjustments, consisting of normal recurring adjustments, which are, in
the opinion of management, necessary for a fair presentation of the
results for the interim periods presented. Operating results for the
quarter and six months ended June 30, 2000, may not be indicative of the
results that may be expected for the year ending December 31, 2000.
Amounts as of December 31, 1999, included in the financial statements,
have been derived from the audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in the Form 10-K of
Commercial Net Lease Realty, Inc. for the year ended December 31, 1999.
The consolidated financial statements include the accounts of Commercial
Net Lease Realty, Inc. and its wholly-owned subsidiaries (the "Company").
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Basic earnings per share are calculated based upon the weighted average
number of common shares outstanding during each period and diluted
earnings per share are calculated based upon weighted average number of
common shares outstanding plus dilutive potential common shares.
In December 1999, the Securities and Exchange Commission (the "SEC")
published Staff Accounting Bulletin 101, "Revenue Recognition." The
Bulletin expressed the SEC's position regarding revenue recognition in
financial statements, including income statement presentation and
disclosures. The implementation date of the Bulletin, as amended, is no
later than the fourth quarter of fiscal years beginning after December 15,
1999. The Company does not believe the implementation of this Bulletin
will have a material effect on the Company's financial position or results
of operations.
2. Leases:
------
The Company generally leases its real estate to operators of major retail
businesses. As of June 30, 2000, 180 of the leases have been classified as
operating leases and 83 leases have been classified as direct financing
leases. For the leases classified as direct financing leases, the building
portions of the property leases are accounted for as direct financing
leases while the land portions of 47 of these leases are accounted for as
operating leases. Substantially all leases have initial terms of 10 to 20
years (expiring between 2001 and 2020) and provide for minimum rentals. In
addition, the majority of the leases provide for contingent rentals and/or
scheduled rent increases over the terms of the leases. The tenant is also
generally required to pay all property taxes and assessments,
substantially maintain the interior and exterior of the building and carry
insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two to four successive five-year periods subject to
substantially the same terms and conditions as the initial lease.
3. Line of Credit Payable:
----------------------
In September 1999, the Company entered into an amended and restated loan
agreement for a $200,000,000 revolving credit facility (the "Credit
Facility"). In May 2000, the Company exercised its option to extend the
revolving credit maturity date to July 30, 2001. As of June 30, 2000 and
December 31, 1999, the outstanding principal balance was $121,500,000 and
$108,700,000, respectively, plus accrued interest of $448,000 and
$135,000, respectively.
4. Earnings Per Share:
------------------
The following represents the calculations of earnings per share and the
weighted average number of shares of dilutive potential common stock for:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Net earnings $ 8,574,000 $ 7,135,000 $17,218,000 $16,965,000
=========== =========== =========== ===========
Weighted average number
of shares outstanding 30,271,506 29,667,539 30,264,824 29,629,587
Merger contingent shares 81,842 702,000 74,825 575,505
----------- ----------- ----------- -----------
Weighted average number
of shares outstanding
used in basic earnings
per share 30,353,348 30,369,539 30,339,649 30,205,092
=========== =========== =========== ===========
Basic earnings per share $ 0.28 $ 0.24 $ 0.57 $ 0.56
=========== =========== =========== ===========
Diluted Earnings Per Share:
Net earnings $ 8,574,000 $ 7,135,000 $17,218,000 $16,965,000
=========== =========== =========== ===========
Weighted average number
of shares outstanding 30,271,506 29,667,539 30,264,824 29,629,587
Effect of dilutive
securities:
Stock options 1,052 10,171 531 7,339
Merger contingent shares 105,399 720,476 91,435 689,349
----------- ----------- ----------- -----------
Weighted average number
of shares outstanding
used in diluted
earnings per share 30,377,957 30,398,186 30,356,790 30,326,275
=========== =========== =========== ===========
Diluted earnings per share $ 0.28 $ 0.23 $ 0.57 $ 0.56
=========== =========== =========== ===========
</TABLE>
The following represents the number of options of common stock which were
not included in computing diluted earnings per share because their effects
were antidilutive:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Antidilutive potential common
stock 1,658,663 1,477,755 1,662,294 1,567,772
=========== =========== =========== ===========
</TABLE>
5. Related Party Transactions:
--------------------------
In connection with the mortgages and other receivables from the Company's
unconsolidated subsidiary, Commercial Net Lease Realty Services, Inc.
