National Retail Properties Annual Report 2003

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FY2003 Annual Report · National Retail Properties

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2003 ANNUAL REPORT

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450 S. Orange Avenue, Suite 900
Orlando, FL 32801
(800) 265-7348
www.nnnreit.com

TABLE OF CONTENTS

DIRECTORS & OFFICERS

Creditworthy tenants like the
United States of America add to
the safety of our portfolio.

Letter to Shareholders

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

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

Retired Chairman and
Chief Executive Officer,
Triangle Bank and
Trust Company

Retired Chairman,
First Marketing Corporation

Fortieth Governor of Florida and
Managing Director, Carlton Fields
Government Consulting

President,
Commercial Net Lease Realty, Inc.

Ted B. Lanier†

Robert C. Legler

Robert Martinez†

Gary M. Ralston

† Member audit committee

EXECUTIVE OFFICERS

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.

Craig Macnab

Chief Executive Officer

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.

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,
invests in, manages and indirectly develops primarily 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 11 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.

349 Properties • 130 Tenants • 39 States*

*as of April 3 0, 20 0 4

Headquarters, Transportation Security Administration

Shareholder Value

LETTER TO SHAREHOLDERS

“I do only the things I understand” – Warren Buffet

were conﬁdent our decision would enhance the safety

and quality of our cash ﬂow and facilitate future

Doing only the things you understand always works.

growth.

At Commercial Net Lease Realty, what we understand

is simple: a consistent, long-term strategy yields

We thus entered the single-tenant ofﬁce market

a consistent, long-term return. That is why, for

through a $142.8 million purchase of two Class A

more than a decade, we’ve been able to generate a

ofﬁce buildings and a related parking garage in

stable, growing cash ﬂow that has provided safe and

Washington D.C. The buildings are adjacent to

growing dividends for our shareholders.

Fashion Centre at Pentagon City in one of the top

The Filters of Experience

ofﬁce markets in the United States. Leased to the

United States of America through 2014, the buildings

Pivotal to generating this stability is our strategy that

serve as the headquarters for the Transportation

recognizes and evaluates new opportunities through

Security Administration.

objective and controlled ﬁlters; ﬁlters not obstructed

by market and institutional imperatives. More than

ﬁve years ago, for example, we began seeking new

ways to grow our company, and last year, fueled by

the discipline of our strategy, decided to diversify

into the ofﬁce and industrial property sectors. Still

primarily committed to the net-lease structure, we

Purposeful diversiﬁcation is just one part of doing

what we understand. We also understand:

Real estate. Our real estate is located in highly

visible areas near regional malls and business

developments or close to major highways with high

trafﬁc counts. These locations provide our tenants

349 Properties • 130 Tenants • 39 States *

* as of April 3 0, 20 0 4

Strategic Real Estate

We focus on tenants that are
leaders in their respective line
of trade.

Best Buy

Shareholder Value

LETTER TO SHAREHOLDERS (continued)

with high visibility to passing trafﬁc as well as easy

increased to $225 million. In 2003, we successfully

ingress and egress. Furthermore, our net lease

raised $190 million in equity, further strengthening

structure enables our tenants to control each site’s

our balance sheet.

operating hours and maintenance standards. If one

of our sites does happen to become vacant, it doesn’t

stay that way for long. Our track record of re-leasing

our space quickly and efﬁciently is impressive.

Risk. We mitigate risk at both the portfolio and

individual property levels. Our focus on long-term

leases helps us to bridge real estate and economic

cycles and adds to the predictability and stability

Tenants. We lease only to creditworthy tenants.

of our income stream. We minimize investment

We target companies that are leaders in their market

risk by growing our portfolio while diversifying by

segments or industries and have the ﬁnancial

individual tenant, industry classiﬁcation, property

strength to compete effectively. We maintain strong

sector and geographic location. And we underwrite

relationships with these companies with outstanding

each acquisition based on the location of the

and ﬂexible service that meets their needs,

property, the credit of the tenant and its impact on

including sale-leaseback ﬁnancing and build-to-suit

our portfolio.

development through our taxable REIT subsidiary.

Balance sheets. Operating with a conservative

take great pride in working here and go the extra

capital structure gives us access to attractive long-

mile to understand our customers’ needs. They build

term debt ﬁnancing when needed. We maintain an

strong relationships with our business partners and

unsecured bank credit facility which was recently

each other. In short, our associates act like owners of

Talent. Our talent drives our success. Our associates

Fourteen Consecutive Years of Increased Dividends

$1.30

$1.24

$1.18

$1.12

$1.06

$1.00

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Commercial Net Lease Realty was one of only 228 of the more than 10,000 publicly
traded companies in America to have increased annual dividends for 14 or more
consecutive years.

Strategic Real Estate

The Home Depot

The popularity of the home
improvement industry has
generated major real estate
expansion needs for retailers
like The Home Depot.

Shareholder Value

LETTER TO SHAREHOLDERS (continued)

the company; and, in fact, many are owners in that

The Value of Experience

they are also shareholders.

Our experience compounds the value of our

Management. Planning for succession is another

approach to investing capital. That we continue

aspect of our commitment to serve our shareholders

to efﬁciently and effectively take advantage of

over the long term, and in early 2004, Craig Macnab

opportunities that fuel our long-term strategy attests

joined our management team as Chief Executive

to the value of doing only what we understand.

Ofﬁcer. For more than 20 years, Craig has held key

And, as the saying goes: practice doesn’t make

executive level positions in both real estate and

perfect; practice makes permanent. Thank you for

ﬁnancial services companies, and we are pleased to

the privilege of managing a company that holds the

welcome someone of his caliber to our team. I will

promise of permanent value for you.

continue as Chariman of the Board and look forward

to working with Craig and his executive team.

Sincerely,

James M. Seneff, Jr.

Chairman

April 30, 2004

Annual Total Return Comparison
For Periods Ending December 31, 2003 (quarterly)rly)

1 Year

3 Years

5 Years

10 Years

Commercial Net Lease Realty, Inc. (NNN)

25.3% 31.0% 16.8% 12.2%

NAREIT Equity REIT Index (NRIXETR)

37.1% 17.5% 14.3% 12.0%

Morgan Stanley REIT Index (RMS)

36.7% 16.9% 14.1%

N/A

S&P 500 Index (SPX)

28.6% -4.0% -.06%

11%

Nasdaq (CCMP)

50.8% -6.3% -1.5% 9.9%

For the last three, ﬁve and ten-year periods, our total return to shareholders has
out-performed not only our peer groups (NAREIT and Morgan Stanley REIT Indices),
but also the broader equity markets (S&P 500 and NASDAQ Composite Index).

Strategic Real Estate

Sacramento, California Ofﬁce Building

Financing real estate through
mezzanine loans has generated
new growth opportunities.

Shareholder Value

HISTORICAL FINANCIAL HIGHLIGHTS (dollars in thousands, except per share data)

Gross revenues(1)
Earnings from continuing operations before
cumulative effect of change in accounting
principle
Net earnings
Total assets
Total long-term debt
Total equity
Cash dividends paid to:

Common stockholders
Series A Preferred Stock stockholders
Series B Preferred Stock stockholders

Weighted average common 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
Series A Preferred Stock stockholders
Series B Preferred Stock stockholders

Other data:

Cash ﬂows provided by (used in):

Operating activities
Investing activities
Financing activities

Funds from operations - diluted (2)

2003

2002

2001

2000

1999

104,656 $

97,510 $

80,526 $

80,891 $

76,543

51,309
53,473
1,208,310
465,138
730,754

55,473
4,008
502

43,078
48,058
954,108
384,589
549,141

51,178
4,010
–

25,730
28,963
1,006,628
435,333
564,640

38,637
–
–

35,167
38,251
761,611
360,381
393,901

37,760
–
–

31,941
35,311
749,789
350,971
391,362

37,495
–
–

43,108,213
43,896,800

40,383,405
40,588,957

31,539,857
31,717,043

30,387,371
30,407,507

30,331,327
30,408,219

1.090
1.080

1.140
1.130

1.280
2.250
50.250

0.970
0.970

1.090
1.090

1.270
2.250
–

0.820
0.810

0.920
0.910

1.260
–
–

1.160
1.160

1.260
1.260

1.245
–
–

1.050
1.050

1.160
1.160

1.240
–
–

54,319
(257,699)
206,007
64,162

58,705
39,983
(103,925)
57,881

37,727
(24,141)
(8,802)
44,616

50,198
(22,372)
(28,965)
43,949

47,876
(64,436)
18,447
46,044

(1)

Gross revenues include revenues from the Company’s continuing and discontinued operations. The Financial
Accounting Standards Board (“FASB”) issued Statement Financial Accounting Standards (“SFAS”) 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 2003 and
2002 have been reclassiﬁed to earnings from discontinued operations.

Strategic Real Estate

(2)

Funds From Operations, commonly referred to as FFO, is a non-GAAP ﬁnancial measure of operating performance of
an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis
determined under GAAP. The Company deﬁnes FFO as net earnings excluding depreciation, gains and losses on the
disposition of real estate and extraordinary 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 primarily excludes the assumption that the value of the real estate assets diminishes
predictably over time, and because industry analysts have accepted it as a performance measure. 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:

2003

2002

2001

2000

1999

Reconciliation of funds from operations:

Net earnings available to common stockholders - diluted

49,465 $

44,048 $

28,963 $ 38,251 $

35,311

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
Dissenting shareholders’ settlement
Cumulative effect of change in accounting principle

Funds from operations - diluted

11,770
102
699
–

9,729
600
479
–

7,182
474
63
12,582

7,459
379
63
1,521

7,150
419
64
9,824

–
(287)
2,413
–
64,162 $

2,256
769
–
–
57,881 $

(4,648)
–
–
–

(4,091)
–
–
367

44,616 $ 43,949 $

(6,724)
–
–
–
46,044

Shareholder Value

QUESTIONS & ANSWERS

Please explain how Preferred Stock differs from
Common Stock?

Preferred stock – A type of stock that pays a ﬁxed

dividend, and which has priority over common

stock in the payment of dividends and liquidation

proceeds. However, it typically carries no voting

rights, may be callable at the company’s option and

does not participate in the growth of the company’s

earnings. The ﬁxed income stream of preferred

stock makes it similar in many ways to bonds.

(NYSE: NNN_PA)

Common stock – Securities that represent an

ownership interest in a corporation. If the company

has also issued preferred stock, both common

and preferred have ownership rights. Common

stockholders assume the greater risk, but generally

exercise the greater control and may gain greater

reward in the form of dividends and capital

appreciation. (NYSE: NNN)

What are the ex-dividend, record and payable dates?

Ex-Dividend – A synonym for “without dividend.”

The buyer of an ex-dividend stock is not entitled

to the next dividend payment. Dividends are paid

quarterly to all those shareholders recorded on

the books of the company as of a previous date of

record. For example, a dividend may be declared as

payable to stockholders of record on a given Friday.

Since three business days are allowed for delivery

of stock in a regular transaction on the New York

Stock Exchange, the shares would trade as of the

opening of the market on the preceding Wednesday.

That means anyone who bought it on or after that

Wednesday would not be entitled to that dividend.

When stocks go “ex-dividend”, the newspaper stock

tables include the symbol “x” following the name.

Strategic Real Estate

Record date – The date on which you must be

registered as a shareholder of a company in order to

receive a declared dividend or, among other things,

to vote on company affairs.

Payable date – The date on which the dividend is

actually paid to shareholders.

How do I ﬁnd Commercial Net Lease Realty’s stock
information in my local newspaper?

Most often, stocks are listed alphabetically by

abbreviated company name, not listed by ticker

symbol. For example, our company’s common

stock is listed as CmclNL in the USA Today and

ComrclNetRlty in the Wall Street Journal. Our

preferred stock is listed as ComrclRltypf in the

Wall Street Journal.

Do you have a dividend reinvestment plan?

Yes, you may reinvest all or part of your total shares.

Contact our ofﬁce for the required forms.

Why did Commercial Net Lease Realty buy
an ofﬁce building?

There is more than $2 trillion of investable real estate

on corporate America’s books, and only a fraction

of that is retail. By diversifying into ofﬁce and

industrial properties, we increase our opportunity

without losing our focus on safe, long-term net lease

investments. Diversiﬁcation also lowers our exposure

to any one property type or region. This ensures a

stable income stream, protects the dividend and helps

to provide solid returns for our shareholders.

Barnes & Noble

Our tenants are generally
recognizable names that have
become part of America’s
lifestyle.

Shareholder Value

QUESTIONS & ANSWERS (continued)

What is mezzanine debt and how does it ﬁt into
your acquisition strategy?

Mezzanine debt refers to the secondary mortgage

debt that is subordinate to a ﬁrst mortgage loan

but senior to a borrower’s equity investment in a

property. A property owner/borrower might have a

ﬁrst mortgage loan-to-value ratio debt of 65 percent;

a mezzanine loan may allow the property owner/

borrower to increase the combined loan-to-value to

85 percent, for example. So by using a mezzanine

loan, a property owner is able to more fully leverage

the property and reduce the equity investment.

At Commercial Net Lease Realty, we underwrite

mezzanine loans to the same standards as if we were

purchasing the underlying property. While we do not

intend to own the property, we want to ensure that

we would be comfortable doing so. Such mezzanine

lending provides opportunities for relatively high

returns.

Why do you sell properties?

We sell properties to reﬁne our portfolio and reduce

our exposure to any one tenant or line of trade.

By selling properties through the 1031 Exchange

market, we are effectively buying at wholesale and

selling at retail. With our 1031 Exchange program,

we can acquire large portfolios, retaining the better

properties for our portfolio while re-selling individual

properties that are not a good ﬁt.

Strategic Real Estate

Please explain your JV Development program?
Is this program a departure from your
Build-to-Suit services?

Our JV Development program complements our

ground-up build-to-suit services and offers us

additional opportunities in the development market.

The JV program reduces the ﬁnancial risks for

developers and gives us additional connections

to clients and projects across the country. The

program is tailored to meet the developer’s needs

offering ﬂexibility in capital structures, risk/reward

allocations and product types.

Comments? Questions?

We enjoy hearing from our
shareholders. Please let us know
if you have any comments or
questions.

Via postal mail:
450 S. Orange Avenue, Suite 900
Orlando, FL 32801

Via phone:
(800) 265-7348

Via our website:
http://www.nnnreit.com

Or email us directly:
kevin.habicht@nnnreit.com

Thank you,

Kevin B. Habicht

OfﬁceMax

We look for properties that are
located on strategic and highly
visible corners near major highways
or successful regional malls.

