FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 ----------------------------------- 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 (I.R.S. Employer of incorporation or organiza- Identification No.) tion) 400 E. South Street, #500 Orlando, Florida 32801 - ---------------------------- ------------------------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number (including area code) (407) 422-1574 ------------------------------- 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. 20,763,672 shares of Common Stock, $.01 par value, outstanding as of November 1, 1996. COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONTENTS -------- Part I Page ---- Item 1. Financial Statements: Condensed Consolidated Balance Sheets 1 Condensed Consolidated Statements of Earnings 2 Condensed Consolidated Statements of Stockholders' Equity 3 Condensed Consolidated Statements of Cash Flows 4-5 Notes to Condensed Consolidated Financial Statements 6-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-17 Part II Other Information 18-20 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31, ASSETS 1996 1995 ------------- ------------ Land and buildings, net of accumulated depreciation $249,646,141 $155,956,739 Net investment in direct financing leases 82,945,782 56,829,126 Cash and cash equivalents 10,784,236 300,714 Receivables 497,203 394,154 Prepaid expenses 158,671 154,538 Loan costs, net of accumulated amortization of $876,462 and $405,179 2,414,637 1,065,149 Accrued rental income 3,747,894 2,194,221 Other assets 285,513 2,362,035 ------------ ------------ $350,480,077 $219,256,676 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable $ 99,218,368 $ 82,600,000 Accrued interest payable 423,286 128,475 Accounts payable and accrued expenses 422,350 350,632 Real estate taxes payable 104,639 82,932 Due to related parties 134,327 69,038 Rents paid in advance and tenant deposits 529,723 183,486 ------------ ------------ Total liabilities 100,832,693 83,414,563 ------------ ------------ Commitments and contingencies (Note 8) Stockholders' equity: Common stock, $.01 par value. Authorized 50,000,000 and 30,000,000 shares, respectively; issued and outstanding 20,538,672 and 11,663,672 shares, respectively 205,387 116,637 Excess stock, $0.01 par value, authorized 50,000,000 and 30,000,000 shares, respectively; none issued and outstanding - - Capital in excess of par value 251,347,230 138,629,751 Accumulated dividends in excess of net earnings (1,905,233) (2,904,275) ------------ ------------ Total stockholders' equity 249,647,384 135,842,113 ------------ ------------ $350,480,077 $219,256,676 ============ ============ See accompanying notes to condensed consolidated financial statements. COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS Quarter Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 ---------- ---------- ----------- ----------- Revenues: Rental income from operating leases $6,684,898 $3,905,354 $17,333,799 $10,163,028 Earned income from direct financing leases 2,256,915 1,393,344 5,735,493 3,854,745 Contingent rental income 183,676 199,091 540,789 579,055 Interest and other 49,961 36,254 120,637 98,477 ---------- ---------- ----------- ----------- 9,175,450 5,534,043 23,730,718 14,695,305 ---------- ---------- ----------- ----------- Expenses: General operating and administrative 257,127 147,473 929,569 550,775 Advisory fees to related party 376,345 261,153 1,026,861 740,069 Interest 2,473,102 1,244,801 5,534,853 2,335,471 Taxes 56,202 118,119 148,722 188,143 Depreciation and amortization 944,306 536,726 2,498,420 1,462,632 ---------- ---------- ----------- ----------- 4,107,082 2,308,272 10,138,425 5,277,090 ---------- ---------- ----------- ----------- Net earnings before gain on sale of land and building 5,068,368 3,225,771 13,592,293 9,418,215 Gain on sale of land and building 45,530 - 45,530 - ---------- ---------- ----------- ----------- Net earnings $5,113,898 $3,225,771 $13,637,823 $ 9,418,215 ========== ========== =========== =========== Earnings per share of common stock $ 0.31 $ 0.28 $ 0.88 $ 0.81 ========== ========== =========== =========== Weighted average number of shares outstanding 16,426,715 11,663,672 15,479,183 11,663,672 ========== ========== =========== =========== See accompanying notes to condensed consolidated financial statements. <TABLE> COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Nine Months Ended September 30, 1996 and Year Ended December 31, 1995 <CAPTION> Accumulated dividends Capital in in excess Number Common excess of of net of shares stock par value earnings Total ---------- -------- ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Balance at December 31, 1994 11,663,672 $116,637 $138,629,751 $ (2,081,686) $136,664,702 Net earnings - - - 12,707,271 12,707,271 Dividends declared and paid ($1.16 per share of common