NNN REIT - 10-Q quarterly report FY

NNN REIT - 10-Q quarterly report FY

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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, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to __________. Commission File Number 0-12989 COMMERCIAL NET LEASE REALTY, INC. (exact name of registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization)	56-1431377 (I.R.S. Employment Identification No.)
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. 40,358,995 shares of Common Stock, $0.01 par value, outstanding as of August 1, 2002.


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	14

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Part II

	Other Information		20

Signatures			25

Certification of Chief Executive Officer			26

Certification of Chief Financial Officer			26


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)


	June 30, 2002			December 31, 2001

ASSETS

Real estate:
Accounted for using the operating method, net of accumulated depreciation and amortization of $34,241 and $31,678, respectively	$	711,215		$	706,280
Accounted for using the direct financing method		109,420			107,272
Investments in, mortgages and other receivables from unconsolidated affiliates		126,364			144,236
Mortgages, notes and accrued interest receivable		17,118			18,374
Cash and cash equivalents		4,218			6,974
Receivables		2,791			2,067
Accrued rental income, net of allowance		17,588			16,184
Debt costs, net of accumulated amortization of $4,831 and $4,393, respectively		3,345			3,057
Other assets		2,587			2,184

Total assets	$	994,646		$	1,006,628


LIABILITIES AND STOCKHOLDERS' EQUITY

Line of credit payable	$	72,800		$	107,400
Mortgages payable		56,806			37,011
Notes payable, net of unamortized discount of $745 and $517, respectively, and unamoritzed interest rate hedge gain of $1,167 and $1,439, respectively		290,422			290,922
Accrued interest payable		3,435			3,133
Other liabilities		16,981			3,522

Total liabilities		440,444			441,988


Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 15,000,000 shares; 1,782,024 and 1,999,974 shares issued and outstanding, respectively; stated at a liquidation value of $25 per share		44,551			50,000
Common stock, $0.01 par value. Authorized 90,000,000 shares; 40,358,995 and 40,599,158 shares issued or outstanding, respectively		404			406
Excess stock, $0.01 par value. Authorized 105,000,000 shares; none issued or outstanding		-			-
Capital in excess of par value		528,256			531,677
Accumulated dividends in excess of net earnings		(15,610	)		(14,527	)
Deferred compensation		(3,399	)		(2,916	)

Total stockholders' equity		554,202			564,640

	$	994,646		$	1,006,628


See accompanying notes to condensed consolidated financial statements. 1


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands, except per share data)


		Quarter Ended June 30,						Six Months Ended June 30,

		2002			2001			2002			2001

	Revenues:
	Rental income from operating leases	$	18,257		$	13,751		$	36,721		$	28,531
	Earned income from direct financing leases		2,874			3,047			5,738			6,272
	Interest from unconsolidated affiliates and other mortgages receivable		1,639			2,114			3,881			4,271
	Other		379			364			797			755

			23,149			19,276			47,137			39,829


	Expenses:
	General operating and administrative		2,728			1,723			4,992			3,576
	Real estate expenses		338			111			875			213
	Interest		6,406			6,052			12,973			12,346
	Depreciation and amortization		2,854			2,164			5,714			4,331
	Expenses incurred in acquiring advisor from related party		-			357			-			691

			12,326			10,407			24,554			21,157


	Earnings from continuing operations before equity in earnings of unconsolidated affiliates and gain on disposition of real estate		10,823			8,869			22,583			18,672

	Equity in earnings of unconsolidated affiliates		1,137			(865	)		1,777			(2,209	)

	Gain on disposition of real estate		-			1,586			-			4,450


	Earnings from continuing operations		11,960			9,590			24,360			20,913
	Earnings from discontinued operations		1,552			795			1,901			1,066


	Net earnings		13,512			10,385			26,261			21,979
	Preferred stock dividends		(880	)		-			(2,005	)		-


	Net earnings available to common stockholders	$	12,632		$	10,385		$	24,256		$	21,979


	Earnings per share available to common stockholders:
	Basic:
	Continuing operations	$	0.27		$	0.31		$	0.55		$	0.68
	Discontinued operations		0.04			0.03			0.05			0.04

	Net earnings	$	0.31		$	0.34		$	0.60		$	0.72

	Diluted:
	Continuing operations	$	0.27		$	0.31		$	0.55		$	0.68
	Discontinued operations		0.04			0.03			0.05			0.04

	Net earnings	$	0.31		$	0.34		$	0.60		$	0.72


	Weighted average number of common shares outstanding:
	Basic	40,262,732			30,583,463				40,449,396			30,549,820

	Diluted	40,448,937			30,707,449				40,578,307			30,625,866



See accompanying notes to condensed consolidated financial statements. 2


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)


	Six Months Ended June 30,

	2002			2001

Cash flows from operating activities:
Net earnings	$	26,261		$	21,979
Adjustments to reconcile net earnings to net cash provided by operating activities:
Stock compensation expense		499			-
Depreciation and amortization		5,849			4,414
Amortization of notes payable discount		59			53
Amortization of deferred interest rate hedge gain		(272	)		(253	)
Expenses incurred in acquiring advisor from related party		-			691
Equity in earnings of unconsolidated affiliates, net of deferred intercompany profits		(1,308	)		2,548
Gain on disposition of real estate		(859	)		(4,450	)
Decrease in real estate leased to others using the direct financing method		1,053			1,047
Increase in mortgages, notes and accrued interest receivable		(618	)		(173	)
Decrease in receivables		592			522
Increase in accrued rental income		(1,413	)		(1,327	)
Decrease (increase) in other assets		(168	)		46
Increase (decrease) in accrued interest payable		302			(13	)
Increase in other liabilities		377			1,291

