2 0 0 2 A N N U A L R E P O R T
1990
1991
1992
1993
Our Shareholders
Our Shareholders
Our Shareholders
Our Shareholders
May, 1990
May, 1991
May, 1992
May, 1993
Three Hundred Seventy Thousand & 00/100
$370,000
Three Hundred Eighty-Five Thousand & 00/100
$385,000
Four Hundred Thousand & 00/100
$400,000
Four Hundred Eighty-Three Thousand & 00/100
$483,000
1Q FY1990 Dividends
1Q FY1991 Dividends
1Q FY1992 Dividends
1Q FY1993 Dividends
Our Shareholders
Our Shareholders
Our Shareholders
Our Shareholders
August, 1990
August, 1991
August, 1992
August, 1993
Three Hundred Eighty-Five Thousand & 00/100
$385,000
Three Hundred Eighty-Five Thousand & 00/100
$385,000
Four Hundred Thousand & 00/100
$400,000
Four Hundred Eighty-Four Thousand & 00/100
$484,000
2Q FY1990 Dividends
2Q FY1991 Dividends
2Q FY1992 Dividends
2Q FY1993 Dividends
Our Shareholders
Our Shareholders
Our Shareholders
Our Shareholders
November, 1990
November, 1991
November, 1992
November, 1993
Three Hundred Eighty-Five Thousand & 00/100
$385,000
Four Hundred Thousand & 00/100
$400,000
Four Hundred Eighty-Three Thousand & 00/100
$483,000
One Million Eighty-Nine Thousand & 00/100
$1,089,000
3Q FY1990 Dividends
3Q FY1991 Dividends
3Q FY1992 Dividends
3Q FY1993 Dividends
Our Shareholders
Our Shareholders
Our Shareholders
Our Shareholders
February, 1991
February, 1992
February, 1993
February, 1994
Three Hundred Eighty-Four Thousand & 00/100
$384,000
Three Hundred Nienty-Nine Thousand & 00/100
$399,000
Four Hundred Eighty-Three Thousand & 00/100
$483,000
One Million One Hundred Thousand & 00/100
$1,100,000
4Q FY1990 Dividends
4Q FY1991 Dividends
4Q FY1992 Dividends
4Q FY1993 Dividends
$1,524,000
$1,569,000
$1,766,000
$3,156,000
1998
1999
2000
2001
Our Shareholders
Our Shareholders
Our Shareholders
Our Shareholders
May, 1998
May, 1999
May, 2000
May, 2001
Eight Million Four Hundred Fifty-Two Thousand & 00/100
$8,452,000
Nine Million Two Hundred Sixty-Seven Thousand & 00/100
$9,267,000
Nine Million Three Hundred Seventy-Eight Thousand & 00/100
$9,378,000
Nine Million Five Hundred Ninety-Four Thousand & 00/100
$9,594,000
1Q FY1998 Dividends
1Q FY1999 Dividends
1Q FY2000 Dividends
1Q FY2001 Dividends
Our Shareholders
Our Shareholders
Our Shareholders
Our Shareholders
August, 1998
August, 1999
August, 2000
August, 2001
Nine Million Forty-Seven Thousand & 00/100
$9,047,000
Nine Million Three Hundred Ninety-Nine Thousand & 00/100
$9,399,000
Nine Million Three Hundred Ninety-Eight Thousand & 00/100
$9,398,000
Nine Million Six Hundred Eight Thousand & 00/100
$9,608,000
2Q FY1998 Dividends
2Q FY1999 Dividends
2Q FY2000 Dividends
2Q FY2001 Dividends
Our Shareholders
Our Shareholders
Our Shareholders
Our Shareholders
November, 1998
November, 1999
November, 2000
November, 2001
Nine Million Seventy-One Thousand & 00/100
$9,071,000
Nine Million Four Hundred Three Thousand & 00/100
$9,403,000
Nine Million Four Hundred Ten Thousand & 00/100
$9,410,000
Nine Million Six Hundred Ninety-Eight Thousand & 00/100
$9,698,000
3Q FY1998 Dividends
3Q FY1999 Dividends
3Q FY2000 Dividends
3Q FY2001 Dividends
Our Shareholders
Our Shareholders
Our Shareholders
Our Shareholders
February, 1999
February, 2000
February, 2001
February, 2002
Nine Million One Hundred Two Thousand & 00/100
$9,102,000
Nine Million Four Hundred Twenty-Six Thousand & 00/100
$9,426,000
Nine Million Five Hundred Seventy-Four Thousand & 00/100
$9,574,000
Nine Million Seven Hundred Thirty-Seven Thousand & 00/100
$9,737,000
4Q FY1998 Dividends
4Q FY1999 Dividends
4Q FY2000 Dividends
4Q FY2001 Dividends
$35,672,000
$37,495,000
$37,760,000
$38,637,000
1994
1995
1996
1997
Our Shareholders
Our Shareholders
Our Shareholders
Our Shareholders
May, 1994
May, 1995
May, 1996
May, 1997
Two Million One Hundred Forty-Six Thousand & 00/100
$2,146,000
Three Million Three Hundred Eighty-TwoThousand & 00/100
$3,382,000
Three Million Three Hundred Eighty-Two Thousand & 00/100
$3,382,000
Six Million Two Hunred Twenty-Nine Thousand & 00/100
$6,229,000
1Q FY1994 Dividends
1Q FY1995 Dividends
1Q FY1996 Dividends
1Q FY1997 Dividends
Our Shareholders
Our Shareholders
Our Shareholders
Our Shareholders
August, 1994
August, 1995
August, 1996
August, 1997
Two Million One Hundred Forty-Six Thousand & 00/100
$2,146,000
Three Million Three Hundred Eighty-TwoThousand & 00/100
$3,382,000
Four Million Five Hundred Fifty Thousand & 00/100
$4,550,000
Seven Million Eighteen Thousand & 00/100
$7,018,000
2Q FY1994 Dividends
2Q FY1995 Dividends
2Q FY1996 Dividends
2Q FY1997 Dividends
Our Shareholders
Our Shareholders
Our Shareholders
Our Shareholders
November, 1994
November, 1995
November, 1996
November, 1997
Two Million Two Hundred Twenty-Two Thousand & 00/100
$2,222,000
Three Million Three Hundred Eighty-Two Thousand & 00/100
$3,382,000
Four Million Seven Hundred Seven Thousand & 00/100
$4,707,000
Seven Million Eighteen Thousand & 00/100
$7,018,000
3Q FY1994 Dividends
3Q FY1995 Dividends
3Q FY1996 Dividends
3Q FY1997 Dividends
Our Shareholders
Our Shareholders
Our Shareholders
Our Shareholders
February, 1995
February, 1996
February, 1997
February, 1998
Three Million Three Hundred Eighty-Three Thousand & 00/100
$3,383,000
Three Million Three Hundred Eighty-Three Thousand & 00/100
$3,383,000
Six Million Two Hunred Twenty-Nine Thousand & 00/100
$6,229,000
Eight Million One Hundred Sixteen Thousand & 00/100
$8,116,000
4Q FY1994 Dividends
4Q FY1995 Dividends
4Q FY1996 Dividends
4Q FY1997 Dividends
$9,897,000
$13,529,000
$18,868,000
$28,381,000
2002
Our Shareholders
May, 2002
Twelve Million Six Hundred Fifty Thousand & 00/100
$12,650,000
1Q FY2002 Dividends
Our Shareholders
August, 2002
Twelve Million Six Hundred Eighty-NineThousand & 00/100
$12,689,000
2Q FY2002 Dividends
Our Shareholders
November, 2002
Twelve Million Nine Hundred FifteenThousand & 00/100
$12,915,000
3Q FY2002 Dividends
Our Shareholders
February, 2003
Twelve Million Nine Hundred Twenty-Four Thousand & 00/100
$12,924,000
4Q FY2002 Dividends
$51,178,000
thirteen consecutive years
of increased dividends per
share totaling $279,432,000
paid to all shareholders
TABLE OF CONTENTS
Company Profile
Letter to Shareholders
Special Thanks
Historical Financial Highlights
Questions & Answers
Management’s Discussion & Analysis
of Financial Condition & Results
of Operations
Independent Auditors’ Report
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Consolidated Quarterly Financial Data
Share Price and Dividend Data
Shareholder Information
Associates
Directors & Officers
5
6
9
10
12
14
35
36
37
39
40
42
71
72
73
74
75
4
thirteen consecutive years of increased dividends
5
COMPANY PROFILE
Commercial Net Lease Realty, Inc. is a
New York Stock Exchange-listed real estate
investment trust (ticker symbol: NNN).
The company acquires, owns, manages and
indirectly develops net-leased, single-tenant
properties in the 7,500 – 100,000 square
foot range nationwide.
The company strives to develop and
maintain long-term tenant relationships
and create value for its shareholders.
By focusing on long-term relationships,
Commercial Net Lease Realty has built a
solid portfolio and stable income stream for
its shareholders.
Three factors distinguish the company’s
portfolio:
•
•
•
A focus on triple net leases
eliminates the majority of real
estate operating risk;
Tenants consist of major national
or regional companies; and,
The average lease term of 12 years
positions the company to bridge
real estate and economic cycles.
Through an unwavering commitment
to serve its customers, Commercial Net
Lease Realty has gained a reputation
for providing innovative real estate
solutions nationwide. The company
offers a complete array of real estate
services including acquisitions, property
management, build-to-suit development
and 1031 exchange dispositions.
336 Properties
111 Tenants
39 States
4
thirteen consecutive years of increased dividends
5
LETTER TO SHAREHOLDERS
Dear Shareholders,
Dividends: they either get paid or they
don’t. In an era when it seems a number
of companies are restating earnings, it
is comforting to know that no company
always stay constant to our purpose and
work to provide dividend income for our
shareholders. That is why protecting and
growing the dividend is the main priority
at Commercial Net Lease Realty, Inc.
can restate dividends. You can trust the
The 2002 dividend of $1.27 per share
dividend – it is money that shareholders
marks our thirteenth consecutive year of
can take to the bank.
Dividends are, and always have been,
an important part of total return to
shareholders. For the last 100 years, 75
percent of the stock market’s total return
increased dividends paid to shareholders.
We are one of only 252 of the more than
10,000 publicly traded companies in
America that have increased dividends for
twelve or more consecutive years.
to investors was made up of dividends,
Total return to shareholders consists of the
according Dr. Jeremy Siegel of The Wharton
dividends received and the change in value
School.
Reliable Returns
Our business is focused on producing
consistent results from long-term net-
leased real estate. We may never be the
latest trend in investing, but we will
Average Annual Return Comparison
For Periods Ending December 31, 2002rly)
in stock price. Our consistent dividend,
coupled with the growth in share price over
time, has generated attractive total returns
for our shareholders. In fact, over the past
one, three, five and ten year periods, we
have outperformed the REIT industry
indices (NAREIT Equity REIT Index and
the Morgan Stanley REIT Index) as well as
the broader stock market benchmarks (the
S&P 500 Index and NASDAQ).
Commercial Net Lease
Realty, Inc. (NNN)
NAREIT Equity
REIT Index (NRIXETR)
Morgan Stanley
REIT Index (RMS)
S&P 500 Index
(SPX)
Nasdaq
(CCMP)
1 Year
3 Years
5 Years
10 Years
Reduced Risk
28.0% 27.5% 6.9% 12.0%
3.8% 14.3% 3.3% 10.5%
Our investment strategy is designed to
create an attractive risk-adjusted return for
3.6% 14.0% 3.3%
N/A
our shareholders. Central to that strategy
-22.1% -14.5% -.06% 9.3%
is our commitment to real estate value.
Disciplined diversification – geographically,
-31.2% -30.8% -2.9% 7.0%
by line of trade and by individual tenant
– enhances the stability of our operating
6
thirteen consecutive years of increased dividends
7
income. Our portfolio is made up of single-
achieved while we also reduced debt levels,
tenant properties in good locations that are
and improved our interest and fixed charge
Line of Trade
Diversification*
net-leased over a long term to creditworthy
coverages. We believe protecting against
tenants. We currently own 336 properties
the downside helps us ensure consistent
located in 39 states that are leased to
operating performance.
111 tenants in 40 different industry
classifications. Maintaining and enhancing
this balance in our portfolio is another way
we focus on reducing risk.
Among the company’s 2002 goals was to
strengthen the core portfolio and increase
our occupancy rate. We improved the
portfolio by selling 19 properties for
Long-term net leases are
a key component to the
safety of our dividend
and the common
thread of each of our
investments. The net
lease structure reduces
real estate operating
risk because tenants
are responsible for
paying property taxes,
insurance and operating
expenses. We believe
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$29.9 million and
investing $45.8 million
in property acquisitions,
completed construction
projects and tenant
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improvements. We also
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increased our occupancy
rate from 89 percent to
94 percent.
Additionally, both
our Build-to-Suit and
Acquisitions/1031
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that leases longer than 10 years generally
bridge real estate and economic cycles. The
weighted average remaining lease term of
our portfolio is 12 years.
Consistent Performance
During 2002, Funds From Operations
(FFO), one of the key measures of a REIT’s
performance, increased to $1.43 per share.
Growth in FFO per share allows us to
prudently increase our dividend. Notably,
this increase in operating results was
Exchange operating groups were profitable
������ ������ ��
for the year. We strengthened our senior
management team with the additions of
Jay Whitehurst, General Counsel, and
David Cobb, Chief Investment Officer of
Commercial Net Lease Realty Services.
And we continue to refine our performance
management system and processes. This
system is a key tool that management uses
to monitor its own progress and maintain
alignment with team members.
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* as a percentage of base rent
(December 31, 2002)
7
6
thirteen consecutive years of increased dividends
The Year Ahead
Thank you for investing in Commercial Net
We have enjoyed a full
year of operation of the
Lease Realty. We look forward to working
for you again this year.
properties successfully
Sincerely,
“For the last 100
years, 75 percent of
the stock market’s
total return to
investors was made
up of dividends”
James M. Seneff, Jr.
Chairman and CEO
Gary M. Ralston
President and COO
March 1, 2003
integrated into our
portfolio from the Captec
acquisition. And while
some real estate sectors
are facing deteriorating
property fundamentals
and operational issues, we
enter 2003 with a stable
operating platform that positions us to take
advantage of market opportunities as they
develop.
Our goals for 2003 include maintaining
our occupancy levels, increasing our
acquisitions for the core portfolio and
improving the profitability in our Build-
to-Suit and Acquisitions/1031 Exchange
operating groups. We will remain true to
our strategy and focus on our primary goal
– protecting and growing the dividend.
We were pleased Governor Bob Martinez
and Bob Legler joined our board of
directors last year. They are a good
complement to our already strong group of
independent directors.
8
thirteen consecutive years of increased dividends
9
SPECIAL THANKS
We would like to add a special thank you to Ed Clark, the company’s founding
president and a vital member of our board of directors, who retired from the
board in 2002.
Ed is part of the World War II generation that has come to be known as the
“Greatest Generation.” Growing up and working on a pineapple plantation in
Hawaii, he learned the value of hard work at an early age.
When World War II broke out, he enlisted in the Army. He served in both the
Pacific and in European theaters and was wounded in the Battle of the Bulge in
Bastogne, France. He was captured by the Germans and was held as a prisoner of
war until the liberation in May 1945.
After the war, he attended the University of North Carolina to study accounting
and went on to become a partner with KPMG. We were very fortunate to have
the wisdom of Ed’s counsel as a director from 1991 through 2002. He is a
testament to the fact that perseverance and long-term perspective are keys to
success.
8
thirteen consecutive years of increased dividends
9
HISTORICAL FINANCIAL HIGHLIGHTS
(dollars in thousands, except per share data)
2002
2001
2000
1999
1998
Gross revenues(1)
Earnings from continuing
$
97,510
$
80,526
$
80,891
$
76,543
$
64,773
operations before cumulative
effect of change in
accounting principle
Net earnings
Total assets
Total long-term debt
Total equity
Cash dividends paid to common
46,060
48,058
954,108
384,589
549,141
27,034
28,963
1,006,628
435,333
564,640
36,172
38,251
761,611
360,381
393,901
32,901
35,311
749,789
350,971
391,362
30,891
32,441
685,595
292,907
383,890
stockholders
51,178
38,637
37,760
37,495
35,672
Cash dividends paid to preferred
stockholders
Weighted average common
4,010
-
-
-
-
shares:
Basic
Diluted
Per share information:
Earnings from continuing
operations before
cumulative effect of
change in accounting
principle:
Basic
Diluted
Net earnings:
Basic
Diluted
Dividends paid to common
stockholders
Dividends paid to preferred
stockholders
Other data:
Funds from operations(2)
Cash flows provided by
(used in):
Operating activities
Investing activities
Financing activities
40,383,405
40,588,957
31,539,857
31,717,043
30,387,371
30,407,507
30,331,327
30,408,219
29,169,371
29,397,154
1.04
1.04
1.09
1.09
1.270
2.250
0.86
0.85
0.92
0.91
1.19
1.19
1.26
1.26
1.08
1.08
1.16
1.16
1.06
1.05
1.11
1.10
1.260
1.245
1.240
1.230
-
-
-
-
57,881
44,616
43,949
46,044
42,517
58,705
39,983
(103,925)
38,008
(24,422)
(8,802)
50,198
(22,372)
(28,965)
47,876
(64,436)
18,447
41,260
(145,643)
103,665
(1) Gross revenues include revenues from the Company’s continuing and discontinued operations.
The Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standard
(“FAS”) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
This statement addresses financial accounting and reporting for the impairment or disposal
of long-lived assets and broadens the presentation of discontinued operations in the income
statement to include a component of an entity. Accordingly, the results of operations related to
these certain properties that have been classified as held for sale or have been disposed of in
2002 have been reclassified to earnings from discontinued operations.
10
thirteen consecutive years of increased dividends
11
(2) Funds From Operations, commonly referred to as FFO, is a relative non-GAAP financial
measure of performance and liquidity of an equity REIT in order to recognize that income-
producing real estate historically has not depreciated on the basis determined under GAAP. For
purposes of the Company, FFO is net earnings excluding depreciation, gains and losses on the
disposition of real estate and non-recurring items of income and expense of the Company, and
the Company’s share of these items from the Company’s unconsolidated partnerships.
FFO is generally considered by industry analysts to be the most appropriate measure of
performance. FFO does not necessarily represent cash provided by operating activities in
accordance with accounting principles generally accepted in the United States of America
and should not be considered an alternative to net income as an indication of the Company’s
performance or to cash flow as a measure of liquidity or ability to make distributions.
Management considers FFO an appropriate measure of performance of an equity REIT because it
is predicated on cash flow analysis.
The Company’s computation of FFO may differ from the methodology for calculating FFO used
by other equity REITs, and therefore, may not be comparable to such other REITs.
The following table reconciles FFO to their most directly comparable GAAP measure, net
earnings available to common stockholders for the years ended December 31:
2002
2001
2000
1999
1998
Reconciliation of funds from operations:
Net earnings available to common
stockholders
$ 44,048
$ 28,963
$ 38,251
$ 35,311
$ 32,441
Real estate depreciation and
amortization:
Continuing operations
Discontinued operations
Partnership real estate depreciation
Expenses incurred in acquisition
of advisor
Loss (gain) on disposition and
impairment of real estate:
Continuing operations
Discontinued operations
Cumulative effect of change in
accounting principle
10,011
317
479
7,309
347
63
7,592
246
63
7,326
243
64
5,640
226
64
-
12,582
1,521
9,824
5,501
1,882
1,144
-
(4,648)
(4,091)
(6,724)
(1,355)
-
-
-
367
-
-
-
-
Funds from operations
$ 57,881
$ 44,616
$ 43,949
$ 46,044
$ 42,517
10
thirteen consecutive years of increased dividends
11
QUESTIONS & ANSWERS
What is a net lease?
A net lease requires the tenant of a property
to bear many of the costs associated with
the property. Such costs would typically
include real estate taxes, maintenance,
utilities and insurance. Many times these
are called a “triple net lease” and is the
reason for our New York Stock Exchange
ticker symbol being “NNN” which is the
industry moniker for a triple net lease.
We strongly believe that using net
leases provide increased stability to our
operating cash flow over the long run.
Today, a number of real estate sectors
are dealing with the negative effects of
increased property expenses (e.g., property
insurance) that we are insulated against by
virtue of using net leases.
What are the implications of President
Bush’s proposed tax plan?
A portion of the President’s recently
announced tax plan proposes the
elimination of taxes on dividends paid to
individual shareholders by corporations
that already pay corporate income taxes.
The way the proposal is currently written,
REIT dividends will continue to be taxed
because REITs generally do not pay
federal corporate income taxes. However,
the average dividend yield of S&P 500
companies is currently between one and
two percent and the average REIT dividend
yield is estimated to be about seven
percent. So, as many investment experts
have recently pointed out, even with no
change in the taxability of REIT dividends,
our industry’s dividend yields are still
very attractive on an after-tax basis to
individuals seeking income.