stock) - - - (13,529,860) (13,529,860) ---------- -------- ------------ ------------ ------------ Balance at December 31, 1995 11,663,672 116,637 138,629,751 (2,904,275) 135,842,113 Net earnings - - - 13,637,823 13,637,823 Dividends declared and paid ($0.88 per share of common stock) - - - (12,638,781) (12,638,781) Issuance of common stock 8,875,000 88,750 120,136,250 - 120,225,000 Stock issuance costs - - (7,418,771) - (7,418,771) ---------- -------- ------------ ------------ ------------ Balance at September 30, 1996 20,538,672 $205,387 $251,347,230 $ (1,905,233) $249,647,384 ========== ======== ============ ============ ============ See accompanying notes to condensed consolidated financial statements. </TABLE> COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 1996 1995 ------------- ------------- Cash flows from operating activities: Net earnings $ 13,637,823 $ 9,418,215 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 1,997,897 1,241,170 Amortization 500,523 221,462 Gain on sale of property (45,530) - Decrease in net investment in direct financing leases 527,497 332,223 Increase in accrued rental income (1,553,673) (862,464) Increase in receivables (103,049) (70,079) Decrease (increase) in prepaid expenses (4,133) 70,336 Decrease in other assets 10,095 8,187 Increase in accrued interest payable 294,811 102,190 Increase (decrease) in accounts payable and accrued expenses 1,174 (72,927) Increase in real estate taxes payable 21,707 46,118 Increase in due to related parties 64,529 50,505 Increase (decrease) in rents paid in advance and tenant deposits 346,237 (174,879) ------------- ------------- Net cash provided by operating activities 15,695,908 10,310,057 ------------- ------------- Cash flows from investing activities: Additions to land and buildings on operating leases (87,920,647) (46,972,876) Investment in direct financing leases (26,644,074) (10,263,265) Proceeds from sale of land and building 422,507 - Increase in other assets (125,390) (1,347,358) Other 115,627 (40,127) ------------- ------------- Net cash used in investing activities (114,151,977) (58,623,626) ------------- ------------- Cash flows from financing activities: Proceeds from loan 139,450,000 58,100,000 Repayment of loan (129,695,486) - Payment of loan costs (1,370,865) (366,384) Proceeds from issuance of common stock 120,225,000 - Payment of stock issuance costs (7,025,455) (4,069) Payment of dividends (12,638,781) (10,147,395) Other (4,822) (175,811) ------------- ------------- Net cash provided by financing activities 108,939,591 47,406,341 ------------- ------------- Net increase (decrease) in cash and cash equivalents 10,483,522 (907,228) Cash and cash equivalents at beginning of period 300,714 1,069,900 ------------- ------------- Cash and cash equivalents at end of period $ 10,784,236 $ 162,672 ============= ============= Supplemental disclosures of non-cash investing and financing activities: Land, building and direct financing lease costs incurred and unpaid at end of period $ 67,566 $ 332,864 ============= ============= Mortgages assumed in exchange for three properties $ 6,863,854 $ - ============= ============= Stock issuance costs incurred and unpaid at end of period $ 246,708 $ - ============= ============= Dividends declared and unpaid at end of period $ - $ 3,382,465 ============= ============= Other financing activity costs incurred and unpaid at end of period $ - $ 21,022 ============= ============= See accompanying notes to condensed consolidated financial statements. COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 1996 and 1995 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 to a fair statement of the results for the interim periods presented. Operating results for the quarter and nine months ended September 30, 1996, may not be indicative of the results that may be expected for the year ending December 31, 1996. Amounts as of December 31, 1995, included in the financial statements, have been derived from 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. (the "Company") for the year ended December 31, 1995. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Earnings per share are calculated based upon the weighted average number of shares outstanding during each period. Stock options outstanding are not included since their inclusion would not result in a material dilution of earnings per share. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of. The Statement provides that an entity review long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Adoption of this standard had no material effect on the Company's financial position or results of operations. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. The Statement provides that companies must either charge the value of stock options granted to their income statement or provide pro forma equivalent information in a footnote disclosure. The Company adopted this standard and will provide pro forma equivalent information in a footnote disclosure to its financial statements at December 31, 1996 and for the year then ended. 