Net cash provided by operating activities		30,354			26,375


Cash flows from investing activities:
Proceeds from the disposition of real estate		21,430			35,285
Additions to real estate accounted for using the operating method		(30,637	)		(13,262	)
Additions to real estate accounted for using the direct financing method		(3,201	)		-
Contributions to unconsolidated affiliates		(7,000	)		(5,000	)
Mortgage and notes payments received		1,278			842
Increase in mortgages and other receivable from unconsolidated affiliates		(70,316	)		(41,591	)
Payments received from unconsolidated affiliates		97,090			17,170
Other		(704	)		43

Net cash provided by (used in) investing activities		7,940			(6,513	)



See accompanying notes to condensed consolidated financial statements. 3


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (dollars in thousands)


	Six Months Ended June 30,

	2002			2001

Cash flows from financing activities:
Proceeds from line of credit payable		68,300			45,200
Repayment of line of credit payable		(102,900	)		(39,100	)
Proceeds from mortgages payable		21,000			-
Repayment of mortgages payable		(1,205	)		(1,049	)
Proceeds from notes payable		49,713			-
Repayment of notes payable		(50,000	)		-
Payment of debt costs		(757	)		(42	)
Proceeds from issuance of common stock		2,121			338
Payment of preferred stock dividends		(1,987	)		-
Payment of common stock dividends		(25,339	)		(19,202	)
Other		4			(98	)

Net cash used in financing activities		(41,050	)		(13,953	)


Net increase (decrease) in cash and cash equivalents		(2,756	)		5,909

Cash and cash equivalents at beginning of period		6,974			2,190


Cash and cash equivalents at end of period	$	4,218		$	8,099


Supplemental disclosure of cash flow information - interest paid, net of amount capitalized	$	12,649		$	13,194


Supplemental disclosure of non-cash investing and financing activities:
Issued 63,282 shares of common stock for the six months ended June 30, 2001 in connection with the acquisition of the Company's advisor	$	-		$	691

Preferred stock dividend for non-dissenting, unexchanged shares held by the Company's transfer agent in connection with the merger of Captec Net Lease Realty, Inc. ("Captec") in December 2001	$	18		$	-

Liability for the consideration due to the dissenting stockholders in connection with the merger of Captec in December 2001 (see Note 9)	$	13,278		$	-

Issued 64,000 shares of common stock in 2002 in connection with the Company's 2000 Performance Incentive Plan	$	982		$	-



See accompanying notes to condensed consolidated financial statements. 4


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Six Months Ended June 30, 2002 and 2001


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, 2002 may not be indicative of the results that may be expected for the year ending December 31, 2002. Amounts as of December 31, 2001, 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, 2001. The condensed 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. Certain items in the prior year’s financial statements and notes to consolidated financial statements have been reclassified to conform with the 2002 presentation. These reclassifications had no effect on stockholders’ equity or net earnings. In August 2001, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards (“FAS”) Statement No. 143, “Accounting for Asset Retirement Obligations.” This statement is effective for fiscal years beginning after June 15, 2002. This statement addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and for the associated asset retirement costs. It requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and (or) normal use of the assets. This statement also addresses when to record a corresponding increase to the carrying amount of the related long-lived asset and to depreciate that cost over the life of the asset. Adoption of this statement is not expected to have a significant impact on the financial position or results of operations of the Company. In October 2001, the FASB issued FAS Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and broadens the presentation of discontinued operations in the income statement to include a component of an entity (rather than a segment of a business). A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. In a period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement of a business enterprise for current and prior periods shall report the results of operations of the component, including any gain or loss recognized, in discontinued


5


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Six Months Ended June 30, 2002 and 2001


1.	Basis of Presentation - continued:

	operations. This statement is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The adoption of this statement did not have a significant impact on the financial position or results of operations of the Company. However, the Company did reclassify the results of operations related to the sale of properties during the six months ended June 30, 2002 from earnings from continuing operations to earnings from discontinued operations in accordance with the statement. In April 2002, the FASB issued FAS Statement No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This statement also rescinds FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers.” This statement amends FASB Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this statement related to the rescission of Statement 4 are applicable in fiscal years beginning after May 15, 2002. The provisions of this statement related to Statement 13 are effective for transactions occurring after May 15, 2002. All other provisions of this statement are effective for financial statements issued on or after May 15, 2002. The provisions of this statement, excluding those related to the rescission of Statement 4, did not have a significant impact on the financial position or results of operations of the Company. The provisions of this statement related to the rescission of Statement 4 are not expected to have a significant impact on the financial position or results of operations of the Company. In July 2002, the FASB issued FAS Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the statement include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. The statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of this statement is not expected to have a significant impact on the financial position or results of operations of the Company.

2.	Leases:

	The Company generally leases its real estate to operators of major retail businesses. As of June 30, 2002, 256 of the leases have been classified as operating leases and 69 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 44 of these leases are accounted for as operating leases. Substantially all leases have initial terms of 10 to 20 years (expiring between 2002 and 2025) 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,


6


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Six Months Ended June 30, 2002 and 2001


2.	Leases - continued:

	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.	Mortgages Payable:

	In June 2002, the Company entered into a long-term, fixed rate mortgage and security agreement for $21,000,000. The loan provides for a 10-year mortgage with principal and interest of $138,000 payable monthly, based on a 30-year amortization, with the balance due in July 2012 and bears interest at a rate of 6.9% 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 June 30, 2002, the aggregate carrying value of these properties totaled $28,156,000.

