National Retail Properties
Annual Report 2004

Plain-text annual report

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(cid:9)(cid:622)(cid:614)(cid:614)(cid:10)(cid:1)(cid:47)(cid:47)(cid:47)(cid:14)(cid:51)(cid:38)(cid:42)(cid:53) (cid:88)(cid:88)(cid:88)(cid:15)(cid:79)(cid:79)(cid:79)(cid:83)(cid:70)(cid:74)(cid:85)(cid:15)(cid:68)(cid:80)(cid:78) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-K (Mark One) ¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the Ñscal year ended December 31, 2004. n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. . For the transition period from to or Commission Ñle number 0-11290 COMMERCIAL NET LEASE REALTY, INC. (Exact name of registrant as speciÑed in its charter) Maryland (State or other jurisdiction of incorporation or organization) 56-1431377 (I.R.S. Employer IdentiÑcation No.) 450 South Orange Avenue, Suite 900 Orlando, Florida 32801 (Address of principal executive oÇces, including zip code) Registrant's telephone number, including area code: (407) 265-7348 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered: Common Stock, $0.01 par value 9% Non-Voting Series A Preferred Stock New York Stock Exchange New York Stock Exchange Securities registered pursuant to section 12(g) of the Act: None (Title of class) Indicate by check mark whether the registrant (1) has Ñled all reports required to be Ñled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to Ñle such reports), and (2) has been subject to such Ñling requirements for the past 90 days: Yes ¥ No n Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in deÑnitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. n Indicate by check mark whether the registrant is an accelerated Ñler (as deÑned in Rule 12b-2 of the Act): Yes ¥ No n The aggregate market value of voting common stock held by non-aÇliates of the registrant as of June 30, 2004 was $831,086,060. The aggregate market value of voting common stock held by non-aÇliates of the registrant as of February 8, 2005 was $963,531,763. The number of shares of common stock outstanding as of March 3, 2005 was 52,096,633. DOCUMENTS INCORPORATED BY REFERENCE: 1. Registrant incorporates by reference portions of the Commercial Net Lease Realty, Inc. Proxy Statement for the 2005 Annual Meeting of Shareholders (Items 10, 11, 12, 13 and 14 of Part III). TABLE OF CONTENTS PART I Page Reference Item 1. Item 2. Item 3. Item 4. Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Submission of Matters to a Vote of StockholdersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PART II Item 5. Item 6. Item 7. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Selected Financial Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Management's Discussion and Analysis of Financial Condition and Results of Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 7A. Quantitative and Qualitative Disclosures About Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financial Statements and Supplementary DataÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Item 9. DisclosureÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Controls and ProceduresÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. Directors and Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Security Ownership of Certain BeneÑcial Owners and Management and Related Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Principal Accountant Fees and ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 15. Exhibits and Financial Statement Schedules ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Signatures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PART IV 2 7 10 10 11 12 14 35 36 77 77 80 80 80 80 80 80 80 85 PART I Item 1. Business The Company Commercial Net Lease Realty, Inc., a Maryland corporation, is a fully integrated real estate investment trust (""REIT'') formed in 1984. The terms ""Registrant'' or ""Company'' refer to Commercial Net Lease Realty, Inc. and its majority owned and controlled subsidiaries. These subsidiaries include the wholly-owned qualiÑed REIT subsidiaries of Commercial Net Lease Realty, Inc., as well as the taxable REIT subsidiary (""TRS'') Commercial Net Lease Realty Services, Inc. and its majority owned and controlled subsidiaries (collectively, ""Services''). 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. James M. SeneÅ, Jr., a director of the Company, Kevin B. Habicht, an oÇcer and director of the Company, and Gary M. Ralston, a former oÇcer and director of the Company, collectively own the remaining 1.3 percent interest, which is 100 percent of the voting interest in Services. EÅective January 1, 2005, the Company acquired the remaining 1.3 percent voting interest in Services increasing the Company's ownership in Services to 100 percent. The Company's executive oÇces are located at 450 S. Orange Avenue, Suite 900, Orlando, Florida 32801, and its telephone number is (800) NNN-REIT (666-7348). The Company has an internet website at www.nnnreit.com where the Company's Ñlings with the Securities and Exchange Commission can be downloaded free of charge. The Company's operations are divided into two primary business segments: real estate held for investment, including structured Ñnance investments, and real estate held for sale. The real estate held for investment and structured Ñnance investments (included in mortgages and notes receivable on the balance sheet) are operated through the Company and its wholly owned qualiÑed REIT subsidiaries. The Company, directly and indirectly, through investment interests, acquires, owns, invests in, manages and develops primarily single-tenant retail properties that are generally leased to established tenants under long-term commercial net leases. Properties Real Estate Held for Investment As of December 31, 2004, the Company owned 362 properties (the ""Investment Properties''), with an aggregate gross leaseable area of 8,542,000 square feet, that are leased to established tenants, including Academy, Barnes & Noble, Best Buy, Borders, CVS, Eckerd, OÇceMax, The Sports Authority, United Rentals and the United States of America. Approximately 97 percent of the gross leaseable area of the Company's portfolio of Investment Properties was leased at December 31, 2004. The Investment Properties are generally leased under net leases pursuant to which the tenant typically will bear responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation. Certain of the Company's Investment Properties are subject to leases under which the Company retains responsibility for certain costs and expenses associated with the Investment Property. The leases of each of the Company's Investment Properties require payment of base rent plus, generally, either percentage rent based on the tenant's gross sales or contractual increases in base rent. During 2004, one of the Company's tenants, the United States of America (the ""USA''), accounted for more than 10 percent of the Company's total rental income. As of December 31, 2004, the USA leased three properties. Based on the minimum rental payments required by the leases, we expect that the USA will continue to account for more than 10 percent of the Company's total rental income in 2005. Any failure of this lessee to make the lease payments when they are due could materially aÅect the Company's income. 2 Structured Finance Investments Structured Ñnance agreements are typically loans secured by a pledge of ownership interests in the borrowers (or their subsidiaries) that own the underlying real estate. These agreements are typically subordinated to senior loans secured by Ñrst mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. The Company has entered $50,290,000 structure Ñnance agreements between October 2003 and December 2004. As of December 31, 2004, the structured Ñnance agreements had an outstanding receivable balance of $29,390,000. Real Estate Held for Sale The Company's real estate held for sale is operated through Services, which directly, and indirectly through investment interests, acquires and develops, real estate primarily for the purpose of selling the real estate to purchasers who are looking for replacement like-kind exchange property or to other purchasers with diÅerent investment objectives. As of December 31, 2004, Services owned 21 properties that were held for sale (""Inventory Properties''). The portfolio of Inventory Properties consists of properties that have been acquired in the marketplace with the intent to resell and properties that have been, or are currently being, developed by Services. As of December 31, 2004, the portfolio of Inventory Properties consisted of 10 completed inventory properties, seven properties under construction and four land parcels. Investments in Consolidated Subsidiaries As of December 31, 2004, the Company had 36 majority or wholly-owned subsidiaries primarily to facilitate the acquisition, development and disposition of certain properties. Some of the subsidiaries were formed to hold an interest in certain of the Company's unconsolidated aÇliates. Investments in Unconsolidated AÇliates The Company has entered into Ñve limited liability company (""LLC'') agreements between June 2001 and July 2003, with Orange Avenue Mortgage Investments, Inc. (""OAMI''), formerly known as CNL Commercial Finance, Inc. Each of the LLCs holds an interest in mortgage loans and is 100 percent equity Ñnanced. 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 OAMI, the Company pledged a portion of its interest in two of the LLCs as partial collateral for the loan. In May 2002, the Company contributed cash to purchase a combined 25 percent partnership interest in CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, ""Plaza''), which owns a 346,000 square foot oÇce building and an interest in an adjacent parking garage. AÇliates of James M. SeneÅ, Jr. and Robert A. Bourne, each a member of the Company's board of directors, own the remaining partnership interests. The Company accounts for its 25 percent interest in the Plaza under the equity method of accounting. Since November 1999, the Company has leased its oÇce space from Plaza. The Company's lease expires in October 2014. In addition, the Company has severally guaranteed 41.67% of a $15,500,000 promissory note on behalf of Plaza. The maximum obligation of the Company under this guarantee is $6,458,300 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, which was extended from the original maturity of November 2004 to May 2005. Plaza intends to reÑnance the promissory note in 2005. In 1999, a wholly-owned subsidiary of Services entered into a limited liability membership arrangement, WXI/SMC Real Estate LLC (""WXI''), with Whitehall Street Real Estate Limited Partnership XI. Services' subsidiary is the sole managing member and holds a 331/3 percent interest in WXI. WXI was organized for the purpose of owning, developing, redeveloping, operating, leasing and selling a portfolio of real estate. The Company accounts for its interest under the equity method of accounting. 3 In September 1997, Net Lease Realty III, Inc., a wholly-owned subsidiary of the Company, formed a limited partnership, Net Lease Institutional Realty L.P. (the ""Partnership''), with The Northern Trust Company, Trustee of the Retirement Plan for the Chicago Transit Authority Employees (""CTA'') to acquire, own and manage nine properties. Net Lease Realty III, Inc. was the sole general partner with a 20 percent interest in the Partnership and CTA was the sole limited partner with an 80 percent interest in the Partnership. Under the terms of the limited partnership agreement of the Partnership, CTA had the right to convert its 80 percent limited partnership interest into shares of the Company's common stock. In February 2004, CTA exercised its right to convert and the Company issued 953,551 shares of its common stock to CTA in a private transaction in exchange for CTA's 80 percent limited partnership interest. Merger In December 2001, the Company acquired 100 percent of Captec Net Lease Realty, Inc. (""Captec''), a publicly traded real estate investment trust, which owned 135 freestanding, net lease properties located in 26 states. Captec shareholders had the right to receive $11,839,000 in cash, 4,349,918 newly issued shares of the Company's common stock and 1,999,974 newly issued shares of the Company's 9% Series A Preferred Stock. The merger was accounted for under the purchase method of accounting. Under the purchase method of accounting, the merger 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. In January 2002, beneÑcial 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), Ñled 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. As a result of this action, the plaintiÅs were not entitled to receive the Company's common and Series A Preferred Stock shares as oÅered 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 plaintiÅs 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 824 and 379, respectively. In 2004, the Company further reduced the number of common and Series A Preferred Stock shares issued and outstanding by 51 and 56, 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 beneÑcial owners of the 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. On February 13, 2003, the parties Ñled a stipulation and order of dismissal and the Court entered the order of dismissal, dismissing the Appraisal Action with prejudice. Anticipated Merger In January 2005, the Company entered into an agreement with National Properties Corporation (""NAPE''), which provided that NAPE would merge with and into a subsidiary of the Company. At the time of the merger agreement, NAPE owned 43 properties located in 12 states which were leased to 17 tenants. If the acquisition is consummated, the Company will issue approximately 1,637,000 shares of common stock to holders of NAPE common stock. Total consideration for the merger transaction is estimated to be approximately $61,000,000 based on the Company's closing stock price on the date of the merger agreement. Completion of the merger is subject to customary closing conditions, including the approval of the holders of a majority of the outstanding shares of NAPE common stock. The Company has entered into a shareholders' agreement with the holders of approximately 53 percent of the outstanding NAPE common stock whereby these holders have agreed to vote in favor of the merger. However, the Company may terminate the merger 4 agreement if a majority of the NAPE shareholders who are not bound by the shareholders' agreement do not approve the merger. The merger does not require approval by the Company's shareholders. The Company anticipates that the merger will be completed not later than the second quarter of 2005. Competition The Company generally competes with other REITs, commercial developers, real estate limited partnerships and other investors, including but not limited to, insurance companies, pension funds and Ñnancial institutions, in the acquisition, leasing, Ñnancing, development and disposition of investments in net- leased properties. There are numerous other REITs that own, manage or develop retail properties. Employees As of December 31, 2004, the Company employed 74 full-time persons including executive, administra- tive and Ñeld personnel. Reference is made to ""Item 10. Directors and Executive OÇcers of the Registrant'' for a listing of the Company's Executive OÇcers. Business Strategies and Policies The following is a discussion of the Company's operating strategy and certain of its investment, Ñnancing and other policies. These strategies and policies have been determined by the Board of Directors and, in general, may be amended or revised from time to time by the Board of Directors without a vote of the Company's stockholders. Operating Strategies The Company's strategy is to invest primarily in single-tenant retail properties which typically are located along high traÇc commercial corridors near areas of commercial and residential density. Management believes that these types of properties when leased to high-quality tenants primarily pursuant to triple-net leases provide attractive opportunities for a stable current return and the potential for capital appreciation. Triple-net leases typically require the tenant to pay substantially 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. In management's view, these types of properties also provide the Company with Öexibility in use and tenant selection when the properties are re-let. As of December 31, 2004, the Company owned Investment Properties in 38 states. In some limited cases, the Company's investment in properties is in the form of structured Ñnance investments, which are typically loans secured by a pledge of ownership interests in the borrowers (or their subsidiaries) that own the underlying real estate. These agreements