Shareholder Value

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 (collectively, the “Company”) believes that the expectations
reﬂected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual
results could differ materially from those set forth in the forward-looking statements. Certain factors that might
cause a difference include the following: the ability of the Company to qualify as a real estate investment trust
for federal income tax purposes; 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; the ability of the
Company to locate suitable tenants for its properties; changes in real estate market conditions; changes in general
economic conditions; the ability of the Company to repay debt ﬁnancing obligations; the ability of the Company
to reﬁnance amounts outstanding under its credit facilities at maturity on terms favorable to the Company;
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 inherent risks associated with owning real estate (including: local real estate market conditions,
governing laws and regulations and illiquidity of real estate investments); the ability of the Company to integrate
ofﬁce and industrial properties into existing operations that historically have been primarily focused on retail
properties; the loss of any member of the Company’s management team; as of February 2004, James M. Seneff, Jr.
no longer serves as chief executive ofﬁcer of the Company, but continues to serve as chairman of the board
of directors; the ability of the Company to successfully implement its selective acquisition strategy or fully
realize the anticipated beneﬁts of renovation or development projects; the ability of the Company to integrate
acquired properties and operations into existing operations; the recent changes in tax legislation provide favorable
treatment for dividends for regular companies, but not generally dividends from real estate investment trusts.
Given these uncertainties, readers are cautioned not to place undue reliance on such statements. Management
of the Company currently knows of no trends that will have a material adverse effect on liquidity, capital
resources or results of operations.

OVERVIEW

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, invests in, manages and indirectly, through
investment interests, develops primarily single-tenant retail, ofﬁce and industrial properties that are generally
leased to established tenants under long-term commercial net leases. As of December 31, 2003, the Company
owned 339 properties (the “Properties”) that are leased to established tenants, including Academy, Barnes &
Noble, Bennigan’s, Best Buy, Borders, Eckerd, Jared Jewelers, OfﬁceMax, The Sports Authority and the United
States of America. Approximately 97 percent of the gross leasable area of the Company’s portfolio of Properties
was leased at December 31, 2003.

The Company’s management team focuses on certain key indicators to evaluate the ﬁnancial condition and
operating performance of the Company. These key indicators include such items as: the structure of the
Company’s portfolio of Properties (such as tenant, geographic and industry classiﬁcation diversiﬁcation);
the occupancy rate of the Company’s portfolio of Properties; certain ﬁnancial ratios; and industry trends and
performance compared to that of the Company.

Strategic Real Estate

LIQUIDITY

General. Historically, the Company’s demand for funds has been primarily for (i) payment of operating
expenses and dividends, (ii) property acquisitions, capital expenditures and development, either directly
or through investment interests, (iii) payment of principal and interest on its outstanding indebtedness
and (iv) other investments.

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,
2003. The table presents principal cash ﬂows by year-end of the expected maturity for debt obligations and
commercial commitments outstanding as of December 31, 2003. As the table incorporates only those exposures
that exist as of December 31, 2003, it does not consider those exposures or positions which arise after that date.

Total

2004

2005

2007

2008

Thereafter

Expected Maturity Date
(dollars in thousands)
2006

Long-term debt (1)
Operating lease
Total contractual cash obligations(2)

$ 465,380 $ 123,158 $

14,226

1,131

$ 479,606 $ 124,289 $

3,415 $ 50,731 $
1,165
4,580 $ 51,931 $

1,200

1,281 $ 100,956 $ 185,839
1,236
8,221
1,273
2,517 $ 102,229 $ 194,060

(1)

Includes amounts outstanding under the revolving credit facility, mortgages and notes payable and excludes
unamortized note discounts and unamortized interest rate hedge gain.

(2) As of December 31, 2003, the Company does not have any other contractual cash obligations, such as purchase

obligations, capital lease obligations or other long-term liabilities other than those reﬂected in the table.

Management anticipates satisfying these obligations with a combination of the Company’s current capital
resources, cash on hand, its revolving credit facility and debt or equity ﬁnancings.

In addition to the contractual obligations outlined in the table above, the Company has agreed to fund
$26,544,000 for building, tenant improvements and other costs related to the lease, of which $11,438,000 had
been funded as of December 31, 2003, in connection with its acquisition of two ofﬁce buildings and a related
parking garage located in Arlington, Virginia (the Washington, D.C. metropolitan area) in August 2003.
These costs will be capitalized to building and improvements upon completion which is anticipated to be
substantially funded by December 31, 2004. The Company anticipates funding the additional costs from
borrowings under the Company’s revolving credit facility. For a description of the acquisition, see “Results
of Operations – Property Analysis” below.

The Company has also guaranteed 41.67 percent of a $15,500,000 promissory note on behalf of an
unconsolidated afﬁliate. The maximum obligation to the Company is $6,458,000 plus interest and the
guarantee shall continue through the loan maturity in November 2004 (see “Capital Resources – Investments in
Unconsolidated Afﬁliates”.) In the event the Company is required to perform under this guarantee, the Company
would potentially use proceeds from its revolving credit facility.

Many of the Properties in the Company’s portfolio are recently constructed and are generally net leased, therefore
management anticipates that capital demands to meet obligations with respect to these Properties will be modest
for the foreseeable future and can be met with funds from operations and working capital. The Company’s leases

Shareholder Value

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, including the two ofﬁce buildings acquired during 2003, are subject to leases under which
the Company retains responsibility for certain costs and expenses associated with the Property (see “Results
of Operations – Property Analysis”). 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.

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. As of February 2004, the Company owns 10 vacant, unleased Properties, which accounts
for three percent of the total gross leasable area of the Company’s portfolio. Additionally, two percent of the
total gross leasable area of the Company’s portfolio is leased to three tenants, which have each ﬁled a voluntary
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.

Dividends. 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. The Company generally will not be subject
to federal income tax on income that it distributes to its stockholders, providing it distributes at least 90 percent
of its real estate investment trust taxable income and meets certain other requirements for qualifying as a REIT.
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, 2003, 2002 and 2001, and intends
to continue to operate the Company so as to remain qualiﬁed as a REIT for federal income tax purposes.

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,
2003, 2002 and 2001, the Company declared and paid dividends to its common stockholders of $55,473,000,
$51,178,000 and $38,637,000, respectively, or $1.28, $1.27 and $1.26 per share, respectively.

Strategic Real Estate

The following presents the characterizations for tax purposes of such common stock dividends for the years ended
December 31:

2003

2002

2001

Ordinary income
Capital gain
Qualiﬁed 5-year Gain
Unrecaptured Section 125 gain
Return of capital

75.71%
–
0.37%
2.88%
21.04%

97.37%
–
–
2.63%
–
100.00% 100.00% 100.00%

92.41%
0.47%
–
0.41%
6.71%

In February 2004, the Company paid dividends to its common stockholders of $16,001,000, or $0.32
per share of stock.

Holders of the 9% Non-Voting Series A Preferred Stock (the “Series A Preferred Stock”) are entitled to receive,
when and as authorized by the board of directors, cumulative preferential cash distributions at the rate of
nine percent of the $25.00 liquidation preference per annum (equivalent to a ﬁxed annual amount of $2.25
per share). For the years ended December 31, 2003 and 2002, the Company declared and paid dividends to its
Series A Preferred Stock stockholders of $4,008,000 and $4,010,000, respectively, or $2.25 per share of stock.
The Series A Preferred Stock dividends paid during the years ended December 31, 2003 and 2002 were
characterized as ordinary income for tax purposes.

In February 2004, the Company declared dividends of $1,002,000 or $0.5625 per share of Series A Preferred
Stock, payable in March 2004.

Holders of the 6.70% Non-Voting Series B Preferred Cumulative Convertible Perpetual Preferred Stock
(the “Series B Preferred Stock”) are entitled to receive, when and as authorized by the board of directors,
cumulative preferential cash distributions at the rate of 6.70 percent of the $2,500.00 liquidation preference
per annum (equivalent to a ﬁxed annual amount of $167.50 per share). For the year ended December 31, 2003,
the Company declared and paid dividends to its Series B Preferred Stock stockholders of $502,000 or $50.25
per share of stock. The Series B Preferred Stock dividends paid during the year ended December 31, 2003 were
characterized as ordinary income for tax purposes.

In February 2004, the Company declared dividends of $419,000 or $41.875 per share of Series B Preferred Stock,
payable in March 2004.

Property Environmental Considerations. The Company may acquire a property whose environmental site
assessment indicates that a contamination or potential contamination exists, subject to a determination of the
level of risk and potential cost of remediation. 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, generally to obtain
a Phase I environmental site assessment for each property and, where warranted, a Phase II environmental site
assessment. In such cases that the Company intends to acquire real estate where contamination or potential
contamination exists, 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. Phase

Shareholder Value

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 has 18
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.

CAPITAL RESOURCES

Generally, cash needs for property acquisitions, capital expenditures and development and other investments
have been funded by equity and debt offerings, bank borrowings, the sale of properties and, to a lesser extent,
from internally generated funds. Cash needs for other items have been met from operations. Potential future
sources of capital include proceeds from the public or private offering of the Company’s debt or equity securities,
secured or unsecured borrowings from banks or other lenders, proceeds from the sale of Properties, as well as
undistributed funds from operations. For the years ended December 31, 2003, 2002 and 2001, the Company
generated $54,319,000, $58,705,000 and $37,727,000, respectively, of net cash from operating activities.
The change in cash provided by operations for the years ended December 31, 2003, 2002 and 2001, is primarily
the result of changes in revenues and expenses as discussed in “Results of Operations.” Cash generated from
operations could be expected to ﬂuctuate in the future.

Indebtedness. The Company expects to use indebtedness primarily to invest in the acquisition and
development of single-tenant retail, ofﬁce and industrial properties, either directly or through investment
interests. In May 2003, the Company entered into an amended and restated loan agreement for a $225,000,000
revolving credit facility (the “Credit Facility”) which amended the Company’s existing loan agreement by
(i) increasing the borrowing capacity to $225,000,000 from $200,000,000, (ii) lowering the interest rates of the
tiered rate structure from a maximum of 150 points above LIBOR to a maximum rate of 135 basis points above
LIBOR (based upon the debt rating of the Company, the current interest rate is 100 basis points above LIBOR),
(iii) requiring the Company to pay a commitment fee based on a tiered rate structure to a maximum of 30 basis
points per annum (based upon the debt rating of the Company), (iv) providing for a competitive bid option for up
to 50 percent of the facility amount, (v) extending the expiration date to May 9, 2006 and (vi) amending certain
of the ﬁnancial covenants of the Company. The principal balance is due in full upon expiration of the Credit
Facility on May 9, 2006, which the Company may request to be extended for an additional 12-month period
with the consent of the lender. As of December 31, 2003, $27,800,000 was outstanding and approximately
$197,200,000 was available for future borrowings under the Credit Facility.

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 service coverage and (iii) cash ﬂow coverage. At December 31, 2003, the Company was in compliance
with those covenants. In the event that the Company violates any of the certain restrictive ﬁnancial covenants,
its access to the debt or equity markets may become impaired.

In November 2003, the Company entered into a long-term, ﬁxed rate interest-only loan for $95,000,000.
The loan bears interest at a rate of 5.42% per annum with monthly interest payments of $435,000 and the
principal balance due in November 2013. Proceeds from the loan were used to pay down outstanding
indebtedness of the Company’s Credit Facility. The loan is secured by a ﬁrst mortgage lien on the two ofﬁce
buildings and related parking garage in the Washington, D.C. metropolitan area acquired in August 2003.
As of December 31, 2003, the outstanding principal balance was $95,000,000 and the aggregate carrying value
of these properties totaled $153,399,000.

Strategic Real Estate

In January 1996, the Company entered into a long-term, ﬁxed rate loan for $39,450,000. The loan bears interest
at a rate of 7.435% per annum and provides for a ten-year term with monthly principal and interest payments of
$330,000 and the balance due in February 2006. The loan is secured by a ﬁrst mortgage lien on certain of the
Company’s Properties. As of December 31, 2003, the outstanding principal balance was $26,118,000 and the
aggregate carrying value of these Properties totaled $61,857,000.

In June 2002, the Company entered into a long-term, ﬁxed rate loan for $21,000,000. The loan bears interest
at a rate of 6.9% per annum and provides for a 10-year term, with monthly principal and interest payments
of $138,000 and the balance due in July 2012. Proceeds from the loan were used to pay down outstanding
indebtedness of the Company’s Credit Facility. The loan is secured by a ﬁrst mortgage lien on ﬁve of the
Company’s Properties. As of December 31, 2003, the outstanding principal balance was $20,721,000 and the
aggregate carrying value of these Properties totaled $27,543,000.

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 Net Lease Realty, Inc. (“Captec”) and for the repayment
of indebtedness and related expenses in connection therewith (see “Results of Operations – 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, 2003, 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 2.9% per annum at December 31, 2003. The Company has the
option to extend the maturity date of the Term Note for two additional 12-month periods.

The Company has acquired four properties subject to mortgages securing loans in the aggregate original
principal balance of $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% per annum and have a
weighted average remaining maturity of 3.3 years, with an aggregate monthly payment of principal and interest
of $83,000. In addition to the Mortgages, the company has letters of credit that also secure three of the loans,
which collectively total $4,794,000. As of December 31, 2003, the outstanding principal balances secured by the
Mortgages totaled $4,244,000, and the aggregate carrying value of these Properties and letters of credit totaled
$16,556,000.

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 used, and expects to use in the future, issuances of debt and
equity securities primarily to pay down its outstanding indebtedness and to ﬁnance property acquisitions. The
Company has maintained investment grade debt ratings from Standard and Poor’s, Moody’s Investors 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 March 2008 (the “2008
Notes”) to pay down outstanding indebtedness of the Company’s Credit Facility. 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 semi-annually commencing on September 15, 1998 (effective interest rate
of 7.163%). The discount of $271,000 is being amortized to 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

Shareholder Value

costs totaling $1,208,000, consisting primarily of underwriting discounts and commissions, legal and accounting
fees, rating agency fees and printing expenses.

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 June 2004 (the “2004 Notes”) to pay down outstanding indebtedness
of the Company’s Credit Facility. 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 to 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. In February 2004, the Company entered into a forward starting interest rate swap agreement with a
notional amount of $94,000,000 and a swap rate of 4.606% per annum.