4.	Notes Payable:

	In June 2002, the Company filed a prospectus supplement to its $200,000,000 shelf registration statement and issued $50,000,000 of 7.75% notes due 2012 (the “Notes”). The Notes are senior, unsecured obligations of the Company and are subordinated to all secured indebtedness of the Company. The Notes were sold at a discount for an aggregate purchase price of $49,713,000 with interest payable semi-annually commencing on December 1, 2002. The discount of $287,000 is being amortized as interest expense over the term of the debt obligation using the effective interest method. The Notes are redeemable at the option of the Company, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the Notes being redeemed plus accrued interest thereon through the redemption date and (ii) the Make-Whole Amount, as defined in the Supplemental Indenture No. 4 dated May 30, 2002 for the Notes and filed as Exhibit 4.9 to this report. In connection with the debt offering, the Company incurred debt issuance costs totaling $410,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees and rating agency fees. Debt issuance costs have been deferred and are being amortized over the term of the Notes using the effective interest method.


7


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Six Months Ended June 30, 2002 and 2001


5.	Earnings from Discontinued Operations:

	In accordance with FAS Statement No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has classified the operations of the 12 properties sold during 2002 as earnings from discontinued operations. Accordingly, the results of operations related to these 12 properties for 2001 have been reclassified to earnings from discontinued operations. The following is a summary of earnings from discontinued operations (dollars in thousands):


		Quarter Ended June 30,					Six Months Ended June 30,

		2002		2001			2002		2001

	Revenues:
	Rental income from operating leases	$	889	$	796		$	1,277	$	1,089
	Earned income from direct financing leases		-		32			-		63
	Other		2		-			2		-

			891		828			1,279		1,152

	Expenses:
	General operating and administrative		-		1			-		1
	Real estate expenses		54		(10	)		102		2
	Depreciation and amortization		53		42			135		83

			107		33			237		86


	Earnings before gain on disposition of real estate		784		795			1,042		1,066

	Gain on disposition of real estate		768		-			859		-


	Earnings from discontinued operations	$	1,552	$	795		$	1,901	$	1,066



8


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Six Months Ended June 30, 2002 and 2001


6.	Earnings Per Share of Common Stock:

	The following represents the calculations of earnings per share of common stock and the weighted average number of shares of dilutive potential common stock for:


		Quarter Ended June 30,					Six Months Ended June 30,

		2002			2001		2002			2001


	Earnings from continuing operations	$	11,960,000		$	9,590,000	$	24,360,000		$	20,913,000
	Preferred stock dividends		(880,000	)		-		(2,005,000	)		-

	Earnings available to common stockholders from continuing operations		11,080,000			9,590,000		22,355,000			20,913,000

	Earnings from discontinued operations		1,552,000			795,000		1,901,000			1,066,000


	Net earnings available to common stockholders	$	12,632,000		$	10,385,000	$	24,256,000		$	21,979,000


	Weighted average number of common shares outstanding		40,262,732			30,477,610		40,449,396			30,470,479
	Merger contingent common shares		-			105,853		-			79,341


	Weighted average number of common shares outstanding used in basic earnings per common share		40,262,732			30,583,463		40,449,396			30,549,820


	Basic earnings per share available to common stockholders:
	Continuing operations	$	0.27		$	0.31	$	0.55		$	0.68
	Discontinued operations		0.04			0.03		0.05			0.04

	Net earnings	$	0.31		$	0.34	$	0.60		$	0.72


	Weighted average number of common shares outstanding		40,262,732			30,477,610		40,449,396			30,470,479
	Effect of dilutive securities:
	Common stock options and restricted stock		186,205			55,046		128,911			36,349
	Merger contingent common shares		-			174,793		-			119,038


	Weighted average number of common shares outstanding used in diluted earnings per common share		40,448,937			30,707,449		40,578,307			30,625,866


	Diluted earnings per share available to common stockholders:
	Continuing operations	$	0.27		$	0.31	$	0.55		$	0.68
	Discontinued operations		0.04			0.03		0.05			0.04

	Net earnings	$	0.31		$	0.34	$	0.60		$	0.72


9


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Six Months Ended June 30, 2002 and 2001


6.	Earnings Per Share of Common Stock - continued:

	The following represents the number of options of common stock which were not included in computing diluted earnings per common share because their effects were antidulutive:


	Quarter Ended June 30,		Six Months Ended June 30,

	2002	2001	2002	2001


Antidilutive potential common stock	801,300	1,398,892	846,313	1,480,892


7.	Related Party Transactions:

	In connection with the mortgages and other receivables from the Company’s unconsolidated subsidiary, Commercial Net Lease Realty Services, Inc. (“Services”) and its wholly-owned subsidiaries, the Company received $2,714,000 and $4,190,000 in interest and fees during the six months ended June 30, 2002 and 2001, respectively, $1,375,000 and $1,868,000 of which was earned during the quarters ended June 30, 2002 and 2001, respectively. In addition, Services paid the Company $339,000 in expense reimbursements for accounting services provided by the Company during each of the six months ended June 30, 2002 and 2001, $170,000 of which was earned during each of the quarters ended June 30, 2002 and 2001. In February and May 2002, the Company modified an existing secured revolving line of credit and security agreement with a wholly-owned subsidiary of Services to increase the borrowing capacity. The secured revolving lines of credit and security agreements with Services and its wholly-owned subsidiaries provide an aggregate borrowing capacity of $153,500,000 and each agreement has an expiration date of October 31, 2003. In February 2002, the Company acquired four properties from Services at fair market value for an aggregate cost of $15,918,000. No gain was recognized by Services on this sale. In April 2002, the Company extended the maturity dates to December 31, 2002 on four mortgages totaling $8,339,000 that are held with affiliates of certain members of the Company’s board of directors. The mortgages bear interest at a weighted average of 8.8%, with interest payable quarterly. In May 2002, the Company purchased a combined 25 percent partnership interest in CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (the “Plaza”) for $750,000. Affiliates of a member of the Company’s board of directors own the remaining partnership interests. Since November 1999, the Company has leased its office space from the Plaza. The Company’s lease expires in October 2014. During the six months ended June 30, 2002 and 2001, the Company incurred rental expenses in connection with the lease of $468,000 and $232,000, respectively. For the quarters ended June 30, 2002 and 2001, rental expenses in connection with the lease totaled $225,000 and $151,000, respectively. In addition, the Company has guaranteed 41.67% or $6,458,300, of a $15,500,000 unsecured promissory note of the Plaza. In June 2002, the Company acquired one property from a wholly-owned subsidiary of Services at fair market value for a cost of $12,648,000. No gain was recognized by Services’ subsidiary on this sale.