are typically subordinated to senior loans secured by Ñrst mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. While not a Company strategy, in the past, the Company also has made opportunistic investments in single-tenant oÇce properties. With respect to real estate held for investment, the Company holds its properties until it determines that the sale of the properties is advantageous in view of the Company's investment objectives. In deciding whether to sell properties, the Company will consider factors such as potential capital appreciation, net cash Öow, potential use of sale proceeds and federal income tax considerations. With respect to real estate held for sale, Services' strategy is to acquire and develop real estate directly and indirectly, through investment interests, primarily for the purpose of selling the real estate to purchasers who are looking for replacement like-kind exchange property, or to other purchasers with diÅerent investment objectives. The Company's management team focuses on certain key indicators to evaluate the Ñnancial condition and operating performance of the Company. The key indicators for the Company include items such as: the composition of the Company's portfolio of investment properties and structured Ñnance investments (such as tenant, geographic and industry classiÑcation diversiÑcation); the occupancy rate of the Company's portfolio of investment properties; certain Ñnancial performance ratios and proÑtability measures; industry trends and 5 performance compared to that of the Company and returns the Company receives on its invested capital in Services. Investment in Real Estate or Interests in Real Estate Management believes that attractive acquisition opportunities for single-tenant retail properties will continue to be available and that the Company is suited to take advantage of these opportunities because of its access to capital markets, ability to underwrite and acquire properties, either for cash or securities, and because of management's experience in seeking out, identifying and evaluating potential acquisitions. In evaluating a particular acquisition, management will consider a variety of factors, including (i) the location and accessibility of the property; (ii) the geographic area and demographic characteristics of the community, as well as the local real estate market, including potential for growth; (iii) the size of the property; (iv) the purchase price; (v) the non-Ñnancial terms of the proposed acquisition; (vi) the availability of funds or other consideration for the proposed acquisition and the cost thereof; (vii) the ""Ñt'' of the property with the Company's existing portfolio; (viii) the potential for, and current extent of, any environmental problems; (ix) the quality of construction and design and the current physical condition of the property; (x) the Ñnancial and other characteristics of the existing tenant, (xi) the tenant's business plan, operating history and management team, (xii) the tenant's industry, (xiii) the terms of any existing leases; and (xiv) the potential for capital appreciation. As of December 31, 2004, the Company owned retail Investment Properties located in 38 states and on parcels of land averaging 117,000 square feet upon which are constructed single story buildings averaging 22,000 square feet. However, the Company may, in the future, acquire other types of real estate in other areas of the country as opportunities present themselves. While the Company may diversify in terms of property locations, size and market, the Company does not set any limit on the amount or percentage of Company assets that may be invested in any one property or any one geographic area. The Company intends to engage in such future investment activities in a manner that is consistent with the maintenance of its status as a REIT for federal income tax purposes and that will not make the Company an investment company under the Investment Company Act of 1940, as amended. Equity investments in acquired properties may be subject to existing mortgage Ñnancings and other indebtedness or to new indebtedness which may be incurred in connection with acquiring or reÑnancing these investments. Investments in Real Estate Mortgages and Securities of or Interests in Persons Engaged in Real Estate Activities While the Company's current portfolio of, and its business objectives primarily emphasize, equity investments in single-tenant retail properties, the Company may invest in (i) a wide variety of retail properties or other property and tenant types; (ii) mortgages, participating or convertible mortgages, deeds of trust and other types of real estate interests or (iii) securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities, consistent with its qualiÑcation as a REIT. For example, the Company from time to time has made investments in mortgage loans or held mortgages on properties the Company sold and has made structured Ñnance investments (as discussed above), which are typically loans secured by a pledge of ownership interests in the borrowers (or their subsidiaries) that own the underlying real estate. Capital Policies The Company has authority to oÅer equity or debt securities in exchange for property and to repurchase or otherwise acquire its common stock or other securities in the open market or otherwise, and may engage in such activities in the future. The Company has not engaged in trading, underwriting or agency distribution or sale of securities of other issues and does not intend to do so. Policy Changes Any of the Company's policies described above may be changed at any time by the Company's Board of Directors without a vote of the Company's stockholders. 6 Item 2. Properties Investment Properties As of December 31, 2004, the Company owned 362 Investment Properties, with an aggregate gross leaseable area of 8,542,000 square feet, located in 38 states, of which 97 percent of the gross leaseable area is leased to established retail and oÇce tenants. Reference is made to the Schedule of Real Estate and Accumulated Depreciation and Amortization Ñled with this report for a listing of the Investment Properties and their respective carrying costs. Description of Retail and OÇce Investment Properties Retail Investment Properties Land. The Company's retail Investment Property sites range from approximately 15,000 to 774,000 (average of 117,000) square feet depending upon building size and local demographic factors. Land costs range from approximately $25,000 to $10,197,000 (average of $1,191,000). Buildings. The buildings generally are single-story structures constructed from various combinations of stucco, steel, wood, brick and tile. Building sizes range from approximately 1,000 to 135,000 (average of 22,000) square feet. Building costs range from $44,000 to $9,211,000 (average of $1,706,000) for each retail Investment Property, depending upon the size of the building and the site and the area in which the Investment Property is located. Generally, the retail Investment Properties owned by the Company are freestanding, with paved parking areas. Leases. Although there are variations in the speciÑc terms of the leases, the following is a summarized description of the general structure of the Company's leases. Generally, the leases of the retail Investment Properties owned by the Company provide for initial terms of 10 to 20 years. As of December 31, 2004, the weighted average remaining lease term was approximately 10 years. The retail Investment Properties are generally leased under net leases pursuant to which the tenant typically will bear responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. In addition, the majority of the Company's leases provide that the tenant is responsible for roof and structural repairs. The leases of the retail Investment Properties provide for annual base rental payments (payable in monthly installments) ranging from $12,000 to $1,635,000 (average of $272,000). Generally, the leases provide for either percentage rent or contractual increases in annual rent. Leases which provide for contractual increases in annual rent generally have increases which range from one to 10 percent after every one to Ñve years of the lease term. In addition, for those leases which provide for the payment of percentage rent, such rent is generally one to eight percent of the tenants' annual gross sales for the respective location, less the amount of annual base rent payable in that lease year. As of December 31, 2004, 83 percent of the Company's annualized base rent was derived from retail Investment Properties. Based on the aggregate annual base rent of the retail Investment Property leases, (i) 55 percent include contractual increases, (ii) eight percent include percentage rent provisions and (iii) 13 percent include both contractual and percentage rent provisions. Generally, the leases of the retail Investment Properties provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions as the initial lease. Some of the leases also provide that in the event the Company wishes to sell the Investment Property subject to that lease, the Company Ñrst must oÅer the lessee the right to purchase the Investment Property on the same terms and conditions as any oÅer which the Company intends to accept for the sale of the Investment Property. Certain of the Company's Investment Properties have leases that provide the tenant with a purchase option to acquire the Investment Property from the Company. The purchase price calculations are generally stated in the lease agreement or are based on current market value. 7 OÇce Investment Properties As of December 31, 2004, the Company's portfolio of Investment Properties included four oÇce properties with an aggregate gross leaseable area of 687,000 square feet. These oÇce Investment Properties represent 17 percent of the current annual base rent of the entire portfolio of Investment Properties. In August 2003, the Company acquired two oÇce buildings and a related parking garage in the Washington, D.C. metropolitan area (""DC OÇce Properties''), for $142,800,000. In addition, the Company has agreed to fund an additional $27,322,000 for building and tenant improvements, and other costs related to the lease. As of December 31, 2004, the Company had funded $23,850,000 of these improvements. The DC OÇce Properties include two oÇce buildings which have an aggregate of 555,000 rentable square feet and a two-level garage with approximately 1,000 parking spaces. The DC OÇce Properties are leased substantially to the USA to be used as the headquarters of the Transportation Security Administration. The lease was executed in December 2002 and the USA began occupying space in the buildings in phases beginning in January 2003. The lease will expire in 2014. The USA executed a lease (per which the landlord pays certain property related operating costs), that commenced for a portion of the properties in December 2002. Annual rent for the DC OÇce Properties is approximately $18,473,000. The USA is responsible for the actual amount of real estate taxes above the base year amount and increases in operating expenses above an expected base year amount, subject to a consumer price index cap. As landlord, the Company is responsible for property insurance. During 2004, the USA was the Company's only tenant that accounted for more than 10 percent of the Company's total rental income. As of December 31, 2004, the USA leased three properties representing 12 percent of the Company's total assets. In May 2004, the Company acquired an oÇce building in St. Louis, Missouri for $15,596,000, with 132,000 rentable square feet. The lease was executed in January 2004, with rent commencement in July 2004 and will expire in January 2015. The tenant is responsible for the actual amount of real estate taxes and operating expenses from rent commencement date. Structured Finance Investments Notes Receivable. Structured Ñnance agreements are typically loans secured by a pledge of ownership interests in the borrowers (or their subsidiaries) that own the underlying real estate. These agreements are typically subordinated to senior loans secured by Ñrst mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. In 2004 and 2003, the Company made structured Ñnance investments of $6,857,000 and $43,433,000, respectively. As of December 31, 2004, the structured Ñnance investments bear a weighted average interest rate of 14.3% per annum, of which 12.5% is payable monthly and the remaining 1.8% accrues and is due at maturity. The principal balance of each structured Ñnance investment is due in full at maturity, which range between November 2006 and November 2007. The structured Ñnance investments are secured by the borrowers' pledge of their respective membership interests in the certain subsidiaries which own real estate. In December 2004, the Company received $20,900,000 in principal payments and a $418,000 prepayment fee. As of December 31, 2004 and 2003, the outstanding receivable balance of the structured Ñnance investments was $29,390,000 and $43,433,000, respectively. In January 2005, the Company received $3,935,000 in principal payments; the outstanding receivable balance of the remaining structured Ñnance agreements was $25,455,000 with a weighted average interest rate of 11.8% per annum. Inventory Properties The portfolio of Inventory Properties may consist of properties that have been acquired with the intent to resell and properties that have been, or are currently being, developed by Services. The Company's Inventory Properties are typically sold to purchasers who are looking for replacement like-kind exchange property or to 8 other purchasers with diÅerent investment objectives. As of December 31, 2004, the Company owned 21 Inventory Properties which include 10 completed inventory properties, seven properties under construction and four land parcels. Reference is made to the Schedule of Real Estate and Accumulated Depreciation and Amortization Ñled with this report for a listing of the Inventory Properties and their respective carrying costs. Completed Inventory Properties. The completed Inventory Properties held for sale at December 31, 2004 had sites range from approximately 35,000 to 511,000 (average of 129,000) square feet depending upon building size and local demographic factors. Land costs range from approximately $77,000 to $5,454,000 (average of $1,645,000). The buildings generally are single-story structures ranging in size from approximately 8,000 to 52,000 (average of 16,000) square feet. Building costs range from $309,000 to $8,779,000 (average of $2,226,000) for each Inventory Property, depending upon the size of the building and the site and the area in which the Inventory Property is located. Under Construction. In connection with the development of seven Inventory Properties by Services, the Company has agreed to fund construction commitments of $26,409,000, of which $12,248,000 has been funded as of December 31, 2004. Property Environmental Considerations The Company may acquire a property whose environmental site assessment indicates that a contamina- tion 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, the Company generally 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 I assessments involve site reconnaissance and review of regulatory Ñles identifying potential areas of concern, whereas Phase II assessments involve some degree of soil and/or groundwater testing. The Company has 12 properties currently under some level of environmental remedia- tion. In general, the seller or the tenant is contractually responsible for the cost of the environmental remediation for each of these properties. 9 Item 3. Legal Proceedings In January 2002, Calapasas Investment Partnership No. 1 Limited Partnership (""Calapasas''), a Captec stockholder, Ñled a class action complaint against Captec, certain former Captec directors, and the Company (as successor in interest to Captec). 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 Ñnancial statements in 2000 and 2001. In July 2004, the parties entered into a Stipulation of Settlement which was Ñled with the court. Pursuant to the Stipulation of Settlement, the total settlement amount paid to the plaintiÅs was $225,000, which included payment of attorneys' fees and costs to plaintiÅs' counsel. In July 2004, a Ñnal judgment of dismissal was entered by the court. 