Please provide an update of your vacancy
situation.
An important priority for the company in
2002 was to increase the occupancy rate
of our properties. The leasing team was
very active, resolving more than 557,000
square feet of vacant space and increasing
our occupancy rate from 89 percent to
94 percent in a daifficult environment to
re-lease space. This accomplishment not
only demonstrates the skill and diligence
of our leasing team, but also affirms our
underwriting philosophy of acquiring
quality locations in attractive markets.
With the increased focus on corporate
governance, how have you altered your
governance practices?
In July 2002, Congress enacted the
Sarbanes-Oxley Act, which requires that
publicly traded companies adopt a number
of formal policies and procedures related
to corporate governance and financial
reporting. Additionally, the New York
Stock Exchange has proposed and adopted
new rules relating to the governance of
corporations traded on its exchange. While
these new laws appear to impose broad
corporate governance requirements, we
are pleased to report that compliance by
Commercial Net Lease Realty primarily
involves the documentation of existing
practices and procedures. For example, our
audit committee already consisted solely
of independent directors and is chaired
by a director who meets the definition of
a “financial expert” under the new law,
and our senior financial officers already
maintained a process for documenting
the review of financial results which now
supports the newly required CEO and CFO
certifications.
12
thirteen consecutive years of increased dividends
13
One of the company’s goals last year was
to improve the profi tability of the taxable
subsidiary (Commercial Net Lease Realty
Services). Please provide an update on the
taxable subsidiary.
The primary business of our taxable
subsidiary is to develop or acquire
net-leased properties. The sale of these
properties to third parties produced
increased gains in 2002 to achieve
profi tability.
Our primary build-to-suit focus remains to
provide quality, cost-effective development
services to tenants seeking high-visibility,
high-traffi c freestanding locations in major
metropolitan statistical areas throughout
the United States. To increase our ability
to serve our customers, we have initiated
developer partnering programs through
which we collaborate with entrepreneurial
developers providing varying levels of
fi nancing and shared project participation.
These programs serve to expand our access
to major tenants in different sectors in all
regions of the country.
The acquisitions group looks to acquire
single-tenant, net-leased properties with
corporations in top metropolitan statistical
areas across the country. Lease terms
typically range between 10 and 20 years
and acquisition investments of $1 - $40
million. We focus on strong real estate
fundamentals and employ a conservative
underwriting philosophy.
The 1031 Exchange group in our taxable
subsidiary markets these properties
as attractive replacement properties to
taxpayers seeking to defer taxes through
Internal Revenue Code Section 1031
Like-Kind Exchanges. In this process,
property owners are able to defer the gain
on the sale of their property by re-investing
the proceeds directly into a like-kind
property of equal or greater value and are
required to complete the exchange within
180 days of the original property sale.
Through its web site, www.nnn1031.com,
our 1031 Exchange group enables buyers
to fully conduct a transaction online, from
property identifi cation through a formal
offer.
Comments? Questions?
We enjoy hearing from our
shareholders. Please let
us know if you have any
comments or questions.
Via postal mail:
450 South Orange Avenue
Suite 900
Orlando, FL 32801
Via phone:
(800) CNL-REIT
Via our website:
http://www.cnlreit.com
Or email me directly:
gary.ralston@cnlreit.com
Thank you,
Gary M. Ralston, President
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thirteen consecutive years of increased dividends
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MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
This information contains forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements generally are characterized
by the use of terms such as “believe,” “expect” and “may.” Although the management of Commercial Net
Lease Realty, Inc. and its wholly-owned subsidiaries (the “Company”) believe that the expectations reflected
in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results
could differ materially from those set forth in the forward-looking statements. Certain factors that might
cause a difference include the following: the loss of any member of the Company’s management team; changes
in general economic conditions; changes in real estate market conditions; continued availability of proceeds
from the Company’s debt or equity capital; the availability of other debt and equity financing alternatives;
market conditions affecting the Company’s equity capital; changes in interest rates under the Company’s
current credit facilities and under any additional variable rate debt arrangements that the Company may enter
into in the future; the ability of the Company to be in compliance with certain debt covenants; the ability of
the Company to qualify as a real estate investment trust for federal income tax purposes; the ability of the
Company to integrate acquired properties and operations into existing operations; the ability of the Company
to refinance amounts outstanding under its credit facilities at maturity on terms favorable to the Company;
the ability of the Company to locate suitable tenants for its properties; the ability of tenants to make payments
under their respective leases and the ability of the Company to re-lease properties that are currently vacant
or that become vacant. Given these uncertainties, readers are cautioned not to place undue reliance on such
statements.
Introduction
Commercial Net Lease Realty, Inc., a Maryland corporation, is a fully integrated, self-administered real estate
investment trust (“REIT”) formed in 1984 that acquires, owns, manages and indirectly develops high-quality,
freestanding properties that are generally leased to major retail businesses under long-term commercial net
leases. As of December 31, 2002, the Company owned 341 properties (the “Properties”) that are leased to
retail businesses, including Academy, Barnes & Noble, Bed, Bath & Beyond, Bennigan’s, Best Buy, Borders,
Eckerd and OfficeMax. Approximately 94 percent of the gross leasable area of the Company’s Property
portfolio was leased at December 31, 2002.
Liquidity and Capital Resources
General. Historically, the Company’s cash needs for the payment of operating expenses and dividends
and the payment of principal and interest on its outstanding indebtedness generally have been met from
operations. Cash needed for property acquisitions and development, either directly or through investment
interests, and other investments have been met from equity and debt offerings, bank borrowings, the sale of
Properties and, to a lesser extent, internally generated funds. The Company anticipates that its future capital
needs will be met using sources similar to the sources historically used. For the years ended December 31,
2002, 2001, and 2000, the Company generated $61,515,000, $38,008,000 and $50,198,000, respectively,
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thirteen consecutive years of increased dividends
15
in net cash from operating activities. The change in cash from operations for each of the years ended
December 31, 2002, 2001, and 2000, is primarily a result of changes in revenues and expenses as discussed in
“Results of Operations.” The Company expects that cash generated from operations could fluctuate in the future.
The Company’s leases typically provide that the tenant bears responsibility for substantially all property costs
and expenses associated with ongoing maintenance and operation, including utilities, property taxes and
insurance. In addition, the Company’s leases generally provide that the tenant is responsible for roof and
structural repairs. Certain of the Company’s Properties are subject to leases under which the Company retains
responsibility for certain costs and expenses associated with the Property. Because many of the Properties,
subject to such leases 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. Management anticipates the costs associated with the Company’s vacant
Properties or those Properties that become vacant will also 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 October 2000, the Company entered into an amended and restated loan agreement for a
$200,000,000 revolving credit facility (the “Credit Facility”) which amended the Company’s existing loan
agreement by (i) lowering the interest rates of the tiered rate structure to a maximum rate of 150 basis points
above LIBOR (based upon the debt rating of the company), (ii) extending the expiration date to October 31,
2003, and (iii) amending certain of the financial covenants of the Company. In connection with the Credit
Facility, the Company is required to pay a commitment fee of 25 basis points per annum. The principal balance
is due in full upon expiration of the Credit Facility on October 31, 2003, which the Company may request
to be extended for an additional 12-month period with the consent of the lender. As of December 31, 2002,
$38,900,000 was outstanding and approximately $161,100,000 was available for future borrowings under
the Credit Facility. The Company expects to use the Credit Facility primarily to invest in the acquisition and
development of freestanding, retail properties, either directly or through investment interests.
In accordance with the terms of the Credit Facility, the Company is required to meet certain restrictive financial
covenants, which, among other things, require the Company to maintain certain (i) maximum leverage ratios
(ii) debt services coverage and (iii) cash flow coverage. At December 31, 2002, the Company was in compliance
with those covenants.
In January 1996, the Company entered into a long-term, fixed rate mortgage and security agreement for
$39,450,000. The loan provides for a 10-year mortgage with principal and interest of $330,000 payable monthly
based on a 17-year amortization, with the balance due in February 2006 and bears interest at a rate of 7.435%
per annum. The mortgage is collateralized by a first lien on, and an assignment of rents and leases of, certain of
the Company’s Properties. As of December 31, 2002, the outstanding principal balance was $28,059,000 and
the aggregate carrying value of the Properties totaled $63,026,000.
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thirteen consecutive years of increased dividends
15
The Company has acquired four Properties each of which are subject to a mortgage totaling $7,214,000
(collectively the “Mortgages”) with maturities between December 2007 and December 2010. The Mortgages bear
interest at a weighted average rate of 8.6% and have a weighted average maturity of 3.9 years, with principal
and interest currently of $83,000 payable monthly. In 2002, three of the Properties were released as collateral
and each was substituted with a letter of credit, collectively totaling $3,747,000. As of December 31, 2002,
the outstanding principal balances for the Mortgages totaled $4,846,000 and the aggregate carrying value of
remaining Property and letters of credit totaled $7,235,000.
In connection with the acquisition of Captec Net Lease Realty, Inc. (“Captec”) on December 1, 2001, the
Company acquired three Properties each subject to a mortgage totaling $1,806,000 (collectively, the “Captec
Mortgages”) with maturities between March 2014 and March 2019. The Captec Mortgages bear interest at a
weighted average rate of 9.0% and have a weighted maturity of 7.8 years, with principal and interest currently of
$25,000 payable monthly. As of December 31, 2002, the outstanding principal balances of the Captec Mortgages
totaled $1,653,000 and the aggregate carrying value of these three Properties totaled $4,178,000.
In November 2001, the Company entered into an unsecured $70,000,000 term note (“Term Note”), due
November 30, 2004, to finance the acquisition of Captec and for the repayment of indebtedness and related
expenses in connection therewith (see “Merger Transactions”). During 2002, the Company used the proceeds
from its $50,000,000 note offering to pay down the Term Note. As of December 31, 2002, the Term Note had
an outstanding principal balance of $20,000,000 and bears interest at a rate of 175 basis points above LIBOR or
3.17% at December 31, 2002. The Company has the option to extend the maturity date of the Term Note for two
additional 12-month periods.
In June 2002, the Company entered into a long-term, fixed rate mortgage and security agreement for
$21,000,000. The loan provides for a 10-year mortgage with principal and interest of $138,000 payable
monthly, based on a 30-year amortization, with the balance due in July 2012 and bears interest at a rate of
6.9% per annum. Proceeds from the debt were used to pay down outstanding indebtedness of the Company’s
Credit Facility. The mortgage is collateralized by a first lien on, and assignments of rents and leases of, five of
the Company’s Properties. As of December 31, 2002, the outstanding principal balance for the mortgage totaled
$20,923,000 and the aggregate carrying value of the Properties totaled $27,956,000.
Payments of principal on the mortgage debt and on advances outstanding under the Credit Facility are expected
to be met from the proceeds of renewing or refinancing the Credit Facility, proceeds from public or private
offerings of the Company’s debt or equity securities, the Company’s secured or unsecured borrowings from
banks or other lenders or proceeds from the sale of one or more of its Properties.
Debt and Equity Securities. The Company has maintained investment grade debt ratings from Standard
and Poor’s, Moody’s Investor Service and Fitch IBCA on its senior, unsecured debt since 1998. In March 1998,
the Company filed a prospectus supplement to its $300,000,000 shelf registration and issued $100,000,000 of
7.125% notes due 2008 (the “2008 Notes”). The 2008 Notes are senior, unsecured obligations of the Company,
redeemable at the option of the Company and are subordinated to all secured indebtedness of the Company.
The 2008 Notes were sold at a discount for an aggregate purchase price of $99,729,000 with interest payable
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thirteen consecutive years of increased dividends
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semi-annually commencing on September 15, 1998. The discount of $271,000 is being amortized as interest
expense over the term of the debt obligation using the effective interest method. In connection with the debt
offering, the Company incurred debt issuance costs totaling $1,208,000, consisting primarily of underwriting
discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. The net
proceeds from the debt offering were used to pay down outstanding indebtedness of the Company’s Credit
Facility.
In June 1999, the Company filed a prospectus supplement to its $300,000,000 shelf registration statement and
issued $100,000,000 of 8.125% notes due 2004 (the “2004 Notes”). The 2004 Notes are senior, unsecured
obligations of the Company, redeemable at the option of the Company, and are subordinated to all secured
indebtedness of the Company. The 2004 Notes were sold at a discount for an aggregate purchase price of
$99,608,000 with interest payable semi-annually commencing on December 15, 1999. The discount of
$392,000 is being amortized as interest expense over the term of the debt obligation using the effective interest
method. In connection with the debt offering, the Company entered into a treasury rate lock agreement which
fixed a treasury rate of 5.1854% on a notional amount of $92,000,000. Upon issuance of the 2004 Notes, the
Company terminated the treasury rate lock agreement resulting in a gain of $2,679,000. The gain has been
deferred and is being amortized as an adjustment to interest expense over the term of the 2004 Notes using
the effective interest method. The effective rate of the 2004 Notes, including the effects of the discount and the
treasury rate lock gain, is 7.547%. In connection with the debt offering, the Company incurred debt issuance
costs totaling $970,000, consisting primarily of underwriting discounts and commissions, legal and accounting
fees, rating agency fees and printing expenses. Debt issuance costs have been deferred and are being amortized
over the term of the 2004 Notes using the effective interest method. The net proceeds of the debt offering were
used to pay down outstanding indebtedness of the Company’s Credit Facility.
In September 2000, the Company filed a prospectus supplement to its $300,000,000 shelf registration statement
and issued $20,000,000 of 8.5% notes due 2010 (the “2010 Notes”). The 2010 Notes are senior, unsecured
obligations of the Company, redeemable at the option of the Company, and are subordinate to all secured
indebtedness of the Company. The 2010 Notes were sold at a discount for an aggregate purchase price of
$19,874,000 with interest payable semi-annually commencing on March 20, 2001. The discount of $126,000
is being amortized as interest expense over the term of the debt obligation using the effective interest method.
In connection with the debt offering, the Company incurred debt issuance costs totaling $233,000 consisting
primarily of underwriter 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 2010 Notes
using the effective interest method. Net proceeds of the debt offering were used to pay down outstanding
indebtedness of the Company’s Credit Facility.
In January 2001, the Company filed a shelf registration statement with the Securities and Exchange
Commission, which permits the issuance by the Company of up to $200,000,000 in debt and equity securities
(which includes approximately $180,000,000 of unissued debt and equity securities under the Company’s
previous $300,000,000 shelf registration statement).
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thirteen consecutive years of increased dividends
17
In June 2002, the Company filed a prospectus supplement to its $200,000,000 shelf registration statement
and issued $50,000,000 of 7.75% notes due 2012 (the “2012 Notes”). The 2012 Notes are senior, unsecured
obligations of the Company, redeemable at the option of the Company, and are subordinated to all secured
indebtedness of the Company. The 2012 Notes were sold at a discount for an aggregate purchase price of
$49,713,000 with interest payable semi-annually commencing on December 1, 2002. The discount of $287,000
is being amortized as interest expense over the term of the debt obligation using the effective interest method.
In connection with the debt offering, the Company incurred debt issuance costs totaling $507,000 consisting
primarily of underwriting discounts and commissions, legal and accounting fees and rating agency fees. Debt
issuance costs have been deferred and are being amortized over the term of the 2012 Notes using the effective
interest method. The net proceeds from the debt offering were used to pay down the Company’s Term Note.
In accordance with the terms of the indenture, pursuant to which the Company’s notes have been issued, the
Company is required to meet certain restrictive financial covenants, which, among other things, require the
Company to maintain (i) certain maximum leverage ratios and (ii) debt services coverage. At December 31,
2002, the Company was in compliance with those covenants.
In July 2001, the Company filed a registration statement on Form S-8 with the Securities and Exchange
Commission, which permitted the issuance of up to 2,900,000 shares of common stock (which included any
shares of common stock represented by options available to be granted under the Company’s previous plan)
pursuant to the Company’s 2000 Performance Incentive Plan (the “2000 Plan”). The terms of the 2000 Plan
automatically increase the number of shares issuable under the plan to 3,400,000 shares and 3,900,000 shares
when the Company has issued and outstanding 35,000,000 shares and 40,000,000 shares, respectively, of its
common stock. In connection with the Company’s issuance of additional shares of common stock during the
year ended December 31, 2001, pursuant to the terms of the 2000 Plan, the number of shares of common stock
reserved for issuance automatically increased to 3,900,000 shares.
Pursuant to the 2000 Plan, in July 2001, the Company granted and issued 239,000 shares of restricted common
stock to certain officers and directors of the Company and its affiliates, of which 234,000 shares were granted
to officers and 5,000 shares were granted to directors. The restricted stock issued to the officers vests in
amounts equal to a rate of 15 percent to 30 percent each year over approximately a five-year period ending on
January 1, 2006 and automatically upon a change in control of the Company. The restricted stock issued to the
directors vests in equal amounts each year over approximately a two-year period ending on January 1, 2003 and
automatically upon a change in control in the Company.
Pursuant to the 2000 Plan, in June 2002 the Company granted and issued 64,000 shares of restricted common
stock to certain officers and directors of the Company and its affiliates, of which 58,000 shares were granted
to officers and 6,000 shares were granted to directors. The restricted stock issued to the officers vests in
amounts equal to a rate of 15 percent to 30 percent each year over approximately a five-year period ending on
January 1, 2007 and automatically upon a change in control of the Company. The restricted stock issued to the
directors vests in equal amounts each year over approximately a two-year period ending on January 1, 2004 and
automatically upon a change in control in the Company.
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thirteen consecutive years of increased dividends
19
In November 2001, the Company issued 4,000,000 shares of common stock and received gross proceeds of
$53,360,000. In addition, in December 2001, the Company issued an additional 525,000 shares of common
stock in connection with the underwriters’ over-allotment option and received gross proceeds of $7,004,000.
In connection with these offerings, the Company incurred stock issuance costs totaling $3,272,000, consisting
primarily of underwriters’ commissions and fees, legal and accounting fees and printing expenses. Net proceeds
from the offerings were generally used to pay down the outstanding indebtedness under the Company’s Credit
Facility.
In December 2001, the Company issued 4,349,918 shares of common stock and 1,999,974 shares of 9%
Non-Voting Series A Preferred Stock (the “Perpetual Preferred Shares”) in connection with the acquisition of
Captec (see “Merger Transactions”). Holders of the Perpetual Preferred Shares are entitled to receive, when and
as authorized by the board of directors, cumulative preferential cash distributions at the rate of nine percent
of the $25.00 liquidation preference per annum (equivalent to a fixed annual amount of $2.25 per share). The
Perpetual Preferred Shares rank senior to the Company’s common stock with respect to distribution rights and
rights upon liquidation, dissolution or winding up of the Company. The Company may redeem the Perpetual
Preferred Shares on or after December 31, 2006, in whole or from time to time in part, for cash, at a redemption
price of $25.00 per share, plus all accumulated and unpaid distributions.
In 2002, as a result of legal action regarding the merger of Captec (see “Merger Transactions”), the Company
reduced the number of common and preferred shares issued and outstanding by 474,037 and 217,950,
respectively, which represents the number of shares that would have been issued to the plaintiffs had they
accepted the original merger consideration. The Company has recorded the value of these shares at the original
consideration share price in addition to the cash portion of the original merger consideration as other liabilities
totaling $13,278,000. The Company intends to use proceeds from its Credit Facility to fund the settlement of
the legal action.
In November 1999, the Company announced the authorization by the Company’s board of directors to acquire
up to $25,000,000 of the Company’s outstanding common stock either through open market transactions or
through privately negotiated transactions. As of December 31, 2002, the Company had acquired and retired
249,200 of such shares for a total cost of $2,379,000.
Property Acquisitions, Dispositions and Commitments. During the year ended December 31, 2002,
the Company used proceeds from its Credit Facility to acquire two Properties, complete construction on one
building and complete tenant improvements on seven Properties at a total cost of $12,372,000. Proceeds from
the Company’s Credit Facility were also used to acquire five properties from Services at fair market value for an
aggregate cost of $28,566,000. In addition, the Company used like-kind exchange proceeds from the sale of
three properties to acquire two properties for an aggregate cost of $4,865,000.
The Company owns one land parcel subject to a lease agreement with a tenant whereby the Company has agreed
to construct a building on the land parcel for aggregate construction costs of approximately $2,388,000, of
which $293,000 of costs had been incurred at December 31, 2002. Pursuant to the lease agreements, rent is to
commence on the property upon completion of construction of the building.