2. Leases: ------ The Company generally leases its land and buildings to operators of major retail businesses. The leases are accounted for under the provisions of Statement of Financial Accounting Standards No. 13, Accounting for Leases. As of September 30, 1996, 116 of the leases have been classified as operating leases and 71 leases have been classified as direct financing leases. For the leases classified as direct financing leases, the building portions of the leases are accounted for as direct financing leases while the land portions of 46 of these leases are accounted for as operating leases. Substantially all leases have initial terms of 15 to 20 years (expiring between 1997 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. Land and Building on Operating Leases: ------------------------------------- Land and buildings on operating leases consisted of the following at: September 30, December 31, 1996 1995 ------------- ------------ Land $129,780,610 $ 83,356,403 Buildings and improvements 127,247,106 78,097,726 ------------ ------------ 257,027,716 161,454,129 Accumulated depreci- ation (7,381,575) (5,497,390) ------------ ------------ $249,646,141 $155,956,739 ============ ============ Some leases provide for escalating guaranteed minimum rent to begin in subsequent lease years. Income from these scheduled rent increases is recognized on a straight-line basis over the terms of the leases. For the nine months ended September 30, 1996 and 1995, the Company recognized $1,553,673 and $862,464 respectively, of such income, $621,180 and $321,281 of which was recognized for the quarters ended September 30, 1996 and 1995, respectively. The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at September 30, 1996: 1996 $ 6,376,077 1997 25,666,409 1998 25,696,926 1999 25,935,689 2000 26,325,026 Thereafter 324,355,359 ------------ $434,355,486 ============ 4. Net Investment in Direct Financing Leases: ----------------------------------------- The following lists the components of net investment in direct financing leases at: September 30, December 31, 1996 1995 ------------- ------------- Minimum lease payments to be received $ 185,879,843 $ 126,314,337 Estimated residual values 25,338,058 17,354,140 Less unearned income (128,272,119) (86,839,351) ------------- ------------- Net investment in direct financing leases $ 82,945,782 $ 56,829,126 ============= ============= The following is a schedule of future minimum lease payments to be received on direct financing leases at September 30, 1996: 1996 $ 2,509,868 1997 10,039,483 1998 10,042,933 1999 10,089,485 2000 10,207,619 Thereafter 142,990,455 ------------ $185,879,843 ============ 5. Notes Payable: ------------- In January 1996, the Company entered into a long-term, fixed rate mortgage and security agreement for $39,450,000 (the "Permanent Debt Financing"). The Permanent Debt Financing provides for a ten-year loan with principal and interest payable monthly, based on a 17-year amortization, with the balance due in February 2006 and bears interest at a rate of 7.435% per annum. The Permanent Debt Financing is secured by a first lien on and assignment of rents and leases of certain of the Company's properties. As of September 30, 1996, the outstanding principal balance was $38,658,767, plus accrued interest of $119,762. In June 1996, the Company acquired three properties each subject to a mortgage totalling $6,863,854 (collectively, the "Mortgages"). The Mortgages bear interest at a weighted average rate of 8.6% and have a weighted average maturity of eight years, with principal and interest payable monthly. As of September 30, 1996, the outstanding principal balances for the Mortgages totalled $6,809,601 plus accrued interest of $42,969. In September 1996, the Company entered into an amended and restated loan agreement for a $150,000,000 revolving credit facility (the "Credit Facility") which expires on June 30, 1998 and provides for an interest rate equal to 160 basis points above LIBOR or the lender's prime rate, whichever the Company selects. The Credit Facility amended the Company's $100,000,000 revolving credit facility. As of September 30, 1996 and December 31, 1995, the outstanding principal balance was $40,600,000 and $69,450,000, respectively, plus accrued interest of $223,571 and $84,094, respectively. The following is a schedule of annual maturities of the Company's outstanding term indebtedness for the remaining portion of 1996 and each of the next four years: 1996 $ 362,366 1997 1,520,219 1998 1,672,434 1999 14,984,294 2000 2,005,074 ----------- $20,544,387 =========== 6. Stock Option Plan: ----------------- The Company's stock option plan (the "Plan") provides compensation and incentive