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 eÅect upon its operations, Ñnancial condition or liquidity. Item 4. Submission of Matters to a Vote of Security Holders None. 10 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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 reÖects 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. First Quarter Second Quarter Third Quarter Fourth Quarter Year 2004 High ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $19.750 17.530 LowÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19.750 CloseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.320 Dividends paid per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003 High ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $15.840 14.350 LowÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.100 CloseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.320 Dividends paid per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $20.080 14.800 17.200 0.320 $17.440 15.100 17.240 0.320 $18.340 16.400 18.220 0.325 $18.380 16.000 17.030 0.320 $21.250 18.210 20.600 0.325 $18.000 17.040 17.800 0.320 $21.250 14.800 20.600 1.290 $18.380 14.350 17.800 1.280 The following presents the characterizations for tax purposes of such common stock dividends for the years ended December 31: Ordinary incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ QualiÑed 5-year gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrecaptured Section 1250 gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Nontaxable distribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 2003 70.99% 75.71% 3.13% Ì Ì 0.37% 2.88% 3.21% 22.67% 21.04% 100.00% 100.00% In February 2005, the Company paid dividends to its stockholders of $16,925,000, or $0.325 per share of common stock. 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 Ñnancial 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, 2005, there were 1,185 stockholders of record of common stock. Reference is made to the Registrant's deÑnitive proxy statement to be Ñled with the Commission pursuant to Regulation 14(a); certain information responsive to this Item is contained in the section thereof captioned ""Executive Compensation Ì Equity Compensation Plan Information,'' and the information in such section is incorporated herein by reference. 11 Item 6. Selected Financial Data Historical Financial Highlights (Dollars in thousands, except per share data) Gross revenues(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings from continuing operations before cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends paid to: Common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Series A Preferred Stock stockholdersÏÏÏ Series B Convertible Preferred Stock stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted average common shares: 2004 2003 2002 2001 2000 $ 157,277 $ 124,248 $ 109,812 $ 85,554 $ 83,495 50,624 64,934 1,300,048 524,241 756,998 66,272 4,008 1,675 42,866 53,473 1,213,778 467,419 730,754 55,473 4,008 502 34,431 48,058 958,300 386,912 549,141 51,178 4,010 Ì 24,372 28,963 1,010,009 435,333 564,640 38,637 Ì Ì 34,778 38,251 769,295 360,381 393,901 37,760 Ì Ì Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,312,434 51,742,518 43,108,213 43,896,800 40,383,405 40,588,957 31,539,857 31,717,043 30,387,371 30,407,507 Per share information: Earnings from continuing operations before cumulative eÅect of change in accounting principle: Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net earnings: Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends paid to: Common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Series A Preferred Stock stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Series B Convertible Preferred Stock stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other data: Cash Öows provided by (used in): Operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Funds from operations Ì diluted(2) ÏÏÏÏ 0.870 0.870 1.150 1.150 1.290 2.250 0.890 0.890 1.140 1.130 1.280 2.250 167.500 50.250 0.750 0.750 1.090 1.090 1.270 2.250 Ì 0.770 0.770 0.920 0.910 1.260 Ì Ì 1.140 1.140 1.260 1.260 1.245 Ì Ì 74,792 (58,955) (19,225) 73,065 48,531 (251,186) 205,965 61,749 111,589 (15,142) (101,654) 54,595 112,267 (2,700) (8,878) 32,034 14,551 17,195 (28,929) 42,061 (1) Gross revenues include revenues 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 Ñnancial 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 classiÑed as held for sale or have been disposed of subsequent to December 31, 2001, the eÅective date of SFAS No. 144, have been reclassiÑed as earnings from discontinued operations. (2) Funds from Operations, commonly referred to as FFO, is a relative non-GAAP Ñnancial measure of operating performance of an equity REIT in order to recognize that income-producing real estate 12 historically has not depreciated on the basis determined under GAAP. FFO is deÑned by the National Association of Real Estate Investment Trusts and is used by the Company as follows: net earnings (computed in accordance with GAAP) plus depreciation and amortization of assets unique to the real estate industry, excluding gains (or including losses) on the disposition of real estate held for investment, 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 operating performance of real estate companies. FFO does not necessarily represent cash provided by operating activities in accordance with GAAP and should not be considered an alternative to net income as an indication of the Company's operating performance or to cash Öow as a measure of liquidity or ability to make distributions. Management considers FFO an appropriate measure of operating 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 an operating performance measure. The Company's computation of FFO may diÅer from the methodology for calculating FFO used by other equity REITs, and therefore, may not be comparable to such other REITs. The Company has earnings from discontinued operations in each of its segments, real estate held for investment and real estate held for sale. All property dispositions from the Company's held for investment segment are classiÑed as discontinued operations. In addition, certain properties in the Company's held for sale segment that have generated revenues before disposition are classiÑed as discontinued operations. These held for sale properties have not historically been classiÑed as discontinued operations, therefore, prior period comparable consolidated Ñnancial statements have been restated to include these properties in its earnings from discontinued operations. These adjustments resulted in a decrease in the Company's reported total revenues and total and per share earnings from continuing operations and an increase in the Company's earnings from discontinued operations. However, the Company's total and per share net earnings available to common stockholders are not aÅected. The following table reconciles FFO to their most directly comparable GAAP measure, net earnings for the years ended December 31: 2004 2003 2002 2001 2000 Reconciliation of funds from operations: Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $64,934 $53,473 $48,058 $28,963 $38,251 Real estate, held for investment depreciation and amortization: Continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Partnership real estate depreciation ÏÏÏÏÏÏÏÏÏÏÏÏ Gain on disposition of real estate held for 15,459 256 622 11,290 582 699 9,259 1,069 479 7,051 605 63 7,354 484 63 investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,523) (287) (260) (4,648) (4,091) FFO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Series A Preferred Stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏ Series B Convertible Preferred Stock dividends ÏÏ FFO available to common stockholders Ì basicÏÏ Series B Convertible Preferred Stock dividends ÏÏ 78,748 (4,008) (1,675) 73,065 Ì 65,757 (4,008) (502) 61,247 502 58,605 (4,010) Ì 54,595 Ì 32,034 Ì Ì 32,034 Ì 42,061 Ì Ì 42,061 Ì FFO available to common stockholders Ì diluted $73,065 $61,749 $54,595 $32,034 $42,061 For a discussion of material events aÅecting the comparability of the information reÖected in the selected Ñnancial data, refer to the Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements generally are characterized by the use of terms such as ""believe,'' ""expect'' and ""may.'' The terms ""Registrant'' or ""Company'' refer to Commercial Net Lease Realty, Inc. and its majority owned and controlled subsidiaries. These subsidiaries include the wholly-owned qualiÑed real estate investment trust (""REIT'') subsidiaries of Commercial Net Lease Realty, Inc., as well as the taxable REIT subsidiary (""TRS'') Commercial Net Lease Realty Services, Inc. and its majority owned and controlled subsidiaries (collectively, ""Services''). Although management believes that the expectations reÖected in such forward-looking statements are based upon reasonable assumptions, the Company's actual results could diÅer materially from those set forth in the forward-looking statements. Certain factors that might cause a diÅerence include the following: ‚ the ability of tenants to make payments under their respective leases, including the Company's reliance on certain major tenants 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 Ñnancing obligations; ‚ the ability of the Company to reÑnance 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 ability of the Company to maintain internal controls and processes to ensure all transactions are accounted for properly, all relevant disclosures and Ñlings are timely made in accordance with all rules and regulations, and any potential fraud or embezzlement is thwarted or detected; ‚ the availability of other debt and equity Ñnancing alternatives; market conditions aÅecting the Company's equity capital; ‚ ability to sell properties at an attractive return; ‚ 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 oÇce properties into existing operations that historically have been primarily focused on retail properties; ‚ the loss of any member of the Company's management team; ‚ the ability of the Company to successfully implement its selective acquisition strategy or fully realize the anticipated beneÑts of renovation or development projects; ‚ the ability of the Company to integrate acquired properties and operations into existing operations; ‚ recent changes in tax legislation provide favorable treatment for dividends for regular companies, but not generally dividends from real estate investment trusts; and ‚ the ability of the Company to qualify as a real estate investment trust for federal income tax purposes. 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 eÅect on its liquidity, capital resources or results of operations. 14 Overview Commercial Net Lease Realty, Inc., a Maryland corporation, is a fully integrated REIT formed in 1984. All prior period comparable consolidated Ñnancial statements have been derived from the audited consoli- dated Ñnancial statements and have been restated to include the consolidated Ñnancial information of Services. EÅective January 1, 2004, Services is included in the consolidated Ñnancial statements due to the Company's implementation of Financial Accounting Standards Board (""FASB'') Interpretation No. 46, ""Consolidation of Variable Interest Entities,'' as amended (""FIN 46R''). 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. James M. SeneÅ, Jr., a director of the Company, Kevin B. Habicht, an oÇcer and director of the Company, and Gary M. Ralston, a former oÇcer and director of the Company, collectively own the remaining 1.3 percent interest, which is 100 percent of the voting interest in Services. EÅective January 1, 2005, the Company acquired the remaining 1.3 percent voting interest in Services increasing the Company's ownership in Services to 100 percent. The Company's operations are divided into two primary business segments: real estate held for investment, including structured Ñnance investments, and real estate held for sale. The real estate held for investment (the ""Investment Properties'') and structured Ñnance investments (included in mortgages and notes receivable on the balance sheet), are operated through Commercial Net Lease Realty, Inc. and its wholly owned qualiÑed REIT subsidiaries. The Company, directly and indirectly, through investment interests, acquires, owns, invests in, manages and develops primarily single-tenant retail properties that are generally leased to established tenants under long-term commercial net leases. As of December 31, 2004, the Company owned 362 Investment Properties, with an aggregate gross leaseable area of 8,542,000 square feet, located in 38 states and leased to established tenants, including Academy, Barnes & Noble, Best Buy, Borders, CVS, Eckerd, OÇceMax, The Sports Authority, United Rentals and the United States of America. In addition to the Investment Properties, as of December 31, 2004, the Company had $29,390,000 in structured Ñnance investments. The real estate held for sale is operated through Services. Services, directly and indirectly, through investment interests, acquires and develops real estate primarily for the purpose of selling the real estate to purchasers who are looking for replacement like-kind exchange property or to other purchasers with diÅerent investment objectives. As of December 31, 2004, Services owned 21 properties that were held for sale (""Inventory Properties''). The Company's management team focuses on certain key indicators to evaluate the Ñnancial condition and operating performance of the Company. The key indicators for the Company include items such as: the composition of the Company's portfolio of Investment Properties and structured Ñnance investments (such as tenant, geographic and industry classiÑcation diversiÑcation); the occupancy rate of the Company's portfolio of Investment Properties; certain Ñnancial performance ratios and proÑtability measures; and industry trends and performance compared to that of the Company; and returns the Company receives on its invested capital in Services. Liquidity General. Historically, the Company's demand for funds has been primarily for (i) payment of operating expenses and dividends, (ii) property acquisitions, structured Ñnance investments, 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 Decem- ber 31, 2004. The table presents principal cash Öows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of December 31, 2004. As the table incorporates only those 15 exposures that exist as of December 31, 2004, it does not consider those exposures or positions which may arise after that date. Long-term debt(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating lease ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $521,109 13,095 $4,070 1,165 $40,276 1,200 Total 2005 2006 2008 Expected Maturity Date 2007 (Dollars in thousands) $ 8,776 1,236 $101,156 1,273 2009 Thereafter $ 964 1,311 $365,867 6,910 Total contractual cash obligations(2) ÏÏÏ $534,204 $5,235 $41,476 $10,012 $102,429 $2,275 $372,777 (1) Includes amounts outstanding under the revolving credit facility, mortgages and notes payable and Ñnancing lease obligation and excludes unamortized note discounts and unamortized interest rate hedge gain. Excludes $4,334,000 of accrued interest payable due in 2005. (2) As of December 31, 2004, the Company does not have any other contractual cash obligations, such as purchase obligations, Ñnancing lease obligations or other long-term liabilities other than those reÖected in the table. In addition to items reÖected in the table, the Company has two series of preferred stock with cumulative preferential cash distributions (see ""Liquidity Ì Dividends''). 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 Ñnancings. In addition to the contractual obligations outlined in the above table, in connection with its acquisition of two oÇce buildings and a related parking garage located in the Washington, D.C. metropolitan area (""DC OÇce Properties'') in August 2003, the Company has agreed to fund $27,322,000 for building and tenant improvements, of which $23,850,000 had been funded as of December 31, 2004. The Company anticipates funding the additional costs from borrowings under the Company's revolving credit facility, which is anticipated to be substantially complete by June 30, 2005. In connection with the development of seven Inventory Properties by Services, the Company has agreed to fund construction commitments of $26,409,000, of which $12,248,000 has been funded as of December 31, 2004. The Company anticipates funding the additional costs from borrowings under the Company's revolving credit facility. The Company has also guaranteed 41.67 percent of a $15,500,000 promissory note on behalf of an unconsolidated aÇliate. The maximum obligation to the Company is $6,458,000 plus interest, and the guarantee shall continue through the loan maturity, which was extended from the original maturity of November 2004 to May 2005. 