10


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Six Months Ended June 30, 2002 and 2001


8.	Segment Information:

	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, 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):


		Rental and Earned Income		Interest and Fee Income			Corporate			Consolidated Totals


	June 30, 2002 and for the quarter then ended
	Revenues	$	21,637	$	1,512		$	-		$	23,149
	General operating and administrative expenses		1,654		568			506			2,728
	Real estate expenses		338		-			-			338
	Interest expense		6,406		-			-			6,406
	Depreciation and amortization		2,847		5			2			2,854
	Equity in earnings of unconsolidated affiliates		452		685			-			1,137

	Earnings from continuing operations		10,844		1,624			(508	)		11,960
	Earnings from discontinued operations		1,552		-			-			1,552

	Net earnings	$	12,396	$	1,624		$	(508	)	$	13,512


	Assets	$	891,486	$	103,086		$	74		$	994,646

	Additions to long-lived assets:
	Real estate	$	17,485	$	-		$	-		$	17,485

	Other	$	7	$	2		$	1		$	10



	June 30, 2001 and for the quarter then ended
	Revenues	$	17,253	$	2,023		$	-		$	19,276
	General operating and administrative expenses		1,188		226			309			1,723
	Real estate expenses		111		-			-			111
	Interest expense		6,031		21			-			6,052
	Depreciation and amortization		2,137		24			3			2,164
	Expenses incurred in acquiring advisor from related party		-		-			357			357
	Equity in earnings of unconsolidated affiliates		86		(951	)		-			(865	)
	Gain on disposition of real estate		1,586		-			-			1,586

	Earnings from continuing operations		9,458		801			(669	)		9,590
	Earnings from discontinued operations		795		-			-			795

	Net earnings	$	10,253	$	801		$	(669	)	$	10,385



11


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Six Months Ended June 30, 2002 and 2001


8.	Segment Information - continued:


		Rental and Earned Income		Interest and Fee Income			Corporate			Consolidated Totals

	Assets	$	671,765	$	99,571		$	83		$	771,419

	Additions to long-lived assets:
	Real estate	$	13,194	$	-		$	-		$	13,194

	Other	$	30	$	7		$	4		$	41


	June 30, 2002 and for the six months then ended
	Revenues	$	43,481	$	3,656		$	-		$	47,137
	General operating and administrative expenses		3,235		1,044			713			4,992
	Real estate expenses		875		-			-			875
	Interest expense		12,973		-			-			12,973
	Depreciation and amortization		5,701		9			4			5,714
	Equity in earnings of unconsolidated affiliates		944		833			-			1,777

	Earnings from continuing operations		21,641		3,436			(717	)		24,360
	Earnings from discontinued operations		1,901		-			-			1,901

	Net earnings	$	23,542	$	3,436		$	(717	)	$	26,261


	Assets	$	891,486	$	103,086		$	74		$	994,646

	Additions to long-lived assets:
	Real estate	$	33,838	$	-		$	-		$	33,838

	Other	$	34	$	9		$	3		$	46


	June 30, 2001 and for the six months then ended
	Revenues	$	35,735	$	4,094		$	-		$	39,829
	General operating and administrative expenses		2,396		467			713			3,576
	Real estate expenses		213		-			-			213
	Interest expense		12,314		32			-			12,346
	Depreciation and amortization		4,287		39			5			4,331
	Expenses incurred in acquiring advisor from related party		-		-			691			691
	Equity in earnings of unconsolidated affiliates		179		(2,388	)		-			(2,209	)
	Gain on disposition of real estate		4,450		-			-			4,450

	Earnings from continuing operations		21,154		1,168			(1,409	)		20,913
	Earnings from discontinued operations		1,066		-			-			1,066

	Net earnings	$	22,220	$	1,168		$	(1,409	)	$	21,979


	Assets	$	671,765	$	99,571		$	83		$	771,419

	Additions to long-lived assets:
	Real estate	$	13,262	$	-		$	-		$	13,262

	Other	$	76	$	13		$	10		$	99


12


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Six Months Ended June 30, 2002 and 2001


9.	Committments and Contingencies:
	On January 24, 2002, Phillip Goldstein and Judy Kauffman Goldstein, beneficial owners of shares of Captec stock held of record by Cede & Co. who allege that they did not vote for the merger of Captec into the Company, filed in the Chancery Court of the State of Delaware in and for New Castle County, a Petition for Appraisal of Stock, PHILLIP GOLDSTEIN, JUDY KAUFFMAN GOLDSTEIN and CEDE & CO. v. COMMERCIAL NET LEASE REALTY, INC., C.A. No. 19368NC (the “Appraisal Action”). The Appraisal Action alleges that a certain number of Captec shares dissented from the merger and seek payment by the Company to all Captec stockholders who have demanded appraisal of their shares the fair value of those shares, with interest from the date of the merger. The Appraisal Action also seeks to require the Company to pay all costs of the proceeding, including fees and expenses for plaintiff’s attorneys and experts. As a result of this action, the plaintiffs are not entitled to receive the Company’s common and preferred shares as offered in the original merger consideration. Accordingly, the Company has reduced the number of common and preferred shares issued and outstanding by 474,037 and 217,950, respectively, which represents the number of shares that would have been issued to the plaintiffs had they accepted the original merger consideration. The Company recorded the value of these shares at the original consideration share price in addition to the cash portion of the original merger consideration as other liabilities totaling $13,278,000 as of June 30, 2002.