to persons ("Key Employees") or entities whose services are considered essential to the Company's continued growth and success. As of December 31, 1995, the Plan had 600,000 shares of common stock reserved for issuance. Pursuant to the Plan, the shares of common stock reserved for issuance automatically increased to 1,200,000 shares in connection with the equity offering during January 1996. The Plan provides for an additional automatic increase in the number of shares issuable under the Plan to 2,000,000 shares at such time as the Company has 25,000,000 shares of common stock issued and outstanding. The following summarizes transactions in the plan for the nine months ended September 30, 1996 and 1995: Number of Shares ---------------------------- Nine Months Ended September 30, 1996 1995 ------------- ------------ Outstanding, January 1 578,100 568,100 Granted at $12.625 to $13.25 per share 390,000 10,000 Exercised - - Surrendered (11,500) - ------- ------- Outstanding, September 30 956,600 578,100 ======= ======= Exercisable, September 30 345,033 173,500 ======= ======= Available for grant, September 30 231,900 21,900 ======= ======= One-third of the grant to each individual becomes exercisable at the end of each of the first three years of service following the date of the grant. The Company applies Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees, in accounting for the Plan. Accordingly, due to the fact that the Plan requires that the exercise price of the options equal the market value of the stock on the grant date, no compensation cost has been recorded with respect to the options for the nine months ended September 30, 1996 and 1995. 7. Related Party Transactions: -------------------------- During the nine months ended September 30, 1996, the Company acquired six properties for purchase prices totalling $13,278,638 from an affiliate of CNL Realty Advisors, Inc. who had developed the properties. The purchase prices paid by the Company for these six properties equalled the affiliate's cost including development costs. The affiliate's cost consisted of the land purchase prices, construction costs, various soft costs including legal costs, survey fees and architect fees, and developers fees aggregating $608,000 paid to an affiliate of CNL Realty Advisors, Inc. In addition, during the nine months ended September 30, 1996, the Company acquired 24 properties and seven buildings which were developed by the tenant on land parcels owned by the Company from unrelated, third parties for purchase prices totalling $101,565,076. In addition, the Company acquired one property for a purchase price of $3,400,000 from a partnership in which an affiliate of CNL Realty Advisors, Inc. is a partner. The purchase price paid by the Company for this property represented the costs incurred by the affiliate to acquire the property, including closing costs. In connection with the acquisition of these 25 properties and seven buildings, the Company paid CNL Realty Advisors, Inc. $2,099,301 in acquisition fees and expense reimbursement fees (representing 1.5% and 0.5%, respectively, of the cost of the properties). In July 1996, the Company sold its property in Marble Falls, Texas, for $440,000 and received net proceeds of $422,507, resulting in a gain of $45,530. In connection with the sale of this property, the Company paid CNL Realty Advisors, Inc. $8,800 in disposition fees. 8. Commitments and Contingencies: ----------------------------- As of September 30, 1996, the Company had entered into agreements to purchase 18 additional properties for an estimated aggregate amount of $55,049,492. In connection with the acquisition of these 18 properties, the Company was contingently liable for $4,678,226 related to bank letters of credit which guarantee the Company's obligation under the purchase agreements to acquire these properties. As of September 30, 1996, the Company owned and leased five land parcels to tenants which were obligated to develop a building on the respective land parcels. The Company has agreed to pay an aggregate amount of up to $8,302,325 upon completion of the buildings. 9. Subsequent Events: ----------------- In October 1996, the Company declared dividends to its shareholders of $6,229,102 or $.30 per share of common stock, payable in November 1996. In October 1996, in connection with the prospectus supplement to the shelf registration statement filed in September 1996, the Company issued 225,000 shares of common stock in connection with the underwriters' overallotment option and received gross proceeds of $3,150,000. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction - ------------ Commercial Net Lease Realty, Inc. (the "Company") is an equity real estate investment trust that acquires, owns and manages high-quality, freestanding properties leased to major retail businesses under long-term commercial net leases. As of September 30, 1996, the Company owned 187 properties (the "Properties") each 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 for the payment of interest on its outstanding indebtedness. Generally, cash needs for items other than property acquisitions have been met from operations and property acquisitions have been funded by equity offerings, borrowings and, to a lesser extent, from internally generated funds. Potential future sources of capital include proceeds from the public or private offering of the Company's debt or equity securities, secured or unsecured borrowings from banks or other lenders, or the sale of Properties, as well as undistributed funds from operations. For the nine months ended September 30, 1996 and 1995, the Company generated $15,695,908 and $10,310,057, respectively, in net cash provided by operating activities. The increase in cash from operations for the nine months ended September 30, 1996, as compared to the nine months ended September 30, 1995, is primarily a result of changes in revenues and expenses as discussed in "Results of Operations." The Company's leases typically provide that the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. In addition, the Company's leases generally provide that the tenant is responsible for roof and structural repairs. Certain of the Company's Properties are subject to leases under which the Company retains responsibility for certain costs and expenses associated with the Property. Because many of the Properties which are subject to leases that place these responsibilities on the Company are recently constructed, management anticipates that capital demands to meet obligations with respect to these Properties will be minimal for the foreseeable future and can be met with funds from operations and working capital. The Company may be required to use bank borrowings or other sources of capital in the event of unforeseen significant capital expenditures. Indebtedness. In January 1996, the Company entered into a long-term, fixed rate mortgage and security agreement for $39,450,000 (the "Permanent Debt Financing"). The Permanent Debt Financing provides for a ten-year loan with principal and interest payable monthly, based on a 17-year amortization, with the balance due in February 2006 and bears interest at a rate of 7.435% per annum. The Permanent Debt Financing is secured by a first lien on and assignment of rents and leases of certain of the Company's Properties. As of September 30, 1996, the outstanding principal balance was $38,658,767. Proceeds from the Permanent Debt Financing were used to pay down the Company's credit facility. In June 1996, the Company acquired three Properties each subject to a mortgage totalling $6,863,854 (collectively, the "Mortgages"). The Mortgages bear interest at a weighted average rate of 8.6% and have a weighted average maturity of eight years, with principal and interest payable monthly, commencing in July 1996. As of September 30, 1996, the outstanding principal balances for the Mortgages totalled $6,809,601. In September 1996, the Company entered into an amended and restated loan agreement for a $150,000,000 revolving credit facility (the "Credit Facility") which expires June 30, 1998 and provides for an interest rate equal to 160 basis points above LIBOR or the lender's prime rate, whichever the Company selects. The Credit Facility amended the Company's $100,000,000 revolving credit facility. As of September 30, 1996, the outstanding principal balance was $40,600,000. Debt and Equity Securities. In July 1995, the Company filed a shelf registration statement with the Securities and Exchange Commission that permits the issuance of debt and equity securities of up to $200,000,000. In January 1996, the Company filed a prospectus supplement to the shelf registration and issued 4,025,000 shares of common stock and received gross proceeds of $52,325,000. In September 1996, the Company filed a prospectus supplement to the shelf registration and issued 4,850,000 shares of common stock and received gross proceeds of $67,900,000. In addition, in October 1996, the Company issued an additional 225,000 shares of common stock in connection with the underwriters' overallotment option and received gross proceeds of $3,150,000. In connection with these offerings, the Company incurred stock issuance costs totalling $7,418,771, consisting primarily of underwriters' commissions and fees, legal and accounting fees and printing expenses. Proceeds from the offerings were used to pay down the Company's credit facility. Property Acquisitions and Commitments. During the nine months ended September 30, 1996, the Company borrowed $116,000,000 under its credit facility and assumed mortgages totalling $6,863,854 to acquire 31 Properties (five Eckerd drugstores, three OfficeMax office supply stores, two Barnes & Noble bookstores, four