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 Investment Properties 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 leases typically provide that the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. In addition, the Company's leases generally provide that the tenant is responsible for roof and structural repairs. Certain of the Company's Investment Properties, including the DC OÇce Properties, are subject to leases under which the Company retains responsibility for certain costs and expenses associated with the Investment Property. Management anticipates the costs associated with the Company's vacant Investment Properties or those Investment Properties that become vacant will also be met with funds from operations and working capital. The Company may be required to borrow under the Company's revolving credit facility or use other sources of capital in the event of unforeseen signiÑcant 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 eÅect on the liquidity and results of operations of the Company if the Company is unable to re-lease the Investment Properties at 16 comparable rental rates and in a timely manner. As of January 31, 2005, the Company owns 10 vacant, unleased Investment Properties, which account for approximately three percent of the total gross leaseable area of the Company's portfolio of Investment Properties. Dividends. The Company has 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 REIT 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 qualiÑcation is lost. Such an event could materially aÅect the Company's income and its ability to pay dividends. 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, 2004, 2003 and 2002, and intends to continue to operate the Company so as to remain qualiÑed as a REIT for federal income tax purposes. One of the Company's primary objectives, consistent with its policy of retaining suÇcient 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, 2004, 2003 and 2002, the Company declared and paid dividends to its common stockholders of $66,272,000, $55,473,000 and $51,178,000 respectively, or $1.29, $1.28 and $1.27 per share, respectively, of common stock. The following presents the characterizations for tax purposes of such common stock dividends for the years ended December 31: Ordinary income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ QualiÑed 5-year Gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrecaptured Section 1250 gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Nontaxable distributionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 2003 2002 70.99% 75.71% 92.41% 0.47% Ì 3.13% Ì 0.37% Ì 2.88% 3.21% 22.67% 21.04% 0.41% 6.71% 100.00% 100.00% 100.00% In February 2005, the Company paid dividends to its common stockholders of $16,925,000, or $0.325 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 Ñxed annual amount of $2.25 per share). For the years ended December 31, 2004, 2003 and 2002, the Company declared and paid dividends to its Series A Preferred Stock stockholders of $4,008,000, $4,008,000 and $4,010,000, respec- tively, or $2.25 per share of stock. In February 2005, the Company declared dividends of $1,002,000 or $0.5625 per share of Series A Preferred Stock, payable in March 2005. Holders of the 6.70% Non-Voting Series B Preferred Cumulative Convertible Perpetual Preferred Stock (the ""Series B Convertible Preferred Stock''), issued during 2003, 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 Ñxed annual amount of $167.50 per share). For the years ended December 31, 2004 and 2003, the Company declared and paid dividends to its Series B Convertible Preferred Stock stockholders of $1,675,000 and $502,000, respectively, or $167.50 and $50.25 per share of stock. 17 In February 2005, the Company declared dividends of $419,000 or $41.875 per share of Series B Convertible Preferred Stock, payable in March 2005. 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 generally 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 I assessments involve site reconnaissance and review of regulatory Ñles identifying potential areas of concern, whereas Phase II assessments involve some degree of soil and/or groundwater testing. The Company has 12 Investment Properties currently under some level of environmental remediation. In general, the seller or the tenant is contractually responsible for the cost of the environmental remediation for each of these Investment Properties. Capital Resources Generally, cash needs for property acquisitions, structured Ñnance investments, capital expenditures, development and other investments have been funded by equity and debt oÅerings, 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 oÅering 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, 2004, 2003, and 2002, the company generated $74,792,000, $48,531,000 and $111,589,000 respectively, of net cash from operating activities. The change in cash provided by operations for the years ended December 31, 2004, 2003 and 2002, is primarily the result of changes in revenues and expenses as discussed in ""Results of Operations.'' Cash generated from operations could be expected to Öuctuate in the future. Indebtedness. The Company expects to use indebtedness primarily for property acquisitions and development of single-tenant retail and oÇce properties, either directly or through investment interests and structured Ñnance investments. 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 Ñnancial covenants of the Company. The principal balance is due in full upon expiration of the Credit Facility in May 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, 2004, $17,900,000 was outstanding and approximately $207,100,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit. In accordance with the terms of the Credit Facility, the Company is required to meet certain restrictive Ñnancial covenants, which, among other things, require the Company to maintain certain (i) maximum leverage ratios, (ii) debt service coverage and (iii) cash Öow coverage. At December 31, 2004, the Company 18 was in compliance with those covenants. In the event that the Company violates any of the certain restrictive Ñnancial covenants, its access to the debt or equity markets may become impaired. In November 2003, the Company entered into a long-term, Ñxed 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 Ñrst mortgage lien on the DC OÇce Properties. As of December 31, 2004, the outstanding principal balance was $95,000,000, and the aggregate carrying value of these properties totaled $155,601,000. In January 1996, the Company entered into a long-term, Ñxed 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 Ñrst mortgage lien on certain of the Company's Investment Properties. As of December 31, 2004, the outstanding principal balance was $22,466,000, and the aggregate carrying value of these Investment Properties totaled $58,049,000. In February 2004, the Company increased its ownership in Net Lease Institutional Realty, L.P. to 100 percent (see Capital Resources Ì Investments in Unconsolidated AÇliates). In October 1997, the partnership entered into a long-term, Ñxed rated loan for $12,000,000. The loan bears interest at a rate of 7.37% per annum with monthly principal and interest payments of $103,000 and the principal balance due in September 2007. The loan is secured by a Ñrst mortgage lien on certain of the partnership's properties. As of December 31, 2004, the outstanding principal balance was $8,606,000, and the aggregate carrying value of these Investment Properties totaled $28,893,000. In June 2002, the Company entered into a long-term, Ñxed 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 Ñrst mortgage lien on Ñve of the Company's Investment Properties. As of December 31, 2004, the outstanding principal balance was $20,508,000, and the aggregate carrying value of these Investment Properties totaled $27,111,000. In February 2004, the Company acquired an Investment Property subject to a mortgage securing a loan for $6,952,000. The loan bears interest at a rate of 6.90% per annum with monthly principal and interest payments of $68,000 and the balance due in January 2016. As of December 31, 2004, the aggregate carrying value of this Investment Property was $12,358,000. The outstanding principal balance as of December 31, 2004, was $6,665,000. The Company has acquired four Investment 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 2009. In December 2004, the Company sold one of the properties and the related mortgage was simultaneously paid, which accounted for $2,455,000 of the original principal balance. The remaining Mortgages bear interest at a weighted average rate of 8.45% per annum and have a weighted average remaining maturity of 2.4 years, with an aggregate monthly payment of principal and interest of $60,000. In addition to the Mortgages, the company has letters of credit that also secure two of the loans, which collectively total $2,426,000. As of December 31, 2004, the outstanding principal balances secured by the Mortgages totaled $2,189,000, and the aggregate carrying value of the three Investment Properties and letters of credit totaled $10,751,000. In July 2002, Services entered into a long-term, Ñxed rate loan for $2,340,000. The loan bore interest at a rate of 7.42% per annum with monthly principal and interest payments of $18,000 and the principal balance due in July 2012. The loan was secured by a Ñrst mortgage lien on one of Services' properties. In August 2004, the Company disposed of the property, at which time the buyer assumed the loan. Payments of principal on the mortgage debt and on advances outstanding under the Credit Facility are expected to be met from borrowings under the Credit Facility, proceeds from public or private oÅerings 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. 19 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 Ñnance investment acquisitions. The Company has maintained investment grade debt ratings from Standard and Poor's, Moody's Investor Service and Fitch IBCA on its senior, unsecured debt since 1998. In May 2003, the Company Ñled 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; as of December 31, 2004, the Company had $259,167,000 available for issuance under this shelf registration statement. The Company Ñled a prospectus supplement to its shelf registration for each issuance of notes outlined in the table below (dollars in thousands). Issue Date 2008 Notes(1) ÏÏÏÏÏÏÏ March 1998 2004 Notes(1)(5) ÏÏÏÏ 2010 Notes(1) ÏÏÏÏÏÏÏ September 2000 2012 Notes(1) ÏÏÏÏÏÏÏ 2014 Notes(1)(2)(6) June 2002 June 2004 June 1999 Purchase Price $100,000 100,000 20,000 50,000 150,000 Discount(3) $271 392 126 287 440 Discounted Purchase Price $ 99,729 99,608 19,874 49,713 149,560 Commencement Day of Semi-Annual Interest Payments Stated EÅective Rate(4) Rate Maturity Date 7.125% 7.163% September 1998 March 2008 8.125% 7.547% December 1999 8.500% 8.595% March 2001 7.750% 7.833% December 2002 6.250% 5.910% June 2004 June 2004 September 2010 June 2012 June 2014 (1) The proceeds from the note issuance were used to pay down outstanding indebtedness of the Company's Credit Facility. (2) The proceeds from the note issuance were used to repay the obligation of the 2004 Notes. (3) The note discounts are amortized to interest expense over the respective term of each debt obligation using the eÅective interest method. (4) Includes the eÅects of the discount, treasury lock gain and swap gain (as applicable). (5) The Company entered into a treasury rate lock agreement which Ñxed 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 was deferred and amortized as an adjustment to interest expense over the term of the 2004 Notes using the eÅective interest method. (6) The Company entered into a forward starting interest rate swap agreement which Ñxed a swap rate of 4.61% on a notional amount of $94,000,000. Upon issuance of the 2014 Notes, the Company terminated the forward starting interest rate swap agreement resulting in a gain of $4,148,000. The gain has been deferred and is being amortized as an adjustment to interest expense over the term of the 2014 Notes using the eÅective interest method. Each issuance of notes is redeemable at the option of the Company, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the notes being redeemed plus accrued interest thereon through the redemption date and (ii) the make-whole amount, as deÑned in the respective supplemental indenture notes. In connection with the debt oÅerings, the Company incurred debt issuance costs totaling $4,193,000 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 respective notes using the eÅective interest method. 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 Ñnancial covenants, which, among other things, require the Company to maintain (i) certain leverage ratios and (ii) certain interest coverage. At December 31, 2004, the Company was in compliance with those covenants. In the event that the Company violates any of the certain restrictive Ñnancial covenants, its access to the debt or equity markets may become impaired. In November 2001, the Company entered into an unsecured $70,000,000 term note (""Term Note''), due November 30, 2004, to Ñnance the acquisition of Captec Net Lease Realty, Inc. (""Captec'') and for the 20 repayment of indebtedness and related expenses in connection therewith. As of December 31, 2003, the Term Note had an outstanding principal balance of $20,000,000. The Term Note bore interest at a rate of 175 basis points above LIBOR. In November 2004, the Company used proceeds from the Credit Facility to repay the obligation of the Term Note. 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 Ì 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 Ñxed 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 2002, as a result of the appraisal action arising out of the Captec merger (see ""Results of Operations Ì 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. In 2004, the Company further reduced the number of common and Series A Preferred Stock shares issued and outstanding by 51 and 56, respectively. The reduction in shares represent the number of shares that would have been issued to the plaintiÅs 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 Ñled 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 shelf registration statement). In July 2003, the Company Ñled a prospectus supplement to its shelf registration statement and issued 5,600,000 shares of common stock and received gross proceeds of $100,800,000. In connection with this oÅering, 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 oÅering were used to fund a portion of the acquisition of the DC OÇce Properties (see ""Results of Operations Ì Property Analysis Ì Real Estate Held for Investment''). In August 2003, the Company Ñled a prospectus supplement to its shelf registration statement and issued 10,000 shares of Series B Convertible Preferred Stock and received gross proceeds of $25,000,000. In connection with this oÅering, the Company incurred stock issuance costs totaling approximately $687,000, consisting primarily of placement fees and legal and accounting fees. The Series B Convertible 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 Ñrst anniversary from the date on which the shares were issued. Holders of the Series B Convertible 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 Ñxed annual amount of $167.50 per share). The Series B Convertible 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 Convertible 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 oÅering were used to pay down outstanding indebtedness of the Company's Credit Facility. 