UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________. Commission File Number 0-12989 COMMERCIAL NET LEASE REALTY, INC. (exact name of registrant as specified in its charter) Maryland 56-1431377 (State or other jurisdiction of (I.R.S. Employment Identification incorporation or organization) No.) 450 South Orange Avenue, Orlando, Florida 32801 (Address of principal executive offices, including zip code) (407) 265-7348 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 30,406,706 shares of Common Stock, $0.01 par value, outstanding as of November 8, 1999 .
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.........21 Part II Other Information..........................................................22
CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) ASSETS September 30, December 31, 1999 1998 ------------- ------------- Real estate: Accounted for using the operating method, net of accumulated depreciation $ 550,054 $ 519,948 Accounted for using the direct financing method 125,963 138,809 Investment in unconsolidated subsidiary 4,770 - Investment in unconsolidated partnership 3,846 3,850 Mortgages receivable 7,492 - Mortgage receivable from unconsolidated subsidiary 30,753 - Cash and cash equivalents 1,595 1,442 Receivables 2,383 3,532 Accrued rental income 12,173 10,395 Debt costs, net of accumulated amortization of $3,053 and $2,559 3,176 2,282 Other assets 1,781 5,337 ------------- ------------- Total assets $ 743,986 $ 685,595 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Line of credit payable $ 89,800 $ 138,100 Mortgages payable 53,701 55,063 Notes payable, net of unamortized discount of $614 and $256, respectively, and unamortized interest rate hedge gain of $2,550 in 1999 201,936 99,744 Accrued interest payable 2,895 2,646 Accounts payable and accrued expenses 2,425 5,343 Rents received in advance 677 809 ------------- ------------- Total liabilities 351,434 301,705 ------------- ------------- Commitments and contingencies (Note 11) Stockholders' equity: Preferred stock, $0.01 par value. Authorized 15,000,000 shares at September 30, 1999 and December 31, 1998; none issued or outstanding - - Common stock, $0.01 par value. Authorized 90,000,000 shares; issued and outstanding 30,406,706 and 29,521,089 shares at September 30, 1999 and December 31, 1998, respectively 304 295 Excess stock, $0.01 par value. Authorized 105,000,000 shares at September 30, 1999 and December 31, 1998; none issued or outstanding - - Capital in excess of par value 397,716 386,755 Accumulated dividends in excess of net earnings (5,468) (3,160) ------------- ------------- Total stockholders' equity 392,552 383,890 ------------- ------------- $ 743,986 $ 685,595 ============= ============= See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands, except per share data) Quarter Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Revenues: Rental income from operating leases $ 14,552 $ 11,831 $ 42,811 $ 33,944 Earned income from direct financing leases 3,366 3,127 10,504 9,427 Contingent rental income 238 211 671 653 Development and asset management fees from related parties 609 527 2,113 1,969 Interest and other 218 125 866 454 ---------- ---------- ---------- ---------- 18,983 15,821 56,965 46,447 ---------- ---------- ---------- ---------- Expenses: General operating and administrative 1,202 2,149 5,406 5,009 Real estate expenses 92 85 268 343 Interest 5,663 3,307 15,797 9,175 Depreciation and amortization 2,230 1,708 6,283 4,935 Expenses incurred in acquiring advisor from related party 794 - 8,961 4,692 ---------- ---------- ---------- ---------- 9,981 7,249 36,715 24,154 ---------- ---------- ---------- ---------- Earnings before equity in earnings of unconsolidated partnership and unconsolidated subsidiary, and gain on sale of real estate 9,002 8,572 20,250 22,293 Equity in earnings of unconsolidated partnership 93 91 279 273 Equity in earnings of unconsolidated subsidiary (299) - (552) - Gain on sale of real estate - 1,288 5,784 1,288 ---------- ---------- ---------- ---------- Net earnings $ 8,796 $ 9,951 $ 25,761 $ 23,854 ========== ========== ========== ========== Net earnings per share of common stock: Basic $ 0.29 $ 0.34 $ 0.85 $ 0.82 ========== ========== ========== ========== Diluted $ 0.29 $ 0.34 $ 0.85 $ 0.82 ========== ========== ========== ========== Weighted average number of shares outstanding: Basic 30,425,097 29,326,745 30,279,232 29,012,455 ========== ========== ========== ========== Diluted 30,448,811 29,463,035 30,367,306 29,202,262 ========== ========== ========== ========== See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Nine Months Ended September 30, 1999 1998 ---------- ---------- Cash flows from operating activities: Net earnings $ 25,761 $ 23,854 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 6,283 4,935 Amortization of notes payable discount 34 10 Amortization of deferred interest rate hedge gain (129) - Gain on sale of real estate (5,784) (1,288) Expenses incurred in acquiring advisor from related party 8,961 4,692 Distributions from unconsolidated partnership, net of equity in earnings 2 7 Equity in earnings of unconsolidated subsidiary 552 - Deferred intercompany profits 378 - Decrease in real estate leased to others using the direct financing method 1,333 996 Decrease in accrued mortgage interest receivable 261 - Decrease (increase) in receivables 1,162 (1,700) Increase in accrued rental income (2,919) (2,340) Increase in other assets (236) (229) Increase in accrued interest payable 249 4 Increase in accounts payable and accrued expenses 574 563 Decrease in rents received in advance (132) (669) ---------- ---------- Net cash provided by operating activities 36,350 28,835 ---------- ---------- Cash flows from investing activities: Proceeds from the sale of real estate 40,103 5,570 Additions to real estate accounted for using the operating method (72,611) (66,038) Additions to real estate accounted for using the direct financing method (1,901) (4,889) Increase in mortgages receivable (3,952) - Mortgage payments received 101 - Increase in mortgage receivable from unconsolidated subsidiary (23,053) - Increase in other assets (262) (2,316) Other 377 10 ---------- ---------- Net cash used in investing activities (61,198) (67,663) ---------- ---------- Cash flows from financing activities: Proceeds from line of credit payable 61,100 69,400 Repayment of line of credit payable (109,400) (116,000) Repayment of mortgages payable (1,362) (1,243) Proceeds from notes payable 99,608 99,729 Proceeds from termination of interest rate hedge 2,679 - Payment of debt costs (1,334) (1,164) Proceeds from issuance of common stock 2,018 19,858 Payment of stock issuance costs 91 (1,103) Payment of dividends (28,069) (26,570) Other (330) (415) ---------- ---------- Net cash provided by financing activities 25,001 42,492 ---------- ---------- Net increase in cash and cash equivalents 153 3,664 Cash and cash equivalents at beginning of period 1,442 2,160 ---------- ---------- Cash and cash equivalents at end of period $ 1,595 $ 5,824 ========== ========== Supplemental schedule of non-cash investing and financing activities: Issued 720,476 and 220,000 shares of common stock in 1999 and 1998, respectively, in connection with the acquisition of the Company's advisor $ 8,961 $ 3,933 ========== ========== Net assets acquired in connection with the acquisition of the Company's advisor $ - $ 12 ========== ========== Mortgage note accepted in connection with sale of real estate $ 3,538 $ - ========== ========== Real estate and other assets contributed to unconsolidated subsidiary in exchange for: Non-voting common stock $ 5,700 $ - ========== ========== Mortgage receivable $ 8,064 $ - ========== ========== See accompanying notes to condensed consolidated financial statements.
COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended September 30, 1999 and 1998 1. Basis of Presentation: --------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. The financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Operating results for the quarter and nine months ended September 30, 1999, may not be indicative of the results that may be expected for the year ending December 31, 1999. Amounts as of December 31, 1998, 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, 1998. The consolidated financial statements include the accounts of Commercial Net Lease Realty, Inc. and its wholly-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Basic earnings per share are calculated based upon the weighted average number of common shares outstanding during each period and diluted earnings per share are calculated based upon weighted average number of common shares outstanding plus dilutive potential common shares. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The Statement requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company is currently reviewing the Statement to see what impact, if any, it will have on the Company's consolidated financial statements. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133." Statement No. 137 defers the effective date of Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" for one year. Statement No. 133, as amended, is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. 2. Leases: ------ The Company generally leases its real estate to operators of major retail businesses. As of September 30, 1999, 185 of the leases have been classified as operating leases and 84 leases have been classified as direct financing leases. For the leases classified as direct financing leases, the building portions of the property leases are accounted for as direct financing leases while the land portions of 48 of these leases are accounted for as operating leases. Substantially all leases have initial terms of 10 to 20 years (expiring between 2000 and 2020) and provide for minimum rentals. In addition, the majority of the leases provide for contingent rentals and/or scheduled rent increases over the terms of the leases. The tenant is also generally required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building and carry insurance coverage for public liability, property damage, fire and extended coverage. The lease options generally allow tenants to renew the leases for two to four successive five-year periods subject to substantially the same terms and conditions as the initial lease. 3. Real Estate: ----------- Accounted for Using the Operating Method - Real estate on operating leases ---------------------------------------- consisted of the following at (dollars in thousands): September 30, December 31, 1999 1998 ------------- ------------- Land $ 267,797 $ 258,545 Buildings and improvements 298,330 269,225 Leasehold interests 4,324 - ------------- ------------- 570,451 527,770 Less accumulated depreciation and amortization (20,469) (17,335) ------------- ------------- 549,982 510,435 Construction in progress 72 9,513 ------------- ------------- $ 550,054 $ 519,948 ============= ============= Some leases provide for scheduled rent increases throughout the lease term. Such amounts are recognized on a straight-line basis over the terms of the leases. For the nine months ended September 30, 1999 and 1998, the Company recognized $2,962,000 and $2,382,000, respectively, of such income, $1,159,000 and $836,000 of which was recognized for the quarters ended September 30, 1999 and 1998, respectively. The following is a schedule of future minimum lease payments to be received on non-cancelable operating leases at September 30, 1999 (dollars in thousands): 1999 $ 13,691 2000 55,998 2001 56,913 2002 56,747 2003 56,880 Thereafter 575,653 ---------- $ 815,882 ========== Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the initial lease terms. In addition, this table does not include any amounts for future contingent rentals which may be received on the leases based on a percentage of the tenants' gross sales. Accounted for Using the Direct Financing Method - The following lists the ------------------------------------------------ components of net investment in direct financing leases at (dollars in thousands): September 30, December 31, 1999 1998 ------------ ------------- Minimum lease payments to be received $ 249,132 $ 283,185 Estimated residual values 39,643 43,154 Less unearned income (162,812) (187,530) ------------- ------------- Real estate leased to others using the direct financing method $ 125,963 $ 138,809 ============= ============= The following is a schedule of future minimum lease payments to be received on direct financing leases at September 30, 1999 (dollars in thousands): 1999 $ 3,826 2000 15,349 2001 15,382 2002 15,443 2003 15,456 Thereafter 183,676 --------- $ 249,132 ========= The above table does not include future minimum lease payments for renewal periods or contingent rental payments that may become due in future periods (see Real Estate: Accounted for Using the Operating Method). 4. Investment in Unconsolidated Subsidiary: --------------------------------------- In May 1999, the Company transferred its build-to-suit development operation to a 95%-owned, taxable unconsolidated subsidiary (the "Subsidiary"). The Company contributed $5.7 million of real estate and other assets to the Subsidiary in exchange for 5,700 shares of non-voting common stock. The Company accounts for its investment in the Subsidiary using the equity method. The Company also entered into a secured line of credit agreement with the Subsidiary for a $30,000,000 revolving credit facility. The credit facility is secured by a first mortgage on the Subsidiary's properties. In addition, the Company entered into a loan agreement with a wholly-owned subsidiary of the Subsidiary for a $20,000,000 revolving credit facility. 