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 September 2010 (the “2010 Notes”) to pay down outstanding
indebtedness of the Company’s Credit Facility. 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 (effective interest rate of 8.595%). The discount of $126,000
is being amortized to 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.

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 June 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 (effective interest rate of
7.833%). The discount of $287,000 is being amortized to 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

Strategic Real Estate

Company to maintain (i) certain leverage ratios and (ii) certain interest coverage. At December 31, 2003, the
Company was in compliance with those covenants. In the event that the Company violates any of the certain
restrictive ﬁnancial covenants, its access to the debt or equity markets may become impaired.

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 of the Company’s Credit
Facility.

In December 2001, the Company issued 4,349,918 shares of common stock and 1,999,974 shares of Series A
Preferred Stock in connection with the acquisition of Captec (see “Results of Operations – Merger Transactions”).
Holders of the Series A Preferred Stock are entitled to receive, when and as authorized by the board of directors,
cumulative preferential cash distributions at the rate of nine percent of the $25.00 liquidation preference per
annum (equivalent to a ﬁxed annual amount of $2.25 per share). The Series A Preferred Stock 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 Series A Preferred Stock 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 the appraisal action arising out of the Captec merger (see “Results of Operations –
Merger Transactions”), the Company reduced the number of common and Series A Preferred Stock shares issued
and outstanding by 474,037 and 217,950, respectively. In 2003, the Company further reduced the number of
common and Series A Preferred Stock shares issued and outstanding by 823 and 379, respectively. The reduction
in shares represent 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. In 2003, the Company used proceeds from its Credit Facility to fund the
settlement of the appraisal action.

In May 2003, the Company ﬁled a shelf registration statement with the Securities and Exchange Commission,
which permits the issuance by the Company of up to $600,000,000 in debt and equity securities (which includes
approximately $89,637,000 of unissued debt and equity securities under the Company’s previous $200,000,000
shelf registration statement).

In July 2003, the Company ﬁled a prospectus supplement to its $600,000,000 shelf registration statement and
issued 5,600,000 shares of common stock and received gross proceeds of $100,800,000. In connection with this
offering, the Company incurred stock issuance costs totaling approximately $5,374,000, consisting primarily
of underwriters’ commissions and fees, legal and accounting fees and printing expenses. Net proceeds from the
offering were used to fund a portion of the acquisition of the two ofﬁce buildings and a related parking garage in
the Washington, D.C. metropolitan area (see “Results of Operations – Property Analysis”).

In August 2003, the Company ﬁled a prospectus supplement to its $600,000,000 shelf registration statement and
issued 10,000 shares of Series B Preferred Stock and received gross proceeds of $25,000,000. In connection with
this offering, the Company incurred stock issuance costs totaling approximately $687,000, consisting primarily

Shareholder Value

of placement fees and legal and accounting fees. The Series B Preferred Stock is convertible at the option of the
holder into 1,293,996 shares of the Company’s common stock on and after the ﬁrst anniversary from the date
on which the shares were issued. Holders of the Series B Preferred Stock are entitled to receive, when and as
authorized by the board of directors, cumulative preferential cash distributions at the rate of 6.70 percent of
the $2,500.00 liquidation preference per annum (equivalent to a ﬁxed annual amount of $167.50 per share).
The Series B Preferred Stock ranks pari passu with the Series A Preferred Stock and 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 Series B Preferred Stock on or after August 13, 2008, in whole or from
time to time in part, for cash, at a redemption price of $2,500.00 per share, plus all accumulated and unpaid
distributions. Net proceeds from the offering were used to pay down outstanding indebtedness of the Company’s
Credit Facility.

In December 2003, the Company ﬁled a prospectus supplement to its $600,000,000 shelf registration statement
and issued 3,250,000 shares of common stock and received gross proceeds of $56,517,000. In addition, the
Company issued an additional 487,500 shares of common stock in connection with the underwriters’ over-
allotment option and received gross proceeds of $8,478,000. In connection with these offerings, the Company
incurred stock issuance costs totaling approximately $671,000, consisting primarily of underwriters’ commissions
and fees, legal and accounting fees and printing expenses. Net proceeds from these offerings were used to pay
down outstanding indebtedness of the Company’s Credit Facility.

Compensation Plan Equity Issuances. The Company believes that equity-based or equity-related
compensation is an important element of overall compensation for the Company. Such compensation advances
the interest of the Company by encouraging, and providing for, the acquisition of equity interests in the Company
by directors, ofﬁcers and other key associates, thereby aligning their interests with stockholders and providing
them with a substantial motivation to enhance stockholder value. 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.

Strategic Real Estate

Pursuant to the 2000 Plan, the Company has granted and issued shares of restricted stock to certain ofﬁcers and
directors of the Company. The following information is a summary of the various issuances of restricted stock:

Annual
Vesting
Rate

Number of
Years for
Vesting

Shares are 100%
Vested on: (1)

Ofﬁcers:

July 2001
June 2002
March 2003
March 2003
Total

Directors:

July 2001
June 2002
June 2003
Total

234,000 15% - 30%
58,000 15% - 30%
40,407
30,000 15% - 30%

25%

362,407

5,000
6,000
6,000
17,000

50%
50%
50%

5
5
4
5

2
2
2

January 1, 2006
January 1, 2007
January 1, 2007
January 1, 2008

January 1, 2003
January 1, 2004
January 1, 2005

(1) The restricted stock shares automatically vests upon a change in the

control of the Company.

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, 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.

In May 2003, the Company modiﬁed its existing Amended and Restated Secured Revolving Line of Credit
and Security Agreement (the “Security Agreement”) with Services to decrease the borrowing capacity from
$85,000,000 to $35,000,000. The credit facility is secured by a ﬁrst mortgage on Services’ properties and bears
interest at prime rate plus 0.25% per annum and expires on May 9, 2006. The outstanding principal balance of
the mortgage at December 31, 2003 was $12,588,000 and bore interest at a rate of 4.25% per annum. 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 May 2003, 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 $15,000,000 to $45,000,000. 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 $115,000,000, each
bears interest at prime rate plus 0.25% per annum and expires May 9, 2006 and is secured by a pledge of the real

Shareholder Value

estate and/or the other assets owned by the respective borrower. The aggregate outstanding principal balance
of the Subsidiary Agreements at December 31, 2003 was $42,646,000 and bore interest at a rate of 4.25% per
annum. The Security Agreement and the Subsidiary Agreements provide for an aggregate borrowing capacity of
$150,000,000 to Services and its wholly-owned subsidiaries. As of December 31, 2003, the aggregate outstanding
balance of the secured revolving lines of credit and security agreements with Services and its wholly-owned
subsidiaries was $55,234,000, resulting in $94,766,000 available for future borrowings under the lines of credit.

In May 2001, Services and certain of its wholly-owned subsidiaries became direct borrowers under the
Company’s Credit Facility. During 2003, the Company borrowed $193,670,000 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 $192,236,000 during the year ended December 31, 2003, which
the Company used to pay down outstanding indebtedness of the Company’s Credit Facility.

Absent additional investment by the Company, as of December 31, 2003, the maximum exposure to loss as
a result of the Company’s involvement with Services would be approximately $75,280,000, including the
investment, revolving lines of credit and other receivables. As of December 31, 2003, the carrying values of
Services’ assets and liabilities were $80,945,000 and $60,496,000, respectively.

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 Partnership owns and leases nine properties to eight 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.

Under the terms of the Agreement, CTA had the right to convert its 80 percent limited Partnership interest into
shares of the Company’s common stock. In October 2003, CTA exercised that right and based on the terms and
calculation deﬁned in the limited partnership agreement, the Company issued 953,551 shares of common stock to
CTA in a private transaction in February 2004.

The Company has entered into ﬁve limited liability company (“LLC”) agreements between June 2001 and July
2003, with CNL Commercial Finance, Inc. (“CCF”), a related party. Each of the LLCs holds an interest in
mortgage loans and is 100 percent equity ﬁnanced. 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 2003, in connection with a loan to CCF from an afﬁliate of James M. Seneff, Jr., an
ofﬁcer and director of the Company, the Company pledged a portion of its interest in two of the LLCs as partial
collateral for the loan.

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 percent
of a $15,500,000 promissory note on behalf of Plaza. The maximum obligation of the Company is $6,458,000
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. Plaza intends
to renew the promissory note in 2004.

Strategic Real Estate

Note Receivable. In October 2003, the Company entered into a Mezzanine Loan Agreement (“Mezzanine
Loan”) with BFSC Holdings, LLC, BFSC Holdings II, LLC, BFSC Holdings III, LLC, BFWV Holdings, LLC
(collectively, the “Borrowers”) for $45,200,000. The Mezzanine Loan provided for an initial advance to the
Borrowers at the time of closing of $43,433,000 and a second and ﬁnal advance of $1,767,000 was funded
in January 2004. The Mezzanine Loan bears interest at a rate of 13.5% per annum, of which 11% is payable
monthly and the remaining 2.5% accrues and is due at maturity. The principal balance is due in full at maturity
in November 2007. The Mezzanine Loan is secured by the Borrowers’ pledge of its membership interests in the
certain subsidiaries which own real estate.

There are certain inherent risks associated with the Mezzanine Loan, which pose different investment risks than
the Company’s investments in single-tenant net leased real property. The Mezzanine Loan is subordinated to
senior loans secured by ﬁrst mortgages. Subordinated positions are subject to special risk, including a greater
risk of loss of principal and non-payment of interest, than more senior loans and tend to be more sensitive to
changes in economic conditions than more senior loans. The Mezzanine Loan is not secured by a ﬁrst mortgage
on real estate, but rather by the Borrowers’ pledge of membership interests in certain subsidiaries of the borrowers
that own the underlying real estate. In the event of a default on a senior loan, the Company may elect to make
payments if the Company has the right and the additional funds to do so to prevent foreclosure on a senior
loan. In the event of foreclosure of the senior loan and Mezzanine Loan, the Company will be entitled to share
in foreclosure proceeds only after satisfaction of the amounts due to the senior lenders, which may result in the
Company being unable to recover any amount of the investment, including any additional funds advanced prior
to foreclosure.

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 generally leases its real estate pursuant to long-term, 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 as determined by accounting
principles generally accepted in the United States of America. Such methods are described below:

Shareholder Value

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.

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 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.

Intangible Assets. In connection with real estate acquisitions, value is assigned to tangible and other intangible
assets. These other intangible assets are computed by valuing the property on an as if vacant basis and
subtracting from the total acquisition cost the sum of the (i) as if vacant value, (ii) lease to market value and
(iii) value assigned to tenant improvements and leasing costs. These other intangible assets are amortized over
the estimated useful lives of the assets; the useful lives of these assets are shorter than the depreciable periods
of the buildings. Deferred revenue or deferred assets recorded in connection with the acquired properties are
amortized into rental revenue over the life of the leases. The value assigned to tenant improvements and leasing
costs are depreciated or amortized over the life of the leases.

Reclassiﬁcation. Certain items in prior years’ ﬁnancial statements and notes to consolidated ﬁnancial statements
have been reclassiﬁed to conform with the 2003 presentation. While the reclassiﬁcation caused some items
to vary from that disclosed in prior reports, these reclassiﬁcations had no effect on stockholders’ equity or net
earnings.

Use of Estimates. Additional critical accounting policies of the Company include management’s estimates
and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities to prepare the consolidated ﬁnancial statements in conformity with accounting
principles generally accepted in the United States of America. 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. Actual results could differ from those estimates.

Strategic Real Estate

Property Analysis

General. As of December 31, 2003, the Company owned 339 Properties that are leased to established
tenants, including Academy, Barnes & Noble, Bennigan’s, Best Buy, Borders, Eckerd, Jared Jewelers, OfﬁceMax,
The Sports Authority and the United States of America. Approximately 97 percent of the gross leasable area
of the Company’s portfolio of Properties was leased at December 31, 2003. The following table summarized
the Company’s portfolio of Properties as of December 31:

2003

2002

2001

Properties Owned:

Number
Total gross leasable area (square feet)

339
7,668,000

341

351
6,416,000 6,552,000

Properties Leased:

Number
Total gross leasable area (square feet)
Percent of total gross leasable area
Weighted average remaining lease term(1) (years)

328
7,430,000
97%
11

321

320
6,053,000 5,808,000
89%
13

94%
12

(1) Properties are leased on a long-term basis, generally 10 to 20 years, with renewal

options for an additional ﬁve to 20 years.

The Company regularly evaluates its (i) portfolio of Properties, (ii) ﬁnancial position, (iii) market opportunities
and (iv) strategic objectives and, based on certain factors, may determine to acquire or dispose of a given property
or portfolio of properties.

Property Acquisitions. Property acquisitions are typically funded using funds from the Company’s Credit
Facility, proceeds for debt or equity offerings and to a lesser extent, proceeds generated from like-kind
exchange transactions.

The following table summarizes the property acquisitions during each of the years ended December 31:

2003

2002

2001

Acquisitions:

Number of properties
Gross leasable area (square feet)

23
1,439,000

9
267,000

137
1,032,000

Construction projects:

Properties completed
Gross leasable area (square feet)
Land parcels acquired

Tenant improvements:

Number of properties

1
14,000
–

–
–
1

–

Total dollars invested in real estate

$ 212,317,000 $ 45,541,000 $ 240,137,000

Shareholder Value

In August 2003, the Company acquired two ofﬁce buildings and a related parking garage located in Arlington,
Virginia (the Washington, D.C. metropolitan area) for $142,800,000 as a part of its strategic objective to diversify
the Company’s portfolio into the ofﬁce sector. The Company used the net proceeds from a common stock
offering to fund a portion of the purchase price (see “Debt and Equity Securities”). The remaining portion of the
purchase price was funded through borrowings under the Company’s Credit Facility. In addition, pursuant to the
lease agreement, the Company has agreed to fund an additional $26,544,000 for building, tenant improvements
and other costs related to the lease, of which $11,438,000 had been funded as of December 31, 2003. These
costs will be capitalized to building and improvements upon completion which is anticipated to be substantially
complete by December 31, 2004. The Company anticipates funding the additional costs from borrowings under
the Company’s Credit Facility. The properties include two ofﬁce buildings containing an aggregate of 555,000
rentable square feet (505,000 usable square feet for purposes of calculating rent) and a two-level garage with
1,079 parking spaces.