21 In December 2003, the Company Ñled a prospectus supplement to its 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 oÅerings, the Company incurred stock issuance costs totaling approximately $671,000, consisting primarily of underwriters' commis- sions and fees, legal and accounting fees and printing expenses. Net proceeds from these oÅerings were used to pay down outstanding indebtedness of the Company's Credit Facility. Financing Lease Obligation. In July 2004, the Company sold Ñve investment properties for approxi- mately $26,041,000 and subsequently leased back the properties under a 10-year Ñnancing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the Ñnancing lease. In accordance with the provisions of Statement of Financial Accounting Standards (""SFAS'') No. 66, ""Accounting for Sales of Real Estate,'' the Company has recognized this as a Ñnancing transaction. The 10-year Ñnancing lease bears an interest rate of 5.00% annually with monthly interest payments of $109,000 and expires in June 2014 unless either the put or call option is exercised. The Company used the proceeds from two properties to reinvest in other Investment Properties and the remaining proceeds 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, oÇcers and other key associates, thereby aligning their interests with stockholders and providing them with a substantial motivation to enhance stockholder value. Pursuant to the Company's 2000 Performance Incentive Plan, the Company has granted and issued shares of restricted stock to certain oÇcers and directors of the Company. The following information is a summary of the restricted stock grants for the years ended December 31, 2004, 2003 and 2002: OÇcers: Shares 58,000 June 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40,407 March 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,000 April 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100,000 35,000 April 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,211 April 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,000 September 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 328,618 Directors: Annual Vesting Rate 15% - 30% 25% 15% - 30% 20% 20% 14.3% 14.3% June 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ June 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ August 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ December 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,000 6,000 4,500 868 50% 50% 50% 50% Total issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,368 Number of Years for Vesting Shares are 100% Vested on 5 4 5 4 5 6 6 2 2 2 2 January 1, 2007 January 1, 2007 January 1, 2008 January 1, 2008 January 1, 2009 January 1, 2010 January 1, 2011 January 1, 2004 January 1, 2005 January 1, 2006 January 1, 2006 During 2004 and 2003, the Company cancelled 29,926 and 5,950, respectively, shares of restricted stock. Investments in Unconsolidated AÇliates. In September 1997, the Company entered into a partnership, 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''). Under the terms of the limited partnership agreement of the Partnership, CTA had the right to convert its 80 percent limited partnership 22 interest into shares of the Company's common stock. In October 2003, CTA exercised that right, and, based on the terms of and calculation deÑned in the limited partnership agreement, the Company issued 953,551 shares of common stock to CTA in a private transaction in February 2004 in exchange for CTA's 80 percent limited partnership interest, increasing the Company's ownership in the Partnership to 100 percent. Prior to CTA's exercise, the Company accounted for its 20 percent interest in the Partnership under the equity method of accounting. Net income and losses of the Partnership were allocated to the partners in accordance with their respective percentage interest in the Partnership's term. The Company has entered into Ñve limited liability company (""LLC'') agreements (collectively, ""CCMH LLCs'') with Orange Avenue Mortgage Investments, Inc. (""OAMI''), formerly known as CNL Commercial Finance, Inc. Each of the LLCs holds an interest in mortgage loans and is 100 percent equity Ñnanced. The Company holds a non-voting and non-controlling interest in each of the LLCs and accounts for its investment under the equity method of accounting. The following table summarizes each of the investments as of December 31, 2004: Date of Agreement LLC Agreement Investment Interest June 2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CCMH I, LLC December 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CCMH II, LLC June 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CCMH III, LLC December 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CCMH IV, LLC July 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CCMH V, LLC 42.7% 44.0% 36.7% 38.3% 38.4% In 2003, in connection with a loan to OAMI, the Company pledged a portion of its interest in two of the LLC's 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 oÇce building and an interest in an adjacent parking garage. AÇliates of James M. SeneÅ, Jr. and Robert A. Bourne, each members of the Company's board of directors, own the remaining partnership interests. Since November 1999, the Company has leased its oÇce 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 points per annum on the unpaid principal amount. This guarantee shall continue through the loan maturity, which was extended from the original maturity of November 2004 to May 2005. Plaza intends to reÑnance the promissory note in 2005. Notes Receivable. Structured Ñnance agreements are typically loans secured by a pledge of ownership interests in the borrowers (or their subsidiaries) that own the underlying real estate. These agreements are typically subordinated to senior loans secured by Ñrst mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. In 2004 and 2003, the Company made structured Ñnance investments of $6,857,000 and $43,433,000, respectively. As of December 31, 2004, the structured Ñnance investments bear a weighted average interest rate of 14.3% per annum, of which 12.5% is payable monthly and the remaining 1.8% accrues and is due at maturity. The principal balance of each structured Ñnance investment is due in full at maturity, which range between November 2006 and November 2007. The structured Ñnance investments are secured by the borrowers' pledge of their respective membership interests in the certain subsidiaries which own real estate. In December 2004, the Company received $20,900,000 in principal payments and a $418,000 prepayment fee. As of December 31, 2004 and 2003, the outstanding receivable balance of the structured Ñnance investments was $29,390,000 and $43,433,000, respectively. In January 2005, the Company received $3,935,000 in principal payments; the outstanding receivable balance of the remaining structured Ñnance agreements was $25,455,000 with a weighted average interest rate of 11.8% per annum. 23 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 identiÑed the following critical accounting policies that aÅect the more signiÑcant judgments and estimates used in the preparation of the Company's consolidated Ñnancial statements. The preparation of the Company's consolidated Ñnancial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments on assumptions that aÅect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Ñnancial 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 Ñnancial statements. Management believes the following critical accounting policies among others aÅect its more signiÑcant judgment of estimates used in the preparation of the Company's consolidated Ñnancial statements. Real Estate Held for Investment 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 Ñnancing method. Such methods are described below: Operating method Ì 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 diÅerence between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis. Direct Ñnancing method Ì Leases accounted for using the direct Ñnancing 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 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 Öows (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) contractual to market value rent and (iii) value assigned to in-place leases. Deferred revenue or deferred assets recorded in 24 connection with the contractual to market rent value for acquired properties are amortized into rental revenue over the life of the leases. The value assigned to in-place leases is amortized over the life of the leases. Real Estate Held for Sale. Services acquires, develops and currently owns properties that it intends to sell. The properties that are classiÑed as held for sale at any given time may consist of properties that have been acquired in the marketplace with the intent to resell the properties that have been, or are currently being, constructed by Services. Services' records the acquisition of the real estate at cost, including the acquisition and closing costs. The cost of the real estate developed by Services includes direct and indirect costs of construction, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. The asset is not depreciated. In accordance with the provisions of Statement of Financial Accounting Standards (""SFAS'') No. 144, ""Accounting for the Impairment or Disposal of Long-Lived Assets,'' Services classiÑes its real estate held for sale as discontinued operations when rental revenues are generated. When real estate held for sale is disposed of, the related costs are removed from the accounts and gains and losses from the dispositions are reÖected in earnings. Income Taxes. The Company has 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 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 REIT. For each of the years in the three-year period ended December 31, 2004, the Company believes it has qualiÑed as a REIT. Not withstanding the Company's qualiÑcation for taxation as a real estate investment trust, the Company is subject to certain state taxes on its income and real estate. EÅective January 1, 2001, Commercial Net Lease Realty, Inc. elected for Services to be treated as a TRS pursuant to the provisions of the REIT Modernization Act. As a TRS, Services is able to engage in activities resulting in income that previously would have been disqualiÑed from being eligible REIT income under the federal income tax regulations. As a result, certain activities of the Company which occur within Services are therefore subject to federal and state income taxes. All provisions for federal income taxes in the accompanying consolidated Ñnancial statements are attributable to Services. Income taxes are accounted for under the asset and liability method as required by SFAS No. 109, ""Accounting for Income Taxes.'' Deferred tax assets and liabilities are recognized for the temporary diÅerences based on estimated future tax consequences attributable to diÅerences between the Ñnancial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in eÅect for the year in which those temporary diÅerences are expected to be recovered or settled. The eÅect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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 Ñnancial 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, the collectibility of receivables from tenants, including accrued rental income, and capitalized overhead relating to development projects. Actual results could diÅer from those estimates. Property Analysis Property Analysis Ì Real Estate Held for Investment General. As of December 31, 2004, the Company owned 362 Investment Properties that are leased to established tenants, including Academy, Barnes & Noble, Best Buy, Borders, CVS, Eckerd, OÇceMax, The Sports Authority, United Rentals and the United States of America. Approximately 97 percent of the gross 25 leaseable area of the Company's portfolio of Investment Properties was leased at December 31, 2004. The following table summarizes the Company's portfolio of Investment Properties as of December 31: 2004 2003 2002 Investment Properties Owned: NumberÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total gross leaseable area (square feet) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 362 8,542,000 348 7,907,000 350 6,655,000 Investment Properties Leased: NumberÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total gross leaseable area (square feet) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Percent of total gross leaseable area ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted average remaining lease term (years) ÏÏÏÏÏÏÏÏ 351 8,322,000 337 7,669,000 330 6,293,000 97% 10 97% 11 94% 12 The Company regularly evaluates its (i) portfolio of Investment Properties, (ii) Ñnancial position, (iii) market opportunities and (iv) strategic objectives and, based on certain factors, may decide 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 revolving credit facility, proceeds for debt or equity oÅerings and to a lesser extent, proceeds generated from like-kind exchange transactions. The following table summarizes the Investment Property acquisitions for each of the years ended December 31: 2004 2003 2002 Acquisitions: Number of Investment Properties ÏÏÏÏÏÏÏÏÏÏÏÏ Gross leaseable area (square feet)ÏÏÏÏÏÏÏÏÏÏÏÏ 36 825,000 23 1,439,000 Construction projects: Properties completed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross leaseable area (square feet)ÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1 14,000 9 267,000 1 14,000 Tenant improvements Number of Investment Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total dollars investedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 $139,303,000 9 $212,317,000 7 $45,541,000 In August 2003, the Company acquired the DC OÇce Properties. Pursuant to the lease agreement, the Company has agreed to fund $27,322,000 for building and tenant improvements, of which $23,850,000 had been funded as of December 31, 2004. The Company anticipates funding the additional costs, which are anticipated to be substantially complete by June 30, 2005, from borrowings under the Company's Credit Facility. The properties include two oÇce buildings containing an aggregate of 555,000 rentable square feet and a two-level garage with approximately 1,000 parking spaces. Property Dispositions. The Company typically uses property sales proceeds to either (i) pay down the outstanding indebtedness of the Company's Credit Facility or (ii) reinvest in real estate. The following table summarizes the properties held for investment sold by the Company for each of the years ended December 31: 2004 2003 2002 20 Number of properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 155,000 Gross leaseable areaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net sales proceeds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $32,444,000 Net gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,452,000 14 345,000 $25,023,000 161,000 $ 19 408,000 $29,928,000 256,000 $ During 2004 and 2003, the Company used the proceeds from the dispositions to pay down the outstanding indebtedness of the Company's Credit Facility. 26 During 2002, the Company reinvested the proceeds from three of the investment properties sold to reinvest in additional Investment Properties and the proceeds from the sale of the remaining 16 investment properties to pay down the outstanding indebtedness of the Company's Credit Facility. In accordance with Statement of Financial Accounting Standards (""SFAS'') No. 144, ""Accounting for the Impairment or Disposal of Long-Lived Assets,'' the Company has classiÑed its investment properties sold during the years ended December 31, 2004, 2003 and 2002, as discontinued operations. In addition, the Company has classiÑed one leasehold interest that expired during the year ended December 31, 2004 as discontinued operations. All investment properties sold subsequent to December 31, 2001, the eÅective date of SFAS No. 144, have been reclassiÑed to discontinued operations. Property Analysis Ì Real Estate Held for Sale General. The Company's real estate held for sale is operated through Services, which directly and indirectly, through investment interests, acquires and develops real estate primarily for the purpose of selling the real estate to purchasers who are looking for replacement like-kind exchange property or to other purchasers with diÅerent investment objectives. The following summarizes the Company's real estate held for sale as of December 31: Number of properties held for sale: Completed Inventory Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Properties under construction ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Land parcels ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 2003 2002 10 7 4 21 6 5 4 15 15 3 1 19 Property Acquisitions. Inventory Property acquisitions are typically funded using funds from the Company's credit facility and proceeds from debt or equity oÅerings. The following table summarizes the Inventory Property acquisitions for each of the years ended December 31: Acquisitions: 2004 2003 2002 Number of properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dollars invested ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33 $48,318,000 23 $38,836,000 13 $11,672,000 Completed construction: Number of properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dollars invested ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total dollars invested in real estate held for sale ÏÏÏÏ 8 $26,366,000 $76,647,000 8 $23,169,000 $63,469,000 9 $23,178,000 $30,875,000 27 Property Dispositions. The following table summarizes the number of inventory properties sold and the corresponding gain recognized from the disposition of real estate held for sale included in earnings from continuing and discontinued operations for each of the years ended December 31 (dollars in thousands): Continuing operations ÏÏÏÏÏÏÏÏ Discontinued operations: Gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intersegment eliminations ÏÏ Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏ Total discontinued operations 2004 2003 2002 # of Properties Gain # of Properties Gain # of Properties Gain 7 $ 4,700 3 $ 3,247 4 $1,290 17,885 817 18,702 (6,422) 12,280 $16,980 26 29 7,891 1,037 8,928 (986) 7,942 $11,189 21 25 4,489 1,966 6,455 Ì 6,455 $7,745 17 24 During the years ended December 31, 2004, 2003 and 2002, the Company used the proceeds from the sale of the inventory properties to pay down the outstanding indebtedness of the Company's Credit Facility. 