Academy sporting goods stores, two Borders bookstores, three Computer City computer stores, three Luria's jewelry and giftware stores, one Good Guys consumer electronics store, one Homeplace home furnishing store, one Baby Superstore baby products retailer, one Pier 1 Imports home furnishings store, two Dick's Clothing and Sporting Goods stores and three Sears Homelife furniture stores) and seven buildings (five Barnes and Noble bookstores, one Academy sporting goods store and one Food 4 Less grocery store) which were developed by the tenant on land parcels owned by the Company for an aggregate amount of approximately $118,200,000. As of September 30, 1996, the Company had entered into agreements to purchase 18 additional properties for an estimated aggregate amount of $55,049,492. The purchase of these properties is subject to conditions relating to completion of development activities, review of title and obtaining title insurance, engineering and environmental inspections and other matters. In addition, as of September 30, 1996, the Company owned five land parcels which are leased to tenants who are obligated to develop buildings on the respective land parcels. Pursuant to each lease, the Company has agreed to purchase the buildings upon completion and occupancy for an aggregate amount of up to $8,302,325. In addition to the 18 properties under contract and the five buildings under construction as of September 30, 1996, the Company is currently negotiating the acquisition of prospective properties. The Company may elect to acquire these prospective properties or other additional properties (or interests therein) in the future. Such property acquisitions are expected to be the primary demand for additional capital in the future. The Company anticipates that it may engage in equity or debt financing, through either public or private offerings of its securities for cash, issuance of such securities in exchange for assets, or a combination of the foregoing. Subject to the constraints imposed by the Company's $150,000,000 Credit Facility and long-term, fixed rate financing, the Company may enter into additional financing arrangements. In July 1996, the Company sold its property in Marble Falls, Texas, for $440,000 and received net sales proceeds of $422,507, resulting in a gain of $45,530 for financial reporting purposes. The Company reinvested the proceeds to acquire an additional property and structured the transaction to qualify as a like-kind exchange transaction for federal income tax purposes. Management believes that the Company's current capital resources (including cash on hand), coupled with the Company's borrowing capacity, are sufficient to meet its liquidity needs for the foreseeable future. Dividends. One of the Company's primary objectives, consistent with its policy of retaining sufficient cash for reserves and working capital purposes, is to distribute a substantial portion of its funds available from operations to its stockholders in the form of dividends. For the nine months ended September 30, 1996 and 1995, the Company declared and paid dividends to its stockholders of $12,638,781 and $10,147,395, respectively, or $.88 and $.87, respectively, per share of common stock. In October 1996, the Company declared dividends to its shareholders of $6,229,102 or $.30 per share of common stock, payable in November 1996. Results of Operations - --------------------- As of September 30, 1996 and 1995, the Company owned and leased 187 and 154 Properties, respectively, to operators of major retail businesses. In connection therewith, during the nine months ended September 30, 1996 and 1995, the Company earned $23,069,292 and $14,017,773, respectively, in rental income from operating leases and earned income from direct financing leases, $8,941,813 and $5,298,698 of which was earned during the quarters ended September 30, 1996 and 1995, respectively. The increase in rental and earned income during the quarter and nine months ended September 30, 1996, is primarily a result of the facts that (i) the 29 Properties acquired and four buildings upon which construction was completed during 1995 were operational for a full quarter in 1996 and (ii) the Company acquired 31 Properties and seven buildings upon which construction was completed during the nine months ended September 30, 1996. Rental and earned income are expected to increase as the Company acquires additional properties and due to the fact that the six Properties acquired during the quarter ended September 30, 1996 will contribute to the Company's income for a full fiscal quarter in future quarters. The Company incurred $5,534,853 and $2,335,471 in interest expense for the nine months ended September 30, 1996 and 1995, respectively, $2,473,102 and $1,244,801 of which was incurred for the quarters ended September 30, 1996 and 1995, respectively. Interest