5. Line of Credit Payable: ---------------------- In September 1999, the Company entered into an amended and restated loan agreement for a $200,000,000 revolving credit facility (the "Credit Facility") which amended certain provisions of the Company's existing loan agreement and which expires on July 30, 2000. As of September 30, 1999 and December 31, 1998, the outstanding principal balance was $89,800,000 and $138,100,000, respectively, plus accrued interest of $181,000 and $361,000, respectively. For the nine months ended September 30, 1999 and 1998, interest cost incurred on the Credit Facility was $6,088,000 and $3,121,000, respectively, of which $487,000 and $779,000, respectively, was capitalized, $5,242,000 and $2,342,000, respectively, was charged to operations. 6. Notes Payable: ------------- In June 1999, the Company filed a prospectus supplement to its $300,000,000 shelf registration statement and issued $100,000,000 of 8.125% Notes due 2004 (the "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 $99,608,000 with interest payable semi-annually commencing on December 15, 1999. The discount of $392,000 is being amortized as interest expense over the term of the debt obligation using the effective interest method. In connection with the debt offering, the Company entered into a treasury rate lock agreement which fixed a treasury rate of 5.1854% on a notional amount of $92,000,000. Upon issuance of the Notes, the Company terminated the treasury rate lock agreement resulting in a gain of $2,679,000. The gain has been deferred and is being amortized as an adjustment to interest expense over the term of the Notes using the effective interest method. The effective rate of the Notes, including the effects of the discount and the treasury rate lock gain, is 7.547%. 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. 2 dated June 21, 1999 for the Notes. In connection with the debt offering, the Company incurred debt issuance costs totaling $970,000, consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. Debt issuance costs have been deferred and are being amortized over the term of the Notes using the effective interest method. The net proceeds of the debt offering were used to pay down outstanding indebtedness of the Company's Credit Facility. 7. Earnings Per Share: ------------------ The following details the amounts used in computing earnings per share for: The quarter ended The nine months ended September 30, September 30, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Basic Earnings Per Share: Net earnings $ 8,796,000 $ 9,951,000 $25,761,000 $23,854,000 =========== =========== =========== =========== Weighted average number of shares outstanding 29,680,089 29,312,599 29,646,606 29,007,688 Merger contingent shares 745,008 14,146 632,626 4,767 ----------- ----------- ----------- ----------- Weighted average number of shares outstanding used in basic earnings per share 30,425,097 29,326,745 30,279,232 29,012,455 =========== =========== =========== =========== Basic earnings per share $ 0.29 $ 0.34 $ 0.85 $ 0.82 =========== =========== =========== =========== Diluted Earnings Per Share: Net earnings $ 8,796,000 $ 9,951,000 $25,761,000 $23,854,000 =========== =========== =========== =========== Weighted average number of shares outstanding 29,680,089 29,312,599 29,646,606 29,007,688 Effect of dilutive securities: Stock options 1,854 92,623 5,511 175,303 Merger contingent shares 766,868 57,813 715,189 19,271 ----------- ----------- ----------- ----------- Weighted average number of shares outstanding used in diluted earnings per share 30,448,811 29,463,035 30,367,306 29,202,262 =========== =========== =========== =========== Diluted earnings per share $ 0.29 $ 0.34 $ 0.85 $ 0.82 =========== =========== =========== =========== For the quarter and nine months ended September 30, 1999 and 1998, options on 1,642,159 and 859,000 shares of common stock, respectively, were not included in computing diluted earnings per share because their effects were antidilutive. 8. Merger Transaction: ------------------ On December 18, 1997, the Company's stockholders voted to approve an agreement and plan of merger with CNL Realty Advisors, Inc. (the "Advisor"), whereby the stockholders of the Advisor agreed to exchange 100 percent of the outstanding shares of common stock of the Advisor for up to 2,200,000 shares (the "Share Consideration") of the Company's common stock (the "Merger"). As a result, the Company became a fully integrated, self-administered real estate investment trust effective January 1, 1998. Since the effective date of the Merger, the Company has issued 998,000 shares incurring expenses of $14,462,000, all of which were charged to operations. In addition, in connection with the property acquisitions during the quarter ended September 30, 1999, on October 1, 1999, 98,776 shares became issuable to the stockholders of the Advisor. The market value of the issuable shares is $1,099,000, all of which will be charged to operations during the quarter ended December 31, 1999. 9. Related Party Transactions: -------------------------- During the nine months ended September 30, 1999 and 1998, the Company provided certain development services for an affiliate of a member of the board of directors. In connection therewith, the Company received $1,351,000 and $1,806,000, respectively, in development fees relating to these services. In August 1999, the Company entered into an asset management agreement with WXI/SMC Real Estate, LLC (the "LLC"), in which a wholly-owned subsidiary of the Subsidiary holds a 33 1/3% equity interest. Pursuant to the asset management agreement, the LLC paid the Company $506,000 in fees during the quarter ended September 30, 1999. In March 1999, the Company sold 38 of its properties to an affiliate of a member of the board of directors for a total of $36,568,000 and received net proceeds of $36,173,000, resulting in a gain of $5,363,000 for financial reporting purposes. 