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 ""Capital Resources Ì 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 diversiÑcation, produced cost savings from opportunities for economies of scale and operating eÇciencies and enhanced the Company's capital markets proÑle. In January 2002, beneÑcial 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), Ñled 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. As a result of this action, the plaintiÅs were not entitled to receive the Company's common and Series A Preferred Stock as oÅered 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 plaintiÅs 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. In 2004, the Company further reduced the number of common and Series A Preferred Stock shares issued and outstanding by 51 and 56, 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 beneÑcial owners of the 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 28 settlement of the legal action. In February 2003, the parties Ñled a stipulation and order of dismissal and the Court entered the order of dismissal, dismissing the Appraisal Action with prejudice. Anticipated Merger In January 2005, the Company entered into an agreement with National Properties Corporation (""NAPE''), which provided that NAPE would merge with and into a subsidiary of the Company. At the time of the merger agreement, NAPE owned 43 properties located in 12 states which were leased to 17 tenants. If the acquisition is consummated, the Company will issue approximately 1,637,000 shares of common stock to holders of NAPE common stock. Total consideration for the merger transaction is estimated to be approximately $61,000,000 based on the Company's closing stock price on the date of the merger agreement. Completion of the merger is subject to customary closing conditions, including the approval of the holders of a majority of the outstanding shares of NAPE common stock. The Company has entered into a shareholders' agreement with the holders of approximately 53 percent of the outstanding NAPE common stock whereby these holders have agreed to vote in favor of the merger. However, the Company may terminate the merger agreement if a majority of the NAPE shareholders who are not bound by the shareholders' agreement do not approve the merger. The merger does not require approval by the Company's shareholders. The Company anticipates that the merger will be completed not later than the second quarter of 2005. Revenue From Operations Analysis General. During the year ended December 31, 2004, the Company's rental income increased primarily due to the acquisition of DC OÇce Properties in August 2003 and other Investment Properties (See ""Results of Operations Ì Property Analysis Ì Real Estate Held For Investment Ì Property Acquisitions'') and maintaining an occupancy rate of 97 percent at December 31, 2004 and 2003. The Company anticipates any signiÑcant increase in rental income will continue to come primarily from additional property acquisitions. The following summarizes the Company's revenues (dollars in thousands): 2004 2003 2002 Percent of Total Percent of Total Percent of Total Rental income(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $111,135 Real estate expense reimbursement from 85.9% $ 92,929 89.7% $78,036 92.9% tenants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gain on disposition of real estate held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest and other income from real 5,756 4.5% 5,048 4.9% 2,932 3.5% 4,700 3.6% 3,247 3.1% 1,290 1.5% estate transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,718 6.0% 2,390 2.3% 1,773 2.1% Total revenue from continuing operations $129,309 100.0% $103,614 100.0% $84,031 100.0% (1) Includes rental income from operating leases, earned income from direct Ñnancing leases and contingent rental income from continuing operations (""Rental Income''). Revenue From Operations Analysis by Source of Income. The Company has identiÑed two primary business segments, and thus, sources of revenue: (i) earnings from real estate held for investment and (ii) earnings from real estate held for sale. Breaking down revenues into the Company's two primary operating segments of revenue shows that revenues are historically consistent. Operating segments are components of an enterprise about which separate Ñnancial information is available that is evaluated regularly by the chief 29 operating decision makers in deciding how to allocate resources and in assessing performance. The following table summarizes the revenues from continuing operations (dollars in thousands): Real estate, held for investment ÏÏÏÏÏÏÏÏ $124,374 4,935 Real estate, held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 96.2% $ 99,760 3,854 3.8% 96.3% $82,171 1,860 3.7% 2004 2003 2002 Percent of Total Percent of Total Percent of Total 97.8% 2.2% Total revenue from continuing operations $129,309 100.0% $103,614 100.0% $84,031 100.0% The Company evaluates its ability to pay dividends to stockholders by considering the combined eÅect of income from continuing and discontinued operations. Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003. Rental Income increased 19.6 percent for the year ended December 31, 2004, as compared to the year ended December 31, 2003, primarily due to the addition of an aggregate gross leaseable area of 825,000 square feet to the Company's portfolio resulting from the acquisition of 36 Investment Properties during the year ended December 31, 2004 and the addition of 24 Investment Properties with an aggregate gross leaseable area of 1,453,000 during the year ended December 31, 2003. However, this increase is partially oÅset by the investment property dispositions during the years ended December 31, 2004 and 2003. Real estate expense reimbursements from tenants increased 14 percent for the year ended December 31, 2004, as compared to the year ended December 31, 2003, primarily due to the addition of properties that reimburse for expenses, see ""Results of Operations Ì Property Analysis Ì Real Estate Held for Investment''. The gain on disposition of real estate held for sale included in continuing operations, increased 44.8 percent for the year ended December 31, 2004, as compared to the year ended December 31, 2003, primarily due to the increase in gross margin on sales of inventory properties. During the year ended December 31, 2004, the Company disposed of seven inventory properties and recognized a gain of $4,700,000 compared to three inventory properties for a $3,247,000 gain for the year ended December 31, 2003. Interest and other income from real estate transactions increased 222.9 percent for the year ended December 31, 2004 as compared to the year ended December 31, 2003, primarily due to the interest earned on the $50,290,000 structured Ñnance investments entered into since October 2003. However, this increase was partially oÅset by a decrease in development fees. Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002. Rental Income increased 19.1 percent for the year ended December 31, 2003 due to a three percent increase in the Company's Investment Property portfolio occupancy rate (97 percent at December 31, 2003 versus 94 percent at December 31, 2002) and the addition of 24 Investment Properties with an aggregate gross leaseable area of 1,453,000 square feet and the completed tenant improvements on nine Investment Properties. However, this increase is partially oÅset by the investment property dispositions during the years ended December 31, 2003 and 2002. Real estate expense reimbursements from tenants increased 72.2 percent for the year ended Decem- ber 31, 2003, as compared to the year ended December 31, 2002, primarily due to the addition of properties and the addition of real estate expenses reimbursed by tenants from the DC OÇce Properties, see ""Property Analysis Ì Real Estate Held for Investment''. The gain on disposition of real estate held for sale included in continuing operations, increased 151.6 percent, as compared to the year ended December 31, 2002, primarily due to the increase in gross margin on sales of inventory properties. During the year ended December 31, 2003, the Company disposed of three inventory properties and recognized a gain of $3,247,000 compared to four inventory properties for a $1,290,000 gain for the year ended December 31, 2002. 30 Interest and other income from real estate transactions increased 34.8 percent for the year ended December 31, 2003, compared to the year ended December 31, 2002. This increase was primarily attributable to (i) the $45,200,000 structured Ñnance investment entered into in October 2003, and (ii) an increase in development fees. However, the increase was partially oÅset by a decrease in mortgage interest income. Expense Analysis General. During 2004 operating expenses increased primarily as a result of the acquisition of additional properties but remained generally proportionate to the Company's total revenue. The following summarizes the Company's expenses (dollars in thousands): General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏ Provision for loss on impairment of real estateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dissenting shareholders' settlementÏÏÏÏÏÏÏÏ Transition costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total operating expenses from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 2003 2002 Percent of Total Percent of Total Percent of Total $22,996 12,161 17,138 41.0% $21,696 7,394 21.7% 13,217 30.6% 48.5% $16,324 4,365 16.5% 10,843 29.6% Ì Ì 3,741 Ì Ì 6.7% Ì 2,413 Ì Ì 5.4% Ì 1,613 Ì Ì 49.2% 13.2% 32.7% 4.9% Ì Ì $56,036 100.0% $44,720 100.0% $33,145 100.0% Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003. In general, operating expenses increased 25.3 percent for the year ended December 31, 2004, over the year ended December 31, 2003, and increased as a percentage of total revenues by 0.1 percent to 43.3 percent. General and administrative expenses increased 6.0 percent for the year ended December 31, 2004, but decreased as a percentage of total revenues by 3.1 percent to 17.8 percent. General and administrative expenses increased for the year ended December 31, 2004, primarily as a result of increases in expenses related to personnel. In addition, expenses related to professional services provided to the Company increased for the year ended December 31, 2004. For the year ended December 31, 2004, this increase is partially oÅset by a decrease in state taxes paid by the Company. Real estate expenses increased 64.5 percent for the year ended December 31, 2004, and increased as a percentage of total revenues by 2.3 percent to 9.4 percent. Real estate expenses for the year ended December 31, 2004, increased primarily due to the August 2003 acquisition of the DC OÇce Properties. The DC OÇce Properties lease and the revenues related to such real estate expenses are included in real estate expense reimbursement from tenants. Real estate expenses related to the DC OÇce Properties were 59.6 and 51.3 percent, respectively, of total real estate expenses for the years ended December 31, 2004 and 2003, respectively. In addition, real estate expenses on vacant properties increased for the year ended December 31, 2004. Depreciation and amortization expense increased 29.7 percent for the year ended December 31, 2004, and increased 0.5 percent to 13.3 percent of total revenues for the year ended December 31, 2004. The increase in depreciation and amortization expense for the year ended December 31, 2004, is primarily attributable (i) the depreciation on the acquisition of 36 additional Investment Properties and the tenant improvements on four Investment Properties since December 31, 2003, and (ii) the amortization of additional lease costs. The increase is partially oÅset by a decrease in the amortization of debt costs and the decrease in depreciation resulting from the disposition of 21 and 14 investment properties during each of the years ended December 31, 2004 and 2003, respectively. 31 During the year ended December 31, 2003, the Company recorded a dissenting shareholders' settlement expense of $2,413,000 related to the lawsuit that arose as a result of the merger with Captec in December 2001. (See ""Results of Operations Ì Merger Transactions''). During the year ended December 31, 2004, the Company recorded transition costs of $3,741,000, including severance, accelerated vesting of restricted stock and recruitment costs in connection with the appointment of Craig Macnab as Chief Executive OÇcer in February 2004, and the resignation of Gary M. Ralston as President and Chief Operating OÇcer in May 2004. Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002. Operating expenses increased 34.9 percent for the year ended December 31, 2003 over the year ended December 31, 2002, and increased as a percentage of total revenues by 3.8 percent to 43.2 percent. General and administrative expenses increased 32.9 percent for the year ended December 31, 2003, and increased as a percentage of total revenues by 1.5 percent to 20.9 percent. General and administrative expenses increased for the year ended December 31, 2003 primarily as a result of (i) increases in expenses related to personnel costs, (ii) increases in expenses related to professional services provided to the Company, and (iii) increases in state taxes. Real estate expenses increased 69.4 percent for the year ended December 31, 2003 primarily due to the August 2003 acquisition of the DC OÇce Properties, increasing as a percentage of total revenues by 1.9 percent to 7.1 percent. The DC OÇce Properties lease and the revenues related to such real estate expenses are included in real estate expense reimbursements from tenants. Real estate expenses related to the DC OÇce Properties were 51.3 percent of total real estate expenses for the year ended December 31, 2003. The increase in real estate expenses was partially oÅset 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 21.9 percent for the year ended December 31, 2003, but decreased as a percentage of total revenues by 0.1 percent to 12.8 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 Investment Properties in 2003, (ii) the amortization of loan costs related to the amended Credit Facility and the Term Note, and (iii) the amortization of additional lease costs. 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 $1,613,000 and $1,672,000 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 Öows 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. (See ""Results of Operations Ì Merger Transactions''). Analysis of Other Expenses and Revenues General. During the year ended December 31, 2004, interest and other income and interest expense increased with the acquisition of additional properties but remained generally proportionate to the Company's 32 total revenue and expenses. The following summarizes the Company's other expenses (revenues) from continuing operations (dollars in thousands): 2004 2003 2002 Percent of Total Percent of Total Percent of Total Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(3,779) 32,463 (13.2)% $(3,346) 113.2% 26,754 (14.3)% $(3,890) 114.3% 25,179 (18.3)% 118.3% Total other expenses (revenues) from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $28,684 100.0% $23,408 100.0% $21,289 100.0% Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003. In general, other expenses (revenues) increased 22.5 percent for the year ended December 31, 2004, over the year ended December 31, 2003, but decreased as a percentage of total revenues by 0.4 percent to 22.2 percent. Interest expense increased 21.3 percent for the year ended December 31, 2004, but decreased as a percentage of total revenues by 0.7 percent to 25.1 percent for the year ended December 31, 2004. The increase in interest expense for the year ended December 31, 2004, was primarily attributable to an increase in the long-term Ñxed rate average debt outstanding of $475,802,000 as of December 31, 2004, including the addition of the $95,000,000 Ñxed rate mortgage loan entered into in November 2003. However, the increase in interest expense was partially oÅset by a lower average debt outstanding of $39,869,000 as of December 31, 2004 on the Company's short-term variable interest rate debt. Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002. In general, other expenses (revenues) increased 10.0 percent for the year ended December 31, 2003, over the year ended December 31, 2002, but decreased as a percentage of total revenues by 2.7 percent to 22.6 percent. Interest and other income decreased 14.0 percent for the year ended December 31, 2003, and decreased as a percentage of total revenues by 1.3 percent to 3.2 percent. Interest and other income decreased for the year ended December 31, 2003, primarily as a result of a decrease of interest earned on a note receivable and a related party line of credit. Interest expense increased 6.3 percent for the year ended December 31, 2003, but decreased as a percentage of total revenues by 4.2 percent to 25.8 percent for the year ended December 31, 2003. The increase in interest expense for the year ended December 31, 2003, was primarily as a result of reÑnancing a portion of the Company's Credit Facility and Term Note to long-term Ñxed rate debt, including the 2012 Notes and the $21,000,000 Ñxed rate mortgage loan, both entered into in June 2002 and the addition of the $95,000,000 Ñxed rate mortgage loan entered into in November 2003, as a means to reduce Öoating interest rate risk. However, the increase in interest expense was partially oÅset by a decrease in the average interest rates on the Company's variable interest rate debt. Unconsolidated AÇliates For details on each of the Company's unconsolidated aÇliates, see ""Capital Resources Ì Investments in Unconsolidated AÇliates.'' During the years ended December 31, 2004, 2003 and 2002, the Company recognized equity in earnings of unconsolidated aÇliates of $4,724,000, $4,341,000 and $1,800,000, respectively. The increase in equity in earnings of unconsolidated aÇliates was primarily attributable to the income earned on investments in mortgage loans. Earnings from Discontinued Operations The Company has recorded discontinued operations by the deÑned Company segments: (i) real estate held for investment and (ii) real estate held for sale. As a result, in accordance with SFAS No. 144, ""Accounting for the Impairment or Disposal of Long-Lived Assets,'' the Company classiÑed the revenues 33 and expenses related to its investment properties that were sold and expired leasehold interests subsequent to December 31, 2001, as discontinued operations. The Company also classiÑed the revenues and expenses of its held for sale properties that were sold and generated rental revenues as discontinued operations. In addition, the Company also classiÑed the revenues and expenses related to its 21 Inventory Properties held for sale as of December 31, 2004, as discontinued operations. During the years ended December 31, 2004, 2003 and 2002, the Company recognized earnings from discontinued operations of (dollars in thousands): Real estate, held for investment(1) ÏÏÏ Real estate, held for sale ÏÏÏÏÏÏÏÏÏÏÏÏ # of Sold Properties 21 17 38 2004 $ 4,766 9,544 $14,310 # of Sold Properties 14 26 40 2003 $ 4,330 6,277 $10,607 # of Sold Properties 19 21 40 2002 $ 8,023 5,604 $13,627 (1) 2004 includes one expired leasehold interest. The Company occasionally sells investment 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 eÅect of income from continuing and discontinued operations. 34 Item 7A. 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, Ñxed rate debt used to Ñnance 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 Öows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows at both Ñxed and variable rates on its long-term debt. The Company entered into a forward starting interest rate swap in February 2004 and terminated the swap eÅective June 2004 for a swap gain of $4,148,000. The Company had no outstanding derivatives as of December 31, 2004 and 2003. The information in the table below summarizes the Company's market risks associated with its debt obligations outstanding as of December 31, 2004 and 2003. The table presents principal cash Öows and related interest rates by year of expected maturity for debt obligations outstanding as of December 31, 2004. The variable interest rates shown represent the weighted average rates for the Credit Facility and Term Note at the end of the periods. As the table incorporates only those exposures that exist as of December 31, 2004, it does not consider those exposures or positions which could arise after those dates. Moreover, because Ñrm 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 Öuctuations will depend on the exposures that arise during the period, the Company's hedging strategies at that time and interest rates. Variable Rate Credit Facility Fixed Rate Mortgages Fixed Rate Notes Financing Lease Obligation(3) Debt Obligations (dollars in thousands)(1) Weighted Average Interest Rate(2) Ì 2.72% Ì Ì Ì Ì Debt Obligation $ Ì 17,900 Ì Ì Ì Ì 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2008ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2009ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $17,900 Weighted Average Interest Rate 6.20% 6.00% 5.92% 5.86% 5.83% 7.08% Debt Obligation(4) $ Ì Ì Ì 99,892 Ì 223,240 $323,132 Weighted Average Interest Rate 6.77% 6.77% 6.77% 6.64% 6.59% 6.25% Debt Obligation $ Ì Ì Ì Ì Ì 26,041 $26,041 Weighted Average Interest Rate 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Debt Obligation $ 4,070 22,376 8,776 1,156 964 119,826 $157,168 Fair Value: December 31, 2004 ÏÏÏÏÏ $17,900 2.72% $157,168 6.27% $353,647 7.04% $26,041 5.00% December 31, 2003 ÏÏÏÏÏ $27,800 2.41% $149,861 6.68% $295,139 7.54% $ Ì Ì (1) The $20,000,000 variable rate term note matured in 2004. As of December 31, 2003, the term note had a weighted average interest rate of 3.01% and a fair value of $20,000,000. (2) 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. (3) In July 2004, the Company sold Ñve investment properties for $26,041,000 and subsequently leased back the properties under a 10-year Ñnancing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the Ñnancing lease. (4) Net of unamortized note discounts and unamortized interest rate hedge gain. 35 Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Commercial Net Lease Realty, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of earnings, stockholders' equity, and cash Öows for each of the years in the three-year period ended December 31, 2004. In connection with our audits of the consolidated Ñnancial statements, we also have audited Ñnancial statement schedules III and IV. These consolidated Ñnancial statements and Ñnancial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated Ñnancial statements and Ñnancial statement schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Ñnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial statements. An audit also includes assessing the accounting principles used and signiÑcant estimates made by management, as well as evaluating the overall Ñnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated Ñnancial statements referred to above present fairly, in all material respects, the Ñnancial position of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash Öows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related Ñnancial statement schedules, when considered in relation to the basic consolidated Ñnancial statements taken as a whole, present fairly, in all material respects, the information set forth therein. EÅective January 1, 2004, the Company implemented Financial Accounting Standards Board Interpreta- tion No. 46, revised December 2003, ""Consolidation of Variable Interest Entities'' (FIN 46R) and has restated all prior period consolidated Ñnancial statements to reÖect its adoption. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the eÅectiveness of Commercial Net Lease Realty, Inc.'s internal control over Ñnancial reporting as of December 31, 2004, based on criteria established in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 9, 2005 expressed an unqualiÑed opinion on management's assessment of, and the eÅective operation of, internal control over Ñnancial reporting. Orlando, Florida March 9, 2005 36 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Commercial Net Lease Realty, Inc. and Subsidiaries: We have audited management's assessment, included in Management's Report on Internal Control Over Financial Reporting, that Commercial Net Lease Realty, Inc. maintained eÅective internal control over Ñnancial reporting as of December 31, 2004, based on criteria established in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Commercial Net Lease Realty, Inc.'s management is responsible for maintaining eÅective internal control over Ñnancial reporting and for its assessment of the eÅectiveness of internal control over Ñnancial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the eÅectiveness of the Company's internal control over Ñnancial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether eÅective internal control over Ñnancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over Ñnancial reporting, evaluating management's assessment, testing and evaluating the design and operating eÅectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over Ñnancial reporting is a process designed to provide reasonable assurance regarding the reliability of Ñnancial reporting and the preparation of Ñnancial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over Ñnancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reÖect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of Ñnancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material eÅect on the Ñnancial statements. Because of its inherent limitations, internal control over Ñnancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of eÅectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Commercial Net Lease Realty, Inc. maintained eÅective internal control over Ñnancial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Commercial Net Lease Realty, Inc. maintained, in all material respects, eÅective internal control over Ñnancial reporting as of December 31, 2004, based on criteria established in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 37 We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of earnings, stockholders' equity and cash Öows for each of the years in the three-year period ended December 31, 2004, and the related Ñnancial statement schedules III and IV and our report dated March 9, 2005 expressed an unqualiÑed opinion on those consolidated Ñnancial statements and the related Ñnancial statement sched- ules III and IV. Orlando, Florida March 9, 2005 38 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) December 31, 2004 2003 Real estate, held for investment: ASSETS Accounted for using the operating method, net of accumulated depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,009,397 102,311 58,049 29,307 Ì Accounted for using the direct Ñnancing methodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate, held for sale net of accumulated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investments in and other receivables from unconsolidated aÇliates ÏÏÏÏÏÏÏÏÏÏÏ Line of credit, note and accrued interest receivable from related party ÏÏÏÏÏÏÏÏ Mortgages, notes and accrued interest receivable, net of allowance of $896 and $979, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Receivables, net of allowance of $924 and $1,590, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued rental income, net of allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Debt costs, net of accumulated amortization of $8,063 and $6,714, respectively Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income tax assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45,564 1,947 6,636 28,619 3,926 14,292 Ì Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,300,048 $ 887,124 102,970 45,822 39,606 16,530 68,423 5,335 4,740 25,322 3,776 11,596 2,534 $1,213,778 LIABILITIES AND STOCKHOLDERS' EQUITY Line of credit payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Mortgages payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Notes payable, net of unamortized discount of $847 and $530, respectively, and unamortized interest rate hedge gain of $3,979 and $288, respectively ÏÏÏÏÏÏÏ Financing lease obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minority interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stockholders' equity: 17,900 157,168 $ 27,800 149,861 323,132 26,041 4,334 11,745 702 541,022 2,028 289,758 Ì 3,820 11,508 Ì 482,747 277 Preferred stock, $0.01 par value. Authorized 15,000,000 shares Series A, 1,781,589 and 1,781,645 shares issued and outstanding, at December 31, 2004 and 2003, respectively; stated liquidation value of $25 per share ÏÏÏÏÏ Series B convertible, 10,000 shares issued and outstanding, at December 31, 2004 and 2003; stated liquidation value of $2,500 per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common stock, $0.01 par value. Authorized 190,000,000 shares; 52,077,825 and 50,001,898 shares issued and outstanding at December 31, 2004 and 2003, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Excess stock, $0.01 par value. Authorized 205,000,000 shares; none issued or outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital in excess of par valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated dividends in excess of net earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44,540 44,541 25,000 25,000 521 500 Ì 725,337 (35,188) (3,212) 756,998 $1,300,048 Ì 691,704 (28,167) (2,824) 730,754 $1,213,778 See accompanying notes to consolidated Ñnancial statements. 39 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Dollars in thousands, except per share data) Year Ended December 31, 2003 2004 2002 Revenues: Rental income from operating leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earned income from direct Ñnancing leasesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate expense reimbursement from tenants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Contingent rental incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gain on disposition of real estate, held for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest and other income from real estate transactionsÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating expenses: General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for loss on impairment of real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dissenting shareholders' settlement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Transition costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other expenses (revenues): Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings from continuing operations before provision for income taxes, minority interest and equity in earnings of unconsolidated aÇliates ÏÏÏ Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings from continuing operations before minority interest and equity in earnings of unconsolidated aÇliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings from continuing operations before equity in earnings of unconsolidated aÇliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Equity in earnings of unconsolidated aÇliatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings from continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings from discontinued operations: Real estate, held for investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate, held for sale, net of provision for income taxes and minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Series A preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Series B convertible preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net earnings available to common stockholders Ì basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Series B convertible preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net earnings available to common stockholders Ì diluted ÏÏÏÏÏÏÏÏÏÏÏÏ $ 99,863 10,861 5,756 411 4,700 7,718 129,309 $ 81,854 10,670 5,048 405 3,247 2,390 103,614 $66,765 10,864 2,932 407 1,290 1,773 84,031 16,324 4,365 10,843 1,613 Ì Ì 33,145 50,886 21,696 7,394 13,217 Ì 2,413 Ì 44,720 58,894 (3,346) 26,754 23,408 (3,890) 25,179 21,289 35,486 2,902 38,388 137 38,525 4,341 42,866 29,597 3,042 32,639 (8) 32,631 1,800 34,431 22,996 12,161 17,138 Ì Ì 3,741 56,036 73,273 (3,779) 32,463 28,684 44,589 2,542 47,131 (1,231) 45,900 4,724 50,624 4,766 4,330 8,023 9,544 14,310 64,934 (4,008) (1,675) 59,251 Ì $ 59,251 6,277 10,607 53,473 (4,008) (502) 48,963 502 $ 49,465 5,604 13,627 48,058 (4,010) Ì 44,048 Ì $44,048 See accompanying notes to consolidated Ñnancial statements. 40 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Ì CONTINUED (Dollars in thousands, except per share data) Net earnings per share of common stock: Basic: Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Diluted: Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Weighted average number of common shares outstanding: Year Ended December 31, 2003 2002 2004 0.87 0.28 1.15 0.87 028 1.15 $ $ $ $ 0.89 0.25 1.14 0.89 0.24 1.13 $ $ $ $ 0.75 0.34 1.09 0.75 0.34 1.09 Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,312,434 43,108,213 40,383,405 Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,742,518 43,896,800 40,588,957 See accompanying notes to consolidated Ñnancial statements. 