13


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. These statements generally are characterized by the use of terms such as “believe,” “expect” and “may.” Although the management of Commercial Net Lease Realty, Inc. and its wholly-owned subsidiaries (the “Company”) believe 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: the loss of any member of the Company’s management team; changes in general economic conditions; changes in real estate market conditions; continued availability of proceeds from the Company’s debt or equity capital; the availability of other debt and equity financing alternatives; market conditions affecting the Company’s equity capital; changes in interest rates under the Company’s current credit facilities and under any additional variable-rate debt arrangements that the Company may enter into in the future; the ability of the Company to be in compliance with certain debt covenants; the ability of the Company to qualify as a real estate investment trust for federal income tax purposes; the ability of the Company to integrate acquired properties and operations into existing operations; the ability of the Company to refinance amounts outstanding under its credit facilities at maturity on terms favorable to the Company; the ability of the Company to locate suitable tenants for its Properties; the ability of tenants to make payments under their respective leases and the ability of the Company to re-lease properties that are currently vacant or that become vacant. Given these uncertainties, readers are cautioned not to place undue reliance on such statements. Introduction Commercial Net Lease Realty, Inc., a Maryland corporation, is a fully integrated, self-administrated real estate investment trust (“REIT”), formed in 1984 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, 2002, the Company owned 346 properties (the “Properties”) that are leased to major retail businesses, including Academy, Barnes & Noble, Bed, Bath & Beyond, Bennigan’s, Best Buy, Borders, Eckerd, Food 4 Less, Good Guys, OfficeMax and The Sports Authority. Approximately 93 percent of the gross leasable area of the Company’s Property portfolio was leased at June 30, 2002. 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, for the payment of interest on its outstanding indebtedness and for other investments. 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, 2002 and 2001, the Company generated $30,354,000 and $26,375,000 respectively, in net cash provided by operating activities. The increase in cash from operations for the six months ended June 30, 2002, as compared to the six months ended June 30, 2001, is primarily the result of changes in revenues and expenses as discussed below in “Results of Operations.” Cash generated from operations could be expected to fluctuate in the future. 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


14

Liquidity and Capital Resources - continued:

Company recorded the value of these shares at the original consideration share price in addition to the cash portion of the original merger consideration as other liabilities totaling $13,278,000 as of June 30, 2002.

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 common stockholders in the form of dividends. For the six months ended June 30, 2002 and 2001, the Company declared and paid dividends to its common stockholders of $25,339,000 and $19,202,000, respectively, or $0.63 and $0.63 per share of common stock, respectively. In July 2002, the Company declared dividends to its common stockholders of $12,915,000 or $0.32 per share of common stock, payable in August 2002.

Holders of the 9% Non-Voting Series A Preferred Stock are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions at the rate of nine percent of the $25.00 liquidation preference per annum (equivalent to a fixed annual amount of $2.25 per share). For the six months ended June 30, 2002, the Company declared and paid dividends to its preferred stockholders of $2,005,000 or $1.125 per share of preferred stock.

Contractual Obligations and Commercial Commitments. The information in the table summarizes the Company’s contractual obligations and commercial commitments outstanding as of June 30, 2002. The table presents principal cash flows by year end of the expected maturity for debt obligations and commercial commitments outstanding as of June 30, 2002. As the table incorporates only those exposures that exist as of June 30, 2002, it does not consider those exposures or positions, which arise after that date.


	Maturity Date (dollars in thousands)

	Total		2002		2003		2004		2005		2006		Thereafter


Line of credit	$	72,800	$	-	$	72,800	$	-	$	-	$	-	$	-
Mortgages		56,806		1,338		2,926		3,190		3,444		22,963		22,945
Long term debt⁽¹⁾		290,000		-		-		120,000		-		-		170,000


Total contractual cash obligations	$	419,606	$	1,338	$	75,726	$	123,190	$	3,444	$	22,963	$	192,945

⁽¹⁾Excludes unamortizied note discounts and unamortized interest rate hedge gain.

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.

Results of Operations

As of June 30, 2002 and 2001, the Company owned 346 and 232 Properties, respectively, 323 and 226, respectively, of which were leased to operators of major retail businesses. In addition, during the six months ended June 30, 2002, the Company sold 12 properties, five of which were leased during 2002. During the six months ended June 30, 2002 and 2001, the Company earned $42,459,000 and $34,803,000, respectively, in rental income from operating leases and earned income from direct financing leases from continuing operations (“Rental Income”). The increase in Rental Income during the six months ended June 30, 2002, is primarily a result of (i) the additional rental income from the properties acquired in the Captec merger on December 1, 2001 and (ii) an increase in receipts by the Company of non-recurring additional Rental Income related to the termination of leases during the six months ended June 30, 2002 of $2,076,000, as compared to $1,000,000 for the six months ended June 30, 2001. The increase in Rental Income was partially offset by a decrease in Rental Income related to (i) the 37 properties sold in 2001 that were leased during the six months ended June 30, 2001 and (ii) the 13 vacant, unleased Properties owned by the Company during the six months ended June 30, 2002 that were leased or partially leased during the quarter ended June 30, 2001. These 13 Properties account for 5.6

ITEM 3. 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 Company has no outstanding derivatives as of June 30, 2002 and December 31, 2001. The Company does not use derivatives for speculative or trading purposes.