10. Segment Information: ------------------- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. While the Company does not have more than one reportable segment as defined by the Statement, the Company has identified two primary sources of revenue: (i) rental and earned income from the triple net leases and (ii) fee income from development, property management and asset management services. The following tables represent the revenues, expenses and asset allocation for the two segments and the Company's consolidated totals at (dollars in thousands): Rental and Earned Fee Consolidated Income Income Corporate Totals ------------ ------------ ------------ ------------ September 30, 1999 and for the quarter then ended ------------------ Revenues $ 18,390 $ 593 $ - $ 18,983 General operating and administrative expenses 1,053 106 43 1,202 Real estate expenses 92 - - 92 Interest expense 5,663 - - 5,663 Depreciation and amortization 2,215 8 7 2,230 Expenses incurred in acquiring advisor from related party - - 794 794 Equity in earnings of unconsolidated partnership 93 - - 93 Equity in earnings of unconsolidated subsidiary - (299) - (299) Gain on sale of real estate - - - - ------------ ------------ ------------ ------------ Net earnings $ 9,460 $ 180 $ (844) $ 8,796 ============ ============ ============ ============ Assets $ 743,814 $ 39 $ 133 $ 743,986 ============ ============ ============ ============ Additions to long-lived assets: Real estate $ 5,287 $ - $ - $ 5,287 ============ ============ ============ ============ Other $ 4 $ - $ - $ 4 ============ ============ ============ ============ September 30, 1998 and for the quarter then ended ------------------ Revenues $ 15,205 $ 616 $ - $ 15,821 General operating and administrative expenses 1,593 476 80 2,149 Real estate expenses 85 - - 85 Interest expense 3,307 - - 3,307 Depreciation and amortization 1,704 2 2 1,708 Expenses incurred in acquiring advisor from related party - - - - Equity in earnings of unconsolidated partnership 91 - - 91 Equity in earnings of unconsolidated subsidiary - - - - Gain on sale of real estate 1,288 - - 1,288 ------------ ------------ ------------ ------------ Net earnings $ 9,895 $ 138 $ (82) $ 9,951 ============ ============ ============ ============ Assets $ 611,901 $ 172 $ 25 $ 612,098 ============ ============ ============ ============ Additions to long-lived assets: Real estate $ 24,195 $ - $ - $ 24,195 ============ ============ ============ ============ Other $ 20 $ 11 $ - $ 31 ============ ============ ============ ============ September 30, 1999 and for the nine months then ended ------------------ Revenues $ 54,551 $ 2,414 $ - $ 56,965 General operating and administrative expenses 4,109 823 474 5,406 Real estate expenses 268 - - 268 Interest expense 15,797 - - 15,797 Depreciation and amortization 6,221 43 19 6,283 Expenses incurred in acquiring advisor from related party - - 8,961 8,961 Equity in earnings of unconsolidated partnership 279 - - 279 Equity in earnings of unconsolidated subsidiary - (552) - (552) Gain on sale of real estate 5,784 - - 5,784 ------------ ------------ ------------ ------------ Net earnings $ 34,219 $ 996 $ (9,454) $ 25,761 ============ ============ ============ ============ Assets $ 743,814 $ 39 $ 133 $ 743,986 ============ ============ ============ ============ Additions to long-lived assets: Real estate $ 74,512 $ - $ - $ 74,512 ============ ============ ============ ============ Other $ 131 $ 158 $ 78 $ 367 ============ ============ ============ ============ September 30, 1998 and for the nine months then ended ------------------ Revenues $ 44,203 $ 2,244 $ - $ 46,447 General operating and administrative expenses 3,172 1,223 614 5,009 Real estate expenses 343 - - 343 Interest expense 9,175 - - 9,175 Depreciation and amortization 4,907 21 7 4,935 Expenses incurred in acquiring advisor from related party - - 4,692 4,692 Equity in earnings of unconsolidated partnership 273 - - 273 Equity in earnings of unconsolidated subsidiary - - - - Gain on sale of real estate 1,288 - - 1,288 ------------ ------------ ------------ ------------ Net earnings $ 28,167 $ 1,000 $ (5,313) $ 23,854 ============ ============ ============ ============ Assets $ 661,901 $ 172 $ 25 $ 612,098 ============ ============ ============ ============ Additions to long-lived assets: Real estate $ 70,927 $ - - $ 70,927 ============ ============ ============ ============ Other $ 138 $ 172 $ 25 $ 335 ============ ============ ============ ============ 11. Commitments and Contingencies: ----------------------------- As of September 30, 1999, the Company owned and leased two land parcels to a tenant which is obligated to develop a building on the respective land parcels. The Company has agreed to acquire the completed buildings for an aggregate amount of up to $1,371,000, at which time rental income is to increase for each of the properties. As of September 30, 1999, the Company owned one land parcel on which the Company has agreed to construct a building for a prospective tenant on the land parcel for construction costs of approximately $2,525,000, of which $72,000 of costs had been incurred at September 30, 1999. During the nine months ended September 30, 1999, the Company entered into a purchase and sale agreement whereby the Company acquired ten land parcels leased to major retailers and has agreed to acquire the buildings on each of the respective land parcels at the expiration of the initial term of the ground lease for an aggregate amount of approximately $23 million. The seller of the buildings holds a security interest in each of the land parcels which secures the Company's obligation to purchase the buildings under the purchase and sale agreement. 12. Subsequent Event: ---------------- In October 1999, the Company declared dividends to its shareholders of $9,426,000 or $0.31 per share of common stock, payable in November 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction - ------------ Commercial Net Lease Realty, Inc. (the "Company") is a fully integrated, self-administrated real estate investment trust that acquires, owns, develops and manages high-quality, freestanding properties leased to major retail businesses under long-term commercial net leases. As of September 30, 1999, the Company owned, either directly or through a partnership interest, 281 properties (the "Properties") substantially all of which are leased to major retail businesses. Liquidity and Capital Resources - -------------------------------- General. Historically, the Company's only demand for funds has been for the payment of operating expenses and dividends, for property acquisitions and development and for the payment of interest on its outstanding indebtedness. Generally, cash needs for items other than property acquisitions and development have been met from operations and property acquisitions and development have been funded by equity and debt offerings, bank borrowings 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, 1999 and 1998, the Company generated $36,350,000 and $28,835,000 respectively, in net cash provided by operating activities. The increase in cash from operations for the nine months ended September 30, 1999, as compared to the nine months ended September 30, 1998, is primarily the result of changes in revenues and expenses as discussed in "Results of Operations." The Company's leases typically provide that the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation including utilities, property taxes and insurance. In addition, the Company's leases generally provide that the tenant is responsible for roof and structural repairs. Certain of the Company's Properties are subject to leases under which the Company retains