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thirteen consecutive years of increased dividends
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In addition to the one building under construction and 10 buildings under a sale and purchase agreement as
of December 31, 2002, the Company may elect to acquire or develop additional properties, either directly or
indirectly through investment interests, in the future. Such property acquisitions and development are expected
to be the primary demand for additional capital in the future. The Company anticipates that it may engage
in equity or debt financing, through either public or private offerings of its securities for cash, issuance of
such securities in exchange for assets, disposition of assets or a combination of the foregoing. Subject to the
constraints imposed by the Company’s Credit Facility and long-term, fixed rate financing, the Company
may enter into additional financing arrangements.
During 2000, the Company sold 13 of its properties for a total of $32,061,000 and received net sales proceeds of
$31,257,000. The Company recognized a net gain on the sale of these 13 properties of $4,091,000 for financial
reporting purposes. The Company used the proceeds to pay down outstanding indebtedness of the Company’s
Credit Facility.
During 2001, the Company sold 37 of its properties for a total of $46,626,000 and received net sales proceeds of
$45,897,000. The Company recognized a net gain on the sale of these 37 properties of $4,648,000 for financial
reporting purposes. The Company reinvested the proceeds from 21 of these properties to acquire additional
Properties and structured the transactions to qualify as tax-free like-kind exchange transactions for federal
income tax purposes. The Company used the remaining proceeds to pay down the outstanding indebtedness of
the Company’s Credit Facility.
During 2002, the Company sold 19 of its properties for a total of $31,134,000 and received net sales proceeds of
$29,928,000. The Company recognized a net gain on the sale of these 19 properties of $256,000 for financial
reporting purposes, which is included in earnings from discontinued operations. The Company reinvested
the proceeds from three of these properties to acquire additional Properties and structured the transactions to
qualify as tax-free like-kind exchange transactions for federal income tax purposes. The Company used the
remaining proceeds to pay down the outstanding indebtedness of the Company’s Credit Facility.
Investments in Unconsolidated Affiliates. In May 1999, the Company transferred its build-to-suit
development operation to a 95-percent-owned, taxable unconsolidated subsidiary, Commercial Net Lease
Realty Services, Inc. (“Services”) whose officers and directors consist of certain officers and directors of the
Company. The Company contributed $5,700,000 of real estate and other assets to Services in exchange for
shares of non-voting common stock. In connection with its contribution, the Company received a 95 percent,
non-controlling interest in Services and was entitled to receive 95 percent of the dividends paid by Services.
On December 31, 2001, the Company contributed an additional $20,042,000 of real estate. As a result of its
additional contribution, as of January 1, 2002 the Company holds a 98.7 percent, non-controlling interest in
Services and is entitled to receive 98.7 percent of the dividends paid by Services. Gary M. Ralston, James M.
Seneff, Jr. and Kevin B. Habicht, each of which are officers and directors of the Company, own the remaining 1.3
percent interest, which is 100 percent of the voting interest in Services. The Company accounts for its interest
in Services under the equity method of accounting.
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thirteen consecutive years of increased dividends
21
The Company’s existing Amended and Restated Secured Revolving Line of Credit and Security Agreement
(the “Security Agreement”) with Services allows for a borrowing capacity of $85,000,000. The credit facility is
secured by a first mortgage on Services’ properties and bears interest at prime rate plus 0.25%. In February and
May 2002, the Company modified an existing secured revolving line of credit and security agreement with a
wholly-owned subsidiary of Services to increase the borrowing capacity from $32,000,000 to $40,000,000
and from $40,000,000 to $45,000,000, respectively. In December 2002, the Company modified an existing
secured revolving line of credit and security agreement with another wholly-owned subsidiary of Services to (i)
increase the borrowing capacity from $7,500,000 to $25,000,000 and (ii) add a second wholly-owned subsidiary
of Services to this agreement, making each subsidiary a co-borrower. All secured revolving line of credit and
security agreements between the Company and any wholly-owned subsidiaries of Services are collectively
referred to as the “Subsidiary Agreements.” The Subsidiary Agreements provide for an aggregate borrowing
capacity of $86,000,000 and bear interest at prime rate plus 0.25%. The Security Agreement and the Subsidiary
Agreements provide an aggregate borrowing capacity of $171,000,000 and each agreement has an expiration
date of October 31, 2003. In May 2001, Services and certain of its wholly-owned subsidiaries became direct
borrowers under the Company’s $200,000,000 revolving Credit Facility. During 2002, the Company borrowed
$120,569,000 under its Credit Facility to fund the amounts drawn against these revolving credit facilities. The
Company received payments on the Security Agreement and Subsidiary Agreements totaling $178,548,000
during the year ended December 31, 2002, which the Company used to re-pay its Credit Facility.
In September 1997, the Company entered into a partnership arrangement, Net Lease Institutional Realty,
L.P. (the “Partnership”), with the Northern Trust Company, as Trustee of the Retirement Plan for the Chicago
Transit Authority Employees (“CTA”). The Company is the sole general partner with a 20 percent interest
in the Partnership and CTA is the sole limited partner with an 80 percent limited partnership interest. The
Partnership owns and leases nine properties to retail tenants under long-term commercial net leases. Net
income and losses of the Partnership are to be allocated to the partners in accordance with their respective
percentage interest in the Partnership. The Company accounts for its 20 percent interest in the Partnership
under the equity method of accounting.
The Company has entered into four limited liability company (“LLC”) agreements between June 2001 and
December 2002, with CNL Commercial Finance, Inc. a related party. Each of the LLCs holds an interest in
mortgage loans and is 100 percent equity financed with no third party debt. The Company holds a non-voting
and non-controlling interest in each of the LLCs ranging from 36.7 to 44.0 percent and accounts for its interests
under the equity method of accounting.
In May 2002, the Company purchased a combined 25 percent partnership interest for $750,000 in CNL Plaza,
Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”), which owns a 346,000 square foot office building
and an interest in an adjacent parking garage. Affiliates of James M. Seneff, Jr., an officer and director of
the Company, and Robert A. Bourne, a member of the Company’s board of directors, own the remaining
partnership interests. Since November 1999, the Company has leased its office space from Plaza. The
Company’s lease expires in October 2014. In addition, the Company has severally guaranteed 41.67% of a
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thirteen consecutive years of increased dividends
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$15,500,000 promissory note on behalf of Plaza. The maximum obligation to the Company is $6,458,300 plus
interest. Interest accrues at a rate of LIBOR plus 200 basis point per annum on the unpaid principal amount.
This guarantee shall continue through the loan maturity in November 2004.
Merger Transactions. 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 REIT effective January 1, 1998. Ten percent of the Share Consideration
(220,000 shares) was paid January 1, 1998, and the balance (the “Share Balance”) of the Share Consideration
was to be paid over time, within five years from the date of the merger, based upon the Company’s completed
property acquisitions and completed development projects in accordance with the Merger agreement. For
accounting purposes, the Advisor was not considered a “business” for purposes of applying APB Opinion No. 16,
“Business Combinations,” and therefore, the market value of the common shares issued in excess of the fair value
of the net tangible assets acquired was charged to operations rather than capitalized as goodwill. The Company
has issued the entire Share Balance as of December 31, 2001. The cumulative market value of the Share Balance
issued was $24,736,000, all of which was charged to operations in the respective years in which the shares were
issued.
On December 1, 2001, the Company acquired 100 percent of Captec, a publicly traded real estate investment
trust, which owned 135 freestanding, net lease properties located in 26 states. Captec shareholders received
$11,839,000 in cash, 4,349,918 newly issued shares of the Company’s common stock and 1,999,974 newly
issued Perpetual Preferred Shares (see “Debt and Equity Securities”). Under the purchase method of accounting,
the acquisition price of $124,722,000 was allocated to the assets acquired and liabilities assumed at their fair
values. As a result, the Company did not record goodwill. The merger was unanimously approved by both
the Company’s and Captec’s board of directors. This transaction increased funds from operations, increased
diversification, produced cost savings from opportunities for economies of scale and operating efficiencies and
enhanced its capital markets profile. In connection with the merger, several parties have filed lawsuits which
may have an adverse effect on the Company’s liquidity and capital resources.
On January 24, 2002, beneficial owners of shares of Captec stock held of record by Cede & Co. who alleged that
they did not vote for the merger (and who alleged that they caused a written demand for appraisal of their Captec
shares to be served on Captec), filed in the Chancery Court of the State of Delaware in and for New Castle
County a Petition for Appraisal of Stock, PHILLIP GOLDSTEIN, JUDY KAUFFMAN GOLDSTEIN and CEDE
& CO. v. COMMERCIAL NET LEASE REALTY, INC., C.A. No. 19368NC (“Appraisal Action”). The Appraisal
Action alleged that 1,037,946 shares of Captec dissented from the merger and sought to require the Company to
pay to all Captec stockholders who have demanded appraisal of their shares the fair value of those shares, with
interest from the date of the merger. The Appraisal Action also sought to require the Company to pay all costs
of the proceeding, including fees and expenses for plaintiff’s attorneys and experts. As a result of this action,
the plaintiffs were not entitled to receive the Company’s common and preferred shares as offered in the original
merger consideration. Accordingly, the Company reduced the number of common and preferred shares issued
and outstanding by 474,037 and 217,950, respectively, which represents the number of shares that would have
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thirteen consecutive years of increased dividends
23
been issued to the plaintiffs had they accepted the original merger consideration. As of December 31, 2002, the
Company had recorded the value of these shares at the original consideration share price in addition to the cash
portion of the original merger consideration as other liabilities totaling $13,278,000. The Company intends
to use proceeds from its Credit Facility to fund the settlement of the legal action. The Company entered into a
settlement agreement dated as of February 7, 2003 with the beneficial owners of the alleged 1,037,946 dissenting
shares (including the petitioners in the Appraisal Action) which required the Company to pay $15,569,000.
On February 13, 2003, the parties filed a stipulation and order of dismissal and the Court entered the order of
dismissal, dismissing the Appraisal Action with prejudice.
Dividends. One of the Company’s primary objectives, consistent with its policy of retaining sufficient cash
for reserves and working capital purposes and maintaining its status as a REIT, is to distribute a substantial
portion of its funds available from operations to its stockholders in the form of dividends. During the years
ended December 31, 2002, 2001 and 2000, the Company declared and paid dividends to its stockholders of
$51,178,000, $38,637,000 and $37,760,000, respectively, or $1.270, $1.260 and $1.245 per share of common
stock, respectively.
The following presents the characterizations for tax purposes of such common stock dividends for the years
ended December 31:
Ordinary income
Capital gain
Unrecaptured Section 125 gain
Return of capital
2002
92.41%
0.47%
0.41%
6.71%
100.00%
2001
97.37%
-
2.63%
-
2000
91.19%
4.35%
4.46%
-
100.00%
100.00%
In January 2003, the Company declared dividends to its stockholders of $12,929,000, or $0.32 per share of
common stock, payable in February 2003.
Holders of the 9% Non-Voting Series A Preferred Stock are entitled to receive, when and as authorized
by the board of directors, cumulative preferential cash distributions at the rate of nine percent of the $25
liquidation preference per annum (equivalent to a fixed annual amount of $2.25 per share). For the year ended
December 31, 2002, the Company declared and paid dividends to its preferred stockholders of $4,010,000 or
$2.25 per share of preferred stock. The preferred stock dividends paid during the year ended December 31, 2002
of $2.25 per share were characterized as ordinary income for tax purposes.
In February 2003, the Company declared dividends of $1,002,000, or $0.5625 per share of preferred stock,
payable in March 2003.
22
thirteen consecutive years of increased dividends
23
Contractual Obligations and Commercial Commitments. The information in the following table
summarizes the Company’s contractual obligations and commercial commitments outstanding as of
December 31, 2002. The table presents principal cash flows by year-end of the expected maturity for debt
obligations and commercial commitments outstanding as of December 31, 2002. As the table incorporates only
those exposures that exist as of December 31, 2002, it does not consider those exposures or positions which
arise after that date.
Expected Maturity Date
(dollars in thousands)
Total
2003
2004
2005
2006
2007
Thereafter
Line of credit,
outstanding
Line of credit,
available
Mortgages
$
38,900
$
38,900
$
161,100
161,100
$
-
-
$
-
-
$
-
-
$
-
-
-
-
55,481
2,904
3,163
3,420
22,937
1,261
21,796
Long-term debt (1)
290,000
-
120,000
-
-
-
170,000
Total contractual cash
obligations
$ 545,481
$ 202,904
$ 123,163
$
3,420
$
22,937
$
1,261
$ 191,796
(1) Excludes unamortized note discounts and unamortized interest rate hedge gain.
During the year ended December 31, 1999, the Company entered into a purchase and sale agreement whereby
the Company acquired 10 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 $23,421,000. The initial term of each of the 10 respective ground leases expires between
February 2003 and April 2004. 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.
As of December 31, 2002, the Company owned one land parcel subject to a lease agreement with a tenant
whereby the Company has agreed to construct a building on the land parcel for aggregate construction costs of
approximately $2,388,000, of which $293,000 of costs had been incurred at December 31, 2002. Pursuant to
the lease agreement, rent is to commence on the property upon completion of construction of the building.
Management anticipates satisfying these maturities with a combination of the Company’s current capital
resources (including cash on hand), its revolving Credit Facility, which the Company intends to renew in 2003
and debt or equity financings if deemed desirable by the Company’s management.
24
thirteen consecutive years of increased dividends
25
Results of Operations
Critical Accounting Policies and Estimates. In response to the SEC’s Release Numbers 33-8040 “Cautionary
Advice Regarding Disclosure About Critical Accounting Policies” and 33-8056 “Commission Statement About
Analysis of Financial Condition and Results of Operations,” the Company’s management has identified the
following critical accounting policies that affect the more significant judgments and estimates used in the
preparation of the Company’s consolidated financial statements. The preparation of the Company’s consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and judgments on assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis,
management evaluates its estimates and judgments. A summary of the Company’s accounting policies and
procedures are included in Note 1 of the Company’s consolidated financial statements. Management believes the
following critical accounting policies among others affect its more significant judgment of estimates used in the
preparation of the Company’s consolidated financial statements.
Real Estate and Lease Accounting – The Company leases its real estate pursuant to long-term, triple-net
leases, under which the tenants typically pay all operating expenses of a property, including, but not limited to,
all real estate taxes, assessments and other government charges, insurance, utilities, repairs and maintenance.
The leases are accounted for using the operating or direct financing method. Such methods are described below:
Operating method – Leases accounted for using the operating method are recorded at the cost of the real
estate. Revenue is recognized as rentals are earned and expenses (including depreciation) are charged to
operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful
lives (generally 35 to 40 years). Leasehold interests are amortized on the straight-line method over the
terms of their respective leases. When scheduled rentals vary during the lease term, income is recognized
on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accrued rental
income is the aggregate difference between the scheduled rents which vary during the lease term and the
income recognized on a straight-line basis.
Direct financing method – Leases accounted for using the direct financing method are recorded at their net
investment (which at the inception of the lease generally represents the cost of the property). Unearned
income is deferred and amortized into income over the lease terms so as to produce a constant periodic rate
of return on the Company’s net investment in the leases.
Real Estate Impairment – The Company periodically assesses its real estate assets for possible permanent
impairment when certain events or changes in circumstances indicate that the carrying value of the asset,
including any accrued rental income, may not be recoverable. Management considers current market conditions
and tenant credit analysis in determining whether the recoverability of the carrying amount of an asset should
be assessed. When an assessment is warranted, management determines whether an impairment in value has
24
thirteen consecutive years of increased dividends
25
occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including
the residual value of the real estate, with the carrying cost of the individual asset. If an impairment is indicated,
a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value.
Additional critical accounting policies include management’s estimates of the useful lives used in calculating
depreciation expense relating to the Company’s real estate assets, the recoverability of the carrying value of
long-lived assets and the collectibility of receivables from tenants, including accrued rental income.
Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001. As of December 31,
2002 and 2001, the Company owned 341 and 351 Properties, respectively, 321 and 320, respectively, of
which were leased to operators of retail businesses. In addition, during the year ended December 31, 2002,
the Company sold 14 properties with an aggregate gross leasable area of 325,000 square feet, that were leased
or partially leased during 2002. During the year ended December 31, 2001, the Company sold 37 properties
with an aggregate gross leasable area of 458,000 square feet that were leased or partially leased during 2001.
The Properties are leased on a long-term basis, generally 10 to 20 years, with renewal options for an additional
five to 20 years. As of December 31, 2002, the weighted average remaining lease term of the Properties was
approximately 12 years.
During the years ended December 31, 2002 and 2001, the Company earned $85,316,000 and $67,207,000,
respectively, in rental income from operating leases, earned income from direct financing leases and contingent
rental income from continuing operations (“Rental Income”), representing a 27 percent increase in Rental
Income. The increase in Rental Income for the year ended December 31, 2002 is attributable to (i) the
additional Rental Income from the Properties acquired as a result of the Captec merger, (ii) the additional
Rental Income from re-leasing Properties that were vacant during the year ended December 31, 2001 and (iii)
an increase in receipts by the Company of non-recurring additional Rental Income received during the year
ended December 31, 2002 of $3,368,000 related to the termination of leases on six properties in comparison
to $2,205,000 received during the year ended December 31, 2001 related to the termination of leases on
33 properties. Rental Income for the years ended December 31, 2002 and 2001 includes $18,309,000 and
$2,073,000, respectively, of Rental Income related to the Properties acquired in connection with the merger
of Captec in December 2001 (see “Merger Transactions”). Excluding the Rental Income attributed to the
Captec merger, Rental Income would have increased three percent. The increase in Rental Income for the
year ended December 31, 2002, was partially offset by (i) seven vacant, unleased Properties during the year
ended December 31, 2002, that were leased or partially leased during the year ended December 31, 2001 and
(ii) a decrease in contingent rental income. The Company earned $474,000 and $934,000 from contingent
rental income for the years ended December 31, 2002 and 2001, respectively, which represented 0.6 and 1.4,
respectively, percent of Rental Income.
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 accounting principles generally accepted in the United States of America, the Company has identified two
primary sources of revenue: (i) rental and earned income from triple net leases and (ii) interest income from
26
thirteen consecutive years of increased dividends
27
affiliates and fee income from development, property management and asset management services. During the
years ended December 31, 2002 and 2001, the Company generated $87,213,000 and $69,401,000, respectively,
in revenues from its triple net lease segment. Revenues from the triple net lease segment for the years ended
December 31, 2002 and 2001 included $18,309,000 and $2,073,000, respectively, that is attributable to the
Properties acquired in connection with the merger of Captec. In addition, the Company generated $3,683,000
and $2,653,000 in revenues from its triple net lease segment that was classified as earnings from discontinued
operations for the years ended December 31, 2002 and 2001, respectively. For the years ended December 31,
2002 and 2001, the Company generated revenues totaling $6,614,000 and $8,472,000, respectively, from its
interest and fee income segment.
During 2002, one of the Company’s lessees, Eckerd Corporation, accounted for more than 10 percent of the
Company’s total rental income (including the Company’s share of rental income from nine properties owned
by one of the Company’s unconsolidated affiliates). As of December 31, 2002, Eckerd Corporation leased 52
Properties (including three properties under leases with one of the Company’s unconsolidated affiliates). It
is anticipated that, based on the minimum rental payments required by the leases, Eckerd Corporation will
continue to account for more than 10 percent of the Company’s total rental income in 2003. Any failure of this
lessee to make its lease payments when they are due could materially affect the Company’s earnings.
During the year ended December 31, 2002 and 2001, the Company recognized $6,955,000 and $8,791,000,
respectively, of interest from unconsolidated affiliates and other mortgages receivable. The decrease in interest
earned from unconsolidated affiliates and other mortgages receivable during 2002 was primarily attributable
to (i) a decrease in the average borrowing levels on the lines of credit with Services and its wholly-owned
subsidiaries and (ii) a decline in the average interest rate on the lines of credit.
During the years ended December 31, 2002 and 2001, operating expenses from continuing operations,
excluding interest, the provision for loss on impairment of real estate and expenses incurred in acquiring the
Company’s Advisor from a related party and including depreciation and amortization, were $22,381,000 and
$16,478,000, respectively, (23.9% and 21.2%, respectively, of total revenues, representing a 2.7% increase).