("Services"), the Company received $1,384,000 and $191,000 in interest and
fees during the six months ended June 30, 2000 and 1999, respectively. In
addition, Services paid the Company $204,000 and $37,000 in expense
reimbursements for accounting services provided by the Company during the
six months ended June 30, 2000 and 1999, respectively.
In April 2000, the Company entered into the Modification of Amended and
Restated Secured Revolving Line of Credit and Security Agreement with
Services, which amended Services' existing credit agreement with the
Company by (i) increasing the borrowing capacity from $30,000,000 to
$50,000,000, and (ii) extending the expiration date to July 30, 2001. In
addition, the Company entered into the Modification of Secured Revolving
Line of Credit and Security Agreement with a wholly-owned subsidiary of
Services, which amended its existing $20,000,000 revolving credit facility
with the Company by extending the expiration date to July 30, 2001.
6. Segment Information:
-------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. While the Company does
not have more than one reportable segment as defined by the Statement, the
Company has identified two primary sources of revenue: (i) rental and
earned income from the triple net leases and (ii) fee income from
development, property management and asset management services.
The following tables represent the revenues, expenses and asset allocation
for the two segments and the Company's consolidated totals at (dollars in
thousands):
<TABLE>
<CAPTION>
Rental and
Earned Fee Consolidated
Income Income Corporate Totals
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
June 30, 2000 and for
the quarter then ended
-------------------------
Revenues $ 18,673 $ 911 $ - $ 19,584
General operating and
administrative expenses 901 44 291 1,236
Real estate expenses 92 - - 92
Interest expense 6,233 - - 6,233
Depreciation and amortization 2,225 25 4 2,254
Expenses incurred in acquiring
advisor from related party - - 275 275
Equity in earnings of
unconsolidated subsidiary (1,015) - (1,015)
Equity in earnings of
unconsolidated partnership 95 - - 95
------------ ------------ ------------ ------------
Net earnings $ 9,317 $ (173) $ (570) $ 8,574
============ ============ ============ ============
Assets $ 761,325 $ 83 $ 82 $ 761,490
============ ============ ============ ============
Additions to long-lived assets:
Real estate $ 1,089 $ - $ - $ 1,089
============ ============ ============ ============
Other $ 39 $ 1 $ - $ 40
============ ============ ============ ============
June 30, 1999 and for
the quarter then ended
-------------------------
Revenues $ 18,446 $ 706 $ - $ 19,152
General operating and
administrative expenses 1,517 226 122 1,865
Real estate expenses 78 - - 78
Interest expense 5,357 - - 5,357
Depreciation and amortization 2,047 9 4 2,060
Expenses incurred in acquiring
advisor from related party - - 3,239 3,239
Equity in earnings of
unconsolidated subsidiary - (253) - (253)
Equity in earnings of
unconsolidated partnership 94 - - 94
Gain on sale of real estate 741 - - 741
------------ ------------ ------------ ------------
Net earnings $ 10,282 $ 218 $ (3,365) $ 7,135
============ ============ =========== ============
Assets $ 726,843 $ 39 $ 133 $ 727,015
============ ============ ============ ============
Additions to long-lived assets:
Real estate $ 44,586 $ - $ - $ 44,586
============ ============ ============ ============
Other $ 23 $ - $ 50 $ 73
============ ============ ============ ============
June 30, 2000 and for
the six months then ended
----------------------------
Revenues $ 38,494 $ 1,677 $ - $ 40,171
General operating and
administrative expenses 1,849 92 545 2,486
Real estate expenses 192 - - 192
Interest expense 12,879 - - 12,879
Depreciation and amortization 4,485 49 8 4,542
Expenses incurred in acquiring
advisor from related party - - 766 766
Equity in earnings of
unconsolidated subsidiary - (2,276) - (2,276)
Equity in earnings of
unconsolidated partnership 188 - - 188
------------ ------------ ------------ ------------
Net earnings $ 19,277 $ (740) $ (1,319) $ 17,218
============ ============ ============ ============
Assets $ 761,325 $ 83 $ 82 $ 761,490
============ ============ ============ ============