In 1999, the Company entered into a purchase and sale agreement whereby the Company acquired 10 land
parcels leased to established tenants and agreed to acquire the buildings on each of the respective land parcels at
speciﬁc dates between February 2003 and April 2004. In October 2003, the Company acquired the interest in
each of these buildings for an aggregate purchase price of $23,422,000.

Property Dispositions. The Company evaluates anticipated property dispositions to determine whether to use
anticipated sales proceeds to either (i) pay down the outstanding indebtedness of the Company’s Credit Facility
or (ii) acquire additional properties and structure the transactions to qualify as tax-free like-kind exchange
transactions for federal income tax purposes. The following table summarizes the properties disposed of during
each of the years ended December 31:

2003

2002

2001

Number of properties
Gross leasable area (square feet)
Net sales proceeds
Net gain

14
345,000

37
485,000
$ 25,023,000 $ 29,928,000 $ 45,897,000
4,648,000
$

19
408,000

256,000 $

161,000 $

During 2003, the Company used the proceeds from the 14 properties sold to pay down the outstanding
indebtedness of the Company’s Credit Facility.

During 2002, the Company reinvested the proceeds from three of the properties sold 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.

During 2001, the Company reinvested the proceeds from 21 of the properties sold 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.

Strategic Real Estate

operations. Accordingly, the results of operations for 2003, 2002 and 2001 related to these 33 properties have
been reclassiﬁed to earnings from discontinued operations.

Merger Transactions

In December 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 Series A Preferred Stock (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. No goodwill was recorded in connection with the acquisition. The merger was unanimously approved by
both the Company’s and Captec’s board of directors and Captec’s shareholders. This transaction increased funds
from operations, increased diversiﬁcation, produced cost savings from opportunities for economies of scale and
operating efﬁciencies and enhanced the Company’s capital markets proﬁle.

In January 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 (“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 Series A Preferred Stock as offered in the original merger consideration. Accordingly,
the Company reduced the number of common and Series A Preferred Stock 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. In 2003, the Company further reduced the
number of common and Series A Preferred Stock shares issued and outstanding by 823 and 379, respectively.
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.
In February 2003, the Company entered into a settlement agreement 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 which approximated the value of the original merger consideration (which included cash,
common stock and Series A Preferred Stock shares) at the time of the litigation settlement plus the dividends that
would have been paid if the shares had been issued at the time of the merger. The Company used proceeds from
its Credit Facility to fund the settlement of the legal action. In February 2003, the parties ﬁled a stipulation and
order of dismissal and the Court entered the order of dismissal, dismissing the Appraisal Action with prejudice.

As of December 31, 2001, the Company had completed all payments due in connection with its merger with
CNL Realty Advisors, Inc. (the “Advisor”). 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,

Shareholder Value

the 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.

Revenue Analysis

General. During 2003 the Company’s rental income increased substantially due to new property acquisitions
and an increased occupancy rate, continuing the increase in rental income recorded in 2002 resulting from
properties acquired in the Captec merger. While interest income decreased over both periods due to lower
average outstanding balances and average interest rates, interest income diminished to 4.7 percent of total
revenue, minimizing the impact of the decrease. The Company anticipates any signiﬁcant increase in rental
income will continue to come primarily from additional property acquisitions over the next several years. In
addition to retail properties, the Company anticipates that it will also acquire ofﬁce and industrial properties.

The following summarizes the Company’s revenues for each of the years ended December 31:

2003

2002

2001

Percent
of Total

Rental Income(1)
Interest(2)
Other
Total Revenue

95,790,000
4,866,000
2,002,000
$ 102,658,000

93.3% $

4.7%
2.0%

100.0% $

82,392,000
6,955,000
1,544,000
90,891,000

90.6% $

7.7%
1.7%

100.0% $

65,792,000
8,791,000
1,875,000
76,458,000

Percent
of Total

86.0%
11.5%
2.5%
100.0%

(1) Includes rental income from operating leases, earned income from direct ﬁnancing leases and contingent

rental income from continuing operations (“Rental Income”).

(2) Includes interest from unconsolidated afﬁliates, including Services, and other mortgages and notes

receivable (“Interest Income”).

Revenue Analysis by Source of Income. Breaking down revenues into the Company’s two primary sources
of revenue reveals similar trends. 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 leased properties (“Leased
Properties”), and (ii) interest income from afﬁliates and fee income from development, property management and
asset management services (“Interest and Fee Income”). The Company evaluates its ability to pay dividends to
stockholders by considering the combined effect of income from continuing and discontinued operations (see
“Results of Operations – Earnings from Discontinued Operations”).

Strategic Real Estate

2003

Percent
of Total

Revenues by Primary Source
2002

2001

Percent
of Total

Leased Properties
Interest and fee income
Total revenue from continuing

operations

98,596,000
4,062,000

96.0% $

4.0%

84,277,000
6,614,000

92.7% $
7.3%

67,986,000
8,472,000

88.9%
11.1%

$ 102,658,000 100.0% $

90,891,000 100.0% $

76,458,000

100.0%

Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002. Rental Income
increased 16.3 percent for the year ended December 31, 2003 due to a three percent increase in the Company’s
portfolio occupancy rate (97 percent at December 31, 2003 versus 94 percent at December 31, 2002) and the
addition of an aggregate gross leasable area of 1,453,000 square feet to the Company’s portfolio resulting from
the acquisition of 23 Properties and the completed construction of one Property.

During ﬁscal years 2003 and 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 the one of the Company’s unconsolidated afﬁliates). As of December 31, 2003,
Eckerd Corporation leased 52 Properties (including three properties under leases with one of the Company’s
unconsolidated afﬁliates). Based on the minimum rental payments required by the leases, Eckerd Corporation
may continue to account for more than 10 percent of the Company’s total rental income in 2004. In August
2003, the Company entered into a lease agreement with the United States of America, which the Company
expects to account for more than 10 percent of the Company’s total rental income in future years. Any failure of
these lessees to make the lease payments when they are due could materially affect the Company’s earnings.

Interest Income decreased 30.0 percent for the year ended December 31, 2003. This decrease 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. However, the decrease was
offset by $1,049,000 of interest earned on the $43,433,000 Mezzanine Loan investment made in October 2003.
Excluding this loan, Interest Income would have decreased by 45.1 percent.

Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001. Rental Income
increased 25.2 percent for the year ended December 31, 2002 due to (i) the Properties acquired in the Captec
merger, (ii) a ﬁve percent increase in the occupancy rate in the Company’s portfolio to 94 percent at December 31,
2002 from 89 percent at December 31, 2001 and (iii) a 52.7 percent increase in non-recurring additional
Rental Income related to the termination of leases on certain properties for the year ended December 31, 2002
($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 from Properties acquired in connection with the Captec merger account for 22.9 percent of the
25.2 percent increase in Rental Income. Rental Income includes $16,790,000 and $1,662,000 for the years ended
December 31, 2002 and 2001, respectively, of revenues attributable to these certain Properties (see “Results of

Shareholder Value

Operations – Merger Transactions”). The increase in Rental Income for the year ended December 31, 2002, was
partially offset by a decrease in contingent rental income. The Company earned $407,000 and $892,000 from
contingent rental income for the years ended December 31, 2002 and 2001, respectively, which represented 0.5
and 1.4, respectively, percent of Rental Income.

Interest Income decreased 20.9 percent for the year ended December 31, 2002 from the year ended December 31,
2001, however only decreased 3.8 percent as a percentage of total revenues. This decrease was which 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 rates on the lines of credit.

Expense Analysis

During 2003 operating expenses increased with the acquisition of additional properties, but remained generally
proportionate to the Company’s total revenue. Likewise, general operating and administrative expenses, real
estate expenses and depreciation and amortization expenses all increased with the acquisition of additional
properties. The following summarizes the Company’s expenses for each of the years ended December 31:

2003

2002

2001

Percent
of Total
Revenues

General operating and administrative

11,486,000

11.2% $

9,465,000

10.4% $

6,894,000

Real estate

2,406,000

2.3%

1,446,000

1.6%

736,000

Depreciation and amortization

13,467,000

13.1%

11,142,000

12.3%

8,737,000

Operating expenses(1)

Interest
Loss on impairment of real estate
Other expenses(2)
Total expenses from continuing

operations

27,359,000
27,731,000
–
2,413,000

26.6% $
27.0%
–
2.4%

22,053,000
26,720,000
2,256,000
–

24.3% $
29.4%
2.5%
–

16,367,000
24,952,000
–
12,582,000

57,503,000

56.0% $

51,029,000

56.2% $

53,901,000

70.5%

Percent
of Total
Revenues

9.0%

1.0%

11.4%

21.4%
32.6%
–
16.5%

(1)

Includes operating expenses from continuing operations, excluding interest, the provision for loss on impairment
of real estate and expenses incurred in 2003 in connection with dissenting shareholders’ settlement and expenses
incurred in 2001 in acquiring the Company’s Advisor from a related party and including depreciation and amortization
(“Operating Expenses”).

(2) 2003 includes expenses incurred in connection with dissenting shareholders’ settlement. 2001 includes expenses

incurred in acquiring the Company’s Advisor from a related party.

Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002. Operating Expenses
increased 24.1 percent for the year ended December 31, 2003 over the year ended December 31, 2002, and
increased as a percentage of total revenues by 2.3 percent to 26.6 percent.

General operating and administrative expenses increased 21.4 percent for the year ended December 31, 2003,
and increased as a percentage of total revenues by 0.8 percent to 11.2 percent. General operating and
administrative expenses increased for the year ended December 31, 2003 primarily as a result of (i) increases
in expenses related to personnel, (ii) increases in expenses related to professional services provided to the
Company, and (iii) increases in state taxes.

Strategic Real Estate

Real estate expenses increased 66.4 percent for the year ended December 31, 2003 primarily due to the August
2003 acquisition of two ofﬁce buildings and a related parking garage in the Washington D.C. metropolitan area,
increasing as a percentage of total revenues by 0.7 percent to 2.3 percent. The increase in real estate expenses
was partially offset by an increase in the Company’s occupancy rate to 97 percent at December 31, 2003 from
94 percent at December 31, 2002.

Depreciation and amortization expense increased 20.9 percent for the year ended December 31, 2003, but only
increased as a percentage of total revenues by 0.8 percent to 13.1 percent for the year ended December 31,
2003. The increase in depreciation and amortization expense for the year ended December 31, 2003 is primarily
attributable to (i) the depreciation on acquisition of and tenant improvements on additional Properties in 2003,
(ii) the amortization of loan costs related to the amended Credit Facility and (iii) the amortization of additional
lease costs.

Interest expense increased 3.8 percent to 27.0 percent of total revenues for the year ended December 31, 2003
as a result of reﬁnancing a portion of the Company’s Credit Facility and Term Note to long-term ﬁxed rate debt,
including the $50,000,000 notes payable and the $21,000,000 ﬁxed rate mortgage loan, both entered into in June
2002 and the addition of the $95,000,000 ﬁxed rate mortgage loan entered into in November 2003, as a means to
reduce ﬂoating interest rate risk. However, the increase in interest expense was partially offset by a decrease in
the average interest rates on the Company’s variable interest rate debt.

The Company recorded no loss on impairment of real estate during 2003. The Company recorded a provision
for loss on impairment of real estate of $2,256,000 and $1,029,000 in continuing operations and discontinued
operations, respectively, in the year ended December 31, 2002. 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.

During the year ended December 31, 2003, the Company recorded a dissenting shareholders’ settlement expense
of $2,413,000 related to the Appraisal Action that arose as a result of the merger with Captec in December 2001.
For a description of the settlement, see Item 3 of the accompanying Annual Report on Form 10-K.

Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001. Operating Expenses
increased 34.7 percent for the year ended December 31, 2002 over the year ended December 31, 2001, but only
increased as a percentage of total revenues by 2.9 percent to 24.3 percent.

General operating and administrative expenses increased 37.3 percent over the same period, but only
increased as a percentage of total revenues by 1.4 percent to 10.4 percent. The increase in general operating
and administrative expenses resulted primarily from increased personnel expenses and expenses related to
professional services provided to the Company.

Although, real estate expenses nearly doubled for the year ended December 31, 2002 due to real estate taxes,
utilities and maintenance related to vacant properties owned by the Company during the period, but only
increased as a percentage of total revenues by 0.6 percent to 1.6 percent. As of December 31, 2002 and 2001,
the Company’s continuing operations included 15 and 19 vacant Properties, respectively, with an aggregate gross
leasable area of 275,000 square feet and 502,000 square feet, respectively.

Shareholder Value

Depreciation and amortization expenses increased 27.5 percent for the year ended December 31, 2002 primarily
due to Properties acquired in connection with the Captec merger. Excluding properties acquired during the
Captec merger, depreciation and amortization expenses increased 3.4 percent due to expenses connected with 10
properties acquired during the period and amortization attributable to additional debt costs (including the costs
related to the Term Note and 2012 Notes) incurred during the year ended December 31, 2002. These expenses
were offset by a decrease in depreciation and amortization expense due to the sale of 19 properties sold during
2002 and 35 properties sold during 2001.

Interest expense increased 7.1 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 and (ii) $50,000,000 notes payable
and the $21,000,000 ﬁxed rate mortgage loan, both 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. Although, interest expense increased for
the year ended December 31, 2002, interest expense decreased as a percentage of total revenues by 3.2 percent to
29.4 percent.

The Company recorded a provision for loss on impairment of real estate of $2,256,000 (2.5 percent of total
revenues) and $1,029,000 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 (16.5 percent of total revenues) in expenses incurred in acquiring the
Advisor from a related party for the year ended December 31, 2001. As of December 31, 2001, the Company
had issued the entire balance of shares required in connection with the acquisition of the Advisor (see “Results
of Operations – Merger Transactions”). The Company did not incur any expenses during the year December 31,
2002 related to acquiring the Advisor.

Unconsolidated Afﬁliates

For details on each of the afﬁliates, see “Capital Resources – Investments in Unconsolidated Afﬁliates.” During
the years ended December 31, 2003 and 2002, the Company recognized equity in earnings of unconsolidated
afﬁliates of $6,154,000 and $3,216,000, respectively. The increase in equity in earnings of unconsolidated
afﬁliates was primarily attributable to the income earned on the investments in mortgage loans. In addition,
the increase was partially attributable to the increase in earnings from Services and its wholly-owned subsidiaries,
which was attributable to the gain recognized on real estate dispositions by Services and its subsidiaries.

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

Strategic Real Estate

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.