expense increased during the quarter and nine months ended September 30, 1996, primarily as a result of the Company's Permanent Debt Financing and higher average borrowing levels on the Company's credit facility. However, the increase was partially offset by the Company's long-term, fixed rate financing and a decrease in the average interest rates of the Company's credit facility. During the nine months ended September 30, 1996 and 1995, operating expenses, including depreciation and amortization, were $4,603,572 and $2,941,619, respectively (19.4% and 20.0%, respectively, of gross operating revenues) of which $1,633,980 and $1,063,471 (17.8% and 19.2%, respectively, of gross operating revenues) were incurred for the quarters ended September 30, 1996 and 1995, respectively. The increase in the dollar amount of operating expenses for the quarter and nine months ended September 30, 1996, as compared to the quarter and nine months ended September 30, 1995, is primarily attributable to the increase in depreciation expense as a result of the additional Properties acquired during the nine months ended September 30, 1996, and a full quarter and nine months of depreciation expense relating to the 29 Properties and four buildings acquired during 1995. The increase is also attributable to an increase in amortization expense as a result of the amortization of loan costs relating to the Company's Permanent Debt Financing and amendment to the Company's Credit Facility. In addition, advisory fees increased as a result of increased funds from operations for the quarter and nine months ended September 30, 1996. PART II. OTHER INFORMATION Item 1. Legal Proceedings. ----------------- No material developments in legal proceedings as previously reported in the Form 10-K for the year ended December 31, 1995. Item 2. Changes in Securities. Not applicable. --------------------- Item 3. Defaults Upon Senior Securities. Not applicable. ------------------------------- Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- Not applicable. Item 5. Other Information. Not applicable. ----------------- Item 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) The following exhibits are filed as a part of this report. 3.1 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 3.3(ii) to Amendment No. 2 to the Registrant's Registration Statement No. 1-11290 on Form 8-B, and incorporated herein by reference). 3.3 Articles of Amendment to the Articles of Incorporation of 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). 4 Specimen Certificate of Common Stock, par value $.01 per share, of the Registrant (filed as Exhibit 3.4 to the Registrant's Registration Statement No. 1-11290 on Form 8-B, and incorporated herein by reference). 10.1 Stock Purchase Agreement dated as of January 23, 1992 by and among the Registrant, CNL Group, Inc. and certain entities affiliated therewith (filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference). 10.2 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). 10.3 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). 10.4 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). 10.5 Interest Rate Cap Agreement dated December 23, 1994, by and between the Registrant and First Union National Bank of Florida (filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference). 10.6 Second Amended and Restated Line of Credit and Security Agreement, dated December 7, 1995, among Registrant, certain lenders listed therein and First Union National Bank of Florida, as the Agent, relating to a $100,000,000 loan (filed as Exhibit 10.14 to the Registrant's Current Report on Form 8-K dated January 18, 1996, and incorporated herein by reference). 10.7 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). 10.8 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). 10.9 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). 10.10 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). 10.11 Third Amended and Restated Line of Credit and Security Agreement, dated September 3, 1996, by and among Registrant, certain lenders and First Union National Bank of Florida, as the Agent, relating to a $150,000,000 loan (filed herewith). 10.12 Second Renewal and Modification Promissory Note, date September 3, 1996, by and among Registrant and First Union National Bank of Florida, as the Agent, relating to a $150,000,000 loan (filed herewith). (b) The Company filed one report on Form 8-K on August 19, 1996, reporting pro forma financial information relating to an equity offering, long-term, fixed rate financing and property and proposed property acquisitions. 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 7th day of November, 1996. COMMERCIAL NET LEASE REALTY, INC. By: /s/ Gary M. Ralston ----------------------- Gary M. Ralston President By: /s/ Kevin B. Habicht ----------------------- Kevin B. Habicht Chief Financial Officer