Additions to long-lived assets:
Real estate $ 1,223 $ - $ - $ 1,223
============ ============ ============ ============
Other $ 68 $ 2 $ - $ 70
============ ============ ============ ============
June 30, 1999 and for
the six months then ended
----------------------------
Revenues $ 36,161 $ 1,821 $ - $ 37,982
General operating and
administrative expenses 3,056 717 431 4,204
Real estate expenses 176 - - 176
Interest expense 10,134 - - 10,134
Depreciation and amortization 4,006 35 12 4,053
Expenses incurred in acquiring
advisor from related party - - 8,167 8,167
Equity in earnings of
unconsolidated subsidiary - (253) - (253)
Equity in earnings of
unconsolidated partnership 186 - - 186
Gain on sale of real estate 5,784 - - 5,784
------------ ------------ ------------ ------------
Net earnings $ 24,759 $ 816 $ (8,610) $ 16,965
============ ============ ============ ============
Assets $ 726,843 $ 39 $ 133 $ 727,015
============ ============ ============ ============
Additions to long-lived assets:
Real estate $ 69,225 $ - $ - $ 69,225
============ ============ ============ ============
Other $ 92 $ 81 $ 31 $ 204
============ ============ ============ ============
</TABLE>
7. Subsequent Event:
----------------
In July 2000, the Company declared dividends to its shareholders of
$9,410,000 or $0.31 per share of common stock, payable in August 2000.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
------------
Commercial Net Lease Realty, Inc. is a fully integrated, self-administrated real
estate investment trust that acquires, owns, manages and indirectly, through
investment interests, develops high-quality, freestanding properties that are
generally leased to major retail businesses under long-term commercial net
leases. As of June 30, 2000, Commercial Net Lease Realty, Inc. and its
subsidiaries (the "Company") owned, either directly or through a partnership
interest, 276 properties (the "Properties") substantially all of which are
leased to major retail businesses.
Liquidity and Capital Resources
-------------------------------
General. Historically, the Company's only demand for funds has been for the
payment of operating expenses and dividends, for property acquisitions and
development, either directly or through investment interests, and for the
payment of interest on its outstanding indebtedness. Generally, cash needs for
items other than property acquisitions and development have been met from
operations and property acquisitions and development have been funded by equity
and debt offerings, bank borrowings, the sale of Properties and, to a lesser
extent, from internally generated funds. Potential future sources of capital
include proceeds from the public or private offering of the Company's debt or
equity securities, secured or unsecured borrowings from banks or other lenders,
proceeds from the sale of Properties, as well as undistributed funds from
operations. For the six months ended June 30, 2000 and 1999, the Company
generated $26,604,000 and $24,663,000 respectively, in net cash provided by
operating activities. The increase in cash from operations for the six months
ended June 30, 2000, as compared to the six months ended June 30, 1999, is
primarily the result of changes in revenues and expenses as discussed in
"Results of Operations."
The Company's leases typically provide that the tenant bears responsibility for
substantially all property costs and expenses associated with ongoing
maintenance and operation including utilities, property taxes and insurance. In
addition, the Company's leases generally provide that the tenant is responsible
for roof and structural repairs. Certain of the Company's Properties are subject
to leases under which the Company retains responsibility for certain costs and
expenses associated with the Property. Because many of the Properties which are
subject to leases that place these responsibilities on the Company are recently
constructed, management anticipates that capital demands to meet obligations
with respect to these Properties will be minimal for the foreseeable future and
can be met with funds from operations and working capital. The Company may be
required to use bank borrowings or other sources of capital in the event of
unforeseen significant capital expenditures.