Earnings from Discontinued Operations

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the
Company has classiﬁed its 14 and 19 properties sold during 2003 and 2002, respectively, as discontinued
operations. Accordingly, the results of operations for 2003, 2002 and 2001 related to these 33 properties have
been reclassiﬁed to earnings from discontinued operations. During the years ended December 31, 2003, 2002
and 2001, the Company recognized earnings from discontinued operations of $2,164,000, $4,980,000 and
$3,233,000, respectively. The Company occasionally sells properties and may reinvest the proceeds of the sales
to purchase new properties. The Company evaluates its ability to pay dividends to stockholders by considering
the combined effect of income from continuing and discontinued operations. See “Results of Operations
– Property Dispositions.”

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, 2003 and 2002. The Company does not use
derivatives for speculative or trading purposes.

The information in the table on the subsequent page summarizes the Company’s market risks associated with
its debt obligations outstanding as of December 31, 2003 and 2002. The table presents principal cash ﬂows and
related interest rates by year of expected maturity for debt obligations outstanding as of December 31, 2003.
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, 2003 and 2002, 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.

Shareholder Value

2004

2005

Expected Maturity Date
(dollars in thousands)
2007
2006

2008

Variable rate Credit Facility
Average interest rate

Variable rate Term Note
Average interest rate

Fixed rate mortgages
Average interest rate

–
–

20,000
(2)

3,158
6.17%

Fixed rate notes
Average interest rate

$ 100,000
7.58%

–
–

3,415
6.12%

–
7.47%

27,800
(1)

–
–

22,931
5.89%

–
7.47%

–
–

1,281
5.82%

Thereafter
–
$
–

–
–

956
5.81%

$ 115,839
7.40%

–
7.47%

$ 100,000
7.85%

70,000
7.86%

(1)

Interest rate varies based upon a tiered rate structure ranging from 70 basis points above LIBOR to 135 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, 2003
(dollars in thousands)
Weighted
Average
Interest
Rate

Fair
Value

2.41% $

27,800

Total
27,800

20,000

3.01% $

20,000

Variable rate Credit Facility

Variable rate Term Note

Fixed rate mortgages

$ 147,580

6.98% $ 147,580

December 31, 2002
(dollars in thousands)
Weighted
Average
Interest
Rate
3.10% $

Total
38,900

Fair
Value

38,900

20,000

3.64% $

20,000

55,481

7.52% $

55,481

Fixed rate notes (1)

$ 270,000

7.71% $ 295,488

$ 270,000

7.71% $ 287,898

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

Strategic Real Estate

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, 2003 and 2002, 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, 2003.
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, 2003 and 2002, and
results of their operations and their cash ﬂows for each of the years in the three-year period ended December 31,
2003, in conformity with accounting principles generally accepted in the United States of America.

Orlando, Florida
January 16, 2004, except as to the eighth paragraph of Note 4, which is as of February 2, 2004

Shareholder Value

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, net of allowance
Cash and cash equivalents
Receivables, net of allowance of $1,564 and $799, respectively
Accrued rental income, net of allowance of $1,320 and $998, respectively
Debt costs, net of accumulated amortization of $6,680 and $5,353, respectively
Other assets

Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Line of credit payable
Mortgages payable
Notes payable, net of unamortized discount of $530 and $677, respectively, and

unamortized interest rate hedge gain of $288 and $885, respectively

Accrued interest payable
Other liabilities

Total liabilities

Commitments and contingencies (Note 22)

Stockholders’ equity:

Preferred stock, $0.01 par value. Authorized 15,000,000 shares

Series A Preferred Stock, 1,781,645 and 1,782,024 shares issued and
outstanding, respectively; stated liquidation value of $25 per share

Series B Convertible Preferred Stock, 10,000 shares issued and outstanding;

stated liquidation value of $2,500 per share

Common stock, $0.01 par value. Authorized 90,000,000 shares; 50,001,898

and 40,403,611 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,

2003

2002

887,124
102,970
114,803
56,568
4,364
4,458
25,322
3,733
8,968
$ 1,208,310

27,800
147,580

289,758
3,806
8,612
477,556

703,465
108,308
102,633
11,253
1,737
1,227
19,172
3,181
3,132
954,108

38,900
55,481

290,208
3,560
16,818
404,967

44,541

44,551

25,000

500

–
691,704
(28,167)
(2,824)
730,754
$ 1,208,310

–

404

–
528,888
(21,657)
(3,045)
549,141
954,108

Strategic Real Estate

See accompanying notes to consolidated ﬁnancial statements.

COMMERCIAL NET LEASE REALTY, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in thousands, except per share data)

Year Ended December 31,
2002

2001

2003

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
Dissenting shareholders’ settlement

84,446
10,939
405
4,866
2,002
102,658

11,486
2,406
27,731
13,467
–
–
2,413
57,503

70,839
11,146
407
6,955
1,544
90,891

9,465
1,446
26,720
11,142
2,256
–
–
51,029

53,685
11,215
892
8,791
1,875
76,458

6,894
736
24,952
8,737
–
12,582
–
53,901

Earnings from continuing operations before equity in earnings of
unconsolidated afﬁliates and gain on disposition of real estate

45,155

39,862

22,557

Equity in earnings of unconsolidated afﬁliates

6,154

3,216

(1,475)

Gain on disposition of real estate

Earnings from continuing operations

Earnings from discontinued operations

Net earnings
Series A Preferred Stock dividends
Series B Preferred Stock dividends
Net earnings available to common stockholders – basic
Series B Preferred Stock dividends
Net earnings available to common stockholders – diluted

Earnings per share of common stock:

Basic:

Continuing operations
Discontinued operations
Net earnings

Diluted:

Continuing operations
Discontinued operations
Net earnings

Weighted average number of common shares outstanding:

Basic
Diluted

–

4,648

51,309

43,078

25,730

2,164

4,980

3,233

53,473
(4,008)
(502)
48,963
502
49,465

1.09
0.05
1.14

1.08
0.05
1.13

48,058
(4,010)
–
44,048
–
44,048

0.97
0.12
1.09

28,963
–
–
28,963
–
28,963

0.82
0.10
0.92

0.81
0.10
0.91

43,108,213 40,383,405 31,539,857
43,896,800 40,588,957 31,717,043

See accompanying notes to consolidated ﬁnancial statements.

Shareholder Value

COMMERCIAL NET LEASE REALTY, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2003, 2002 and 2001

(dollars in thousands, except per share data)

Series A
Preferred
Stock

Series B
Preferred
Stock

Common
Stock

Capital in
Excess of
Par Value

Accumulated
Dividends
in Excess of
Net Earnings

Deferred
Compensation
on Restricted
Stock

Total

Balances at December 31, 2000

– $

305 $ 398,449 $

(4,853) $

– $ 393,901

Net earnings
Dividends declared and paid

($1.26 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

–

50,000

–

–
–

–

Balances at December 31, 2001

50,000

Net earnings
Dividends declared and paid

($2.25 per share of Series A
Preferred Stock)

Dividends $1.27 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

–

(5,449)

–

–
–

–
44,551

–

–
–

–

–
–

–

2
–

–

28,963

(38,637)

59,724

12,572

61,016

3,188
(3,272)

–

–
–

–

(3,190)
–

28,963

(38,637)

109,767

12,582

61,062

–
(3,272)

274

406

531,677

(14,527)

(2,916)

564,640

–

48,058

(4,010)

(51,178)

(5)

(6,509)

1
–

2,752

982
(14)

–

–
–

–

48,058

(4,010)

(51,178)

(11,963)

2,754

(983)
–

–
(14)

–
404

–
528,888

(21,657)

854
(3,045)

854
549,141

Strategic Real Estate

See accompanying notes to consolidated ﬁnancial statements.

COMMERCIAL NET LEASE REALTY, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - CONTINUED

Years Ended December 31, 2003, 2002 and 2001

(dollars in thousands, except per share data)

Series A
Preferred
Stock

Series B
Preferred
Stock

Common
Stock

Capital in
Excess of
Par Value

Accumulated
Dividends
in Excess of
Net Earnings

Deferred
Compensation
on Restricted
Stock

Total

Balances at December 31, 2002

44,551

404

528,888

(21,657)

(3,045)

549,141

–

25,000

–

–
–

–

(10)

–

–
–

Net earnings
Dividends declared and paid

($2.25 per share of Series A
Preferred Stock)

Dividends declared and paid

($50.25 per share of Series B
Preferred Stock)

Dividends declared and paid

($1.28 per share of common
stock)

Reversal of 379 shares of

preferred stock and 823
shares of common stock
originally offered to the
dissenting stockholders in
connection with the merger
in 2001

Issuance of 9,528,653 shares of

common stock

Issuance of 10,000 shares

of preferred stock

Issuance of 76,407 shares of
restricted common stock
Cancellation of 5,950 shares of
restricted common stock

Stock issuance costs
Amortization of deferred

compensation

Balances at December 31, 2003

–

–
–

–

53,473

(4,008)

(502)

(55,473)

(11)

168,512

–

1,140

(91)
(6,734)

–

–
–

–

53,473

(4,008)

(502)

(55,473)

(21)

168,607

25,000

(1,141)

–

91
–

–
(6,734)

1,271
1,271
(2,824) $ 730,754

–
44,541 $

–
25,000 $

–

–
500 $ 691,704 $ (28,167) $

–

See accompanying notes to consolidated ﬁnancial statements.

Shareholder Value

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
Changes in assets and liabilities net of the effects of the acquisition
of Captec Net Lease Realty, Inc. (“Captec”) in December 2001:
Decrease in real estate leased to others using the direct

ﬁnancing method

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 disposition 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 acquisition, net of cash received
Consideration paid to the dissenting shareholders in connection with the

merger of Captec
Payment of lease costs
Other

Net cash provided by (used in) investing activities

Year Ended December 31,
2002

2001

2003

53,473

48,058

28,963

1,155
13,569
–
147
(597)
–

(6,468)
(287)

2,368
(875)
(3,231)
(6,548)
(1,118)
246
2,485
54,319

25,024
(215,730)
–
(8,750)
4,699
(46,878)
1,780
(193,670)

192,236
–

(13,278)
(3,127)
(5)
$ (257,699)

854
11,742
3,285
128
(555)
–

(3,914)
(260)

2,165
(685)
840
(3,172)
(379)
427
171
58,705

29,329
(40,159)
(3,201)
(14,500)
2,810
–
7,637
(120,569)

178,548
–

–
(1,075)
1,163
39,983

274
9,211
–
107
(515)
12,582

1,657
(4,648)

1,979
(645)
(283)
(2,209)
(2,803)
(1,696)
(4,247)
37,727

45,288
(19,836)
–
(11,750)
281
–
1,689
(114,888)

82,506
(7,696)

–
(32)
297
(24,141)

Strategic Real Estate

See accompanying notes to consolidated ﬁnancial statements.

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 Series B Preferred Stock
Proceeds from issuance of common stock
Payment of stock issuance costs
Payment of Series A Preferred Stock dividends
Payment of Series B Preferred Stock dividends
Payment of common stock dividends
Other

Net cash provided by (used in) ﬁnancing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Supplemental disclosure of cash ﬂow information – interest paid, net of

amount capitalized

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 (see
Note 17)

Issued 973,920 shares of common stock in 2001 in connection with the

acquisition of the Company’s advisor

Issued 76,407, 64,000 and 239,000 shares of restricted common stock in
2003, 2002 and 2001, respectively, in connection with the Company’s
2000 Performance Incentive Plan

Common and preferred 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 17)

Note and mortgage notes accepted in connection with real estate

transactions

Real estate and other assets contributed to unconsolidated afﬁliate in

exchange for additional equity

Year Ended December 31,
2002

2001

2003

352,800
(363,900)
95,000
(2,901)
–
–
(1,901)
25,000
168,579
(6,686)
(4,010)
(502)
(55,472)
–
206,007

111,500
(180,000)
21,000
(2,530)
49,713
(50,000)
(1,145)
–
2,725
(4)
(4,007)
–
(51,177)
–
$ (103,925)

2,627

(5,237)

1,737

4,364

28,036

–

1,141

(1)

(2)

–

3,445

–

6,974

1,737

26,119

–

982

13,278

599

–

157,200
(151,500)
–
(2,146)
70,000
(101,213)
(186)
–
61,062
(3,272)
–
–
(38,637)
(110)
(8,802)

4,784

2,190

6,974

27,509

109,767

12,582

3,190

–

610

20,042

See accompanying notes to consolidated ﬁnancial statements.

Shareholder Value

COMMERCIAL NET LEASE REALTY, INC. & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2003, 2002 and 2001

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,
invests in, manages and indirectly, through investment interests, develops primarily single-tenant retail, ofﬁce
and industrial properties that are generally leased to established tenants under long-term commercial net leases.
As of December 31, 2003, the Company owned 339 properties, located in 39 states, that are leased to established
tenants, including Academy, Barnes & Noble, Bennigan’s, Best Buy, Borders, Eckerd, Jared Jewelers, OfﬁceMax,
The Sports Authority and the United States of America.

Principles of Consolidation – The consolidated ﬁnancial statements include the accounts of Commercial Net
Lease Realty, Inc. and its 21 wholly-owned subsidiaries (collectively, 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 tenants 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.

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 disposition are reﬂected in income. Gains from disposition of real estate are generally
recognized using the full accrual method in accordance with the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 66 “Accounting for Real Estate Sales,” provided that various criteria relating to the terms
of the sale and any subsequent involvement by the Company with the real estate sold are met. Lease termination
fees are recognized when the related leases are cancelled and the Company no longer has a continuing obligation
to provide services to the former tenants.

Strategic Real Estate

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.

Purchase Accounting for Acquisition of Real Estate – For purchases of real estate that were consummated
subsequent to June 30, 2001, the effective date of SFAS No. 141, Business Combinations, the fair value of the real
estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements,
and identiﬁed intangible assets and liabilities, consisting of the value of above-market and below-market leases,
other value of in-place leases and value of tenant relationships, based in each case on their relative fair values.

The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were
vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on the
determination of the relative fair values of these assets. Management uses the as-if-vacant fair value of a property
provided by independent appraisers.

In allocating the fair value of the identiﬁed intangible assets and liabilities of an acquired property, above-market
and below-market in-place lease values are recorded based on the present value (using an interest rate which
reﬂects the risks associated with the leases acquired) of the difference between (i) the contractual amounts
to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the
corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease.
The capitalized above-market lease values (included in other assets in the accompanying combined balance sheet)
are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases.
The capitalized below-market lease values (presented as other assets in the accompanying combined balance
sheet) are amortized as an increase to rental income over the initial term and any ﬁxed rate renewal periods in
the respective leases. The Company’s leases do not currently include ﬁxed-rate renewal periods.