During the years ended December 31, 2002 and 2001, general operating and administrative expenses were
$9,475,000 and $6,896,000, respectively, (10.1% and 8.9%, respectively, of total revenues). General operating
and administrative expenses increased as a result (i) increases in expenses related to personnel and (ii) increases
in expenses related to professional services provided to the Company. During the years ended December 31,
2002 and 2001, real estate expenses were $1,481,000 and $718,000, respectively, (1.6% and 0.9%, respectively,
of total revenues). The increase in real estate expenses is attributable to the real estate taxes, utilities and
maintenance related to the vacant properties owned by the Company. As of December 31, 2002 and 2001, the
Company’s continuing operations included 17 and 28 vacant Properties, respectively, with an aggregate gross
leasable area of 281,000 square feet and 688,000 square feet, respectively. Depreciation and amortization
expense increased 29 percent to $11,425,000 for the year ended December 31, 2002 from $8,864,000 for the
year ended December 31, 2001. Depreciation and amortization expense for the years ended December 31, 2002
and 2001 include $2,388,000 and $114,000, respectively, related to the Properties acquired in connection with
the merger of Captec in December 2001. Excluding the depreciation and amortization expense attributed to
the Captec merger, depreciation and amortization expense increased three percent as a result of the additional
26
thirteen consecutive years of increased dividends
27
expense related to the 10 properties acquired in 2002 and the amortization attributable to the additional debt
costs incurred in 2002. However, the increase in depreciation and amortization expense was partially offset by
a decrease in depreciation and amortization expense related to the sale of 19 properties during the year ended
December 31, 2002 and a full year of depreciation and amortization expense related to the 35 properties sold
during the year ended December 31, 2001.
The Company recognized $26,720,000 and $24,952,000 in interest expense for the years ended December 31,
2002 and 2001, respectively. Interest expense increased seven percent for the year ended December 31, 2002,
primarily as a result of the interest incurred on (i) the Term Note the Company entered into in November 2001,
(ii) the 2012 Notes issued in June 2002 and (iii) the $21,000,000 fixed rate mortgage due in July 2012 that the
Company entered into in June 2002. However, the increase in interest expense was partially offset by (i) a
decrease in the average interest rates and borrowing levels on the Company’s Credit Facility and (ii) the partial
repayment of the Term Note in 2002.
The Company recorded a provision for loss on impairment of real estate of $1,882,000 and $1,403,000 in
continuing operations and discontinued operations, respectively, in the year ended December 31, 2002. The
provision for loss on impairment of real estate in continuing operation includes $1,532,000 related to Properties
acquired in connection with the Captec merger. The Company recorded a provision for loss on impairment
of real estate of $125,000 that was classified as discontinued operations in the year ended December 31, 2001.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Generally, the Company makes a provision for
impairment loss if estimated future operating cash flows plus estimated disposition proceeds are less than the
current book value. Impairment losses are measured as the amount by which the current book value of the asset
exceeds the estimated fair value of the asset.
The Company recorded $12,582,000 in expenses incurred in acquiring the Advisor from a related party for the
year ended December 31, 2001. The Company did not incur any expenses during the year ended December 31,
2002 related to acquiring the Advisor. As of December 2001, the Company had issued the entire balance of
shares required in connection with the acquisition of the Advisor (see “Merger Transactions”).
During the years ended December 31, 2002 and 2001, the Company recognized equity in earnings of
unconsolidated affiliates of $3,216,000 and $(1,475,000), respectively. The increase in equity in earnings of
unconsolidated affiliates was primarily attributable to (i) the income generated by Services and its wholly-owned
subsidiaries, which was attributable to the increase in the number of real estate dispositions by Services and its
subsidiaries and (ii) the income generated from the investments in mortgage loans.
During 2001, the Company sold 37 of its properties for a total of $46,626,000 and received net sales proceeds
of $45,897,000. The Company recognized a gain on the sale of these 37 properties of $4,648,000 for financial
reporting purposes. Two of the 37 properties sold during the year ended December 31, 2001, were acquired in
connection with the merger of Captec. These two properties were sold for $3,458,000 with net sales proceeds
of $3,406,000, and the Company recognized a net gain of $10,000 for financial reporting purposes. The
Company reinvested the proceeds from 21 of these properties to acquire additional Properties and structured
28
thirteen consecutive years of increased dividends
29
the transactions to qualify as tax-free like-kind exchange transactions for federal income tax purposes. The
Company used the proceeds from the remaining 16 properties to pay down the outstanding indebtedness of the
Company’s Credit Facility.
In accordance with Financial Accounting Standard (“FAS”) Statement No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets,” the Company has classified its three properties held for sale at December 31,
2002 and 19 properties sold during 2002 as discontinued operations. Accordingly, the results of operations for
2001 related to these 22 properties have been reclassified to earnings from discontinued operations. During the
years ended December 31, 2002 and 2001, the Company recognized earnings from discontinued operations of
$1,998,000 and $1,929,000, respectively.
During the year ended December 31, 2002, the Company sold 19 properties for a total of $31,134,000 and
received net sales proceeds of $29,928,000. The Company recognized a net gain on the sale of these 19
properties of $256,000 for financial reporting purposes, which is included in earnings from discontinued
operations. The Company used the proceeds from three of the properties to acquire additional properties
and structured the transactions to qualify as tax-free like-kind exchange transactions for federal income tax
purposes. The Company used the proceeds from the sale of the remaining 16 properties to pay down the
outstanding indebtedness of the Company’s Credit Facility.
Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000. As of December 31,
2001 and 2000, the Company owned 351 and 259 Properties, respectively, 320 and 257, respectively, of which
were leased to operators of major retail businesses. In connection with the Captec merger in December 2001,
the Company acquired 135 Properties of which 124 were leased to operators of major retail businesses. In
addition, during the year ended December 31, 2001, the Company sold 37 properties that were leased or
partially leased during 2001. During the year ended December 31, 2000 the Company sold 13 properties that
were leased during 2000. The Properties are leased on a long-term basis, generally 10 to 20 years, with renewal
options for an additional five to 20 years. As of December 31, 2001, the weighted average remaining lease term
of the Properties was approximately 13 years.
During the years ended December 31, 2001 and 2000, the Company earned $67,207,000 and $71,085,000,
respectively, in rental income from operating leases, earned income from direct financing leases and contingent
rental income from continuing operations (“Rental Income”), representing a five percent decrease in Rental
Income. The five percent decrease in Rental Income for 2001 was primarily a result of the decrease in Rental
Income relating to the 37 properties sold during the year ended December 31, 2001, which were operational
during the entire year ended December 31, 2000. The decrease in Rental Income was partially offset as a
result of non-recurring additional Rental Income received during the year ended December 31, 2001 and 2000
of $2,205,000 and $1,540,000, respectively, related to the termination of leases on 33 and seven properties,
respectively. Rental Income for the year ended December 31, 2001 includes $2,073,000 related to the Properties
acquired in connection with the merger of Captec in December 2001. Excluding the Rental Income attributed
to the Captec merger, Rental Income would have decreased eight percent. The decrease in Rental Income for the
year ended December 31, 2001 was also attributed to the 31 vacant, unleased Properties owned by the Company
which accounted for 11 percent of the total gross leasable area.
28
thirteen consecutive years of increased dividends
29
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 accounting principles generally accepted in the United States of America, the Company has identified two
primary sources of revenue: (i) rental and earned income from triple net leases and (ii) interest income from
affiliates and fee income from development, property management and asset management services. During the
years ended December 31, 2001 and 2000, the Company generated $69,401,000 and $73,334,000, respectively,
in revenues from its triple net lease segment. In addition, the Company generated $2,653,000 and $2,691,000,
in revenues from its triple net lease segment that was classified as earnings from discontinued operations for the
years ended December 31, 2001 and 2000, respectively. For the years ended December 31, 2001 and 2000, the
Company generated revenues totaling $8,472,000 and $4,856,000, respectively, from its interest and fee income
segment.
During 2001, one of the Company’s lessees, Eckerd Corporation, accounted for more than 10 percent of the
Company’s total rental income (including the Company’s share of rental income from nine properties owned by
the Company’s unconsolidated affiliates). As of December 31, 2001, Eckerd Corporation leased 49 Properties
(including three properties under leases with one of the Company’s unconsolidated affiliates).
During the year ended December 31, 2001 and 2000, the Company recognized $8,791,000 and $5,760,000,
respectively, of interest from unconsolidated affiliates and other mortgages receivable. The increase in interest
from unconsolidated affiliates and other mortgages receivable was primarily due to an increase in the average
borrowing levels on the lines of credit with Services and its wholly-owned subsidiaries. The increase was
partially offset by a decline in the average interest rate on the lines of credit.
During the years ended December 31, 2001 and 2000, operating expenses from continuing operations,
excluding interest and expenses incurred in acquiring the Company’s Advisor from a related party and
including depreciation and amortization, were $16,478,000 and $14,090,000, respectively, (21.2% and 18.0%,
respectively, of total revenues, representing a 3.2% increase). During the years ended December 31, 2001 and
2000, general operating and administrative expenses were $6,896,000 and $4,849,000, respectively, (8.9% and
6.2%, respectively, of total revenues). General operating and administrative expenses increased as a result of an
increase in costs related to office expenses, personnel, debt financing charges and professional services provided
to the Company. During the years ended December 31, 2001 and 2000, real estate expenses were $718,000 and
$399,000, respectively, (0.9% and 0.5%, respectively, of total revenues). The increase in real estate expenses
is attributable to the real estate taxes, utilities and maintenance related to the vacant properties owned by the
Company. As of December 31, 2001, the Company’s continuing operations included 28 vacant Properties,
compared to one vacant Property as of December 31, 2000. During the years ended December 31, 2001 and
2000, depreciation and amortization expense was $8,864,000 and $8,842,000, respectively.
30
thirteen consecutive years of increased dividends
31
The Company recognized $24,952,000 and $26,528,000 in interest expense for the years ended December 31,
2001 and 2000, respectively. Interest expense decreased for the year ended December 31, 2001, primarily as
a result of the decline in the average interest rate on the Company’s Credit Facility. However, the decrease in
interest expense was partially offset by an increase in the average borrowing levels of the Company’s Credit
Facility and an increase in interest incurred due to the issuance of the 2010 Notes in September 2000.
The Company recorded $12,582,000 and $1,521,000 in expenses incurred in acquiring the Advisor from
a related party for the years ended December 31, 2001 and 2000, respectively. As of December 2001, the
Company had issued the entire balance of shares required in connection with the acquisition of the Advisor (see
“Merger Transactions”).
During the years ended December 31, 2001 and 2000, the Company recognized equity in earnings of
unconsolidated affiliates of $(1,475,000) and $(3,980,000), respectively. The increase in equity in earnings of
unconsolidated affiliates was primarily attributable to (i) the decrease in losses of Services and its wholly-owned
subsidiaries, which was attributable to the increase in the number of real estate dispositions by Services and its
subsidiaries and (ii) the income generated from the investments in mortgage loans.
During 2001, the Company sold 37 of its properties for a total of $46,626,000 and received net sales proceeds
of $45,897,000. The Company recognized a gain on the sale of these 37 properties of $4,648,000 for financial
reporting purposes. Two of the 37 properties sold during the year ended December 31, 2001, were acquired in
connection with the merger of Captec. These two properties were sold for $3,458,000 with net sales proceeds
of $3,406,000 and the Company recognized a net gain of $10,000 for financial reporting purposes. The
Company reinvested the proceeds from 21 of these properties to acquire additional Properties and structured
the transactions to qualify as tax-free like-kind exchange transactions for federal income tax purposes. The
Company used the proceeds from the remaining 16 properties to pay down the outstanding indebtedness of the
Company’s Credit Facility.
During 2000, the Company sold 13 of its properties for a total of $32,061,000 and received net sales proceeds
of $31,257,000. The Company recognized a gain on the sale of these 13 properties of $4,091,000 for financial
reporting purposes. The Company used the proceeds to pay down outstanding indebtedness of the Company’s
Credit Facility.
In accordance with FAS Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
the Company has classified its three properties held for sale at December 31, 2002 and 19 properties sold
during 2002 as discontinued operations. Accordingly, the results of operations for 2001 and 2000 related to
these 22 properties have been reclassified to earnings from discontinued operations. During the years ended
December 31, 2001 and 2000, the Company recognized earnings from discontinued operations of $1,929,000
and $2,446,000, respectively.
Investment Considerations. Currently, the Company owns 16 vacant, unleased Properties, which accounts
for four percent of the total gross leasable area of the Company’s portfolio. Additionally, three percent of the
total gross leasable area of the Company’s portfolio is leased to five tenants, which have each filed a voluntary
30
thirteen consecutive years of increased dividends
31
petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, each of the tenants has
the right to reject or affirm its leases with the Company. The lost revenues and increased property expenses
resulting from the rejection by any bankrupt tenant of any of their respective leases with the Company could
have a material adverse effect on the liquidity and results of operations of the Company if the Company is unable
to re-lease the Properties at comparable rental rates and in a timely manner.
The Company had made an election to be taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended, and related regulations. As a REIT, for federal income tax purposes, the
Company generally will not be subject to federal income tax on income that it distributes to its stockholders. If
the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable
income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income
tax purposes for four years following the year during which qualification is lost. Such an event could materially
affect the Company’s income. However, the Company believes that it was organized and operated in such
a manner as to qualify for treatment as a REIT for the years ended December 31, 2002, 2001 and 2000, and
intends to continue to operate the Company so as to remain qualified as a REIT for federal income tax purposes.
Management of the Company currently knows of no trends that will have a material adverse effect on liquidity,
capital resources or results of operations; however, certain factors exist that could contribute to trends that
may adversely effect the Company in the future. Such factors include the following: the loss of any member
of the Company’s management team, changes in general economic conditions, changes in real estate market
conditions, interest rate fluctuations, the ability of the Company to be in compliance with certain debt
covenants, the ability of the Company to qualify as a real estate investment trust for federal income tax purposes,
an increase in non-store based retailing (e.g., internet), the ability of the Company to locate suitable tenants for
its Properties, the ability of tenants to make payments under their respective leases, the ability of borrowers to
make payments on their respective loan agreements and the ability of the Company to re-lease properties that
are currently vacant or that become vacant.
Investments in real property create a potential for environmental liability on the part of the owner of such
property from the presence or discharge of hazardous substances on the property. It is the Company’s policy,
as a part of its acquisition due diligence process, to obtain a Phase I environmental site assessment for each
property and, where warranted, a Phase II environmental site assessment. Phase I assessments involve
site reconnaissance and review of regulatory files identifying potential areas of concern, whereas Phase II
assessments involve some degree of soil and/or groundwater testing. The Company may acquire a property
whose environmental site assessment indicates that a problem or potential problem exists, subject to a
determination of the level of risk and potential cost of remediation. In such cases, the Company requires the
seller and/or tenant to (i) remediate the problem prior to the Company’s acquiring the property, (ii) indemnify
the Company for environmental liabilities or (iii) agree to other arrangements deemed appropriate by the
Company to address environmental conditions at the property. The Company has 13 Properties currently under
some level of environmental remediation. The seller or the tenant is contractually responsible for the cost of the
environmental remediation for each of these Properties.
32
thirteen consecutive years of increased dividends
33
Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to interest changes
primarily as a result of its variable rate Credit Facility and its long-term, fixed rate debt used to finance the
Company’s development and acquisition activities and for general corporate purposes. The Company’s interest
rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and
to lower its overall borrowing costs. To achieve its objectives, the Company borrows at both fixed and variable
rates on its long-term debt.
The Company has no outstanding derivatives as of December 31, 2002 and 2001. The Company does not use
derivatives for speculative or trading purposes.
32
thirteen consecutive years of increased dividends
33
The information in the table below summarizes the Company’s market risks associated with its debt obligations
outstanding as of December 31, 2002 and 2001. The table presents principal cash flows and related interest
rates by year of expected maturity for debt obligations outstanding as of December 31, 2002. The variable
interest rates shown represent the weighted average rates for the Credit Facility at the end of the periods. As
the table incorporates only those exposures that exist as of December 31, 2002 and 2001, it does not consider
those exposures or positions which could arise after those dates. Moreover, because firm commitments are not
presented in the table below, the information presented therein has limited predictive value. As a result, the
Company’s ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures
that arise during the period, the Company’s hedging strategies at that time and interest rates.
Variable rate Credit Facility
Average interest rate
Variable rate Term Note
Average interest rate
Fixed rate mortgages
Average interest rate
Fixed rate notes
Average interest rate
2003
$ 38,900
(1)
-
-
2,904
7.41%
$
$
$
Expected Maturity Date
(dollars in thousands)
2006
-
-
2005
-
-
$
$
2004
-
-
20,000
(2)
$
-
-
$
-
-
$
$
2007
-
-
Thereafter
-
$
-
$
-
-
-
-
3,163
7.40%
$ 3,420
$ 22,937
$ 1,261
$
21,796
7.37%
7.26%
7.20%
8.23%
$
$
$
-
-
$ 100,000
$
7.58%
$
-
-
$
-
-
-
-
$ 170,000
7.86%
(1) Interest rate varies based upon a tiered rate structure ranging from 80 basis points above LIBOR to 150 basis points
above LIBOR based upon the debt rating of the Company.
(2) Interest rate varies based upon a tiered rate structure ranging from 155 basis points above LIBOR to 225 basis points
above LIBOR based upon the debt rating of the Company.
December 31, 2002
(dollars in thousands)
Weighted
average
interest
rate
3.10%
3.64%
7.52%
7.71%
Total
38,900
$
20,000
$
$
55,481
$ 270,000
Fair
value
38,900
$
20,000
$
$
55,481
$ 287,898
$
$
$
$
Variable rate Credit Facility
Variable rate Term Note
Fixed rate mortgages
Fixed rate notes (1)
(1) Excludes unamortized note discount and unamortized interest rate hedge gain.
34
thirteen consecutive years of increased dividends
December 31, 2001
(dollars in thousands)
Weighted
average
interest
rate
5.23% $
3.66% $
7.62% $
7.70% $
Total
107,400
70,000
37,011
220,000
Fair
value
107,400
70,000
37,011
222,322
INDEPENDENT AUDITORS’ REPORT
The Board of Directors
Commercial Net Lease Realty, Inc.:
We have audited the accompanying consolidated balance sheets of Commercial Net Lease Realty, Inc.
and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of earnings,
stockholders’ equity and cash flows for each of the years in the three-year period ended December 31,
2002. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 2002 and
2001, and results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2002, in conformity with accounting principles generally accepted in the United States of
America.