responsibility for certain costs and expenses associated with the Property. Because many of the Properties which are subject to leases that place these responsibilities on the Company are recently constructed, management anticipates that capital demands to meet obligations with respect to these Properties will be minimal for the foreseeable future and can be met with funds from operations and working capital. The Company may be required to use bank borrowings or other sources of capital in the event of unforeseen significant capital expenditures. Two of the Company's tenants, HomePlace and Luria's, each filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in January 1998 and August 1997, respectively. As a result, the tenants have the right to reject or affirm their leases with the Company. In May 1998, HomePlace rejected two of its five leases with the Company, at which time HomePlace was no longer required to pay rent on these two leases. In September 1998, one of the Properties was re-leased to Waccamaw Corporation. During the nine months ended September 30, 1999, HomePlace emerged from bankruptcy and affirmed three of its leases with the Company. The remaining Property is currently being marketed for lease or sale. In March 1998, Luria's rejected its three leases with the Company, at which time Luria's was no longer required to pay rent on these three leases. Two of these Properties were re-leased in 1998 and one was sold in March 1999. Indebtedness. In September 1999, the Company entered into an amended and restated loan agreement for a $200,000,000 revolving credit facility (the "Credit Facility") which amended certain provisions of the Company's existing loan agreement and which expires on July 30, 2000. As of September 30, 1999, $89,800,000 was outstanding and approximately $110,200,000 was available for future borrowings under the Credit Facility. The Company expects to use the Credit Facility to invest in freestanding retail properties. Debt Securities. In June 1999, the Company filed a prospectus supplement to its $300,000,000 shelf registration statement and issued $100,000,000 of 8.125% Notes due 2004 (the "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 $99,608,000 with interest payable semi-annually commencing on December 15, 1999. The discount of $392,000 is being amortized as interest expense over the term of the debt obligation using the effective interest method. In connection with the debt offering, the Company entered into a treasury rate lock agreement which fixed a treasury rate of 5.1854% on a notional amount of $92,000,000. Upon issuance of the Notes, the Company terminated the treasury rate lock agreement resulting in a gain of $2,679,000. The gain has been deferred and is being amortized as an adjustment to interest expense over the term of the Notes using the effective interest method. The effective rate of the Notes, including the effects of the discount and the treasury rate lock gain, is 7.547%. 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. 2 dated June 21, 1999 for the Notes. In connection with the debt offering, the Company incurred debt issuance costs totaling $970,000, consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. Debt issuance costs have been deferred and are being amortized over the term of the Notes using the effective interest method. The net proceeds of the debt offering were used to pay down outstanding indebtedness of the Company's Credit Facility. Property Acquisitions and Commitments. During the nine months ended September 30, 1999, the Company borrowed $61,100,000 under its Credit Facility (i) to acquire 35 properties, one of which is a land only parcel upon which a building is currently under construction, (ii) to purchase three buildings constructed by the tenants on land parcels owned by the Company and (iii) to complete construction of ten buildings by the Company on previously acquired land parcels. As of September 30, 1999, the Company owned and leased two land parcels to a tenant which is obligated to develop a building on the respective land parcels. The Company has agreed to acquire the completed buildings for an aggregate amount of up to $1,371,000, at which time rental income is to increase for each of the Properties. As of September 30, 1999, the Company owned one land parcel on which the Company has agreed to construct a building for a prospective tenant on the land parcel for an amount of approximately $2,525,000 of which $72,000 of costs had been incurred at September 30, 1999. In addition to the three buildings under construction as of September 30, 1999, the Company may elect to acquire 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 Credit Facility and long-term, fixed rate financing, the Company may enter into additional financing arrangements. During the nine months ended September 30, 1999, the Company sold 42 of its properties for a total of $44,231,000 and received net sales proceeds of $43,641,000. The Company recognized a net gain on the sale of these 42 properties of $5,784,000 for financial reporting purposes. The Company reinvested the proceeds from 41 of these properties to acquire additional properties and leasehold interests and structured the transactions to qualify as tax-free like-kind exchange transactions for federal income tax purposes. Investment in Unconsolidated Subsidiary. In May 1999, the Company transferred its build-to-suit development operation to a 95%-owned, taxable unconsolidated subsidiary, (the "Subsidiary"). The Company contributed $5.7 million of real estate and other assets to the Subsidiary in exchange for 5,700 shares of non-voting common stock. The Company also entered into a secured line of credit agreement with the Subsidiary for a $30,000,000 revolving credit facility. The credit facility is secured by a first mortgage on the Subsidiary's properties. In addition, the Company entered into a loan agreement with a wholly-owned subsidiary of the Subsidiary for a $20,000,000 revolving credit facility. Merger Transaction. On December 18, 1997, the Company's stockholders voted to approve an agreement and plan of merger with CNL Realty Advisors, Inc. (the "Advisor"), whereby the stockholders of the Advisor agreed to exchange 100 percent of the outstanding shares of common stock of the Advisor for up to 2,200,000 shares (the "Share Consideration") of the Company's common stock (the "Merger"). As a result, the Company became a fully integrated, self-administered real estate investment trust effective January 1, 1998. Since the effective date of the Merger, the Company has issued 998,000 shares incurring expenses of $14,462,000, all of which were charged to operations. In addition, in connection with the property acquisitions during the quarter ended September 30, 1999, on October 1, 1999, 98,776 shares became issuable to the stockholders