The aggregate value of other acquired intangible assets, consisting of in-place leases, is measured by the excess
of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over
(ii) the estimated fair value of the property as if vacant, determined as set forth above. The value of in-place
leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the
remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated
expiration, all unamortized amounts relating to that lease would be written off.

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). The Company exercises
signiﬁcant inﬂuence over these unconsolidated afﬁliates, but not control.

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.

Shareholder 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 $225,000,000 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 – At December 31, 2003, the company has one stock-based employee
compensation plan, which is described more fully in Note 16. Prior to 2003, the company accounted for those
plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations. No stock-based employee compensation cost is reﬂected in 2002 or
2001 net earnings, as all options granted under that plan had an exercise price equal to the market value of the
underlying common stock on the date of grant. Effective January 1, 2003, the company adopted the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, prospectively to all employee
awards granted, modiﬁed, or settled after January 1, 2003. Awards under the company’s plans vest over periods
ranging from two to ﬁve years. Therefore, the cost related to stock-based employee compensation included in the
determination of net income for 2003 is less than that which would have been recognized if the fair value based
method had been applied to all awards since the original effective date of SFAS No. 123.

Strategic Real Estate

The following table illustrates the effect on net earnings available to common stockholders and earnings per share
if the fair value based method had been applied to all outstanding and unvested awards in each period (dollars in
thousands, except per share data):

2003

2002

2001

Net earnings available to common stockholders – basic,

as reported:

$ 48,963

$ 44,048

28,963

Add: stock-based employee compensation
expense included in reported net earnings
Deduct: total stock-based employee compensation
expense determined under the fair value
based method for all awards
Pro forma net earnings available to common

stockholders – basic

–

(74)

(27)

(64)

$ 48,892

44,021

$ 28,899

Net earnings available to common stockholders – diluted,

as reported:

49,465

$ 44,048

28,963

Add: stock-based compensation expense included in

reported net earnings

Deduct: total stock-based employee compensation

expense determined under the fair value based method
for all awards

Pro forma net earnings available to common

stockholders – diluted

Earnings available to common stockholders per common

share as reported:

Basic
Diluted

Pro forma earnings available to common stockholders per

common share:

Basic
Diluted

–

(74)

(27)

(64)

$ 49,394

44,021

$ 28,899

$
$

1.14
1.13

1.13
1.13

$
$

1.09
1.09

1.09
1.08

$
$

0.92
0.91

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 2003, 2002 and 2001: (i) risk free rates of 5.5% for the 2003
grant, 5.4% and 5.5% for the 2002 grants and 5.1% for the 2001 grant, (ii) expected volatility of 18.0%, 18.0%
and 26.4%, respectively, (iii) dividend yields of 9.3%, 9.3% and 11.9%, respectively, and (iv) expected lives of
ten years for grants in 2003, 2002 and 2001.

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 90 percent of its real estate investment trust taxable income 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, 2003, the Company believes it has qualiﬁed as a real estate investment trust; accordingly, no

Shareholder Value

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 15).

New Accounting Standards – In August 2001, Financial Accounting Standards Board (“FASB”) issued
SFAS 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 adoption of this statement did not 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. The provisions of this
interpretation did not have a signiﬁcant impact on the ﬁnancial position or results of operations of the Company.

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

Strategic Real Estate

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. A public entity that is not a small business issuer
shall apply FASB Interpretation No. 46, as amended, to all entities subject to FASB Interpretation No. 46, as
amended, no later than the end of the ﬁrst reporting period that ends after March 15, 2004. However, prior to
the required application of FASB Interpretation No. 46, as amended, a public entity that is not a small business
issuer shall apply FASB Interpretation No. 46 or FASB Interpretation No. 46, as amended, to those entities that
are considered to be “special-purpose entities” no later than as of the end of the ﬁrst reporting period that ends
after December 15, 2003. If initial application of the requirements of FASB Interpretation No. 46, as amended,
results in initial consolidation of an entity created before December 31, 2003, the consolidating enterprise shall
initially measure the assets, liabilities, and noncontrolling interests of the variable interest entity at their carrying
amounts at the date the requirements of FASB Interpretation No. 46, as amended, ﬁrst apply. If determining the
carrying amounts is not practicable, the assets, liabilities, and noncontrolling interests of the variable interest
entity shall be measured at fair value at the date FASB Interpretation No. 46, as amended, ﬁrst applies. Any
differences between the net amount added to the balance sheet of the consolidating enterprise and the amount of
any previously recognized interest in the newly consolidated entity shall be recognized as the cumulative effect
of an accounting change. FASB Interpretation No. 46, as amended, may be applied 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. Restatement is encouraged but not required. No entities in which the Company held a variable interest
were considered to be “special-purpose entities”, as deﬁned in FASB Interpretation No. 46, as amended. At this
time, the Company believes that Commercial Net Lease Realty Services, Inc. (“Services”) will be considered
a variable interest entity subject to consolidation according to the provisions of this interpretation. Absent
additional investment by the Company, as of December 31, 2003, the maximum exposure to loss as a result of the
Company’s involvement with Services would be approximately $75,280,000, including the investment, revolving
lines of credit and other receivables. As of December 31, 2003, the carrying values of Services’ assets and
liabilities were $80,945,000 and $60,496,000, respectively. The adoption of this interpretation is not expected
to have a signiﬁcant impact on the ﬁnancial position or results of operations of the Company.

In April 2003, FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and
Hedging Activities.” This statement amends and clariﬁes accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” This statement is effective for contracts entered
into or modiﬁed after June 30, 2003 and for hedging relationships designated after June 30, 2003. The guidance
should be applied prospectively. The adoption of this statement did not have a signiﬁcant impact on the ﬁnancial
position or results of operations of the Company.

In May 2003, FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity.” This statement establishes standards for how a company classiﬁes and measures
certain ﬁnancial instruments with characteristics of both liabilities and equity. This statement requires that a
company classify a ﬁnancial instrument that is within its scope as a liability (or an asset in some circumstances)
in statements of ﬁnancial position. Many of those instruments were previously classiﬁed as equity. This
statement is effective for ﬁnancial instruments entered into or modiﬁed after May 31, 2003; otherwise effective
at the beginning of the ﬁrst interim period beginning after June 15, 2003. Adoption of this statement did not
have a signiﬁcant impact on the ﬁnancial position or results of operations of the Company.

Shareholder Value

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.

Reclassiﬁcation – Certain items in prior years’ ﬁnancial statements and notes to consolidated ﬁnancial
statements have been reclassiﬁed to conform with the 2003 presentation. These reclassiﬁcations had no effect
on stockholders’ equity or net earnings.

2. Leases:

The Company generally leases its real estate to established tenants. As of December 31, 2003, 271 of the leases
have been classiﬁed as operating leases and 67 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 2004 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. Generally, the tenant is also 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, and ﬁre coverage. Certain of the Company’s properties, including the two ofﬁce buildings
acquired during 2003, are subject to leases under which the Company retains responsibility for certain costs
and expenses with the property. As of December 31, 2003, the weighted average remaining lease term was
approximately 11 years. Any 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 and improvements
Buildings and improvements
Leasehold interests

Less accumulated depreciation and amortization

Construction in progress

Less provision for loss on impairment of real estate

2003

2002

384,134
544,246
3,381
931,761
(48,863)
882,898
6,482
889,380
(2,256)
887,124

349,267
392,172
3,381
744,820
(38,671)
706,149
298
706,447
(2,982)
703,465

Strategic Real Estate

and other costs related to the lease, of which $11,438,000 had been funded as of December 31, 2003. These
costs will be capitalized to building and improvements upon completion which is anticipated to be substantially
complete by December 31, 2004. The properties include two ofﬁce buildings containing an aggregate of 555,000
rentable square feet (505,000 usable square feet for purposes of calculating rent) and a two-level garage with
1,079 parking spaces.

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, 2003, 2002 and 2001,
the Company recognized collectively in continuing and discontinued operations, $6,756,000, $3,223,000 and
$2,259,000, respectively, of such income. At December 31, 2003 and 2002, the balance of accrued rental income
was $25,322,000 and $19,172,000, net of allowances of $1,320,000 and $998,000, respectively.

The following is a schedule of future minimum lease payments to be received on noncancellable operating leases
at December 31, 2003 (dollars in thousands):

2004
2005
2006
2007
2008
Thereafter

89,311
93,340
93,548
92,538
90,856
607,261
$ 1,066,854

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):

Minimum lease payments to be received
Estimated unguaranteed residual values
Less unearned income
Net investment in direct ﬁnancing leases

2003

2002

175,236
32,354
(104,620)
102,970

191,994
33,829
(117,515)
108,308

Shareholder Value

The following is a schedule of future minimum lease payments to be received on direct ﬁnancing leases at
December 31, 2003 (dollars in thousands):

2004
2005
2006
2007
2008
Thereafter

13,346
13,424
13,445
13,491
13,495
108,035
175,236

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).

4. Investments in Unconsolidated Afﬁliates:

In May 1999, the Company transferred its build-to-suit development operation to 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.

In May 2003, the Company modiﬁed its existing Amended and Restated Secured Revolving Line of Credit
and Security Agreement (the “Security Agreement”) with Services to decrease the borrowing capacity from
$85,000,000 to $35,000,000. The credit facility is secured by a ﬁrst mortgage on Services’ properties, bears
interest at prime rate plus 0.25% per annum and expires on May 9, 2006. The outstanding principal balance
of the mortgage at December 31, 2003 and 2002 was $12,588,000 and $14,846,000, respectively, and bore
interest at a rate of 4.25% and 4.50%, respectively, per annum. 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 May 2003, 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 $15,000,000 to
$45,000,000. 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 $115,000,000, each bears interest at prime rate
plus 0.25% per annum and expires on May 9, 2006, and is secured by a pledge of the real estate and/or the
other assets owned by the respective borrower. The aggregate outstanding principal balance of the Subsidiary
Agreements at December 31, 2003 and 2002 were $42,646,000 and $38,722,000, respectively, and bore interest
at a rate of 4.25% and 4.50%, respectively, per annum. The Security Agreement and the Subsidiary Agreements
provide for an aggregate borrowing capacity of $150,000,000 to Services and its wholly-owned subsidiaries.

Strategic Real Estate

In connection with the mortgages and other receivables from Services and its wholly-owned subsidiaries,
the Company received $2,958,000, $4,621,000 and $6,999,000 in interest and fees during the years ended
December 31, 2003, 2002 and 2001, respectively. In addition, Services paid the Company $1,583,000,
$1,007,000 and $998,000 for accounting, executive, technology and ofﬁce space costs incurred on behalf
of Services by the Company during the years ended December 31, 2003, 2002 and 2001, respectively.

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

Minority interest

Stockholders’ equity

Total liabilities and stockholders’ equity

December 31,

2003

2002

45,843
257
971
24,605
9,269
80,945

55,305
2,281
2,910
60,496

44,940
847
289
23,986
7,258
77,320

53,872
2,323
2,530
58,725

321

–

20,128
80,945

18,595
77,320

Year Ended December 31,
2002

2001

2003

Revenues
Net earnings (loss)

$ 6,033
$ 1,535

$ 7,949
621
$

$ 9,037
$ (2,145)

For the years ended December 31, 2003, 2002 and 2001, the Company recognized earnings (loss) of $1,515,000,
$613,000, and $(2,212,000), 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

Shareholder Value

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.

Under the terms of the limited partnership agreement, CTA had the option to convert its 80 percent limited
Partnership interest into shares of the Company’s common stock. In October 2003, CTA elected to exercise
its option and, based on the terms and calculation deﬁned in the limited partnership agreement, the Company
issued 953,551 shares of common stock to CTA in a private transaction in February 2004.

The Company received $116,000 and $66,000 in distributions from Partnership for the years ended December 31,
2003 and 2002, respectively. For the years ended December 31, 2003, 2002 and 2001, the Company recognized
income of $280,000, $270,000 and $278,000, respectively, from the Partnership. The Company manages the
Partnership and pursuant to a management agreement, the Partnership paid the Company $193,000, $193,000
and $200,000 in asset management fees during the years ended December 31, 2003, 2002 and 2001, respectively.

The Company has entered into ﬁve limited liability company (“LLC”) agreements with CNL Commercial Finance,
Inc. (“CCF”), 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; CNL Commercial Mortgage Holdings IV, LLC (“CCMH IV”) in
December 2002; and CNL Commercial Mortgage Holdings V, LLC (“CCMH V”) in July 2003. Each of the LLCs
holds an interest in mortgage loans and is 100 percent equity ﬁnanced. The Company holds a non-voting and
non-controlling interest in CCMH I, CCMH II, CCMH III, CCMH IV and CCMH V (collectively, “CCMH LLCs”)
of 42.7, 44.0, 36.7, 38.3, and 38.4 percent, respectively, in these investments and accounts for its interests under
the equity method of accounting. During the years ended December 31, 2003 and 2002, the Company received
$4,211,000 and $2,333,000, respectively, in distributions. In 2003, in connection with a loan to CCF from an
afﬁliate of James M. Seneff, Jr., an ofﬁcer and director of the Company, the Company pledged a portion of its
interest in two of the LLCs as partial collateral for the loan.

Strategic Real Estate

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,

2003

2002

70,472
–
1
70,473

–
70,473
70,473

51,950
3,814
1
55,765

–
55,765
55,765

Year Ended December 31,
2002

2003

2001

Revenues
Net earnings

$ 9,110
$ 9,110

$ 5,035
$ 5,035

$ 1,097
$ 1,097

For the years ended December 31, 2003, 2002 and 2001, the Company recognized earnings of $4,583,000,
$2,445,000 and $459,000, 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”). The remaining partnership interests in Plaza are owned
by 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. Plaza owns a 346,000 square foot ofﬁce building and an interest in an adjacent
parking garage. The Company has severally guaranteed 41.67 percent of a $15,500,000 unsecured promissory
note on behalf of Plaza. The maximum obligation to the Company is $6,458,000, plus interest. Interest
accrues at a rate of LIBOR plus 200 basis points per annum on the unpaid principal amount. This guarantee
shall continue through the loan maturity in November 2004. The fair value of the Company’s guarantee is
$73,000. During the years ended December 31, 2003 and 2002 the Company received $372,000 and $411,000,
respectively, in distributions. For the years ended December 31, 2003 and 2002, the Company recognized a loss
of $224,000 and $112,000, respectively.