In April 2000, the Company entered into the Modification of Amended and Restated
Secured Revolving Line of Credit and Security Agreement with the Company's
unconsolidated subsidiary, Commercial Net Lease Realty Services,
Inc.("Services"), which amended Services' existing credit agreement with the
Company by (i) increasing the borrowing capacity from $30,000,000 to
$50,000,000, and (ii) extending the expiration date to July 30, 2001. In
addition, the Company entered into the Modification of Secured Revolving Line of
Credit and Security Agreement with a wholly-owned subsidiary of Services, which
amended its existing $20,000,000 revolving credit facility with the Company by
extending the expiration date to July 30, 2001.
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 real estate investment trust, is to distribute a
substantial portion of its funds available from operations to its stockholders
in the form of dividends. For the six months ended June 30, 2000 and 1999, the
Company declared and paid dividends to its stockholders of $18,775,000 and
$18,666,000, respectively, or $0.62 per share of common stock. In July 2000, the
Company declared dividends to its shareholders of $9,410,000 or $0.31 per share
of common stock, payable in August 2000.
Results of Operations
---------------------
As of June 30, 2000 and 1999, the Company owned 267 and 266 wholly-owned
Properties, respectively, 263 and 262, respectively, of which were leased to
operators of major retail businesses. In addition, during the six months ended
June 30, 2000, the Company sold one property which was leased during 2000.
During the six months ended June 30, 1999, the Company sold 41 properties which
were leased during 1999 and one property which was vacant. During the six months
ended June 30, 2000 and 1999, the Company earned $37,354,000 and $35,830,000,
respectively, in rental income from operating leases, earned income from direct
financing leases and contingent rental income ("Rental Income"), $18,034,000 and
$18,198,000 of which was earned during the quarters ended June 30, 2000 and
1999, respectively. The increase in Rental Income during the six months ended
June 30, 2000, is primarily a result of the facts that (i) the 36 Properties
acquired and 15 buildings upon which construction was completed during 1999 were
operational for a full six months in 2000 and (ii) the Company received
non-recurring additional rental income of $1,096,000 related to the termination
of leases on two of its properties. The decrease in Rental Income for the
quarter ended June 30, 2000, as compared to the quarter ended June 30, 1999, is
primarily attributable to the decrease in earned income as a result of the sale
of one property accounted for using the direct financing method.
During the six months ended June 30, 2000 and 1999, the Company earned $190,000
and $1,504,000, respectively, in development and asset management fees, $94,000
and $460,000 of which was earned during the quarters ended June 30, 2000 and
1999, respectively. The fees earned during 2000 were primarily earned by the
Company's build-to-suit development operation. In May 1999, the Company
transferred its build-to-suit development operation to Commercial Net Lease
Realty Services, Inc., a 95 percent owned taxable unconsolidated subsidiary.
Development fees earned by Services during the quarter and six months ended June
30, 2000 are included in the Company's equity in earnings of unconsolidated
subsidiary.
During the six months ended June 30, 2000 and 1999, the Company earned
$2,289,000 and $485,000, respectively, in interest income, $1,212,000 and
$427,000 of which was earned during the quarters ended June 30, 2000 and 1999,
respectively. The increase in interest earned during 2000 is attributable to the
interest earned on the mortgages receivable and the mortgages and other
receivables from Services issued during 1999.
During the six months ended June 30, 2000 and 1999, operating expenses,
excluding interest and including depreciation and amortization, were $7,986,000
and $16,600,000, respectively, (19.9% and 43.7%, respectively, of total
revenues) $3,857,000 and $7,242,000 (19.7% and 37.8%, respectively, of total
revenues) of which was incurred during the quarters ended June 30, 2000 and
1999, respectively. The decrease in operating expenses for the quarter and six
months ended June 30, 2000, as compared to the quarter and six months ended June
30, 1999, is attributable to the decrease in charges related to the costs
incurred in acquiring the Company's external advisor from a related party and
the decrease in general operating and administrative expenses as a result of the
transfer of the Company's build-to-suit development operation to Services. The
decrease in operating expenses was partially offset by an increase in
depreciation and amortization expense as a result of a full quarter and six
months of depreciation and amortization expense relating to the 36 Properties
and 15 buildings acquired during 1999. The increase in depreciation and
amortization expense was partially offset by a decrease in depreciation and
amortization expense related to the sale of 42 properties during the six months
ended June 30, 1999.