of the Advisor. The market value of the issuable shares is $1,099,000, all of which will be charged to operations during the quarter ended December 31, 1999. Management believes that the Company's current capital resources (including cash on hand), coupled with the Company's borrowing capacity, are sufficient to meet its liquidity needs for the foreseeable future. Dividends. One of the Company's primary objectives, consistent with its policy of retaining sufficient cash for reserves and working capital purposes and maintaining its status as a real estate investment trust, is to distribute a substantial portion of its funds available from operations to its stockholders in the form of dividends. For the nine months ended September 30, 1999 and 1998, the Company declared and paid dividends to its stockholders of $28,069,000 and $26,570,000, respectively, or $0.93 and $0.92, respectively, per share of common stock. In October 1999, the Company declared dividends to its shareholders of $9,426,000 or $0.31 per share of common stock, payable in November 1999. Results of Operations - --------------------- As of September 30, 1999 and 1998, the Company owned 272 and 254 wholly-owned Properties, respectively, 269 and 251, respectively, of which were leased to operators of major retail businesses. In addition, during the nine months ended September 30, 1999, the Company sold 41 properties which were leased during 1999 and one property which was vacant. In connection therewith, during the nine months ended September 30, 1999 and 1998, the Company earned $53,986,000 and $44,024,000, respectively, in rental income from operating leases, earned income from direct financing leases and contingent rental income ("Rental Income"), $18,156,000 and $15,169,000 of which was earned during the quarters ended September 30, 1999 and 1998, respectively. The increase in Rental Income during the quarter and nine months ended September 30, 1999, is primarily a result of the facts that (i) the 55 Properties acquired and 15 buildings upon which construction was completed during 1998 were operational for a full quarter and nine months in 1999 and (ii) the Company acquired 35 Properties and 13 buildings upon which construction was completed during the nine months ended September 30, 1999. The increase in Rental Income was partially offset by a decrease in Rental Income relating to 41 leased Properties which were sold during the nine months ended September 30, 1999. Rental Income is expected to increase as the Company acquires additional properties and due to the fact that the 35 Properties and 13 of the buildings acquired during the nine months ended September 30, 1999, will contribute to the Company's income for a full fiscal quarter in future quarters. During the nine months ended September 30, 1999 and 1998, the Company earned $2,113,000 and $1,969,000, respectively, in development and asset management fees, $609,000 and $527,000 of which were earned during the quarters ended September 30, 1999 and 1998, respectively. The Company began providing development and asset management services on January 1, 1998 in connection with the Merger of the Company's Advisor. The increase in development and asset management fees during the quarter and nine months ended September 30, 1999 is attributable to an increase in asset management services provided. During the nine months ended September 30, 1999 and 1998, operating expenses, excluding interest and including depreciation and amortization, were $20,918,000 and $14,979,000, respectively, (36.7% and 32.2%, respectively, of total revenues) $4,318,000 and $3,942,000 (22.7% and 24.9%, respectively, of total revenues) of which was incurred during the quarters ended September 30, 1999 and 1998, respectively. The increase in the amount of operating expenses for the quarter and nine months ended September 30, 1999, as compared to the quarter and nine months ended September 30, 1998, is primarily attributable to the charges related to the costs incurred in acquiring the Company's Advisor from a related party. Operating expenses for the nine months ended September 30, 1999 and 1998, excluding the costs relating to the acquisition of the Advisor were $11,957,000 and $10,287,000 (20.9% and 22.1%, respectively, of total revenues), $3,524,000 and $3,942,000 (18.6% and 24.9%, respectively, of total revenues) of which was incurred during the quarters ended September 30, 1999 and 1998, respectively. The increase in operating expenses for the nine months ended September 30, 1999, as compared to the nine months ended September 30, 1998, is also attributable to the increase in depreciation expense as a result of the additional Properties acquired during the quarter ended September 30, 1999, and a full quarter of depreciation expense relating to the 55 Properties and 15 buildings acquired during 1998. The increase in depreciation expense was partially offset by a decrease in depreciation expense related to the sale of 42 properties during the nine months ended September 30, 1999. The decrease in operating expenses for the quarter ended September 30, 1999 as compared to the quarter ended September 30, 1998 is primarily attributable to the transfer of the Company's build-to-suit development operation to the Subsidiary. The Company recognized $15,797,000 and $9,175,000 in interest expense for the nine months ended September 30, 1999 and 1998, respectively, $5,663,000 and $3,307,000 of which was incurred during the quarters ended September 30, 1999 and 1998, respectively. Interest expense increased during the quarter and nine months ended September 30, 1999, primarily as a result of higher average borrowing levels on the Company's Credit Facility and the issuance of the Notes in March 1998 and in June 1999. However, the increase was partially offset by a decrease in the average interest rates of the Company's Credit Facility. Year 2000 Readiness Disclosure Overview of Year 2000 Problem. The Year 2000 problem concerns the inability of information and non-information technology systems to properly recognize and process date sensitive information beyond January 1, 2000. The failure to accurately recognize the year 2000 could result in a variety of problems from data miscalculations to the failure of entire systems. Information and Non-Information Technology Systems. The information technology system of the Company consists of a network of personal computers and servers built using hardware and software from mainstream suppliers. The non-information technology systems of the Company are primarily facility related and include building security systems, elevators, fire suppressions, HVAC, electrical systems and other utilities. The Company has no internally generated programmed software coding to correct, because substantially all of the software utilized by the Company is purchased or