Since November 1999, the Company 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 other afﬁliates lease an aggregate of 64 percent of the 346,000 square foot ofﬁce building.
During the years ended December 31, 2003, 2002 and 2001, the Company incurred rental expenses in
connection with the lease of $1,083,000, $1,168,000 and $1,173,000, respectively. In May 2000, the
Company subleased a portion of its ofﬁce space to afﬁliates of James M. Seneff, Jr. During the years ended
December 31, 2003, 2002 and 2001, the Company earned $338,000, $270,000 and $442,000, respectively,
in rental and accrued rental income from these afﬁliates.

Shareholder Value

The following is a schedule of the Company’s future minimum lease payments and the future minimum
sublease income from the afﬁliates related to the ofﬁce space leased from Plaza at December 31, 2003
(dollars in thousands):

Lease
Payments

Sublease
Income

Net

1,131
1,165
1,200
1,236
1,273
8,221
$ 14,226

496
522
538
554
571
3,687
6,368

635
643
662
682
702
4,534
7,858

2004
2005
2006
2007
2008
Thereafter

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. The Company has the option to renew its lease with
Plaza for three successive ﬁve-year periods subject to similar terms and conditions as the initial lease.

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

2003

2002

20,046
12,588
42,646
35,193

18,469
14,846
38,722
26,071

4,313
17
$ 114,803

4,508
17
$ 102,633

The following presents a reconciliation of equity in earnings of unconsolidated afﬁliates for the years ended
December 31 (dollars in thousands):

Services, consolidated
CCMH LLCs
Other

2003

2002

2001

1,515
4,583
56
6,154

613
2,445
158
3,216

$ (2,212)
459
278
$ (1,475)

Strategic Real Estate

5. Note Receivable:

In October 2003, the Company entered into a Mezzanine Loan Agreement (“Mezzanine Loan”) with
BFSC Holdings, LLC, BFSC Holdings II, LLC, BFSC Holdings III, LLC, BFWV Holdings, LLC (collectively, the
“Borrowers”) for $45,200,000. The Mezzanine Loan provided for an initial advance to the Borrowers at the time
of closing of $43,433,000 and a second and ﬁnal advance of $1,767,000 when certain conditions set forth in the
Mezzanine Loan have been satisﬁed by the Borrowers. The Mezzanine Loan bears interest at a rate of 13.5% per
annum, of which 11% is payable monthly and the remaining 2.5% accrues and is due at maturity. The principal
balance is due in full at maturity in November 2007. The Mezzanine Loan is secured by the Borrowers’ pledge of
its membership interests in the certain subsidiaries which own real estate.

6. Line of Credit Payable:

In May 2003, the Company entered into an amended and restated loan agreement for a $225,000,000 revolving
credit facility (the “Credit Facility”) which amended the Company’s existing loan agreement by (i) increasing the
borrowing capacity to $225,000,000 from $200,000,000, (ii) lowering the interest rates of the tiered rate structure
to a maximum rate of 135 basis points above LIBOR (based upon the debt rating of the Company, the current
interest rate is 100 basis points above LIBOR), (iii) requiring the Company to pay a commitment fee based on a
tiered rate structure to a maximum of 30 basis points per annum (based upon the debt rating of the Company),
(iv) providing for a competitive bid option for up to 50 percent of the facility amount, (v) extending the expiration
date to May 9, 2006 and (vi) amending certain of the ﬁnancial covenants of the Company. The principal balance
is due in full upon expiration of the Credit Facility on May 9, 2006, which the Company may request to be
extended for an additional 12-month period with the consent of the lender. 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, 2003.

For the years ended December 31, 2003, 2002 and 2001, interest cost incurred was $2,103,000, $2,562,000 and
$5,762,000, respectively, of which $177,000, $1,000 and $1,000, respectively, was capitalized by the Company
as a cost of buildings constructed for its own use, and $2,001,000, $3,162,000 and $5,310,000, respectively, was
charged to operations.

7. Mortgages Payable:

In January 1996, the Company entered into a long-term, ﬁxed rate loan for $39,450,000. The loan bears interest
at a rate of 7.435% per annum and provides for a ten-year term with monthly principal and interest payments
of $330,000 and the balance due in February 2006. The loan is secured by a ﬁrst mortgage lien on certain of
the Company’s properties. As of December 31, 2003, the aggregate carrying value of these properties totaled
$61,857,000. The outstanding principal balance as of December 31, 2003 and 2002 was $26,118,000 and
$28,059,000, respectively.

The Company has acquired four properties subject to mortgages securing loans in the aggregate original principal
balance of $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% per annum and have a weighted average
maturity of 3.3 years, with an aggregate monthly payment of principal and interest of $83,000. In addition
to the Mortgages, the company has letters of credit that also secure three of the loans, which collectively total
$4,794,000. As of December 31, 2003, the aggregate carrying value of these properties and letters of credit

Shareholder Value

totaled $16,556,000. As of December 31, 2003 and 2002, the outstanding principal balances secured by the
Mortgages totaled $4,244,000 and $4,846,000, respectively.

In connection with the acquisition of Captec Net Lease Realty, Inc. (“Captec”) in December 2001, the Company
acquired three properties, subject to mortgages securing loans in the aggregate principal balance of $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% per annum and have a weighted maturity of 7.5 years,
with an aggregate monthly payment of principal and interest of $25,000. As of December 31, 2003, the aggregate
carrying value of these three properties totaled $4,111,000. As of December 31, 2003 and 2002, the outstanding
principal balances of the loans secured by the Captec Mortgages totaled $1,497,000 and $1,653,000, respectively.

In June 2002, the Company entered into a long-term, ﬁxed rate loan for $21,000,000. The loan bears interest
at a rate of 6.9% per annum and provides for a 10-year term with monthly principal and interest payments of
$138,000 and the balance due in July 2012. The loan is secured by a ﬁrst mortgage lien on ﬁve of the Company’s
properties. As of December 31, 2003, the aggregate carrying value of these properties totaled $27,543,000. As of
December 31, 2003 and 2002, the outstanding principal balance was $20,721,000 and $20,923,000, respectively.

In November 2003, the Company entered into a long-term, ﬁxed rate interest-only loan for $95,000,000.
The loan bears interest at a rate of 5.42% per annum with monthly interest payments of $435,000 and the
principal balance due in November 2013. The loan is secured by a ﬁrst mortgage lien on the two ofﬁce
buildings and related parking garage in the Washington, D.C. metropolitan area acquired in August 2003. As of
December 31, 2003, the outstanding principal balance was $95,000,000 and the aggregate carrying value of these
properties totaled $153,399,000.

The following is a schedule of the annual maturities of the Company’s mortgages payable (dollars in thousands):

2004
2005
2006
2007
2008
Thereafter

3,158
3,415
22,931
1,281
956
115,839
$ 147,580

8. 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 March 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 to 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

Strategic Real Estate

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, 2003.

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 June 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 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 to 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, 2003.

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 September 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 to 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, 2003.

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 June 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 to 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, 2003.

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.

Shareholder Value

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 17). As of December 31, 2003 and 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 2.90% at December 31, 2003. 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.

9. Preferred Stock:

In December 2001, the Company issued 1,999,974 shares of 9% Non-Voting Series A Preferred Stock (the
“Series A Preferred Stock”) in connection with the acquisition of Captec (see Note 17). Holders of the Series A
Preferred Stock 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 Series A Preferred Stock ranks 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 Series A Preferred Stock 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 2003 and 2002, as a result of a legal action in connection with the merger of Captec (see Note 17), the
Company reduced the number of Series A Preferred Stock shares issued and outstanding by 379 and 217,950,
respectively.

In August 2003, the Company ﬁled a prospectus supplement to its $600,000,000 shelf registration statement and
issued 10,000 shares of 6.70% Non-Voting Series B Cumulative Convertible Perpetual Preferred Stock (the “Series
B Preferred Stock”) and received gross proceeds of $25,000,000. In connection with this offering, the Company
incurred stock issuance costs totaling approximately $687,000, consisting primarily of placement fees and legal
and accounting fees. The Series B Preferred Stock is convertible at the option of the holder, into 1,293,996 shares
of the Company’s common stock on and after the ﬁrst anniversary from the date on which the shares were issued.
Holders of the Series B Preferred Stock are entitled to receive, when and as authorized by the board of directors,
cumulative preferential cash distributions at the rate of 6.70 percent of the $2,500.00 liquidation preference per
annum (equivalent to a ﬁxed annual amount of $167.50 per share). The Series B Preferred Stock ranks pari passu
with the Series A Preferred Stock and ranks 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
Series B Preferred Stock on or after August 13, 2008, in whole or from time to time in part, for cash, at
a redemption price of $2,500.00 per share, plus all accumulated and unpaid distributions.

Strategic Real Estate

10. Common Stock:

In 2003 and 2002, as a result of a legal action in connection with the merger of Captec (see Note 17), the
Company reduced the number of common stock issued and outstanding by 823 and 474,037, respectively.

In December 2003, the Company ﬁled a prospectus supplement to its $600,000,000 shelf registration statement
and issued 3,250,000 shares of common stock and received gross proceeds of $56,517,000. Subsequently, the
Company issued an additional 487,500 shares in connection with the underwriters’ over-allotment option and
received gross proceeds of $8,478,000. In connection with these offerings, the Company incurred stock issuance
costs totaling approximately $671,000, consisting primarily of underwriters’ commissions and fees, legal and
accounting fees and printing expenses.

11. 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, 2003, 2002 and 2001 totaled $64,000, $51,000 and $46,000,
respectively.

12. Dividends:

The following presents the characterization for tax purposes of common stock dividends paid to stockholders for
the years ended December 31:

Ordinary income
Capital gain
Qualiﬁed 5-year Gain
Unrecaptured Section 1250 Gain
Return of capital

2003

2002

2001

0.969
–
0.005
0.037
0.269
1.280

1.174
0.006
–
0.005
0.085
1.270

1.227
–
–
0.033
–
1.260

The Series A Preferred Stock dividends of $2.25 per share paid in each of the years ended December 31, 2003 and
2002, were characterized as ordinary income for tax purposes. The Series B Preferred Stock dividends of $50.25
per share paid during the year ended December 31, 2003 were characterized as ordinary income for tax purposes.

Shareholder Value

13. Dissenting Shareholders’ Settlement:

During the year ended December 31, 2003, the Company recorded a dissenting shareholders’ settlement expense
of $2,413,000 related to the appraisal rights litigation disclosed in Item 3 of the Company’s Annual Report on
Form 10-K for the ﬁscal year ended December 31, 2002, that arose as a result of the merger with Captec Net
Lease Realty, Inc. (“Captec”) in December 2001 (the “Appraisal Action”). In February 2003, the Company entered
into a settlement agreement 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, which approximated the
value of the original merger consideration (which included cash, common stock and Series A Preferred Stock
shares) at the time of the litigation settlement plus the dividends that would have been paid if the shares had been
issued at the time of the merger. In February 2003, the parties ﬁled a stipulation and order of dismissal and the
Court entered the order of dismissal, dismissing the Appraisal Action with prejudice.

14. Earnings from Discontinued Operations:

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the
Company has classiﬁed its 33 properties sold during 2003 and 2002 as discontinued operations. Accordingly,
the results of operations related to these 33 properties for 2003, 2002 and 2001 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
Interest income from mortgage receivable
Other

Expenses:

General operating and administrative
Real estate
Depreciation and amortization
Provision for loss on impairment of real estate

2003

2002

2001

1,634
187
12
54
111
1,998

6,228 $
296
73
–
22
6,619

3,438
544
77
–
9
4,068

15
4
102
–
121

19
251
600
1,029
1,899

18
218
474
125
835

Earnings before gain on disposition of real estate

1,877

4,720

3,233

Gain on disposition of real estate
Earnings from discontinued operations

287
2,164

260
4,980 $

–
3,233

Strategic Real Estate

15. 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 (dollars in thousands, except per share data):

Earnings from continuing operations
Series A Preferred Stock dividends
Series B Preferred Stock dividends
Earnings available to common stockholders from continuing

operations – basic

Earnings from discontinued operations

2003

2002

2001

51,309
(4,008)
(502)

43,078
(4,010)
–

46,799
2,164

39,068
4,980

25,730
–
–

25,730
3,233

Net earnings available to common stockholders – basic

48,963

44,048

28,963

Basic earnings per share:

Weighted average number of common shares outstanding
Restricted stock
Merger contingent common shares

43,108,213
–
–

40,383,405
–
–

31,226,086
104,767
209,004

Weighted average number of common shares outstanding

used in basic earnings per common share

43,108,213

40,383,405

31,539,857

Basic earnings per share available to common stockholders:

Continuing operations
Discontinued operations
Net earnings

Earnings from continuing operations
Series A Preferred Stock dividends
Earnings available to common stockholders from continuing

operations – diluted

Earnings from discontinued operations

1.09
0.05
1.14

51,309
(4,008)

47,301
2,164

0.97
0.12
1.09

43,078
(4,010)

39,068
4,980

0.82
0.10
0.92

25,730
–

25,730
3,233

Net earnings available to common stockholders – diluted

49,465

44,048

28,963

Diluted earnings per share:

Weighted average number of common shares outstanding
Effect of dilutive securities:

Common stock options and restricted stock
Assumed conversion of Series B Preferred Stock to

common stock

Merger contingent common shares

43,108,213

40,383,405

31,226,086

288,715

205,552

131,822

499,872
–

–
–

–
359,135

Weighted average number of common shares outstanding used

in diluted earnings per common share

43,896,800

40,588,957

31,717,043

Diluted earnings per share available to common stockholders:

Continuing operations
Discontinued operations
Net earnings

1.08
0.05
1.13

0.97
0.12
1.09

0.81
0.10
0.91

For the years ended December 31, 2003, 2002 and 2001, options on 398,500, 454,500 and 1,048,892 shares of
common stock, respectively, were not included in computing diluted earnings per share because their effects were
antidilutive.