The Company recognized $12,879,000 and $10,134,000 in interest expense for the
six months ended June 30, 2000 and 1999, respectively, $6,233,000 and $5,357,000
of which was incurred during the quarters ended June 30, 2000 and 1999,
respectively. Interest expense increased during the quarter and six months ended
June 30, 2000, primarily as a result of the higher average interest rate on the
Company's Credit Facility and the interest incurred related to the issuance of
the $100,000,000 in notes payable in June 1999. However, the increase was
partially offset by a decrease in the average borrowing levels of the Company's
Credit Facility and the maturity of a $13,150,000 mortgage payable in December
1999.
In May 1999, Services was formed to enable the Company to perform additional
development, leasing and disposition services. The Company accounts for its
investment in Services under the equity method, and therefore, recognizes 95
percent of the income or loss of Services as equity in earnings of
unconsolidated subsidiary. The net losses incurred by Services for the quarter
and six months ended June 30, 2000 are primarily due to the nature of the
development, leasing and real estate disposition business which provides for
revenue recognition upon completion of construction, leasing or disposition of
the real estate, while many of the related expenses are recognized as incurred.
Investment Considerations. This information contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Although the Company believes that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, the Company's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause a difference include the following: changes in general economic
conditions, changes in real estate market conditions, continued availability of
proceeds from the Company's debt or equity capital, the ability of the Company
to locate suitable tenants for its Properties and the ability of tenants to make
payments under their respective leases.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in quantitative and qualitative disclosures
about market risk as previously reported in the Form 10-K for the year ended
December 31, 1999.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
No material developments in legal proceedings as previously reported
on the Form 10-K for the year ended December 31, 1999.
Item 2. Changes in Securities and Use of Proceeds. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On June 16, 2000, the Company held its Annual Meeting of Shareholders
(the "Annual Meeting"). At the Annual Meeting, the following nominees
were elected to the Board of Directors of the Company: Messrs. Robert
A. Bourne (25,175,064 for and 762,788 withheld), Edward Clark
(25,147,194 for and 790,658 withheld), Kevin B. Habicht (25,590,569
for and 347,283 withheld), Clifford R. Hinkle (25,555,662 for and
382,190 withheld), Richard B. Jennings (25,562,160 for and 375,692
withheld), Ted B. Lanier (25,583,914 for and 353,938 withheld), Gary
M. Ralston (25,590,171 for and 347,681 withheld) and James M. Seneff,
Jr. (24,088,935 for and 1,848,917 withheld). In addition, the
shareholders voted to approve the 2000 Performance Incentive Plan
(14,060,779 for, 1,542,265 against and 314,735 abstain).
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as a part of this report.
3.1 First Amended and Restated Articles of Incorporation of the
Registrant (filed as Exhibit 3.1 to the Registrant's
Registration Statement No. 333-64511 on Form S-3, and
incorporated herein by reference).
3.2 Bylaws of the Registrant (filed as Exhibit 3.3(ii) to
Amendment No. 2 to the Registrant's Registration Statement
No. 1-11290 on Form 8-B, and incorporated herein by
reference).
4.1 Specimen Certificate of Common stock, par value $0.01 per
share, of the Registrant (filed as Exhibit 3.4 to the
Registrant's Registration Statement No. 1-11290 on Form 8-B,
and incorporated herein by reference).
4.2 Form of Indenture dated March 25, 1998, by and among
Registrant and First Union National Bank, Trustee, relating
to $100,000,000 of 7.125% Notes due 2008 and $100,000,000 of
8.125% Notes due 2004 (filed as Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated March 20,
1998, and incorporated herein by reference).