licensed from external providers. The maintenance of non-information technology systems at the Company's Properties is the responsibility of the tenants of the Properties in accordance with the terms of the Company's leases. The Y2K Team. In early 1998, the Company formed a Year 2000 committee (the "Y2K Team") for the purpose of identifying, understanding and addressing the various issues associated with the Year 2000 problem. The Y2K Team consists of members of the Company and its affiliates, including representatives from senior management, information systems, telecommunications, legal, office management, accounting and property management. Assessing Year 2000 Readiness. The Y2K Team's initial step in assessing Year 2000 readiness consisted of identifying any systems that are date-sensitive and, accordingly, could have potential Year 2000 problems. The Y2K Team has conducted inspections, interviews and tests to identify which of the Company's systems could have a potential Year 2000 problem. The information system of the Company is comprised of hardware and software applications from mainstream suppliers. Accordingly, the Y2K Team has contacted and is evaluating documentation from the respective vendors and manufacturers to verify the Year 2000 compliance of their products. The Y2K Team has also requested and is evaluating documentation from the non-information technology systems providers of the Company. In addition, the Y2K Team has requested and is evaluating documentation of Y2K readiness from other companies with which the Company has material third party relationships. The third parties in addition to the providers of information and non-information technology systems, consist of the Company's transfer agent and financial institutions ("Third Parties"). The Company depends on its transfer agent to maintain and track investor information and its financial institutions for availability of cash. As of September 30, 1999, the Y2K Team had received written responses from all of the Third Parties indicating that they are currently Year 2000 compliant. Although the Y2K Team has received positive responses from the companies with which the Company has third party relationships regarding their Year 2000 compliance, the Company cannot be assured that the Third Parties have adequately considered the impact of the Year 2000. In addition, the Y2K Team has requested documentation of Y2K readiness from the Company's tenants. As of September 30, 1999, all of the responses received from the tenants indicate that they are currently Year 2000 compliant or will be Year 2000 compliant prior to the year 2000. The Company is in the process of contacting all tenants which have not yet responded to the request for documentation. The Company cannot be assured that the tenants have adequately considered the impact of the Year 2000. The Company has also instituted a policy of requiring all new tenants to indicate that their systems are Year 2000 compliant or are expected to be Year 2000 compliant prior to the year 2000. Achieving Year 2000 Compliance. The Y2K Team has identified and completed upgrades for its hardware equipment that was not Year 2000 compliant. In addition, the Y2K Team has identified the software applications which will require upgrades to become Year 2000 compliant. The Y2K Team expects all of these upgrades, as well as any other necessary remedial measures on the information technology systems and non-information technology systems used in the business activities and operations of the Company, to be completed by December 31, 1999, although, the Company cannot be assured that the upgrade solutions provided by the vendors have addressed all possible Year 2000 issues. As of September 30, 1999, the Company does not expect the aggregate cost of the Year 2000 remedial measures to exceed $50,000 which will not have a material impact on its results of operations. Assessing the Risks to the Company of Non-Compliance and Developing Contingency Plans Risk of Failure of Information and Non-Information Technology Systems Used by the Company. The Y2K Team believes that the reasonably likely worst case scenario with regard to the information and non-information technology systems used by the Company is the failure of one or more of these systems as a result of Year 2000 problems. Because the Company's major source of income is rental payments under long-term triple-net leases, any failure of information or non-information technology systems used by the Company is not expected to have a material impact on the Company's results of operations. Even if such systems failed, the payments under the Company's leases would not be affected. In addition, the Y2K Team is expected to correct any Y2K problems within its control before the year 2000. The Y2K Team has determined that a contingency plan to address this risk is not necessary at this time. However, if the Y2K Team identifies additional risks associated with the Year 2000 compliance of the information or non-information technology systems used by the Company or if the progress of the Y2K Team in remediating Year 2000 problems with such systems deviates from the anticipated timeline, the Y2K Team will develop a contingency plan if deemed necessary at that time. Risk of Inability of Transfer Agent to Accurately Maintain Company Records. The Y2K Team believes that the reasonably likely worst case scenario with regard to the Company's transfer agent is that the transfer agent will fail to achieve Year 2000 compliance of its systems and will not be able to accurately maintain the records of the Company. This could result in the inability of the Company to accurately identify its stockholders for purposes of dividend payments, delivery of disclosure materials and transfers of common stock. The Y2K Team has received certification from the Company's transfer agent of its Year 2000 compliance. Despite the positive response from the transfer agent, the Company cannot be assured that the transfer agent has addressed all possible Year 2000 issues. Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to Achieve Year 2000 Compliance. The Y2K Team believes that the reasonably likely worst case scenario with regard to the Company's financial institutions is that some or all of the Company's funds on deposit with such financial institutions may be temporarily unavailable. The Y2K Team has received responses from all of the Company's financial institutions indicating that their systems are currently Year 2000 compliant. Despite the positive responses from the financial institutions, the Company cannot be assured that the financial institutions have addressed all possible Year 2000 issues. The loss of short-term liquidity could affect the Company's ability to pay its expenses on a current basis. The Company does not anticipate that a loss of short-term liquidity would have a material impact on its results of operations. Based upon the responses received from the Company's financial institutions and the inability of the Y2K team to identify a suitable alternative for the deposit of funds that is not subject to potential Year 2000 problems, the Y2K Team has determined not to develop a contingency plan to address this risk. Risks of Late Payment or Non-Payment by Tenants. The Y2K Team believes that the reasonably likely worst case scenario with regard to the tenants under the Company's leases is that some of the tenants may make payments late as the result of the failure of the tenants to achieve Year 2000 compliance of their systems used in the payment of rent, the failure of the tenants' financial institutions to achieve Year 2000 compliance, or the temporary disruption of the tenants' businesses. The Y2K Team is in the process of requesting responses from the Company's tenants indicating the extent to which their systems are currently Year 2000 compliant or are expected to be Year 2000 compliant prior to the year 2000. The Company cannot be assured that the tenants have addressed all possible Year 2000 issues. The late payment by one or more tenants would affect the Company's results of operations in the short-term. The Company is not able to estimate the impact of late payments on its results of operations. The Y2K Team is also aware of predictions that the Year 2000 problem, if uncorrected, may result in a global economic crisis. The Y2K Team is not able to determine if such predictions are true. A widespread disruption of the economy could affect the ability of the Company's tenants to make rental payments and, accordingly, could have a material impact on the Company's results of operations. Because rental payments are under the control of the Company's tenants, the Y2K Team is not able to develop a contingency plan to address these risks. In the event of late payment or non-payment of rental payments, the Company will assess the remedies available to it under its lease agreements. Investment Considerations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The Statement requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company is currently reviewing the Statement to see what impact, if any, it will have on the Company's consolidated financial statements. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133." Statement No. 137 defers the effective date of Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" for one year. Statement No. 133, as amended, is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. This information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause a difference include the following: changes in general economic conditions, changes in real estate market conditions, continued availability of proceeds from the Company's debt or equity capital, the ability of the Company to locate suitable tenants for its Property and the ability of tenants to make payments under their respective leases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in quantitative and qualitative disclosures about market risk as previously reported in the Form 10-K for the year ended December 31, 1998.
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, 1998. Item 2. Changes in Securities and Use of Proceeds. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are filed as a part of this report. 3.1 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 September 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). 4.1 Specimen Certificate of Common stock, par value $0.01 per share, of the Registrant (filed as Exhibit 3.4 to the Registrant's Registration Statement No. 1-11290 on Form 8-B, and incorporated herein by reference). 4.2 Form of Indenture dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 and $100,000,000 of 8.125% Notes due 2004 (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference). 4.3 Form of Supplemental Indenture No. 1 dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference). 4.4 Form of 7.125% Notes due 2008 (filed as Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference). 4.5 Form of Supplemental Indenture No. 2 dated June 21, 1999, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 8.125% Notes due 2004 (filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated June 17, 1999, and incorporated herein by reference). 4.6 Form of 8.125% Notes due 2004 (filed as Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated June 17, 1999, and incorporated herein by reference). 10.1 Letter Agreement dated July 10, 1992, amending Stock Purchase Agreement dated January 23, 1992 (filed as Exhibit 10.34 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992, and incorporated herein by reference). 10.2 Advisory Agreement between Registrant and CNL Realty Advisors, Inc. effective as of April 1, 1993 (filed as Exhibit 10.04 to Amendment No. 1 to the Registrant's Registration Statement No. 33-61214 on Form S-2, and incorporated herein by reference). 10.3 1992 Commercial Net Lease Realty, Inc. Stock Option Plan (filed as Exhibit No. 10(x) to the Registrant's Registration Statement No. 33-83110 on Form S-3, and incorporated herein by reference). 10.4 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). 10.5 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). 10.6 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). 10.7 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). 10.8 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). 10.9 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 Florida, as the Agent, relating to a $150,000,000 loan (filed as Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference). 10.10 Second Renewal and Modification Promissory Note, dated September 3, 1996, by and among Registrant and First Union National Bank Florida, as the Agent, relating to a $150,000,000 loan (filed as Exhibit 10.12 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference). 10.11 Agreement and Plan of Merger dated May 15, 1997, by and among Commercial Net Lease Realty, Inc. and Net Lease Realty II, Inc. and CNL Realty Advisors, Inc. and the Stockholders of CNL Realty Advisors, Inc. (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated May 16, 1997, and incorporated herein by reference). 10.12 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). 10.13 Fifth Amended and Restated Line of Credit and Security Agreement, dated September 23, 1999, by and among Registrant, certain lenders and First Union National Bank, as the Agent, relating to a $200,000,000 loan (filed herewith). 27 Financial Data Schedule (filed herewith). (b) No reports on Form 8-K were filed during the quarter ended September 30, 1999.
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 10th day of November, 1999. 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