Orlando, Florida
January 10, 2003, except as to the fifth paragraph of Note 20, which is as of February 13, 2003
35
COMMERCIAL NET LEASE REALTY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
ASSETS
Real estate:
Accounted for using the operating method, net of accumulated
depreciation and amortization
Accounted for using the direct financing method
Investments in, mortgages and other receivables from unconsolidated affiliates
Mortgages, notes and accrued interest receivable
Cash and cash equivalents
Receivables, net of allowance
Accrued rental income, net of allowance
Debt costs, net of accumulated amortization of $5,353 and $4,393, respectively
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Line of credit payable
Mortgages payable
Notes payable, net of unamortized discount of $677 and $517, respectively, and
unamortized interest rate hedge gain of $885 and $1,439, respectively
Accrued interest payable
Other liabilities
Total liabilities
Commitments and contingencies (Note 20)
Stockholders’ equity:
Preferred stock, $0.01 par value. Authorized 15,000,000 shares; 1,782,024 and
1,999,974 shares issued and outstanding, respectively; stated liquidation value of
$25 per share
Common stock, $0.01 par value. Authorized 90,000,000 shares; 40,403,611 and
40,599,158 shares issued and outstanding, respectively
Excess stock, $0.01 par value. Authorized 105,000,000 shares; none issued or
outstanding
Capital in excess of par value
Accumulated dividends in excess of net earnings
Deferred compensation
Total stockholders’ equity
December 31,
2002
2001
$
703,465
108,308
102,633
11,253
1,737
1,227
19,172
3,181
3,132
$
706,280
107,272
144,236
18,374
6,974
2,067
16,184
3,057
2,184
$
954,108
$ 1,006,628
$
38,900
55,481
$
107,400
37,011
290,208
3,560
16,818
404,967
290,922
3,133
3,522
441,988
44,551
50,000
404
–
406
–
528,888
(21,657)
(3,045)
549,141
954,108
531,677
(14,527)
(2,916)
564,640
$ 1,006,628
$
36
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
37
COMMERCIAL NET LEASE REALTY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands, except per share data)
Revenues:
Rental income from operating leases
Earned income from direct financing leases
Contingent rental income
Interest from unconsolidated affiliates and other mortgages
receivable
Other
Expenses:
General operating and administrative
Real estate
Interest
Depreciation and amortization
Provision for loss on impairment of real estate
Expenses incurred in acquiring advisor from related party
Year Ended December 31,
2002
2001
2000
$
73,400
11,442
474
6,955
1,556
93,827
9,475
1,481
26,720
11,425
1,882
–
50,983
$
54,825
11,448
934
8,791
1,875
77,873
6,896
718
24,952
8,864
–
12,582
54,012
$
57,861
12,397
827
5,760
1,355
78,200
4,849
399
26,528
8,842
–
1,521
42,139
Earnings from continuing operations before equity in earnings of
unconsolidated affiliates, gain on disposition of real estate and
cumulative effect of change in accounting principle
42,844
23,861
36,061
Equity in earnings of unconsolidated affiliates
3,216
(1,475)
(3,980)
Gain on disposition of real estate
–
4,648
4,091
Earnings from continuing operations before cumulative effect of
change in accounting principle
46,060
27,034
36,172
Earnings from discontinued operations
1,998
1,929
2,446
Cumulative effect of change in accounting principle
–
–
(367)
Net earnings
Preferred stock dividends
48,058
28,963
38,251
(4,010)
–
–
Net earnings available to common stockholders
$
44,048
$
28,963
$
38,251
36
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
37
COMMERCIAL NET LEASE REALTY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS - CONTINUED
(dollars in thousands, except per share data)
Earnings per share available to common stockholders:
Basic:
Continuing operations before cumulative effect of change in
accounting principle
Discontinued operations
Cumulative effect of change in accounting principle
Net earnings
Diluted:
Continuing operations before cumulative effect of change in
accounting principle
Discontinued operations
Cumulative effect of change in accounting principle
Net earnings
Pro forma amounts available to common stockholders assuming
retroactive application of accounting change:
Net earnings
Basic earnings per share
Diluted earnings per share
Year Ended December 31,
2002
2001
2000
$
$
$
$
$
1.04
0.05
–
$
0.86
0.06
–
1.19
0.08
(0.01)
1.09
$
0.92
$
1.26
$
1.04
0.05
–
$
0.85
0.06
–
1.19
0.08
(0.01)
1.09
$
0.91
$
1.26
$
$
$
38,632
1.27
1.27
Weighted average number of common shares outstanding:
Basic
Diluted
40,383,405
40,588,957
31,539,857
31,717,043
30,387,371
30,407,507
38
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
39
COMMERCIAL NET LEASE REALTY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2002, 2001 and 2000
(dollars in thousands, except per share data)
Preferred stock
net value
Common
stock
par value
Capital in
excess of par
value
Accumulated
dividends in
excess of net
earnings
Deferred
compensation
on restricted
stock
Balances at December 31, 1999
$
$
303
$ 396,403
$
(5,344) $
Net earnings
Dividends declared and paid ($1.245 per
share of common stock)
Issuance of 150,158 shares of common
stock in connection with acquisition of
advisor
Issuance of 55,608 shares of common
stock
Purchase and retirement of 5,000 shares
of common stock
Stock issuance costs
Balances at December 31, 2000
Net earnings
Dividends declared and paid ($1.260 per
share of common stock)
Issuance of 1,999,974 shares of preferred
stock and 4,349,918 shares of common
stock in connection with the merger
Issuance of 973,920 shares of common
stock in connection with acquisition of
advisor
Issuance of 4,579,615 shares of common
stock
Issuance of 239,000 shares of restricted
common stock
Stock issuance costs
Amortization of deferred compensation
Balances at December 31, 2001
Net earnings
Dividends declared and paid ($2.25 per
share of preferred stock)
Dividends declared and paid ($1.270 per
share of common stock)
Reversal of 217,950 shares of preferred
stock and 474,037 shares of common
stock originally offered to the
dissenting stockholders in connection
with the merger in 2001
Issuance of 214,490 shares of common
stock
Issuance of 64,000 shares of restricted
common stock
Stock issuance costs
Amortization of deferred compensation
Balances at December 31, 2002
–
–
–
–
–
–
–
–
–
–
50,000
–
–
–
–
–
50,000
–
–
–
(5,449)
–
–
–
–
$
44,551
$
–
–
2
–
–
–
305
–
–
43
10
46
2
–
–
406
–
–
–
(5)
2
1
–
–
404
–
–
38,251
(37,760)
1,519
578
(48)
(3)
398,449
–
–
59,724
12,572
61,016
3,188
(3,272)
–
–
–
–
–
(4,853)
28,963
(38,637)
–
–
–
–
–
–
531,677
(14,527)
–
–
–
48,058
(4,010)
(51,178)
(6,509)
2,752
982
(14)
–
–
–
–
–
–
$ 528,888
$ (21,657) $
Total
$ 391,362
38,251
(37,760)
1,521
578
(48)
(3)
393,901
28,963
(38,637)
109,767
12,582
61,062
–
(3,272)
274
564,640
48,058
(4,010)
(51,178)
(11,963)
2,754
–
–
–
–
–
–
–
–
–
–
–
–
–
(3,190)
–
274
(2,916)
–
–
–
–
–
(983)
–
854
–
(14)
854
(3,045) $ 549,141
38
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
39
COMMERCIAL NET LEASE REALTY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Stock compensation expense
Depreciation and amortization
Provision for loss on impairment of real estate
Amortization of notes payable discount
Amortization of deferred interest rate hedge gain
Expenses incurred in acquiring advisor from related party
Equity in earnings of unconsolidated affiliates, net of deferred intercompany
profits
Gain on disposition of real estate
Cumulative effect of change in accounting principle
Changes in assets and liabilities net of the effects of the acquisition of Captec
Net Lease Realty, Inc. in 2001:
Decrease in real estate leased to others using the direct financing
method
Decrease in leasehold interests
Decrease (increase) in mortgages, notes and accrued interest receivable
Decrease (increase) in receivables
Increase in accrued rental income
Increase in other assets
Increase (decrease) in accrued interest payable
Increase (decrease) in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from the sale of real estate
Additions to real estate accounted for using the operating method
Additions to real estate accounted for using the direct financing method
Contributions to unconsolidated affiliates
Distributions received from unconsolidated affiliates
Increase in mortgages and notes receivable
Mortgage and notes payments received
Increase in mortgages and other receivables from unconsolidated affiliates
Payments received on mortgages and other receivables from unconsolidated
affiliates
Captec Net Lease Realty, Inc. acquisition, net of cash received
Other
Net cash provided by (used in) investing activities
Year Ended December 31,
2002
2001
2000
$
48,058
$
28,963 $
38,251
854
11,742
3,285
128
(555)
–
(3,914)
(260)
–
2,165
–
(685)
840
(3,172)
(379)
427
171
58,705
274
9,211
–
107
(515)
12,582
1,938
(4,648)
–
1,979
–
(645)
(283)
(2,209)
(2,803)
(1,696)
(4,247)
38,008
29,329
(40,159)
(3,201)
(14,500)
2,810
–
7,637
(120,569)
178,548
–
88
39,983
45,288
(19,836)
–
(11,750)
–
–
1,689
(114,888)
82,506
(7,696)
265
(24,422)
–
9,088
–
93
(479)
1,521
4,740
(4,091)
367
2,048
1,454
998
(418)
(3,081)
(336)
470
(427)
50,198
29,832
(2,015)
(1,984)
–
–
(520)
4,730
(70,967)
19,677
–
(1,125)
(22,372)
40
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
41
COMMERCIAL NET LEASE REALTY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(dollars in thousands)
Cash flows from financing activities:
Proceeds from line of credit payable
Repayment of line of credit payable
Proceeds from mortgages payable
Repayment of mortgages payable
Proceeds from notes payable
Repayment of notes payable
Payment of debt costs
Proceeds from issuance of common stock
Payment of stock issuance costs
Repurchase of common stock
Payment of preferred stock dividends
Payment of common stock dividends
Other
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Year Ended December 31,
2001
2000
2002
111,500
(180,000)
21,000
(2,530)
49,713
(50,000)
(1,145)
2,725
(4)
–
(4,007)
(51,177)
–
(103,925)
(5,237)
6,974
157,200
(151,500)
–
(2,146)
70,000
(101,213)
(186)
61,062
(3,272)
–
–
(38,637)
(110)
(8,802)
4,784
2,190
71,200
(78,200)
–
(3,078)
19,874
–
(1,481)
578
(9)
(48)
–
(37,760)
(41)
(28,965)
(1,139)
3,329
Cash and cash equivalents at end of year
$
1,737
$
6,974
$
2,190
Supplemental disclosure of cash flow information – interest paid, net of
amount capitalized
$
26,119
$
27,509
$
26,957
Supplemental disclosure of non-cash investing and financing activities:
Issued 1,999,974 shares of preferred stock and 4,349,918 shares of
common stock in 2001 in connection with the merger of Captec Net
Lease Realty, Inc. (“Captec”) in December 2001 (see Note 15)
Issued 973,920 and 150,158 shares of common stock in 2001 and 2000,
respectively, in connection with the acquisition of the Company’s advisor
Issued 64,000 and 239,000 shares of common stock in 2002 and 2001,
respectively, in connection with the Company’s 2000 Performance
Incentive Plan
Preferred stock dividends for non-dissenting, unexchanged shares held by
the Company in connection with the merger of Captec
Common stock dividends for non-dissenting, unexchanged shares held by
the Company in connection with the merger of Captec
Cash consideration for non-dissenting, unexchanged shares held by the
Company in connection with the merger of Captec
Liability for the consideration due to the dissenting stockholders in
connection with the merger of Captec (see Note 20)
Mortgage notes accepted in connection with the disposition of real estate
Real estate and other assets contributed to unconsolidated affiliate in
exchange for additional paid in capital
$
$
$
$
$
$
$
$
$
–
–
982
3
1
3
13,278
599
–
$ 109,767
$
12,582
$
$
$
$
$
$
$
3,190
–
–
–
–
610
20,042
$
$
$
$
$
$
$
$
$
–
1,521
–
–
–
–
–
1,425
–
40
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
41
COMMERCIAL NET LEASE REALTY, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001 and 2000
1. Organization and Summary of Significant Accounting Policies:
Organization and Nature of Business – Commercial Net Lease Realty, Inc., a Maryland corporation, is
a fully integrated real estate investment trust formed in 1984. Commercial Net Lease Realty, Inc. acquires,
owns, manages and indirectly, through investment interests, develops high-quality, freestanding properties
that are generally leased to major retail businesses under long-term commercial net leases.
Principles of Consolidation – The consolidated financial statements include the accounts of Commercial
Net Lease Realty, Inc. and its 19 wholly-owned subsidiaries (the “Company”). Each of the subsidiaries is a
qualified real estate investment trust subsidiary as defined in the Internal Revenue Code section 856(i)(2). All
significant intercompany accounts and transactions have been eliminated in consolidation.
Real Estate and Lease Accounting – The Company records the acquisition of real estate at cost, including
acquisition and closing costs. The cost of properties developed by the Company includes direct and indirect
costs of construction, property taxes, interest and other miscellaneous costs incurred during the development
period until the project is substantially complete and available for occupancy.
Real estate is generally leased to others on a net lease basis, whereby the tenant is responsible for all operating
expenses relating to the property, including property taxes, insurance, maintenance and repairs. The leases are
accounted for using either the operating or the direct financing method. Such methods are described below:
Operating method – Leases accounted for using the operating method are recorded at the cost of the real
estate. Revenue is recognized as rentals are earned and expenses (including depreciation) are charged to
operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful
lives (generally 35 to 40 years). Leasehold interests are amortized on the straight-line method over the
terms of their respective leases. When scheduled rentals vary during the lease term, income is recognized
on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accrued rental
income is the aggregate difference between the scheduled rents which vary during the lease term and the
income recognized on a straight-line basis.
Direct financing method – Leases accounted for using the direct financing method are recorded at their net
investment (which at the inception of the lease generally represents the cost of the property). Unearned
income is deferred and amortized into income over the lease terms so as to produce a constant periodic rate
of return on the Company’s net investment in the leases.
Effective in October 2000, the Company adopted the Securities and Exchange Commission’s Staff Accounting
Bulletin 101, “Revenue Recognition,” which established accounting and reporting standards for the recognition
of contingent rental income. Accordingly, the Company modified its revenue recognition policy and recognizes
contingent rental income based on the tenants’ actual gross quarterly or annual sales pursuant to the terms of
the leases. Adoption of this Bulletin resulted in a cumulative effect adjustment of $367,000, which reduced net
earnings for the year ended December 31, 2000.
42
thirteen consecutive years of increased dividends
43
When real estate is disposed of, the related cost, accumulated depreciation or amortization and any accrued
rental income for operating leases and the net investment for direct financing leases are removed from the
accounts and gains and losses from the dispositions are reflected in income.
Management reviews its real estate for impairment whenever events or changes in circumstances indicate that
the carrying value of the asset, including accrued rental income, may not be recoverable through operations.
Management determines whether an impairment in value has occurred by comparing the estimated future
cash flows (undiscounted and without interest charges), including the residual value of the real estate, with the
carrying cost of the individual asset. If an impairment is indicated, a loss will be recorded for the amount by
which the carrying value of the asset exceeds its fair value.
Investment in Unconsolidated Affiliates – The Company accounts for each of its investments in an
unconsolidated affiliate under the equity method of accounting (see Note 4).
Cash and Cash Equivalents – The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash, money
market and escrow deposit accounts. Cash equivalents are stated at cost plus accrued interest, which
approximates fair value.
Cash accounts maintained on behalf of the Company in demand deposits at commercial banks and money
market funds may exceed federally insured levels; however, the Company has not experienced any losses in
such accounts. The Company limits investment of temporary cash investments to financial institutions with
high credit standing; therefore, management believes it is not exposed to any significant credit risk on cash and
cash equivalents.
Debt Costs – Debt costs incurred in connection with the Company’s $200,000,000 line of credit, term note
payable and mortgages payable have been deferred and are being amortized over the term of the respective
loan commitment using the straight-line method which approximates the effective interest method. Debt costs
incurred in connection with the issuance of the Company’s notes payable have been deferred and are being
amortized over the term of the respective debt obligation using the effective interest method.
Stock-Based Compensation – The Financial Accounting Standards Board (“FASB”) issued Financial
Accounting Standard (“FAS”) No. 123, “Accounting for Stock-Based Compensation,” to encourage the use of a
fair-value method of accounting for stock-based awards under which the fair value of stock options is
determined on the date of grant and expensed over the vesting period. As allowed by FAS 123, the Company
has elected to account for its stock-based compensation plan under the intrinsic value-based method of
accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock issued to
Employees.” Under APB 25, compensation expense is recorded on the date of grant if the current market price
of the underlying stock exceeds the exercise price. The Company has adopted the disclosure requirements
of FAS 123 (see Note 14). The following table illustrates the effect on net earnings available to common
stockholders and earnings per common share if the Company had applied the fair value recognition provisions
42
thirteen consecutive years of increased dividends
43
of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock based compensation for the
years ended December 31 (dollars in thousands, except per share data):
2002
2001
2000
Net earnings available to common stockholders as reported
Less total stock-based employee compensation expense
determined under the fair value based method
Pro forma net earnings available to common stockholders
$ 44,048
$ 28,963
$ 38,251
(27)
$ 44,021
(64)
$ 28,899
(233)
$ 38,018
Earnings available to common stockholders per common
share as reported:
Basic
Diluted
Pro forma earnings available to common stockholders per
common share:
Basic
Diluted
$
$
$
$
1.09
1.09
1.09
1.08
$
$
$
$
0.92
0.91
0.92
0.91
$
$
$
$
1.26
1.26
1.25
1.25
Income Taxes – The Company has made an election to be taxed as a real estate investment trust under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. The
Company generally will not be subject to federal income taxes on amounts distributed to stockholders,
providing it distributes at least 95 percent of its real estate investment trust taxable income, 90 percent
effective January 1, 2001, and meets certain other requirements for qualifying as a real estate investment trust.
For each of the years in the three-year period ended December 31, 2002, the Company believes it has qualified
as a real estate investment trust; accordingly, no provisions have been made for federal income taxes in the
accompanying consolidated financial statements. Not withstanding the Company’s qualification for taxation as
a real estate investment trust, the Company is subject to certain state taxes on its income and real estate.
Income taxes of Commercial Net Lease Realty Services, Inc., an unconsolidated affiliate of the Company,
are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings Per Share – Basic earnings per share are calculated based upon the weighted average number
of common shares outstanding during each year, and diluted earnings per share are calculated based upon
weighted average number of common shares outstanding plus dilutive potential common shares (see Note 13).
44
thirteen consecutive years of increased dividends
45
New Accounting Standards – In June 2001, the FASB issued FAS No. 141, “Business Combinations.” This
statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion
No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased
Enterprises. All business combinations in the scope of this statement are to be accounted for using one method,
the purchase method. The provisions of this statement apply to all business combinations initiated after
June 30, 2001. The adoption of this statement did not have a significant impact on the Company’s results of
operations, nor the accounting for the merger transaction (see Note 15).
In June 2001, the FASB issued FAS No. 142, “Goodwill and Other Intangible Assets.” This statement addresses
financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, Intangible Assets. This statement addresses how intangible assets that are acquired individually
or with a group of other assets (but not those acquired in a business combination) should be accounted for in
financial statements upon their acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the financial statements. This
statement is effective for fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. Adoption of this statement did not have a significant impact on the financial position or results of
operations of the Company.
In August 2001, the FASB issued FAS No. 143, “Accounting for Asset Retirement Obligations.” This statement
is effective for the fiscal years beginning after June 15, 2002. This statement addresses financial accounting
and reporting obligations associated with the retirement of tangible long-lived assets and for the associated
asset retirement costs. It requires an enterprise to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and (or) normal use of the assets. This
statement also addresses when to record a corresponding increase to the carrying amount of the related long-
lived asset and to depreciate that cost over the life of the asset. The Company is currently evaluating this
statement to determine what impact it will have on the Company’s consolidated financial statements.
In October 2001, the FASB issued FAS Statement No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and broadens the presentation of discontinued operations in the income
statement to include a component of an entity (rather than a segment of a business). A component of an
entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity. In a period in which a component of an entity either has
been disposed of or is classified as held for sale, the income statement of a business enterprise for current and
prior periods shall report the results of operations of the component, including any gain or loss recognized,
in discontinued operations. This statement is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. The adoption of this statement did not have a significant impact
on the financial position or results of operations of the Company. However, the Company did reclassify
the results of operations related to the three properties classified as held for sale at December 31, 2002 and
19 properties sold during the year ended December 31, 2002 from earnings from continuing operations to
earnings from discontinued operations in accordance with the statement (see Note 12).
44
thirteen consecutive years of increased dividends
45
In April 2002, the FASB issued FAS Statement No. 145, “Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections.” This statement rescinds FASB Statement
No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that statement, FASB
Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This statement
also rescinds FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers.” This statement
amends FASB Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This statement also amends other
existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe
their applicability under changed conditions. The provisions of this statement related to the rescission of
Statement 4 are applicable in fiscal years beginning after May 15, 2002. The provisions of this statement
related to Statement 13 are effective for transactions occurring after May 15, 2002. All other provisions of
this statement are effective for financial statements issued on or after May 15, 2002. The provisions of this
statement, excluding those related to the rescission of Statement 4, did not have a significant impact on the
financial position or results of operations of the Company. The provisions of this statement related to the
rescission of Statement 4 are not expected to have a significant impact on the financial position or results of
operations of the Company.
In July 2002, the FASB issued FAS Statement No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities.” The statement requires companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of
costs covered by the statement include lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. The
statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The
adoption of this statement is not expected to have a significant impact on the financial position or results of
operations of the Company.
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation
elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the
guarantee. This interpretation does not prescribe a specific approach for subsequently measuring the guarantor’s
recognized liability over the term of the related guarantee. The initial recognition and initial measurement
provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements in this
interpretation are effective for financial statements of interim or annual periods ending after December 15,
2002. The interpretive guidance incorporated without change from FASB Interpretation 34 continues to be
required for financial statements for fiscal years ending after June 15, 1981 – the effective date of
Interpretation 34.
46
thirteen consecutive years of increased dividends
47
In December 2002, the FASB issued FAS Statement No. 148, “Accounting for Stock-Based Compensation -
Transition and Disclosure (an amendment of FAS No. 123)”. This statement amends FAS No. 123, “Accounting
for Stock-Based Compensation” (“FAS 123”), to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of FAS 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based employee compensation and
the effect of the method used on reported results. The amendments to FAS 123 in paragraphs 2(a)–2(e) of the
statement shall be effective for financial statements for fiscal years ending after December 15, 2002. Earlier
application of the transition provisions in paragraphs 2(a)–2(d) is permitted for entities with a fiscal year
ending prior to December 15, 2002, provided that financial statements for the 2002 fiscal year have not been
issued as of the date this statement is issued. Early application of the disclosure provisions in paragraph 2(e)
is encouraged. The amendment to FAS 123 in paragraph 2(f) of this statement and the amendment to Opinion
28 in paragraph 3 shall be effective for financial reports containing condensed financial statements for interim
periods beginning after December 15, 2002. Early application is encouraged.
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.”
This Interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest entities. A variable interest entity refers to certain
entities subject to consolidation according to the provisions of this interpretation. This interpretation requires
existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the
variable interest entities do not effectively disperse risks among parties involved. The primary beneficiary of
a variable interest entity is the party that absorbs a majority of the entity’s expected losses, receives a majority
of its expected residual returns, or both, as a result of holding variable interests, which are the ownership,
contractual, or other pecuniary interests in an entity. Certain disclosures are also required by enterprises that
hold significant variable interests in a variable interest. This interpretation applies immediately to variable
interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains
an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003,
to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1,
2003. The interpretation applies to public enterprises as of the beginning of the applicable interim or annual
period, and it applies to nonpublic enterprises as of the end of the applicable annual period. This interpretation
may be applied prospectively with a cumulative effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years with a cumulative effect adjustment as of
the beginning of the first year restated. The Company is currently evaluating this interpretation to determine
what impact it will have on the Company’s consolidated financial statements. Although, at this time, the
Company believes that Commercial Net Lease Realty Services, Inc. will be considered a variable interest entity
subject to consolidation according to the provisions of this interpretation (see Note 4).
Use of Estimates – Management of the Company has made a number of estimates and assumptions relating
to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America. Actual results could differ from those estimates.
46
thirteen consecutive years of increased dividends
47
Reclassification – Certain items in prior years’ financial statements and notes to consolidated financial
statements have been reclassified to conform with the 2002 presentation. These reclassifications had no effect
on stockholders’ equity or net earnings.
2. Leases:
The Company generally leases its real estate to operators of major retail businesses. As of December 31, 2002,
255 of the leases have been classified as operating leases and 69 leases have been classified as direct financing
leases. For the leases classified as direct financing leases, the building portions of the property leases are
accounted for as direct financing leases while the land portions of 44 of these leases are accounted for as
operating leases. Substantially all leases have initial terms of 10 to 20 years (expiring between 2003 and 2025)
and provide for minimum rentals. In addition, the majority of the leases provide for contingent rentals and/or
scheduled rent increases over the terms of the leases. The tenant is also generally required to pay all property
taxes and assessments, 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 one 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 subject to operating leases consisted of the
following at December 31 (dollars in thousands):
Land
Buildings and improvements
Leasehold interests
Less accumulated depreciation and amortization
Construction in progress
Less provision for loss on impairment of real estate
2002
2001
$
$
349,267
392,172
3,381
744,820
(38,671)
706,149
298
706,447
(2,982)
703,465
$
$
346,271
385,857
3,381
735,509
(31,678)
703,831
2,574
706,405
(125)
706,280
Some leases provide for scheduled rent increases throughout the lease term. Such amounts are recognized on
a straight-line basis over the terms of the leases. For the years ended December 31, 2002, 2001 and 2000, the
Company recognized $3,223,000, $2,259,000 and $3,162,000, respectively, of such income. At December 31,
2002 and 2001, the balance of accrued rental income was $19,172,000 and $16,184,000, net of allowances of
$998,000 and $228,000, respectively.
48
thirteen consecutive years of increased dividends
49
The following is a schedule of future minimum lease payments to be received on noncancellable operating
leases at December 31, 2002 (dollars in thousands):
2003
2004
2005
2006
2007
Thereafter
$
70,554
70,695
71,189
71,361
69,537
544,260
$ 897,596
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 rents which may be received on the leases based on a percentage of the tenant’s
gross sales.
Accounted for Using the Direct Financing Method – The following lists the components of net investment
in direct financing leases at December 31 (dollars in thousands):
2002
2001
Minimum lease payments to be received
Estimated residual values
Less unearned income
Net investment in direct financing leases
$ 191,994
33,829
(117,515)
$ 108,308
$ 197,269
33,029
(123,026)
$ 107,272
The following is a schedule of future minimum lease payments to be received on direct financing leases at
December 31, 2002 (dollars in thousands):
2003
2004
2005
2006
2007
Thereafter
$
13,636
13,746
13,824
13,862
13,920
123,006
$ 191,994
The above table does not include future minimum lease payments for renewal periods or for contingent
rental payments that may become due in future periods (See Real Estate – Accounted for Using the
Operating Method).
48
thirteen consecutive years of increased dividends
49
4. Investments in Unconsolidated Affiliates:
In May 1999, the Company transferred its build-to-suit development operation to a 95 percent owned, taxable
unconsolidated subsidiary, Commercial Net Lease Realty Services, Inc. (“Services”), an unconsolidated
affiliate whose officers and directors consist of certain officers and directors of the Company. The Company
contributed $5,700,000 of real estate and other assets to Services in exchange for shares of non-voting common
stock. In connection with its contribution, the Company received a 95 percent, non-controlling interest in
Services and was entitled to receive 95 percent of the dividends paid by Services. On December 31, 2001,
the Company contributed an additional $20,042,000 of real estate. As a result of its additional contribution,
effective January 1, 2002 the Company holds a 98.7 percent, non-controlling interest in Services and is entitled
to receive 98.7 percent of the dividends paid by Services. Gary M. Ralston, James M. Seneff, Jr. and Kevin
B. Habicht, each of which are officers and directors of the Company, own the remaining 1.3 percent interest,
which is 100 percent of the voting interest in Services. The Company accounts for its interest in Services under
the equity method of accounting.
The Company’s existing Amended and Restated Secured Revolving Line of Credit and Security Agreement
(the “Security Agreement”) with Services allows for a borrowing capacity of $85,000,000. The credit
facility is secured by a first mortgage on Services’ properties and bears interest at prime rate plus 0.25%.
The outstanding principal balance of the mortgage at December 31, 2002 and 2001 was $14,846,000 and
$75,842,000, respectively, and bore interest at a rate of 4.5% and 5.0%, respectively. In February and May
2002, the Company modified an existing secured revolving line of credit and security agreement with a
wholly-owned subsidiary of Services to increase the borrowing capacity from $32,000,000 to $40,000,000
and from $40,000,000 to $45,000,000, respectively. In December 2002, the Company modified an existing
secured revolving line of credit and security agreement with another wholly-owned subsidiary of Services
to (i) increase the borrowing capacity from $7,500,000 to $25,000,000 and (ii) add a second wholly-owned
subsidiary of Services to this agreement, making each subsidiary a co-borrower. All secured revolving lines
of credit and security agreements between the Company and any wholly-owned subsidiaries of Services are
collectively referred to as the “Subsidiary Agreements.” The Subsidiary Agreements provide for an aggregate
borrowing capacity of $86,000,000 and bear interest at prime rate plus 0.25%. The aggregate outstanding
principal balance of the Subsidiary Agreements at December 31, 2002 and 2001 were $38,722,000 and
$34,924,000, respectively, and bore interest at a rate of 4.5% and 5.0%, respectively. The Security Agreement
and the Subsidiary Agreements provide an aggregate borrowing capacity of $171,000,000 to Services and its
wholly-owned subsidiaries and each agreement has an expiration date of October 31, 2003.
In connection with the mortgages and other receivables from Services and its wholly-owned subsidiaries,
the Company received $4,621,000, $6,999,000 and $6,181,000 in interest and fees during the years ended
December 31, 2002, 2001 and 2000, respectively. In addition, Services paid the Company $678,000,
$678,000 and $407,000 in expense reimbursements for accounting and technology services provided by the
Company during the years ended December 31, 2002, 2001 and 2000.
50
thirteen consecutive years of increased dividends
51
In February 2002, the Company acquired four properties from Services at fair market value for an aggregate
cost of $15,918,000. In addition, in June 2002, the Company acquired one property from a wholly-owned
subsidiary of Services at fair market value for a cost of $12,648,000. No gain was recognized by Services or its
wholly-owned subsidiary on these sales.
The following presents Services’ consolidated condensed financial information (dollars in thousands):
Real estate, net of accumulated depreciation
Investments in unconsolidated affiliates
Cash and cash equivalents
Notes receivable from related parties
Other assets
Total assets
Mortgage and other payables due to related parties
Mortgage payable
Other liabilities
Total liabilities
Stockholders’ equity
December 31,
2002
2001
$
$
$
44,940 $
847
289
23,986
7,258
96,362
4,578
258
23,814
8,156
77,320 $ 133,168
53,872 $ 111,920
2,323
2,530
58,725
–
3,383
115,303
18,595
17,865
Total liabilities and stockholders’ equity
$
77,320 $ 133,168
For the Year Ended December 31,
2001
2002
2000
Revenues
Net earnings (loss)
$ 7,949
621
$
$ 9,037
$ 4,120
$ (2,145) $ (4,669)
For the years ended December 31, 2002, 2001 and 2000, the Company recognized earnings (loss) of $613,000,
$(2,212,000) and $(4,435,000), respectively, from Services.
In September 1997, the Company entered into a Partnership arrangement, Net Lease Institutional Realty, L.P.
(the “Partnership”), with the Northern Trust Company, as Trustee of the Retirement Plan for Chicago Transit
Authority Employees (“CTA”). The Company is the sole general partner with a 20 percent interest in the
Partnership and CTA is the sole limited partner with an 80 percent interest in the Partnership. The Company
accounts for its 20 percent interest in the Partnership under the equity method of accounting. The Partnership
owns and leases nine properties to retail tenants under long-term, commercial net leases. The Company
received $66,000 and $281,000 in distributions from Partnership for the years ended December 31, 2002
and 2001, respectively. For the years ended December 31, 2002, 2001 and 2000, the Company recognized
50
thirteen consecutive years of increased dividends
51
income of $270,000, $278,000 and $455,000, respectively, from the Partnership. The Company manages
the Partnership and pursuant to a management agreement, the Partnership paid the Company $193,000,
$200,000 and $273,000 in asset management fees during the years ended December 31, 2002, 2001 and 2000,
respectively.
The Company has entered into four limited liability company (“LLC”) agreements with CNL Commercial
Finance, Inc., a related party: CNL Commercial Mortgage Holdings I, LLC (“CCMH I”) in June 2001;
CNL Commercial Mortgage Holdings II, LLC (“CCMH II”) in December 2001; CNL Commercial Mortgage
Holdings III, LLC (“CCMH III”) in June 2002; and CNL Commercial Mortgage Holdings IV, LLC (“CCMH
IV”) in December 2002. Each of the LLCs holds an interest in mortgage loans and is 100 percent equity
financed with no third party debt. The Company holds a non-voting and non-controlling interest in CCMH
I, CCMH II, CCMH III and CCMH IV (collectively, “CCMH LLCs”) of 42.7, 44.0, 36.7 and 38.3 percent,
respectively, in these investments and accounts for its interests under the equity method of accounting.
During the year ended December 31, 2002, the Company received $2,333,000 in distributions.
The following presents the combined condensed financial information of the CCMH LLCs (dollars in
thousands):
Mortgage assets
Receivable from a related party
Other assets
Total assets
Total liabilities
Members’ equity
Total liabilities and members’ equity
December 31,
2002
2001
$
$
$
$
51,950
3,814
1
55,765
–
55,765
55,765
$
$
$
$
24,803
–
1
24,804
–
24,804
24,804
For the Year Ended
December 31,
2001
2002
Revenues
Net earnings
$ 5,035
$ 5,035
$ 1,097
$ 1,097
For the years ended December 31, 2002 and 2001, the Company recognized $2,445,000 and $459,000 of
income, respectively, from the CCMH LLCs.
In May 2002, the Company purchased a combined 25 percent partnership interest for $750,000, in CNL Plaza,
Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”) which owns a 346,000 square foot office building
and an interest in an adjacent parking garage. Affiliates of James M. Seneff, Jr., an officer and director of
52
thirteen consecutive years of increased dividends
53
the Company, and Robert A. Bourne, a member of the Company’s board of directors, own the remaining
partnership interests. The Company has severally guaranteed 41.67% of a $15,500,000 unsecured promissory
note on behalf of Plaza. The maximum obligation to the Company is $6,458,300 plus interest. Interest accrues
at a rate of LIBOR plus 200 basis point per annum on the unpaid principal amount. This guarantee shall
continue through the loan maturity in November 2004. For the year ended December 31, 2002, the Company
received $411,000 in distributions and recognized a loss of $112,000 from Plaza.
Since November 1999, the Company and Services has leased its office space from Plaza. The Company’s lease
expires in October 2014. In addition, other affiliates of James M. Seneff, Jr. also lease office space from Plaza.
The Company and the other affiliates lease an aggregate of the 57.8% of the 346,000 square foot office building.
During the years ended December 31, 2002, 2001 and 2000, the Company and Services incurred rental
expenses in connection with the lease of $1,168,000, $1,173,000 and $1,020,000, respectively. In May 2000,
the Company subleased a portion of its office space to affiliates of James M. Seneff, Jr., an officer and director
of the Company. During the years ended December 31, 2002, 2001 and 2000, the Company earned $225,000,
$368,000 and $248,000, respectively, in rental income and recognized $45,000, $74,000 and $143,000,
respectively, in accrued rental income related to these subleases.
The following presents a reconciliation of investment in unconsolidated affiliates as of December 31 (dollars
in thousands):
Services, consolidated:
Investment
Mortgage receivable
Lines of credit receivable
CCMH LLCs investments
Other:
Investments
Receivables
2002
2001
$
18,469
14,846
38,722
26,071
$
17,303
75,842
34,924
12,209
4,508
17
$ 102,633
3,942
16
$ 144,236
The following presents a reconciliation of equity in earnings of unconsolidated affiliates for the years ended
December 31 (dollars in thousands):
2002
2001
2000
Services, consolidated
CCMH LLCs
Other
$
613 $ (2,212) $ (4,435)
459
278
–
455
$ 3,216 $ (1,475) $ (3,980)
2,445
158
52
thirteen consecutive years of increased dividends
53
5. Line of Credit Payable:
In October 2000, the Company entered into an amended and restated loan agreement for a $200,000,000
revolving credit facility (the “Credit Facility”) which amended the Company’s existing credit facility by (i)
lowering the interest rates of the tiered rate structure to a maximum rate of 150 basis points above LIBOR
(based upon the debt rating of the Company), (ii) extending the expiration date to October 31, 2003, and
(iii) amending certain of the financial covenants of the Company’s existing loan agreement. In connection
with the Credit Facility, the Company is required to pay a commitment fee of 25 basis points per annum on
the commitment. The principal balance is due in full upon termination of the Credit Facility on October 31,
2003, which the Company may request to be extended for an additional 12 month period with the consent
of the lender. Interest incurred on prime rate advances on the Credit Facility is payable quarterly. LIBOR
rate advances have maturity periods ranging from one week to six months, whichever the Company selects,
with interest payable at the end of the selected maturity period. All unpaid interest is due in full upon
termination of the Credit Facility. The terms of the Credit Facility include financial covenants which provide
for the maintenance of certain financial ratios. The Company was in compliance with such covenants as of
December 31, 2002.
For the years ended December 31, 2002, 2001 and 2000, interest cost incurred was $2,562,000, $5,762,000 and
$9,027,000, respectively, of which $1,000, $1,000 and $134,000, respectively, was capitalized by the Company
as a cost of buildings constructed for its own use, and $3,162,000, $5,310,000 and $8,380,000, respectively,
was charged to operations.
6. Mortgages Payable:
In January 1996, the Company entered into a long-term, fixed rate mortgage and security agreement for
$39,450,000. The loan provides for a 10-year mortgage with principal and interest of $330,000 payable
monthly, based on a 17-year amortization, with the balance due in February 2006 and bears interest at a rate
of 7.435% per annum. The mortgage is collateralized by a first lien on and assignments of rents and leases
of certain of the Company’s properties. As of December 31, 2002, the aggregate carrying value of these
properties totaled $63,026,000. The outstanding principal balance as of December 31, 2002 and 2001 was
$28,059,000 and $29,861,000, respectively.
The Company has acquired four Properties each subject to a mortgage totaling $7,214,000 (collectively the
“Mortgages”) with the maturities between December 2007 and December 2010. The Mortgages bear interest
at a weighted average rate of 8.6% and have a weighted average maturity of 3.9 years, with current principal
and interest of $83,000 payable monthly. In 2002, three of the properties were released as collateral and each
was substituted with a letter of credit, collectively totaling $3,747,000. As of December 31, 2002 and 2001,
the outstanding principal balances for the Mortgages totaled $4,846,000 and $5,355,000, respectively. As
of December 31, 2002, the aggregate carrying value of the remaining property and letters of credit totaled
$7,235,000.
54
thirteen consecutive years of increased dividends
55
In addition, in connection with the acquisition of Captec Net Lease Realty, Inc. (“Captec”) on December 1,
2001, the Company acquired three properties, each subject to a mortgage, totaling $1,806,000 (collectively, the
“Captec Mortgages”) with maturities between March 2014 and March 2019. The Captec Mortgages bear interest
at a weighted average rate of 9% and have a weighted maturity of 7.8 years, with current principal and interest
of $25,000 payable monthly. As of December 31, 2002 and 2001, the outstanding principal balances of the
Captec Mortgages totaled $1,653,000 and $1,795,000, respectively. As of December 31, 2002, the aggregate
carrying value of these three properties totaled $4,178,000.
In June 2002, the Company entered into a long-term, fixed rate mortgage and security agreement for
$21,000,000. The loan provides for a 10-year mortgage with principal and interest of $138,000 payable
monthly, based on a 30-year amortization, with the balance due in July 2012 and bears interest at a rate of
6.9% per annum. The mortgage is collateralized by a first lien on and assignments of rents and leases of five
of the Company’s properties. As of December 31, 2002, the outstanding principal balance was $20,923,000
and the aggregate carrying value of these properties totaled $27,956,000.
The following is a schedule of the annual maturities of the Company’s mortgages payable for each of the next
five years (dollars in thousands):
2003
2004
2005
2006
2007
$
$
2,904
3,163
3,420
22,937
1,261
33,685
7. Notes Payable:
In March 1998, the Company filed a prospectus supplement to its $300,000,000 shelf registration statement
and issued $100,000,000 of 7.125% notes due 2008 (the “2008 Notes”). The 2008 Notes are senior,
unsecured obligations of the Company and are subordinated to all secured indebtedness of the Company. The
2008 Notes were sold at a discount for an aggregate purchase price of $99,729,000 with interest payable semi-
annually commencing on September 15, 1998 (effective interest rate of 7.163%). The discount of $271,000 is
being amortized as interest expense over the term of the debt obligation using the effective interest method.
The 2008 Notes are redeemable at the option of the Company, in whole or in part, at a redemption price
equal to the sum of (i) the principal amount of the 2008 Notes being redeemed plus accrued interest thereon
through the redemption date and (ii) the Make-Whole Amount, as defined in the Supplemental Indenture
No. 1 dated March 25, 1998 for the 2008 Notes. The terms of the indenture include financial covenants
which provide for the maintenance of certain financial ratios. The Company was in compliance with such
covenants as of December 31, 2002.
In June 1999, the Company filed a prospectus supplement to its $300,000,000 shelf registration statement and
issued $100,000,000 of 8.125% notes due 2004 (the “2004 Notes”). The 2004 Notes are senior, unsecured
obligations of the Company and are subordinated to all secured indebtedness of the Company. The 2004
54
thirteen consecutive years of increased dividends
55
Notes were sold at a discount for an aggregate purchase price of $99,608,000 with interest payable semi-
annually commencing on December 15, 1999. The discount of $392,000 is being amortized as interest
expense over the term of the debt obligation using the effective interest method. In connection with the debt
offering, the Company entered into a treasury rate lock agreement which fixed a treasury rate of 5.1854% on
a notional amount of $92,000,000. Upon issuance of the 2004 Notes, the Company terminated the treasury
rate lock agreement resulting in a gain of $2,679,000. The gain has been deferred and is being amortized
as an adjustment to interest expense over the term of the 2004 Notes using the effective interest method.
The effective rate of the 2004 Notes, including the effects of the discount and the treasury rate lock gain, is
7.547%. The 2004 Notes are redeemable at the option of the Company, in whole or in part, at a redemption
price equal to the sum of (i) the principal amount of the 2004 Notes being redeemed plus accrued interest
thereon through the redemption date and (ii) the Make-Whole Amount, as defined in the Supplemental
Indenture No. 2 dated June 21, 1999 for the 2004 Notes. The terms of the indenture include financial
covenants, which provide for the maintenance of certain financial ratios. The Company was in compliance
with such covenants as of December 31, 2002.
In September 2000, the Company filed a prospectus supplement to its $300,000,000 shelf registration
statement and issued $20,000,000 of 8.5% notes due 2010 (the “2010 Notes”). The 2010 Notes are senior,
unsecured obligations of the Company and are subordinated to all secured indebtedness of the Company.
The 2010 Notes were sold at a discount for an aggregate purchase price of $19,874,000 with interest payable
semi-annually commencing on March 20, 2001 (effective interest rate of 8.595%). The discount of $126,000
is being amortized as interest expense over the term of the debt obligation using the effective interest method.