Shareholder Value

16. 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 December 31:

Outstanding, January 1
Options granted
Options exercised
Options surrendered
Restricted stock granted
Restricted stock issued
Restricted stock surrendered
Restricted stock canceled
Outstanding, December 31

Number of Shares
2002

2003

2001

1,747,851
15,000
(132,357)
(22,350)
76,407
(76,407)
(5,950)
5,950
1,608,144

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

Exercisable, December 31

1,372,184

1,293,284

1,581,592

Available for grant, December 31

1,561,192

1,628,809

1,933,642

The 76,407, 64,000 and 239,000 shares of restricted stock granted during the years ended December 31, 2003,
2002 and 2001, respectively, had a weighted average grant price of $14.94, $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

2003

2002

2001

$ 14.44
14.57
13.51
14.51
14.40

$ 15.79
15.25
12.17
14.44
14.58

$ 14.20
11.15
10.63
15.79
14.52

Strategic Real Estate

The following summarizes the outstanding options and the exercisable options at December 31, 2003:

Option Price Range
$14.1250
to
$17.8750

$10.1875
to
$13.8750

Total

Outstanding options:
Number of shares
Weighted-average exercise price
Weighted-average remaining contractual

life in years

587,769
12.32

15.77

14.51

3.4

4.6

4.2

Exercisable options:
Number of shares
Weighted-average exercise price

577,759
12.32

794,425
15.91

14.40

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, The Company has granted and issued shares of restricted stock to certain ofﬁcers and
directors of the Company. The following information is a summary of the various issuances of restricted stock:

Annual Vesting
Rate

Number of
Years for
Vesting

Shares are 100%
Vested on: (1)

Ofﬁcers:

July 2001
June 2002
March 2003
March 2003
Total

Directors:

July 2001
June 2002
June 2003
Total

234,000
58,000
40,407
30,000
362,407

5,000
6,000
6,000
17,000

15% - 30%
15% - 30%
25%
15% - 30%

50%
50%
50%

5
5
4
5

2
2
2

January 1, 2006
January 1, 2007
January 1, 2007
January 1, 2008

January 1, 2003
January 1, 2004
January 1, 2005

(1) The restricted stock shares automatically vests upon a change in the control of

the Company.

Compensation expense for the restricted stock is determined based upon the fair value at the date of grant and is
recognized on a straight lined basis over the vesting periods. For the years ended December 31, 2003, 2002 and
2001, the Company recognized $1,241,000, $814,000 and $274,000, respectively, of such expense.

Shareholder Value

17. 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.

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 Series A
Preferred Stock (see Notes 9, 10 and 13). 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

215,498
9,230
151
4,143
5,852
8
234,882

101,213
1,806
6,933
208
110,160

Net assets acquired

124,722

Strategic Real Estate

The merger was unanimously approved by both the Company’s and Captec’s board of directors and Captec’s
shareholders. This transaction increased funds from operations, increased diversiﬁcation, produced costs savings
from opportunities for economies of scale and operating efﬁciencies and enhanced the Company’s
capital markets proﬁle.

The unaudited pro forma combined historical results for the year ended December 31, 2001, as if Captec had
been acquired as of January 1, 2001, are estimated to be (dollars in thousands):

Revenues
Net income
Diluted earnings per common share

$ 101,943
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, 2001, nor are they necessarily indicative of future consolidated results.

18. Fair Value of Financial Instruments:

The Company believes the carrying values of its Credit Facility, Term Note 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, 2003 approximate fair value, based upon current market prices of similar
issues. At December 31, 2003 and 2002, the fair value of the Company’s notes payable was $295,448,000 and
$287,898,000, respectively, based upon the quoted market price.

19. 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 $52,000, $66,000 and $150,000 in fees during the years ended December 31, 2003, 2002 and 2001,
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 was secured by the afﬁliate’s common
stock in CCF, a wholly-owned subsidiary of the afﬁliate. As of December 31, 2002, the outstanding principal
and accrued interest balance was $6,026,000. In July 2003, the promissory note was paid in full. 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.

Shareholder Value

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 March 31, 2004. In December 2003, the line of credit was amended to have a borrowing capacity of
$35,000,000. As of December 31, 2003, $16,600,000 was outstanding and $18,400,000 was available for future
borrowings on the line of credit. The obligation to repay the line of credit is full recourse to CCF.

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
$1,363,000, $1,258,000 and $853,000 in fees relating to these services during the years ended December 31,
2003, 2002 and 2001, respectively.

In 2002, the Company extended the maturity dates to dates between June and December 2007 on four mortgages
securing an original aggregate principal indebtedness totaling $8,514,000 from 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 mortgage loans bear interest at a weighted average of 8.95%, per annum, with interest payable monthly or
quarterly. As of December 31, 2003 and 2002, the aggregate principal balance of the four mortgages, included
in mortgages, notes and accrued interest receivable on the balance sheet, was $2,935,000 and $3,437,000,
respectively. In connection therewith, the Company recorded $281,000, $663,000 and $574,000 as interest from
unconsolidated afﬁliates and other mortgage receivables during the years ended December 31, 2003, 2002 and
2001, respectively.

The Company had guaranteed bank loans to James M. Seneff, Jr., Gary M. Ralston and Dennis Tracy, each of
which are ofﬁcers and directors of the Company or its afﬁliates, totaling $3,746,000. Each of the loans is full
recourse to the respective ofﬁcer and is collateralized by the common shares of the Company that were purchased
with the proceeds from the loan. In July 2003, the Company was released as a guarantor on each of the bank
loans.

20. 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 leased properties (“Leased Properties”) and (ii) interest income
from afﬁliates and fee income from development, property management and asset management services.

Strategic Real Estate

The following represents the revenues, expenses and asset allocation for the two segments and the Company’s
consolidated totals at December 31, 2003, 2002 and 2001, and for the years then ended:

2003
Revenues
General operating and administrative expenses
Real estate expenses
Interest expense
Depreciation and amortization
Dissenting shareholders’ settlement
Equity in earnings of unconsolidated afﬁliates
Earnings (loss) from continuing operations
Earnings from discontinued operations
Net earnings (loss)

Assets
Additions to long-lived assets:

Real estate
Other

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 (loss)

Assets
Additions to long-lived assets:

Real estate
Other

Leased
Properties

Interest and
Fee Income

Corporate

98,596
7,925
2,406
27,731
13,440
–
56
47,150
2,164
49,314

$ 1,097,721

$
$

215,730
3,312

84,277
6,250
1,446
26,720
11,116
2,256
158
36,647
4,980
41,627

855,863

43,360
1,155

$
$

4,062
1,785
–
–
18
–
6,098
8,357
–
8,357

110,541

–
31

6,614
1,693
–
–
17
–
3,058
7,962
–
7,962

98,185

–
23

$
$

–
1,776
–
–
9
2,413
–
(4,198)
–
(4,198) $

102,658
11,486
2,406
27,731
13,467
2,413
6,154
51,309
2,164
53,473

$ 1,208,310

–
23

$
$

215,730
3,366

–
1,522
–
–
9
–
–
(1,531)
–
(1,531) $

90,891
9,465
1,446
26,720
11,142
2,256
3,216
43,078
4,980
48,058

–
9

$
$

954,108

43,360
1,187

Shareholder Value

Leased
Properties

Interest and
Fee Income

Corporate

$
$

67,986
4,657
736
24,874
8,636

–
278
4,648
34,009
3,233
37,242

866,201

19,836
7,828

$
$

8,472
993
–
78
92

–
(1,753)
–
5,556
–
5,556

140,342

–
17

$
$

–
1,244
–
–
9

12,582
–
–
(13,835)
–
(13,835) $

76,458
6,894
736
24,952
8,737

12,582
(1,475)
4,648
25,730
3,233
28,963

$ 1,006,628

–
12

$
$

19,836
7,857

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 (loss)

Assets
Additions to long-lived assets:

Real estate
Other

21. Major Tenants:

For the years ended December 31, 2003, 2002 and 2001, the Company recorded rental and earned income from
one of the Company’s lessees, Eckerd Corporation, of $10,581,000, $10,558,000, and $8,790,000, 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.

22. Commitments and Contingencies:

The Company was a defendant in a lawsuit ﬁled in December 1998 in the United States District Court for the
District of Puerto Rico. The plaintiff, Ysiem Corporation, alleged that the Company was in breach of a ground
lease agreement with the plaintiff regarding a land parcel owned by the plaintiff and was seeking damages of
$7,500,000 and/or speciﬁc performance of the execution of the ground lease. In January 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. In May 2003, the U.S.
First Circuit Court of Appeals afﬁrmed the dismissal and that dismissal is now ﬁnal.

In January 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.
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

Strategic Real Estate

damage awards against Captec and/or its directors, damages for which the Company, as successor in interest to
Captec, could be responsible. In October 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
in November 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 in December 2002. In August 2003,
the Motion to Dismiss the Second Amended Complaint was denied by the court. In October 2003, the parties to
the litigation, through their respective counsel, entered into a Memorandum of Understanding which sets out the
essential terms of settlement of this claim. Pursuant to the Memorandum of Understanding, the total settlement
amount to be paid to the plaintiffs is $225,000, which includes payment of attorneys’ fees and costs to plaintiffs’
counsel. The settlement contemplated by the Memorandum of Understanding is subject to ﬁnal judicial approval of
all settlement terms and a ﬁnal judgment of dismissal with prejudice of the Calapasas Action.

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.

Shareholder Value

CONSOLIDATED QUARTERLY FINANCIAL DATA (dollars in thousands, except per share data)

2003

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Year

Rent and other revenue
Depreciation and amortization expense
Interest expense
Dissenting shareholders’ settlement
Other expenses
Earnings from discontinued operations (1)
Net earnings
Net earnings per share (2):

Basic
Diluted

2002

Rent and other revenue
Depreciation and amortization expense
Interest expense
Provision for loss on impairment of real estate
Other expenses
Earnings (loss) from discontinued operations (1)
Net earnings
Net earnings per share (2):

Basic
Diluted

24,098
2,952
6,509
2,413
2,903
874
10,154

0.23
0.23

24,376
2,941
6,567
–
2,850
1,082
12,749

0.29
0.29

24,312
3,054
6,838
–
2,915
158
12,344

0.28
0.28

24,040
2,908
6,406
–
3,120
2,445
13,512

0.31
0.31

27,551
3,513
6,771
–
3,478
1,078
15,384

0.32
0.32

24,672
2,953
6,860
3,285
2,437
(673)
8,575

0.19
0.19

28,695
4,050
7,613
–
4,615
54
15,591

0.30
0.30

24,422
2,940
6,887
–
2,774
2,126
13,222

0.30
0.30

$ 104,656
13,569
27,731
2,413
13,911
2,164
53,473

1.14
1.13

97,510
11,742
26,720
3,285
11,181
4,980
48,058

1.09
1.09

(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 Statement of Financial Accounting
Standards (“SFAS”) 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 2003 and 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.

Strategic Real Estate

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.

2003

High
Low
Close

Dividends paid per share

2002

High
Low
Close

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Year

15.840
14.350
15.100

17.440
15.100
17.240

18.380
16.000
17.030

18.000
17.040
17.800

18.380
14.350
17.800

0.320

1.280

13.990
13.010
13.960

16.000
13.900
16.000

16.400
12.600
16.120

16.350
15.010
15.330

16.400
12.600
15.330

Dividends paid per share

0.315

0.320

1.270

The following presents the characterizations for tax purposes of such common stock dividends for the years ended
December 31:

Ordinary income
Capital gain
Qualiﬁed 5-year Gain
Unrecaptured Section 125 gain
Return of capital

2003
75.71%
–
0.37%
2.88%
21.04%
100.00%

2002
92.41%
0.47%
–
0.41%
6.71%
100.00%

In January 2004, the Company declared dividends to its stockholders of $16,001,000, or $0.32 per share of
common stock, payable in February 2004.

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, 2004, there were 1,223 stockholders of record of common stock.

Shareholder Value

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) 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) 265-7348
(407) 265-7348
www.nnnreit.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, or on our website.

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.

Strategic Real Estate

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.

Donnie Adkins
Chris Barry
Jay Bastian
Paul Bayer
Pam Becht
Mez Birdie
Andrew Bosco
Orlando Bosques
Darlene Brescia
Robert Bryan
John Carnesale
Dave Carter
David Cobb
Maria DeBoer
Bonnie Dehart
Jason Dewey
Mary Dixon
Eva Eller
Cathy Evanson
Tony Ferry
Andrea Foreman
Mary Ellen Frame
Justin Frye
Kristin Furniss
Ann Garrabrant
Peter Goffstein
Gabrielle Golka
Bill Haberman
Kevin Habicht

Barbara Hammer
Scott Harris
Gary Henson
Alison Hodges
Fred Hohnadel
Tricia Hollister
Ed Hopkins
Steve Horn
Michael Iannone
Ingrid Irvin
Jeff Jennings
Carole Jones
Carolyn Kent
Liz Kohlmyer
Pauly Kostka
David Lachicotte
Jason LaPierre
Katherine Lovelace
Bonnie Luker
Craig Macnab
Bryan Maldonado
Diane McCarey
Paul McKeeby
Dave McLaughlin
Phil Melaugh
Diane Merritts
Diana Miller
Michelle Miller
Suzanne Miller

Laurie Montgomery
Paul Montgomery
Mary Morrison
Amanda Murphy
Michele Olmstead
Belinda Parsons
Cindy Peterson
Dawn Peterson
Elise Quinones
Gary Ralston
Lane Ramsﬁeld
Jennifer Ross
Joe Russo
Viorel Sareboune
Kella Schaible
Chris Schneck
Rebecca Scott
Cynthia Shelton
Tom Sowa
Dan Tervo
Dennis Tracy
Donna Trombley
Rebecca Van Driessche
Jay Whitehurst
Mary Wilkes
Matt Williams
Tom Yeager
Denise Young
Georgia Zampella

as of April 28, 2004

8561 CNLR 2003 AR.v2.indb 75

05/14/04 11:39:56 AM

TABLE OF CONTENTS

DIRECTORS & OFFICERS

Creditworthy tenants like the
United States of America add to
the safety of our portfolio.

Letter to Shareholders

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

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

Retired Chairman and
Chief Executive Officer,
Triangle Bank and
Trust Company

Retired Chairman,
First Marketing Corporation

Fortieth Governor of Florida and
Managing Director, Carlton Fields
Government Consulting

President,
Commercial Net Lease Realty, Inc.

Ted B. Lanier†

Robert C. Legler

Robert Martinez†

Gary M. Ralston

† Member audit committee

EXECUTIVE OFFICERS

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.

Craig Macnab

Chief Executive Officer

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.

2003 ANNUAL REPORT

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450 S. Orange Avenue, Suite 900
Orlando, FL 32801
(800) 265-7348
www.nnnreit.com