The information in the table summarizes the Company’s market risks associated with its debt obligations outstanding as of June 30, 2002 and December 31, 2001. The table presents principal cash flows and related interest rates by year of expected maturity for debt obligations outstanding as of June 30, 2002. 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 June 30, 2002 and December 31, 2001, 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.


	Maturity Date (dollars in thousands)

	2002		2003		2004		2005		2006		Thereafter

Variable rate credit facility	$	-	$	72,800	$	-	$	-	$	-	$	-
Average interest rate		-		(1)		-		-		-		-

Variable rate term note	$	-	$	-	$	20,000	$	-	$	-	$	-
Average interest rate		-		-		(2)		-		-		-

Fixed rate mortgages	$	1,338	$	2,926	$	3,190	$	3,444	$	22,963	$	22,945
Average interest rate		7.43%		7.37%		7.35%		7.33%		7.19%		8.11%

Fixed rate notes	$	-	$	-	$	100,000	$	-	$	-	$	170,000
Average interest rate		-		-		7.58%		-		-		7.79%


(1)	Interest rate varies based upon a tiered rate structure ranging from 80 basis points above LIBOR to 150 basis points above LIBOR based upon the debt rating of the Company.

(2)	Interest rate varies based upon a tiered rate structure ranging from 155 basis points above LIBOR to 225 basis points above LIBOR based upon the debt rating of the Company.


	June 30, 2002 (dollars in thousands)					December 31, 2001 (dollars in thousands)

	Total		Weighted Average Interest Rate	Fair Value		Total		Weighted Average Interest Rate	Fair Value


Variable rate credit facility	$	72,800	3.10%	$	72,800	$	107,400	5.23%	$	107,400

Variable rate term note	$	200,000	3.66%	$	20,000	$	70,000	3.66%	$	70,000

Fixed rate mortgages	$	56,806	7.67%	$	56,806	$	37,011	7.62%	$	37,011

Fixed rate notes⁽¹⁾	$	270,000	7.71%	$	278,572	$	220,000	7.70%	$	222,322

(1) Excludes unamortized note discount and unamortized interest rate hedge gain.

19

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, 2001 except as indicated below.

Beginning July 9, 2001, following the public announcement of the Company’s proposed merger with Captec, various Captec stockholders filed three lawsuits against Captec and its directors in the Chancery Court of the State of Delaware for New Castle County and an additional lawsuit in the United States District Court for the Eastern District of Michigan (the “Michigan Lawsuit”) alleging breaches of fiduciary duty in connection with the merger and in connection with the sale of certain assets of Captec to CRC Asset Acquisition LLC, a Michigan limited liability company controlled by a Captec officer. The Michigan Lawsuit also named the Company, but the Company has since been dismissed as a party to that lawsuit. On October 11, 2001, the Chancery Court of the State of Delaware for New Castle County issued an order consolidating the three Delaware Lawsuits into one action, IN RE CAPTEC NET LEASE REALTY, INC. STOCKHOLDERS LITIGATION, CONSOLIDATED C.A. No. 19008-NC. The plaintiffs sought a declaration that the action is properly maintainable as a class action, equitable relief that would enjoin the proposed merger and unspecified damages. The plaintiffs also sought a preliminary injunction barring the Company’s proposed acquisition of Captec. Captec and the other defendants entered into a Memorandum of Understanding with the plaintiffs pursuant to which the parties agreed to withdraw their preliminary injunction request, to negotiate and execute a Stipulation of Settlement and to submit the Stipulation of Settlement to the court for approval. In addition, Captec agreed to make additional disclosures to its stockholders concerning the proposed merger and to pay plantiffs’ attorneys’ fees in an amount to be determined by the court but not to exceed $350,000. On July 26, 2002 the court approved a Stipulation of Settlement negotiated and executed by the parties and awarded the plantiffs attorney’s fees in the amount of $350,000.

On January 24, 2002, Phillip Goldstein and Judy Kauffman Goldstein, beneficial owners of shares of Captec stock held of record by Cede & Co. who alleged that they did not vote for the merger (and who alleged that they caused a written demand for appraisal of their Captec shares to be served on Captec), filed in the Chancery Court of the State of Delaware in and for New Castle County a Petition for Appraisal of Stock, PHILLIP GOLDSTEIN, JUDY KAUFFMAN GOLDSTEIN and CEDE & CO. v. COMMERCIAL NET LEASE REALTY, INC., C.A. No. 19368NC (“Appraisal Action”). The Appraisal Action alleges that 1,072,146 shares of Captec dissented from the merger and seeks to require the Company to pay to all Captec stockholders who have demanded appraisal of their shares the fair value of those shares, with interest from the date of the merger. The Appraisal Action also seeks to require the Company to pay all costs of the proceeding, including fees and expenses for plaintiff’s attorneys and experts. On February 26, 2002 the Company filed a response to the petition for appraisal and a verified list of stockholders. The parties have commenced discovery in this action. At this early stage in the Appraisal Action, management is not in a position to assess the likelihood, or amount, of any potential award to the dissenting stockholders.