4.3 Form of Supplemental Indenture No. 1 dated March 25, 1998,
by and among Registrant and First Union National Bank,
Trustee, relating to $100,000,000 of 7.125% Notes due 2008
(filed as Exhibit 4.2 to the Registrant's Current Report on
Form 8-K dated March 20, 1998, and incorporated herein by
reference).
4.4 Form of 7.125% Notes due 2008 (filed as Exhibit 4.3 to the
Registrant's Current Report on Form 8-K dated March 20,
1998, and incorporated herein by reference).
4.5 Form of Supplemental Indenture No. 2 dated June 21, 1999, by
and among Registrant and First Union National Bank, Trustee,
relating to $100,000,000 of 8.125% Notes due 2004 (filed as
Exhibit 4.2 to the Registrant's Current Report on Form 8-K
dated June 17, 1999, and incorporated herein by reference).
4.6 Form of 8.125% Notes due 2004 (filed as Exhibit 4.3 to the
Registrant's Current Report on Form 8-K dated June 17, 1999,
and incorporated herein by reference).
10.1 Letter Agreement dated July 10, 1992, amending Stock
Purchase Agreement dated January 23, 1992 (filed as Exhibit
10.34 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1992, and incorporated
herein by reference).
10.2 Advisory Agreement between Registrant and CNL Realty
Advisors, Inc. effective as of April 1, 1993 (filed as
Exhibit 10.04 to Amendment No. 1 to the Registrant's
Registration Statement No. 33-61214 on Form S-2, and
incorporated herein by reference).
10.3 1992 Commercial Net Lease Realty, Inc. Stock Option Plan
(filed as Exhibit No. 10(x) to the Registrant's Registration
Statement No. 33-83110 on Form S-3, and incorporated herein
by reference).
10.4 Secured Promissory Note, dated December 14, 1995, among
Registrant and Principal Mutual Life Insurance Company
relating to a $13,150,000 loan (filed as Exhibit 10.15 to
the Registrant's Current Report on Form 8-K dated January
18, 1996, and incorporated herein by reference).
10.5 Mortgage and Security Agreement, dated December 14, 1995,
among Registrant and Principal Mutual Life Insurance Company
relating to a $13,150,000 loan (filed as Exhibit 10.16 to
the Registrant's Current Report on Form 8-K dated January
18, 1996, and incorporated herein by reference).
10.6 Loan Agreement, dated January 19, 1996, among Registrant and
Principal Mutual Life Insurance Company relating to a
$39,450,000 loan (filed as Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995, and incorporated herein by reference).
10.7 Secured Promissory Note, dated January 19, 1996 among
Registrant and Principal Mutual Life Insurance Company
relating to a $39,450,000 loan (filed as Exhibit 10.13 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995, and incorporated herein by
reference).
10.8 Agreement and Plan of Merger dated May 15, 1997, by and
among Commercial Net Lease Realty, Inc. and Net Lease Realty
II, Inc. and CNL Realty Advisors, Inc. and the Stockholders
of CNL Realty Advisors, Inc. (filed as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated May 16, 1997,
and incorporated herein by reference).
10.9 Fourth Amended and Restated Line of Credit and Security
Agreement, dated August 6, 1997, by and among Registrant,
certain lenders and First Union National Bank, as the Agent,
relating to a $200,000,000 loan (filed as Exhibit 10 to the
Registrant's Current Report on Form 8-K dated September 12,
1997, and incorporated herein by reference).
10.10 Fifth Amended and Restated Line of Credit and Security
Agreement, dated September 23, 1999, by and among
Registrant, certain lenders and First Union National Bank,
as the Agent, relating to a $200,000,000 loan (filed
herewith).
27 Financial Data Schedule (filed herewith).
(b) No reports on Form 8-K were filed during the quarter ended June
30, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED this 11th day of August, 2000.
COMMERCIAL NET LEASE REALTY, INC.
By: /s/ Gary M. Ralston
-------------------
Gary M. Ralston
President and Director
By: /s/ Kevin B. Habicht
--------------------
Kevin B. Habicht
Chief Financial Officer and Director