The 2010 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 2010 Notes being redeemed plus accrued interest thereon through
the redemption date and (ii) the Make-Whole Amount, as defined in the Supplemental Indenture No. 3 dated
September 20, 2000 for the 2010 Notes. The terms of the indenture include financial covenants, which
provide for the maintenance of certain financial ratios. The Company was in compliance with such covenants
as of December 31, 2002.
In June 2002, the Company filed a prospectus supplement to its $200,000,000 shelf registration statement
and issued $50,000,000 of 7.75% notes due 2012 (the “2012 Notes”). The 2012 Notes are senior, unsecured
obligations of the Company and are subordinated to all secured indebtedness of the Company. The 2012
Notes were sold at a discount for an aggregate purchase price of $49,713,000 with interest payable semi-
annually commencing on December 1, 2002 (effective interest rate of 7.833%). The discount of $287,000 is
being amortized as interest expense over the term of the debt obligation using the effective interest method.
The 2012 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 2012 Notes being redeemed plus accrued interest thereon through
the redemption date and (ii) the Make-Whole Amount, as defined in the Supplemental Indenture No. 4 dated
May 30, 2002, for the 2012 Notes. The terms of the indenture include financial covenants, which provide
for the maintenance of certain financial ratios. The Company was in compliance with such covenants as of
December 31, 2002.
56
thirteen consecutive years of increased dividends
57
In connection with the debt offerings, the Company incurred debt issuance costs totaling $2,918,000 consisting
primarily of underwriting discounts and commissions, legal and accounting fees and rating agency fees.
Debt issuance costs have been deferred and are being amortized over the term of the respective notes using
the effective interest method. The net proceeds from the debt offerings were used to pay down outstanding
indebtedness of the Company’s Credit Facility and term note.
In November 2001, the Company entered into an unsecured $70,000,000 term note (“Term Note”), due
November 30, 2004, to finance the acquisition of Captec and for the repayment of indebtedness and related
expenses in connection therewith (see Note 15). As of December 31, 2002, the Term Note had an outstanding
principal balance of $20,000,000. The Term Note bears interest at a rate of 175 basis points above LIBOR or
3.17% at December 31, 2002. The Company has the option to extend the maturity date of the Term Note for
two additional twelve month periods if (i) the Company pays a fee equal to 0.25% of the outstanding principal
balance of the Term Note and (ii) pays at least five percent of the outstanding principal balance of the Term
Note immediately prior to the extension.
In connection with the Term Note, the Company incurred debt costs of $376,000 consisting primarily of bank
commitment fees. The Term Note costs have been deferred and are being amortized over the term of the loan
commitment using the straight-line method which approximates the effective interest method.
8. Preferred Stock:
In December 2001, the Company issued 1,999,974 shares of 9% Non-Voting Series A Preferred Stock
(the “Perpetual Preferred Shares”) in connection with the acquisition of Captec (see Note 15). Holders of
the Perpetual Preferred Shares are entitled to receive, when and as authorized by the board of directors,
cumulative preferential cash distributions at a rate of nine percent of the $25.00 liquidation preference per
annum (equivalent to a fixed annual amount of $2.25 per share). The Perpetual Preferred Shares rank senior
to the Company’s common stock with respect to distribution rights and rights upon liquidation, dissolution
or winding up of the Company. The Company may redeem the Perpetual Preferred Shares on or after
December 31, 2006, in whole or from time to time in part, for cash, at a redemption price of $25.00 per share,
plus all accumulated and unpaid distributions.
In 2002, as a result of a legal action in connection with the merger of Captec (see Note 20), the Company
reduced the number of preferred shares issued and outstanding by 217,950.
9. Common Stock:
In November 1999, the Company announced the authorization by the Company’s board of directors to acquire
up to $25,000,000 of the Company’s outstanding common stock either through open market transactions or
through privately negotiated transactions. As of December 31, 2002, the Company had acquired and retired
249,200 of such shares for a total cost of $2,379,000.
In 2002, as a result of a legal action in connection with the merger of Captec (see Note 20), the Company
reduced the number of common shares issued and outstanding by 474,037.
56
thirteen consecutive years of increased dividends
57
10. Employee Benefit Plan:
Effective January 1, 1998, the Company adopted a defined contribution retirement plan (the “Retirement Plan”)
covering substantially all of the employees of the Company. The Retirement Plan permits participants to defer
up to a maximum of 15 percent of their compensation, as defined in the Retirement Plan, subject to limits
established by the Internal Revenue Code. The Company matches 50 percent of the participants’ contributions
up to a maximum of six percent of a participant’s annual compensation. The Company’s contributions to
the Retirement plan for the years ended December 31, 2002, 2001 and 2000 totaled $51,000, $46,000 and
$36,000, respectively.
11. Dividends:
The following presents the characterization for tax purposes of common stock dividends paid to stockholders
for the years ended December 31:
2002
2001
2000
Ordinary income
Capital gain
Unrecaptured Section 1250 Gain
Return of capital
$ 1.174 $ 1.227 $ 1.135
0.054
0.056
–
–
0.033
–
0.006
0.005
0.085
The preferred dividends of $2.25 per share paid during the year ended December 31, 2002 were characterized
as ordinary income for tax purposes.
$ 1.270 $ 1.260 $ 1.245
58
thirteen consecutive years of increased dividends
59
12. Earnings from Discontinued Operations:
In accordance with FAS Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
the Company has classified its three properties held for sale at December 31, 2002 and 19 properties sold
during 2002 as discontinued operations. Accordingly, the results of operations related to these 22 properties
for 2001 and 2000 have been reclassified to earnings from discontinued operations. The following is a
summary of earnings from discontinued operations for the years ended December 31 (dollars in thousands):
Revenues:
Rental income from operating leases
Earned income from direct financing leases
Contingent rental income
Other
Expenses:
General operating and administrative
Real estate
Depreciation and amortization
Provision for loss on impairment of real estate
2002
2001
2000
$
3,667 $
–
6
10
3,683
2,298 $
311
35
9
2,653
1,873
788
30
–
2,691
9
216
317
1,403
1,945
16
236
347
125
724
1
(2)
246
–
245
Earnings before gain on disposition of real estate
1,738
1,929
2,446
Gain on disposition of real estate
260
–
–
Earnings from discontinued operations
$
1,998 $
1,929 $
2,446
58
thirteen consecutive years of increased dividends
59
13. Earnings Per Share of Common Stock:
The following represents the calculations of earnings per share and the weighted average number of shares of
dilutive potential common stock for the years ended December 31:
2002
2001
2000
Earnings from continuing operations
Preferred stock dividends
Earnings available to common stockholders from continuing
operations before cumulative effect of change in accounting
principle
Earnings from discontinued operations
Cumulative effect of change in accounting principle
$
46,060,000 $
(4,010,000)
27,034,000 $
36,172,000
–
–
42,050,000
1,998,000
–
27,034,000
1,929,000
–
36,172,000
2,446,000
(367,000)
Net earnings available to common stockholders
$
44,048,000 $
28,963,000 $
38,251,000
Basic earnings per share available to common stockholders:
Weighted average number of common shares outstanding
Restricted stock
Merger contingent common shares
40,383,405
–
–
31,226,086
104,767
209,004
30,278,209
–
109,162
Weighted average number of common shares outstanding used in
basic earnings per common share
40,383,405
31,539,857
30,387,371
Continuing operations before cumulative effect of change in
accounting principle
Discontinued operations
Cumulative effect of change in accounting principle
Net earnings
Diluted earnings per share available to common stockholders:
Weighted average number of common shares outstanding
Effect of dilutive securities:
Common stock options and restricted stock
Merger contingent common shares
Weighted average number of common shares outstanding used in
diluted earnings per common share
Continuing operations before cumulative effect of change in
accounting principle
Discontinued operations
Cumulative effect of change in accounting principle
Net earnings
$
$
$
$
1.04 $
0.05
–
1.09 $
0.86 $
0.06
–
0.92 $
1.19
0.08
(0.01)
1.26
40,383,405
31,226,086
30,278,209
205,552
–
131,822
359,135
366
128,932
40,588,957
31,717,043
30,407,507
1.04 $
0.05
–
1.09 $
0.85 $
0.06
–
0.91 $
1.19
0.08
(0.01)
1.26
For the years ended December 31, 2002, 2001 and 2000, options on 454,500, 1,048,892 and 1,665,925 shares
of common stock, respectively, were not included in computing diluted earnings per share because their effects
were antidilutive.
60
thirteen consecutive years of increased dividends
61
14. Performance Incentive Plan:
In July 2001, the Company filed a registration statement on Form S-8 with the Securities and Exchange
Commission, which permitted the issuance of up to 2,900,000 shares of common stock (which included any
shares of common stock represented by options available to be granted under the Company’s previous plan)
pursuant to the Company’s 2000 Performance Incentive Plan (the “2000 Plan”). The terms of the 2000 Plan
automatically increase the number of shares issuable under the plan to 3,400,000 shares and 3,900,000 shares
when the Company has issued and has outstanding 35,000,000 shares and 40,000,000 shares, respectively, of
its common stock. In connection with the Company’s issuance of additional shares of common stock during
the year ended December 31, 2001, pursuant to the terms of the 2000 Plan, the number of shares of common
stock reserved for issuance automatically increased to 3,900,000 shares.
The 2000 Plan allows the Company to award or grant to key employees, directors and persons performing
consulting or advisory services for the Company or its affiliates stock options, stock awards, stock appreciation
rights, Phantom Stock Awards, Performance Awards and Leveraged Stock Purchase Awards, as defined in the
2000 Plan. The following summarizes the stock-based compensation activity for the years ended December 31:
Outstanding, January 1
Options granted
Options exercised
Options surrendered
Restricted stock granted
Restricted stock issued
Outstanding, December 31
Number of Shares
2001
2000
2002
1,692,158
359,300
(180,640)
(122,967)
64,000
(64,000)
1,747,851
1,881,092
12,500
(9,200)
(192,234)
239,000
(239,000)
1,692,158
1,665,925
292,900
–
(77,733)
–
–
1,881,092
Exercisable, December 31
1,293,284
1,581,592
1,401,859
Available for grant, December 31
1,628,809
1,933,642
92,908
The 64,000 and 239,000 shares of restricted stock granted during the years ended December 31, 2002 and 2001,
respectively, had a weighted average grant price of $15.35 and $13.35, respectively, per share. The following
represents the weighted average option exercise price information for the years ended December 31:
Outstanding, January 1
Granted during the year
Exercised during the year
Outstanding, December 31
Exercisable, December 31
2002
2001
2000
$
15.79
15.25
12.17
14.44
14.58
$
14.20
11.15
10.63
15.79
14.52
$
14.83
10.61
–
14.20
14.50
60
thirteen consecutive years of increased dividends
61
The following summarizes the outstanding options and the exercisable options at December 31, 2002:
$10.1875 to
$13.8750
Option Price Range
$14.1250 to
$17.8750
Total
Outstanding options:
Number of shares
Weighted-average exercise price
Weighted-average remaining
contractual life in years
Exercisable options:
Number of shares
Weighted-average exercise price
658,551
12.31
$
1,089,300
15.78
$
1,747,851
14.44
$
4.3
6.8
5.3
542,584
12.62
$
750,700
15.99
$
1,293,284
14.58
$
One-third of the grant to each individual becomes exercisable at the end of each of the first three years of
service following the date of the grant and the options’ maximum term is 10 years.
Pursuant to the 2000 Plan, in July 2001, the Company granted and issued 239,000 shares of restricted
common stock to certain officers and directors of the Company and its affiliate, of which 234,000 shares were
granted to officers and 5,000 shares were granted to directors. The restricted stock issued to the officers vests
at a rate of 15 percent to 30 percent each year over approximately a five-year period ending on January 1, 2006
and automatically upon a change in control of the Company. The restricted stock issued to the directors vests
equally each year over approximately a two-year period ending on January 1, 2003 and automatically upon a
change in control in the Company.
Pursuant to the 2000 Plan, in June 2002, the Company granted and issued 64,000 shares of restricted
common stock to certain officers and directors of the Company and its affiliate, of which 58,000 shares were
granted to officers and 6,000 shares were granted to directors. The restricted stock issued to the officers vests
at a rate of 15 percent to 30 percent each year over approximately a five-year period ending on January 1, 2007
and automatically upon a change in control of the Company. The restricted stock issued to the directors vests
equally each year over approximately a two-year period ending on January 1, 2004 and automatically upon a
change in control in the Company.
Compensation expense for the restricted stock is determined based upon the fair value at the date of grant
and is recognized over the vesting periods. For the years ended December 31, 2002 and 2001, the Company
recognized $854,000 and $274,000, respectively, of such expense.
The Company applies APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
Interpretations in accounting for the 2000 Plan. Accordingly, no compensation expense has been recorded with
respect to the options in the accompanying consolidated financial statements, all options granted under the
2000 Plan had an exercise price equal to the market value of the underlying common stock on the date of the
grant. The following table illustrates the effect on net earnings available to common stockholders and earnings
62
thirteen consecutive years of increased dividends
63
per common share if the Company had applied the fair value recognition provisions of FASB Statement No.
123, “Accounting for Stock-Based Compensation,” to stock-based compensation for the years ended December
31 (dollars in thousands, except per share data):
2002
2001
2000
Net earnings available to common stockholders as reported
Less total stock-based employee compensation expense
determined under the fair value based method
Pro forma net earnings available to common
stockholders
$ 44,048 $ 28,963 $ 38,251
(27)
(64)
(233)
$ 44,021 $ 28,899 $ 38,018
Earnings available to common stockholders per common
share as reported:
Basic
Diluted
Pro forma earnings available to common stockholders per
common share:
Basic
Diluted
$
$
$
$
1.09 $
1.09 $
0.92 $
0.91 $
1.26
1.26
1.09 $
1.08 $
0.92 $
0.91 $
1.25
1.25
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions used for grants in 2002, 2001 and 2000: (i) risk free rates of 5.4% and
5.5% for the 2002 grant, 5.1% for the 2001 grant and 6.7% and 6.2% for the 2000 grants, (ii) expected volatility
of 18.0%, 26.4% and 11.1%, respectively, (iii) dividend yields of 9.3%, 11.9% and 10.5%, respectively, and (iv)
expected lives of 10 years for grants in 2002, 2001 and 2000.
15. Mergers:
On December 18, 1997, the Company’s stockholders voted to approve an agreement and plan of merger with
CNL Realty Advisors, Inc. (the “Advisor”), whereby the stockholders of the Advisor agreed to exchange 100
percent of the outstanding shares of common stock of the Advisor for up to 2,200,000 shares (the “Share
Consideration”) of the Company’s common stock (the “Merger”). As a result, the Company became a fully
integrated, self-administered real estate investment trust effective January 1, 1998. Ten percent of the Share
Consideration (220,000 shares) was paid January 1, 1998, and the balance (the “Share Balance”) of the Share
Consideration was to be paid over time, within five years from the date of the Merger, based on the Company’s
completed property acquisitions and completed development projects in accordance with the Merger
agreement. For accounting purposes, the Advisor was not considered a “business” for purposes of applying
APB Opinion No. 16, “Business Combinations,” and therefore, the market value of the common shares issued
in excess of the fair value of the net tangible assets acquired was charged to operations rather than capitalized
as goodwill. As of December 31, 2001, the Company had issued the entire Share Balance. The cumulative
market value of the Share Balance issued was $24,736,000, all of which was charged to operations in the
respective years in which the shares were issued.
62
thirteen consecutive years of increased dividends
63
On December 1, 2001, the Company acquired 100 percent of Captec, a publicly traded real estate investment
trust, which owned 135 freestanding, net lease properties located in 26 states. Results of Captec operations
have been included in the consolidated financial statements since that date. Captec shareholders received
$11,839,000 in cash, 4,349,918 newly issued shares of the Company’s common stock and 1,999,974 newly
issued Perpetual Preferred Shares (see Notes 8 and 20). Under the purchase method of accounting, the
acquisition price of $124,722,000 was allocated to the assets acquired and liabilities assumed at their fair
values. As a result, the Company did not record goodwill.
The following summarizes the estimated fair values of the assets acquired and liabilities assumed in the Captec
acquisition (dollars in thousands):
Real estate:
Accounted for using the operating method
Accounted for using the direct financing method
Receivables
Cash and cash equivalents
Note receivables
Other assets
Total assets acquired
Note payable
Mortgages payable
Accounts payable and accrued expenses
Other liabilities
Total liabilities assumed
Net assets acquired
$ 215,498
9,230
151
4,143
5,852
8
$ 234,882
$ 101,213
1,806
6,933
208
110,160
$ 124,722
The merger was unanimously approved by both the Company’s and Captec’s board of directors. This
transaction increased funds from operations, increased diversification, produced costs savings from
opportunities for economies of scale and operating efficiencies and enhanced its capital markets profile.
The unaudited pro forma combined historical results for the years ended December 31, 2001 and 2000, as if
Captec had been acquired as of January 1, 2000, are estimated to be (dollars in thousands):
2001
2000
Revenues
Net income
Diluted earnings per common share
$ 101,943 $ 106,506
55,338
$
1.42
$
33,663 $
0.80 $
The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had
been completed as of January 1, 2000, nor are they necessarily indicative of future consolidated results.
64
thirteen consecutive years of increased dividends
65
16. Fair Value of Financial Instruments:
The Company believes the carrying values of its line of credit payable and the lines of credit receivable
from Services and certain wholly-owned subsidiaries of Services approximate fair value based upon their
nature, terms and variable interest rates. The Company believes that the carrying value of its cash and
cash equivalents, receivables, mortgages, notes and accrued interest receivable, mortgages payable, accrued
interest payable and other liabilities at December 31, 2002 approximate fair value, based upon current market
prices of similar issues. At December 31, 2002 and 2001, the fair value of the Company’s notes payable was
$287,898,000 and $292,322,000, respectively, based upon the quoted market price.
17. Related Party Transactions:
For additional related party disclosures see Note 4.
A wholly-owned subsidiary of Services holds a 33 1/3 percent equity interest in WXI/SMC Real Estate LLC
(“WXI”). The Company provides certain management services for WXI on behalf of Services pursuant to
WXI’s Limited Liability Company Agreement and Property Management and Development Agreement. WXI
paid the Company $66,000, $150,000 and $183,000 in fees during the years ended December 31, 2002, 2001
and 2000, respectively.
In September 2000, a wholly-owned subsidiary of Services entered into a $6,000,000 promissory note with
an affiliate in which James M. Seneff, Jr., Gary M. Ralston and Kevin B. Habicht, each of which are officers
and directors of the Company, own a majority equity interest. The note accrues interest at a rate of 10%, and
all principal and interest is due upon maturity. In 2002, the promissory note was amended to extend the
maturity date to December 15, 2003. The note is secured by the affiliate’s common stock in CNL Commercial
Finance, Inc. (“CCF”), a wholly-owned subsidiary of the affiliate. The outstanding principal and accrued
interest balance as of December 31, 2002 was $6,026,000. In addition, the wholly-owned subsidiary of
Services has an option with the affiliate to purchase up to 80 percent of all the common shares of CCF equal
to the purchase price paid by the affiliate for such common stock. The option expires on December 31, 2010.
In September 2000, a wholly-owned subsidiary of Services entered into a $15,000,000 line of credit
agreement with CCF. Interest is payable monthly and the principal balance is due in full upon termination
of the line of credit on October 31, 2003. In 2001 and 2002, the line of credit was amended to increase the
borrowing capacity to $25,000,000 and $37,750,000, respectively. As of December 31, 2002, $16,800,000 was
outstanding and $20,950,000 was available for future borrowings on the line of credit. The line of credit is
collateralized by substantially all of the assets of the affiliate.
An affiliate of James M. Seneff, Jr., an officer and director of the Company, provided certain administrative,
tax and technology services to the Company and Services. In connection therewith, the Company and
Services paid $1,258,000, $853,000 and $1,092,000 in fees relating to these services during the years ended
December 31, 2002, 2001 and 2000, respectively.
64
thirteen consecutive years of increased dividends
65
In 2002, the Company extended the maturity dates to dates between June and December 2007 on four mortgages
with an original aggregate principal balance totaling $8,514,000 that are held with affiliates of James M. Seneff,
Jr., an officer and director of the Company, and Robert A. Bourne, a member of the Company’s board of directors.
The mortgages bear interest at a weighted average of 8.96%, with interest payable monthly or quarterly. As of
December 31, 2002 and 2001, the aggregate principal balance of the four mortgages, included in mortgages, notes
and accrued interest on the balance sheet was $3,437,000 and $8,514,000, respectively. In connection therewith,
the Company recorded $663,000, $574,000 and $578,000 as interest from unconsolidated affiliates and other
mortgage receivables during the years ended December 31, 2002, 2001 and 2000, respectively.