On January 4, 2002, Calapasas Investment Partnership No. 1 Limited Partnership (“Calapasas”), a Captec stockholder, filed a class action complaint against Captec, certain former Captec directors, and the Company (as successor in interest to Captec) in the United States District Court for the Northern District of California, CALAPASAS INVESTMENT PARTNERSHIP NO. 1 LIMITED PARTNERSHIP v. CAPTEC NET LEASE REALTY, INC, a Delaware Corporation; COMMERCIAL NET LEASE REALTY, INC. (as successor in interest to CAPTEC); PATRICK L. BEACH; W. ROSS MARTIN; H. REID SHERARD; RICHARD J.PETERS; LEE C. HOWLEY; and WILLIAM H. KRUL III, Case No. C 02 00071 PJH. In its complaint Calapasas alleged that Captec and certain of its directors violated

provisions of the Securities and Exchange Act of 1934 by misrepresenting the value of certain Captec assets on certain of its financial statements in 2000 and 2001 (the “Calapasas Action”). The Calapasas Action asserts that it is brought on behalf of a class consisting of all persons and entities (except insiders) that purchased Captec common stock between August 9, 2000 and prior to July 2, 2001. The Calapasas Action seeks to be certified as a class action and seeks compensatory and punitive damages for the plaintiff and other members of the class, as well as costs and expenses, including fees for plaintiff’s attorneys, accountants and experts. The Calapasas Action could result in damage awards against Captec and/or its directors, damages for which the Company, as successor in interest to Captec, could be responsible. On May 24, 2002, the Company filed a motion to dismiss the suit, and on July 17, 2002 Calapasas filed a motion in opposition to the Company’s motion to dismiss. At this early stage in the Calapasas Action management is not in a position to assess the likelihood, or amount, of any potential damage award to the plaintiff class.

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 7, 2002, 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 (36,075,498 for and 2,159,627 withheld), Kevin B. Habicht (36,189,338 for and 2,045,787 withheld), Clifford R. Hinkle (36,196,972 for and 2,038,153 withheld), Richard B. Jennings (36,187,532 for and 2,047,593 withheld), Ted B. Lanier (36,167,503 for and 2,067,622 withheld), Robert C. Legler (36,139,276 for and 2,095,849 withheld), Robert Martinez (36,126,653 for and 2,108,472 withheld), Gary M. Ralston (36,192,100 for and 2,043,025 withheld) and James M. Seneff, Jr. (36,191,241 for and 2,043,884 withheld).

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.

Articles of Incorporation and By-laws

3.1

Articles of Incorporation of the Registrant (filed as Exhibit 3.3(i) to the Registrant's Registration Statement No. 1-11290 on Form 8-B and incorporated herein by reference).

3.2

Bylaws of the Registrant, (filed as Exhibit 3(ii) to Amendment No. 2 to the Registrant's Registration No. 33-83110 on Form S-3 and incorporated herein by reference).

3.3

Articles of Amendment to the Articles of Incorporation of the Registrant (filed as Exhibit 3.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference).


		3.4	Articles of Amendment to the Articles of Incorporation of the Registrant (filed as Exhibit 3.4 to the Registrant’s Current Report on Form 8-K dated February 18, 1998, and filed with the Securities and Exchange Commission on February 19, 1998 and incorporated herein by reference).

		3.5	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).

		3.6	Articles of Amendment to the First Amended and Restated Articles of Incorporation of the Registrant (filed herewith).

	4.	Instruments defining the rights of security holders, including indentures

		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 $100,000,00 of 7.125% Notes due 2008 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated March 20, 1998 and incorporated herein by reference).

		4.3	Form of Supplement Indenture No. 1 dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 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% Note due 2008 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated March 20, 1998 and incorporated herein by reference).

		4.5	Form of Supplemental Indenture No. 2 dated June 21, 1999, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 8.125% Notes due 2004 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 17, 1999 and incorporated herein by reference).

		4.6	Form of 8.125% Notes due 2004 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated June 17, 1999 and incorporated herein by reference).

		4.7	Form of Supplemental Indenture No. 3 dated September 20, 2000, by and among Registrant and First Union National Bank, Trustee, relating to $20,000,000 of 8.5% Notes due 2010 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 20, 2000 and incorporated herein by reference).

		4.8	Form of 8.5% Notes due 2010 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated September 20, 2000 and incorporated herein by reference).

22


		4.9	Form of Supplemental Indenture No. 4 dated May 30, 2002, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $50,000,000 of 7.75% Notes due 2012 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 4, 2002 and incorporated herein by reference).

		4.10	Form of 7.75% Notes due 2012 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated June 4, 2002 and incorporated herein by reference).

	10.	Material Contracts

		10.1	Letter Agreement dated July 10, 1992, amending Stock Purchase Agreement dated January 23, 1992 (filed as Exhibit 10.34 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 and incorporated herein by reference).

		10.2	Advisory Agreement between Registrant and CNL Realty Advisors, Inc. effective as of April 1, 1993 and renewed January 1, 1997 (filed as Exhibit 10.04 to Amendment No. 1 to the Registrant's Registration Statement No. 33-61214 on Form S-2 and incorporated herein by reference).

		10.3	1992 Commercial Net Lease Realty, Inc. Stock Option Plan (filed as Exhibit No. 10(x) to the Registrant's Registration Statement No. 33-83110 on Form S-3 and incorporated herein by reference).

		10.4	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., Net Lease Realty II, Inc., 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).

23


			10.9	Fourth Amended and Restated Line of Credit and Security Agreement, dated August 6, 1997, by and among Registrant, certain lenders and First Union National Bank, as the Agent, relating to a $200,000,000 loan (filed as Exhibit 10 to the Registrant’s Current Report on Form 8-K dated September 12, 1997 and incorporated herein by reference).

			10.10	Fifth Amended and Restated Line of Credit and Security Agreement, dated September 23, 1999, by and among Registrant, certain lenders and First Union National Bank, as the Agent, relating to a $200,000,000 loan (filed as Exhibit 10.13 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference).

			10.11	Sixth Amended and Restated Line of Credit and Security Agreement, dated October 26, 2000, by and among Registrant, certain lenders and First Union National Bank, as the Agent, relating to a $200,000,000 loan (filed as Exhibit 10.11 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference).

			10.12	2000 Performande Incentive Plan (filed as Exhibit 99 to the Registrant’s Registration Statement No. 333-64794 on Form S-8 and incorporated herein by reference).

			10.13	Third Renewal Promissory Note dated as of April 1, 2001, by Commercial Net Lease Realty Services, Inc. in favor of Registrant relating to an $85,000,000 line of credit (filed as Exhibit 10.13 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference).

			10.14	Third Modification of Amended and Reatated Secured Revolving Line of Credit and Security Agreement and Other Loan Documents effective as of April 1, 2001, by and between Registrant as lender and Commercial Net Lease Realty Services, Inc. as borrower, relating to an $85,000,000 line of credit (filed as Exhibit 10.14 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference).

			10.15	Fourth Modification of Amended and Restated Secured Revolving Line of Credit and Security Agreement and Other Loan Documents effective as of July 1, 2001, by and between Registrant as lender and Commercial Net Lease Realty Services, Inc. as borrower, relating to an $85,000,000 line of credit (filed as Exhibit 10.15 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference).

			10.16	Agreement and Plan of Merger, dated as of July 1, 2001, among Commercial Net Lease Realty, Inc. and Captec Net Lease Realty, Inc. (filed as Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated July 3, 2001 and incorporated herein by reference).

	(b)	The Registrant filed one report on Form 8-K on June 4, 2002, for the purpose of filing under Item 5 - Other Events certain exhibits in connection with the Registrant's offering of an aggregate principal amount of $50,000,000 of its 7.75% notes due 2012.


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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 9^th day of August, 2002. 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




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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, James M. Seneff, Jr., the Chief Executive Officer of Commercial Net Lease Realty, Inc., (the "Company"), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q for the period ending June 20, 2002 (the "Report"). The undersigned hereby certifies that:
(1)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 9, 2002		/s/ James M. Seneff, Jr. Name: James M. Seneff, Jr. Title: Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Kevin B. Habicht, the Chief Financial Officer of Commercial Net Lease Realty, Inc., (the "Company"), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q for the period ending June 20, 2002 (the "Report"). The undersigned hereby certifies that:
(1)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 9, 2002		/s/ Kevin B. Habicht Name: Kevin B. Habicht Title: Chief Financial Officer


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Liquidity and Capital Resources - continued:

Company retains responsibility for certain costs and expenses associated with the Property. Because many of these certain Properties 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. If required, the Company may use bank borrowings or other sources of capital in the event of unforeseen significant capital expenditures.

Investment in Unconsolidated Affiliates.  In February and May 2002, the Company modified an existing secured revolving line of credit and security agreement with a wholly-owned subsidiary of Commercial Net Lease Realty Services, Inc. (“Services”) to increase the borrowing capacity. The secured revolving lines of credit and security agreements with Services and its wholly-owned subsidiaries provide an aggregate borrowing capacity of $153,500,000 and each agreement has an expiration date of October 31, 2003.

Equity Securities.  In June 2002, pursuant to the Company’s 2000 Performance Incentive Plan (the “2000 Plan”), the Company granted and issued 64,000 shares of restricted common stock to certain officers and directors of the Company and its affiliates. The Company issued restricted stock grants to the officers and directors totaling 58,000 and 6,000 shares, respectively. The restricted stock issued to the officers vests in amounts equal to a rate of 15 percent to 30 percent each year over approximately a five-year period ending on January 1, 2007 and automatically upon a change in control of the Company. The restricted stock issued to the directors vests in equal amounts each year over approximately a two-year period ending on January 1, 2004 and automatically upon a change in control in the Company.

Indebtedness.  In June 2002, the Company entered into a long-term, fixed rate mortgage and security agreement for $21,000,000. The loan provides for a 10-year mortgage with principal and interest of $138,000 payable monthly, based on a 30-year amortization, with the balance due in July 2012 and bears interest at a rate of 6.9% per annum. The mortgage is collateralized by a first lien on and assignments of rents and leases of certain of the Company’s properties. Proceeds from the debt were used to pay down outstanding indebtedness of the Company’s credit facility.

In June 2002, the Company filed a prospectus supplement to its $200,000,000 shelf registration statement and issued $50,000,000 of 7.75% notes due 2012 (the “Notes”). The Notes are senior, unsecured obligations of the Company and are subordinated to all secured indebtedness of the Company. The Notes were sold at a discount for an aggregate purchase price of $49,713,000 with interest payable semi-annually commencing on December 1, 2002. The discount of $287,000 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 incurred debt issuance costs totaling $410,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees and rating agency fees. Debt issuance costs have been deferred and are being amortized over the term of the Notes using the effective interest method. The net proceeds from the debt offering were used to pay down the Company’s term note.

On January 24, 2002, Phillip Goldstein and Judy Kauffman Goldstein, beneficial owners of shares of Captec Net Lease Realty, Inc. (“Captec”) stock held of record by Cede & Co. who allege that they did not vote for the merger of Captec into the Company, filed in the Chancery Court of the State of Delaware in and for New Castle County, a Petition for Appraisal of Stock, PHILLIP GOLDSTEIN, JUDY KAUFFMAN GOLDSTEIN and CEDE & CO. v. COMMERCIAL NET LEASE REALTY, INC., C.A. No. 19368NC (the “Appraisal Action”). The Appraisal Action alleges that a certain number of Captec shares dissented from the merger and seeks payment by the Company to all Captec stockholders who have demanded appraisal of their shares the fair value of those shares, with interest from the date of the merger. The Appraisal Action also seeks to require the Company to pay all costs of the proceeding, including fees and expenses for plaintiff’s attorneys and experts. As a result of this action, the plaintiffs are not entitled to receive the Company’s common and preferred shares as offered in the original merger consideration. Accordingly, the Company has reduced the number of common and preferred shares issued and outstanding by 474,037 and 217,950, respectively, which represents the number of shares that would have been issued to the plaintiffs had they accepted the original merger consideration. The