The Company has guaranteed bank loans to James M. Seneff, Jr., Gary M. Ralston and Dennis E. Tracy, each
of which are officers and directors of the Company or its affiliates, totaling $3,746,000. These guarantees shall
continue through the maturity date of the loans which is on the earlier of (i) the termination of the Company’s
Credit Facility, or (ii) May 31, 2006. Each of the loans is a full recourse to the respective officer and is collateralized
by the common shares of the Company that were purchased with the proceeds from the loans. As of December 31,
2002, the value of the common shares exceeds the liability of the bank loans.
18. Segment Information:
Operating segments are components of an enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing
performance. While the Company does not have more than one reportable segment as defined by accounting
principles generally accepted in the United States of America, the Company has identified two primary sources
of revenue: (i) rental and earned income from the triple net leases and (ii) interest income from affiliates and
fee income from development, property management and asset management services. The following represents
the revenues, expenses and asset allocation for the two segments and the Company’s consolidated totals at
December 31, 2002, 2001 and 2000, and for the years then ended:
2002
Revenues
General operating and administrative expenses
Real estate expenses
Interest expense
Depreciation and amortization
Provision for loss on impairment of real estate
Equity in earnings of unconsolidated affiliates
Earnings (loss) from continuing operations
Earnings from discontinued operations
Net earnings
Assets
Additions to long-lived assets:
Real estate
Other
Rental and
earned
income
Interest and
fee
income
Corporate
Consolidated
$
$
$
$
$
87,213 $
6,260
1,481
26,720
11,399
1,882
158
39,629
1,998
41,627 $
881,934 $
6,614 $
1,693
–
–
17
–
3,058
7,962
–
7,962 $
72,114 $
$
–
1,522
–
–
9
–
–
(1,531)
–
(1,531) $
60 $
93,827
9,475
1,481
26,720
11,425
1,882
3,216
46,060
1,998
48,058
954,108
43,360 $
80 $
$
–
23 $
$
–
9 $
43,360
112
66
thirteen consecutive years of increased dividends
67
Rental and
earned
income
Interest and
fee
income
Corporate
Consolidated
2001
Revenues
General operating and administrative expenses
Real estate expenses
Interest expense
Depreciation and amortization
Expenses incurred in acquiring advisor from related party
Equity in earnings of unconsolidated affiliates
Gain on disposition of real estate
Earnings (loss) from continuing operations
Earnings from discontinued operations
Net earnings
Assets
Additions to long-lived assets:
Real estate
Other
2000
Revenues
General operating and administrative expenses
Real estate expenses
Interest expense
Depreciation and amortization
Expenses incurred in acquiring advisor from related party
Equity in earnings of unconsolidated affiliates
Gain on disposition of real estate
Earnings (loss) from continuing operations
Earnings from discontinued operations
Cumulative effect of change in accounting principle
Net earnings
Assets
Additions to long-lived assets:
Real estate
Other
$
$
$
$
$
$
$
$
$
$
69,401 $
4,659
718
24,874
8,763
–
278
4,648
35,313
1,929
37,242 $
878,410 $
8,472 $
993
–
78
92
–
(1,753)
–
5,556
–
5,556 $
128,133 $
–
1,244
–
–
9
12,582
$
77,873
6,896
718
24,952
8,864
12,582
(1,475)
4,648
27,034
1,929
28,963
85 $ 1,006,628
–
–
(13,835)
–
(13,835) $
19,836 $
100 $
–
$
17 $
–
$
12 $
19,836
129
73,344 $
2,961
399
26,528
8,703
–
455
4,091
39,299
2,446
(367)
41,378 $
684,049 $
4,856 $
823
–
–
134
–
(4,435)
–
(536)
–
–
(536) $
77,495 $
$
–
1,065
–
–
5
1,521
–
–
(2,591)
–
–
(2,591) $
67 $
78,200
4,849
399
26,528
8,842
1,521
(3,980)
4,091
36,172
2,446
(367)
38,251
761,611
3,999 $
667 $
–
$
220 $
–
$
52 $
3,999
939
66
thirteen consecutive years of increased dividends
67
19. Major Tenants:
For the years ended December 31, 2002, 2001 and 2000, the Company recorded rental and earned income from
one of the Company’s lessees, Eckerd Corporation, of $10,558,000, $8,790,000 and $8,674,000, respectively.
The rental and earned income from Eckerd Corporation represents more than 10 percent of the Company’s
rental and earned income for each of the respective years.
20. Commitments and Contingencies:
During the year ended December 31, 1999, the Company entered into a purchase and sale agreement whereby
the Company acquired 10 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 $23,421,000. The initial term of each of the 10 respective ground leases expires between
February 2003 and April 2004. 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.
As of December 31, 2002, the Company owned one land parcel subject to a lease agreement with a tenant
whereby the Company has agreed to construct a building on the land parcel for aggregate construction costs of
approximately $2,388,000, of which $293,000 of costs had been incurred at December 31, 2002. Pursuant to
the lease agreement, rent is to commence on the property upon completion of construction of the building.
The Company is a defendant in a lawsuit filed on December 10, 1998 in the United States District Court for the
District of Puerto Rico. The plaintiff, Ysiem Corporation, is alleging that the Company is in breach of a ground
lease agreement with the plaintiff regarding a land parcel owned by the plaintiff and is seeking damages of
$7,500,000 and/or specific performance of the execution of the ground lease. On January 4, 2002, the District
Court Judge granted the Company’s motion for summary judgment of dismissal of the action. The plaintiff
subsequently appealed the summary judgment to the U.S. First Circuit Court of Appeals. Both parties have
filed briefs with the Court of Appeals and oral arguments have been heard by the Court of Appeals. The
Company believes, in the unlikely event that (i) the Court of Appeals overturns the summary judgment in favor
of the Company and (ii) the Company is subsequently held liable after a trial on the merits of the action, the
resulting judgment would not materially affect the Company’s operations or financial condition.
Beginning July 9, 2001, following the public announcement of the Company’s proposed merger with Captec,
various Captec stockholders filed three lawsuits against Captec and its directors in the Chancery Court of the
State of Delaware for New Castle County and an additional lawsuit in the United States District Court for the
Eastern District of Michigan (the “Michigan Lawsuit”) alleging breaches of fiduciary duty in connection with the
merger and in connection with the sale of certain assets of Captec to CRC Asset Acquisition LLC, a Michigan
limited liability company controlled by a Captec officer. The Michigan Lawsuit also named the Company, but
the Company has since been dismissed as a party to that lawsuit. On October 11, 2001, the Chancery Court
of the State of Delaware for New Castle County issued an order consolidating the three Delaware Lawsuits into
one action, IN RE CAPTEC NET LEASE REALTY, INC. STOCKHOLDERS LITIGATION, CONSOLIDATED
C.A. NO. 19008-NC. The plaintiffs sought a declaration that the action is properly maintainable as a class
action, equitable relief that would enjoin the proposed merger and unspecified damages. The plaintiffs also
68
thirteen consecutive years of increased dividends
69
sought a preliminary injunction barring the Company’s proposed acquisition of Captec. Captec and the other
defendants entered into a Memorandum of Understanding with the plaintiffs pursuant to which the parties
agreed to withdraw their preliminary injunction request, to negotiate and execute a Stipulation of Settlement
and to submit the Stipulation of Settlement to the court for approval. In addition, Captec agreed to make
additional disclosures to its stockholders concerning the proposed merger and to pay plaintiffs’ attorneys’ fees
in an amount to be determined by the court but not to exceed $350,000. On July 26, 2002 the court approved
a Stipulation of Settlement negotiated and executed by the parties and awarded the plaintiffs attorney’s fees in
the amount of $350,000.
On January 24, 2002, beneficial owners of shares of Captec stock held of record by Cede & Co., who alleged
that they did not vote for the merger (and who alleged that they caused a written demand for appraisal of
their Captec shares to be served on Captec), filed in the Chancery Court of the State of Delaware in and for
New Castle County a Petition for Appraisal of Stock, PHILLIP GOLDSTEIN, JUDY KAUFFMAN GOLDSTEIN
AND CEDE & CO. V. COMMERCIAL NET LEASE REALTY, INC., C.A. NO. 19368NC (“Appraisal Action”).
The Appraisal Action alleged that 1,037,946 shares of Captec dissented from the merger and sought to require
the Company to pay to all Captec stockholders who demanded appraisal of their shares the fair value of those
shares, with interest from the date of the merger. The Appraisal Action also sought to require the Company to
pay all costs of the proceeding, including fees and expenses for plaintiff’s attorneys and experts. As a result of
this action, the plaintiffs were not entitled to receive the Company’s common and preferred shares as offered in
the original merger consideration. Accordingly, the Company reduced the number of common and preferred
shares issued and outstanding by 474,037 and 217,950, respectively, which represents the number of shares that
would have been issued to the plaintiffs had they accepted the original merger consideration. As of December
31, 2002, the Company had recorded the value of these shares at the original consideration share price in
addition to the cash portion of the original merger consideration as other liabilities totaling $13,278,000. The
Company entered into a settlement agreement dated as of February 7, 2003, with the beneficial owners of
the alleged 1,037,946 dissenting shares (including the petitioners in the Appraisal Action) which required the
Company to pay $15,569,000. On February 13, 2003, the parties filed a stipulation and order of dismissal and
the Court entered the order of dismissal, dismissing the Appraisal Action with prejudice.
On January 4, 2002, Calapasas Investment Partnership No. 1 Limited Partnership (“Calapasas”), a Captec
stockholder, filed a class action complaint against Captec, certain former Captec directors, and the Company
(as successor in interest to Captec) in the United States District Court for the Northern District of California,
CALAPASAS INVESTMENT PARTNERSHIP NO. 1 LIMITED PARTNERSHIP v. CAPTEC NET LEASE
REALTY, INC, a Delaware Corporation; COMMERCIAL NET LEASE REALTY, INC. (as successor in interest
to CAPTEC); PATRICK L. BEACH; W. ROSS MARTIN; H. REID SHERARD; RICHARD J.PETERS; LEE
C. HOWLEY; and WILLIAM H. KRUL III, Case No. C 02 00071 PJH. In its complaint Calapasas alleged
that Captec and certain of its directors violated provisions of the Securities and Exchange Act of 1934 by
misrepresenting the value of certain Captec assets on certain of its financial statements in 2000 and 2001
(the “Calapasas Action”). The Calapasas Action asserts that it is brought on behalf of a class consisting of
all persons and entities (except insiders) that purchased Captec common stock between August 9, 2000 and
prior to July 2, 2001. The Calapasas Action seeks to be certified as a class action and seeks compensatory and
punitive damages for the plaintiff and other members of the class, as well as costs and expenses, including
fees for plaintiff’s attorneys, accountants and experts. The Calapasas Action could result in damage awards
68
thirteen consecutive years of increased dividends
69
against Captec and/or its directors, damages for which the Company, as successor in interest to Captec, could
be responsible. On October 4, 2002 the Calapasas Action was dismissed by the Court with leave to amend.
A Second Amended Complaint was filed by Calapasas Investment Partnership No. 1 Limited Partnership on
November 8, 2002, which, among other things, reduced the alleged plaintiff class to those persons and entities
(except insiders) who purchased common stock of Captec between March 30, 2001 and July 2, 2001. A Motion
to Dismiss the Second Amended Complaint was filed by the defendants on or about December 18, 2002. At
this early stage in the Calapasas Action management is not in a position to assess the likelihood, or amount, of
any potential damage award to the plaintiff class.
In the ordinary course of its business, the Company is a party to various other legal actions which management
believes is routine in nature and incidental to the operation of the business of the Company. Management
believes that the outcome of the proceedings will not have a material adverse effect upon its operations or
financial condition.
21. Subsequent Events:
In January 2003, the Company terminated an $11,000,000 secured revolving line of credit and security
agreement with a wholly-owned subsidiary of Services. In addition, the Company modified an existing secured
revolving line of credit and security agreement with another wholly-owned subsidiary of Services to increase
the borrowing capacity from $5,000,000 to $15,000,000. As of February 28, 2003, the Subsidiary Agreements
provide for an aggregate borrowing capacity of $85,000,000.
70
thirteen consecutive years of increased dividends
71
CONSOLIDATED QUARTERLY FINANCIAL DATA
(dollars in thousands, except per share data)
2002
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
Rent and other revenue
Depreciation and amortization expense
Interest expense
Provision for loss on impairment of real estate
Other expenses
Earnings from discontinued operations
Net earnings
Net earnings per share (2):
Basic
Diluted
2001
Rent and other revenue
Depreciation and amortization expense
Interest expense
Advisor acquisition expense
Other expenses
Earnings from discontinued operations
Net earnings
Net earnings per share (2):
Basic
Diluted
$
$
$
$
24,376
2,941
6,567
-
2,850
499
12,749
0.29
0.29
20,877
2,208
6,294
334
1,967
557
11,594
0.38
0.38
$
$
24,040
2,908
6,406
-
3,120
1,688
13,512
0.31
0.31
20,104
2,206
6,052
357
1,825
1,033
10,385
0.34
0.34
$
$
24,672
2,953
6,860
3,285
2,437
(1,634)
8,575
0.19
0.19
19,191
2,462
6,106
1,462
1,779
337
7,473
0.24
0.24
$
$
24,422
2,940
6,887
-
2,774
1,445
13,222
0.30
0.30
20,354
2,335
6,500
10,429
2,420
2
(489)
(0.01)
(0.01)
97,510
11,742
26,720
3,285
11,181
1,998
48,058
1.09
1.09
80,526
9,211
24,952
12,582
7,991
1,929
28,963
0.92
0.91
(1) The consolidated quarterly financial data includes revenues and expenses from the Company’s continuing and
discontinued operations. The Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standard
(“FAS”) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement
addresses financial accounting and reporting for the impairment or disposal of long-lived assets and broadens the
presentation of discontinued operations in the income statement to include a component of an entity. Accordingly, the
results of operations related to these certain properties that have been classified as held for sale or have been disposed
of in 2002 have been reclassified to earnings from discontinued operations.
(2) Calculated independently for each period, and consequently, the sum of the quarters may differ from the annual
amount.
70
thirteen consecutive years of increased dividends
71
SHARE PRICE AND DIVIDEND DATA
The common stock of the Company currently is traded on the New York Stock Exchange (“NYSE”) under
the symbol “NNN.” For each calendar quarter indicated, the following table reflects respective high, low and
closing sales prices for the common stock as quoted by the NYSE and the dividends paid per share in each such
period.
2002
High
Low
Close
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
$ 13.9900
13.0100
13.9600
$ 16.0000
13.9000
16.0000
$ 16.4000
12.6000
16.1200
$ 16.3500
15.0100
15.3300
$ 16.4000
12.6000
15.3300
Dividends paid per share
0.3150
0.3150
0.3200
0.3200
1.2700
2001
High
Low
Close
$ 11.8125
10.1250
11.8000
$ 14.2500
11.5000
14.2500
$ 14.1500
11.2500
13.2500
$ 13.6800
12.7500
13.0000
$ 14.2500
10.1250
13.0000
Dividends paid per share
0.3150
0.3150
0.3150
0.3150
1.2600
For federal income tax purposes, 0.88% and 2.63% of dividends paid in 2002 and 2001, respectively, was
considered capital gain (representing 0.47% and 0% of capital gain – 20%, respectively, and 0.41% and 2.63%,
respectively, of unrecaptured Section 1250 gain) and 6.71% of the 2002 dividend was treated as a non-taxable
return of capital.
The Company intends to pay regular quarterly dividends to its stockholders. Future distributions will be
declared and paid at the discretion of the board of directors and will depend upon cash generated by operating
activities, the Company’s financial condition, capital requirements, annual distribution requirements under
the REIT provisions of the Internal Revenue Code of 1986 as amended, and such other factors as the board of
directors deems relevant.
On February 28, 2003, there were 1,255 and 48 shareholders of record of common stock and preferred stock,
respectively.
72
thirteen consecutive years of increased dividends
73
SHAREHOLDER INFORMATION
TRANSFER AGENT AND REGISTRAR:
Stockholder inquiries and requests regarding dividend payments, stock transfers, address changes, replacement of
lost certificates and other stock related matters should be directed to:
WACHOVIA BANK, N.A.
Shareholder Services Group
1525 West W.T. Harris Blvd. - 3C3
Charlotte, NC 28288-1153
(800) 829-8432
INVESTOR INFORMATION:
Business inquiries by security analysts, investment professionals, investors and stockholders should be directed
to:
Kevin B. Habicht
COMMERCIAL NET LEASE REALTY, INC.
450 S. Orange Avenue, Suite 900
Orlando, FL 32801
(800) CNL-REIT (265-7348)
(407) 265-7348
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS:
KPMG LLP
Orlando, FL
COUNSEL:
SHAW PITTMAN
Washington, DC
CORPORATE OFFICES:
COMMERCIAL NET LEASE REALTY, INC.
450 S. Orange Avenue, Suite 900
Orlando, FL 32801
(800) CNL-REIT (265-7348)
(407) 265-7348
www.cnlreit.com
FORM 10-K:
The Company’s annual report, filed on Form 10-K with the Securities and Exchange Commission, is available at
no charge upon written request to the Company’s Secretary at the above address.
DIVIDEND REINVESTMENT PLAN:
The Company’s dividend reinvestment plan provides shareholders with the opportunity to reinvest dividends as
defined in the prospectus. Specifics of the plan are contained in the plan prospectus.
72
thirteen consecutive years of increased dividends
73
ASSOCIATES
These are the people who provide diligent and consistent performance, year in and year out, for the
shareholders of Commercial Net Lease Realty. They are the company’s most important intangible asset.
David Ballew
Ginger Barnes
Chris Barry
Jeff Bass
Jay Bastian
Paul Bayer
Pam Becht
Mez Birdie
Orlando Bosques
Darlene Brescia
Rebecca Brownell
David Carter
David Cobb
Helen Collins
Bonnie Dehart
Jason Dewey
Mary Dixon
Eva Eller
Annette Escoffery
Tony Ferry
Mary Ellen Frame
Kristin Furniss
Ann Garrabrant
Peter Goffstein
Gabrielle Golka
David Gustovich
Bill Haberman
Kevin Habicht
Barbara Hammer
Scott Harris
Fred Hohnadel
Tricia Hollister
Ed Hopkins
Courtney Hubbard
Jeff Jennings
Carole Jones
Carolyn Kent
Liz Kohlmyer
Pauly Kostka
David Lachicotte
Jason LaPierre
Bonnie Luker
Diane McCarey
Paul McKeeby
David McLaughlin
Phil Melaugh
Diana Miller
Michelle Miller
Suzanne Miller
Paul Montgomery
Mary Morrison
Amanda Murphy
Belinda Parsons
Cindy Peterson
Dawn Peterson
Elise Quinones
Gary Ralston
Lane Ramsfield
Jennifer Ryan
Kella Schaible
Chris Schneck
Cynthia Shelton
Cathy Smalley
Dan Tervo
Dennis Tracy
Jay Whitehurst
Mary Wilkes
Matt Williams
Tom Yeager
Georgia Zampella
74
thirteen consecutive years of increased dividends
DIRECTORS & OFFICERS
DIRECTORS
James M. Seneff, Jr.
Chairman
Robert A. Bourne
Vice Chairman
Kevin B. Habicht
Clifford R. Hinkle
†
Executive Vice President,
Commercial Net Lease Realty, Inc.
Chairman and
Chief Executive Officer,
Flagler Holdings, Inc.
Richard B. Jennings
President,
Realty Capital International, LLC
Ted B. Lanier
†
Robert C. Legler
†
Robert Martinez
Gary M. Ralston
Retired Chairman and
Chief Executive Officer
of Triangle Bank and
Trust Company
Retired Chairman of First
Marketing Corporation
Fourtieth Governor of Florida
and Managing Director of Carlton
Fields Government Consulting
President,
Commercial Net Lease Realty, Inc.
† Member audit committee
EXECUTIVE OFFICERS
James M. Seneff, Jr.
Chief Executive Officer
BOARD OF DIRECTORS
(left to right) Cliff Hinkle, Gary Ralston, Bob Legler,
Kevin Habicht, Bob Martinez, Jim Seneff,
Rich Jennings, Bob Bourne, and Ted Lanier.
Gary M. Ralston
President and Chief Operating Officer
Kevin B. Habicht
Executive Vice President, Chief Financial Officer, Secretary
and Treasurer
Julian E. Whitehurst
Executive Vice President and General Counsel
Dennis E. Tracy
David W. Cobb
Executive Vice President and Chief Development Officer,
Commercial Net Lease Realty Services, Inc.
Executive Vice President and Chief Investment Officer,
Commercial Net Lease Realty Services, Inc.
75
450 S. Orange Avenue, Suite 900
Orlando, FL 32801
(800) CNL-REIT
www.cnlreit.com