41 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2004, 2003 and 2002 (Dollars in thousands, except per share data) Series B Series A Convertible Preferred Preferred Common Excess of Par Excess of Net on Restricted Comprehensive Capital in Accumulated Dividends in Compensation Deferred Accumulated Other Stock Stock Stock Value Earnings Stock Income Total Balance at December 21, 2001 ÏÏ $50,000 $ Ì $406 Ì Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends declared and paid Ì Ì $531,677 Ì $(14,527) 48,058 $(2,916) Ì $ Ì $564,640 48,058 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì (4,010) Ì (51,178) (5) (6,509) 2 1 Ì Ì 2,752 982 (14) Ì Ì Ì Ì Ì Ì 44,551 Ì Ì 404 Ì Ì 528,888 Ì (21,657) 53,473 ($2.25 per share of Series A Preferred Stock)ÏÏÏÏÏÏÏÏÏÏÏÏ Dividends declared and paid ($1.27 per share of common stock)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Reversal of 217,950 shares of preferred stock and 474,037 shares of common stock originally oÅered to the dissenting stockholders in connection with the merger in 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,449) Issuance of 214,490 shares of common stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Issuance of 64,000 shares of restricted common stock ÏÏÏÏÏ Stock issuance costsÏÏÏÏÏÏÏÏÏÏÏ Amortization of deferred compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Balances at December 31, 2002 Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends declared and paid ($2.25 per share of Series A Preferred Stock)ÏÏÏÏÏÏÏÏÏÏÏÏ Dividends declared and paid ($50.25 per share of Series B Convertible Preferred Stock) Dividends declared and paid ($1.28 per share of common stock)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Reversal of 379 shares of preferred stock and 823 shares of common stock originally oÅered to the dissenting stockholders in connection with the merger in 2001 ÏÏÏÏÏ Issuance of 9,528,653 shares of common stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Issuance of 10,000 shares of Ì Ì Ì Ì Ì Ì Ì (10) Ì Ì Ì Ì Ì Ì preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 25,000 Issuance of 76,407 shares of restricted common stock ÏÏÏÏÏ Cancellation of 5,950 shares of restricted common stock ÏÏÏÏÏ Stock issuance costsÏÏÏÏÏÏÏÏÏÏÏ Amortization of deferred compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 95 Ì 1 Ì Ì Ì Ì Ì (4,008) (502) Ì (55,473) (11) 168,512 Ì 1,140 (91) (6,734) Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì (983) Ì 854 (3,045) Ì Ì Ì Ì Ì Ì Ì (1,141) 91 Ì 1,271 Ì (4,010) Ì (51,178) Ì (11,963) Ì Ì Ì Ì 2,754 Ì (14) 854 Ì 549,141 53,473 Ì Ì Ì (4,008) (502) Ì (55,473) Ì (21) Ì 168,607 Ì Ì Ì Ì Ì 25,000 Ì Ì (6,734) 1,271 Balances at December 31, 2003 44,541 25,000 500 691,704 (28,167) (2,824) Ì 730,754 See accompanying notes to consolidated Ñnancial statements. 42 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Ì (Continued) Years Ended December 31, 2004, 2003 and 2002 (Dollars in thousands, except per share data) Series B Series A Convertible Preferred Preferred Common Excess of Par Excess of Net on Restricted Comprehensive Capital in Accumulated Dividends in Compensation Deferred Accumulated Other Stock Stock Stock Value Earnings Stock Income Total Balances at December 31, 2003 Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends declared and paid ($2.25 per share of Series A Preferred Stock)ÏÏÏÏÏÏÏÏÏÏÏÏ Dividends declared and paid ($167.50 per share of Series B Convertible Preferred Stock) Dividends declared and paid ($1.29 per share of common stock)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred changes in fair value of interest rate swap ÏÏÏÏÏÏÏÏÏÏÏ Reversal of 56 shares of preferred stock and 51 shares of common stock originally oÅered to the dissenting stockholders in connection with the merger in 2001 ÏÏÏÏÏ Issuance of 886,962 shares of common stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Issuance of 953,551 shares of common stock in exchange for a partnership interest ÏÏÏÏÏÏÏÏ Issuance of 205,579 shares of restricted common stock ÏÏÏÏÏ Cancellation of 29,926 shares of restricted common stock ÏÏÏÏÏ Stock issuance costsÏÏÏÏÏÏÏÏÏÏÏ Amortization of deferred compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Termination and reclass of interest rate swap ÏÏÏÏÏÏÏÏÏÏÏ 44,541 Ì 25,000 Ì 500 Ì 691,704 Ì (28,167) 64,934 Ì Ì Ì Ì (1) Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 1 Ì Ì Ì (4,008) (1,675) 1,056 (66,272) Ì Ì Ì Ì 9 9 2 Ì Ì Ì Ì 12,129 17,440 3,487 (473) (6) Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì (2,824) Ì Ì Ì Ì Ì Ì Ì Ì (3,489) 473 Ì 2,628 Ì 730,754 64,934 Ì Ì Ì (4,008) (1,675) Ì (65,215) (4,148) (4,148) Ì Ì Ì Ì Ì Ì Ì (1) 12,138 17,449 Ì Ì (6) 2,628 4,148 Ì 4,148 Balances at December 31, 2004 $44,540 $25,000 $521 $725,337 $(35,188) $(3,212) $ Ì $756,998 See accompanying notes to consolidated Ñnancial statements. 43 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Year Ended December 31, 2003 2004 2002 Cash Öows from operating activities: Net earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments to reconcile net earnings to net cash provided by operating $ 64,934 $ 53,473 $ 48,058 activities: Stock compensation expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for loss on impairment of real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of notes payable discount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of deferred interest rate hedge gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Equity in earnings of unconsolidated aÇliates, net of deferred intercompany proÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gain on disposition of real estate, held for investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Transition costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Change in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations: Additions to real estate, held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from disposition of real estate, held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gain on disposition of real estate, held for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Decrease in real estate leased to others using the direct Ñnancing method ÏÏ Increase in work in process ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase (decrease) in mortgages, notes and accrued interest receivableÏÏÏÏ Decrease (increase) in receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase in accrued rental incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase in other assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase in accrued interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase (decrease) in other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 978 17,398 Ì 123 (457) (5,064) 1,828 (2,523) 3,236 1,929 (74,024) 87,321 (23,402) 2,770 (2,093) 6,243 (1,642) (3,438) (1,456) 485 1,646 1,905 13,799 Ì 146 (596) (4,674) 341 (287) 941 Ì 1,682 12,640 3,285 128 (555) (1,992) 8 (260) 1,467 Ì (58,612) 72,262 (12,175) 2,368 (2,679) (9,798) (2,614) (6,548) (1,682) 246 2,715 (27,229) 88,494 (7,745) 2,165 (3,694) (1,070) 263 (3,172) (493) 442 (833) Net cash provided by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74,792 48,531 111,589 Cash Öows from investing activities: Proceeds from the disposition of real estate, held for investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additions to real estate, held for investment: Accounted for using the operating method ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounted for using the direct Ñnancing method ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment in unconsolidated aÇliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Distributions received from unconsolidated aÇliatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase in mortgages and notes receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage and notes payments received ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase in mortgages and other receivables from unconsolidated aÇliates ÏÏÏÏÏÏ Payments received on mortgages and other receivables from unconsolidated aÇliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Business combination, net of cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payment of lease costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consideration due to the dissenting shareholders in connection with the merger of Captec Net Lease Realty, Inc. (""Captec'') in December 2001 ÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,639 25,024 29,329 Ì (134,565) (215,730) (41,236) (3,201) (9,362) (14,500) 5,684 (48,328) 1,785 Ì (4) 11,008 (6,857) 23,301 5,785 7,642 (25) (115,600) (119,700) (80,900) 132,200 1,068 (1,491) 125,900 Ì (3,127) 81,818 1,319 Ì Ì (654) (13,278) (54) Ì (1,173) Net cash used in investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (58,955) (251,186) (15,142) See accompanying notes to consolidated Ñnancial statements. 44 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Ì (Continued) (Dollars in thousands) Year Ended December 31, 2003 2004 2002 $ 350,900 $ 352,800 $ 111,500 (360,800) (363,900) (180,000) 95,000 (2,944) 23,340 (2,547) Cash Öows from Ñnancing activities: Proceeds from line of credit payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Repayment of line of credit payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from mortgages payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Repayment of mortgages payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from Ñnancing lease obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from notes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from forward starting interest rate swapÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Repayment of notes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payment of debt costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from issuance of Series B Convertible Preferred Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from issuance of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payment of Series A Preferred Stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payment of Series B Convertible Preferred Stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payment of common stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock issuance costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 406 (9,163) 26,041 149,560 4,148 (120,000) (1,450) Ì 13,230 (4,008) (1,675) (66,272) (140) (2) Ì Ì Ì Ì (1,900) 25,000 168,579 (4,010) (502) (55,472) (6,686) Ì Ì 49,713 Ì (50,000) (1,197) Ì 2,725 (4,007) Ì (51,177) (4) Ì Net cash provided by (used in) Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (19,225) 205,965 (101,654) Net increase (decrease) in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and cash equivalents at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,388) 5,335 3,310 2,025 (5,207) 7,232 Cash and cash equivalents at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,947 $ 5,335 $ 2,025 Supplemental disclosure of cash Öow information Ì interest paid, net of amount capitalized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 33,855 $ 28,948 $ 27,313 Supplemental disclosure of non-cash investing and Ñnancing activities: Issued 205,579, 76,407 and 64,000 shares of restricted common stock in 2004, 2003 and 2002, respectively, in pursuant to the Company's 2000 Performance Incentive Plan, including grants in connection with transition costs ÏÏÏÏÏÏÏÏÏ $ 3,016 $ 1,050 $ 983 Common and preferred stock dividends for non-dissenting, unexchanged shares held by the Company in connection with the merger of Captec ÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ (1) $ Cash consideration for non-dissenting, unexchanged shares held by the Company in connection with the merger of Captec ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ (2) $ 4 3 Liability for the consideration due to the dissenting stockholders in connection with the merger of Captec ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì Ì $ 13,278 Note and mortgage notes accepted in connection with real estate transactionsÏÏ $ Ì $ 17,123 $ 4,344 Acquisition of real estate held for investment and assumption of related mortgage payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7,357 $ Ì $ Issued 953,551 shares of common stock in 2004 in exchange for a partnership interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 17,449 $ Disposition of real estate held for sale and transfer of related mortgage payable $ 2,251 $ Note receivable issued in connection with sale of entity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì $ Ì $ Ì $ Ì Ì Ì 25 See accompanying notes to consolidated Ñnancial statements. 45 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited) (Dollars in thousands, except for per share data) 2004 Gross revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation and amortization expense ÏÏÏÏÏÏÏÏÏÏ Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Transition costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net earnings per share(2): First Quarter Second Quarter Third Quarter Fourth Quarter Year $35,952 4,265 7,731 Ì 8,925 16,268 $34,983 4,265 7,973 3,200 8,812 12,735 $43,374 4,419 8,744 52 8,798 17,005 $42,968 4,449 8,672 489 9,112 18,926 $157,277 17,398 33,120 3,741 35,647 64,934 Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.29 0.29 0.22 0.22 0.30 0.30 0.34 0.34 1.15 1.15 2003 Gross revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation and amortization expense ÏÏÏÏÏÏÏÏÏÏ Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dissenting shareholders' settlement ÏÏÏÏÏÏÏÏÏÏÏÏÏ Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net earnings per share(2): $26,370 3,102 6,523 2,413 5,503 10,154 $28,090 3,275 6,910 Ì 5,902 12,344 $31,236 3,330 6,814 Ì 8,048 15,384 $38,551 4,092 7,658 Ì 9,905 15,591 $124,247 13,799 27,905 2,413 29,358 53,473 Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.23 0.23 0.28 0.28 0.32 0.32 0.30 0.30 1.14 1.13 (1) The consolidated quarterly Ñnancial data above includes revenues and expenses from the Company's continuing and discontinued operations. The Financial Accounting Standard Board (""FASB'') issued Statement of Financial Accounting Standards (""SFAS'') No. 144, ""Accounting for the Impairment or Disposal of Long-Lived Assets.'' This statement addresses Ñnancial 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 classiÑed as held for sale or have been disposed of in 2004 and 2003 have been reclassiÑed as earnings from discontinued operations for each period reported above. As reported in the current Form 10-K, earnings from discontinued operations for the years ended December 31, 2004 and 2003, were $14,310,000 and $10,607,000, respectively. (2) Calculated independently for each period, and consequently, the sum of the quarters may diÅer from the annual amount. 46 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2004, 2003 and 2002 1. Organization and Summary of SigniÑcant Accounting Policies: Organization and Nature of Business Ì Commercial Net Lease Realty, Inc., a Maryland corporation, is a fully integrated real estate investment trust (""REIT'') formed in 1984. The term ""Company'' refers to Commercial Net Lease Realty, Inc. and its majority owned and controlled subsidiaries. These subsidiaries include the wholly-owned qualiÑed REIT subsidiaries of Commercial Net Lease Realty, Inc., as well as the taxable REIT subsidiary (""TRS''), Commercial Net Lease Realty Services, Inc. and its majority owned and controlled subsidiaries (collectively, ""Services''). 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. James M. SeneÅ, Jr., a director of the Company, Kevin B. Habicht, an oÇcer and director of the Company, and Gary M. Ralston, a former oÇcer and director of the Company, collectively own the remaining 1.3 percent interest, which is 100 percent of the voting interest in Services. EÅective January 1, 2005, the Company acquired the remaining 1.3 percent voting interest in Services increasing the Company's ownership in Services to 100 percent. The Company's operations are divided into two primary business segments: real estate held for investment and real estate held for sale. The real estate held for investment is operated through Commercial Net Lease Realty, Inc. and its wholly owned qualiÑed REIT subsidiaries. The Company directly and indirectly, through investment interests, acquires, owns, invests in, manages and develops primarily single- tenant retail properties that are generally leased to established tenants under long-term commercial net leases (""Investment Properties''). As of December 31, 2004, the Company owned 362 properties, located in 38 states, that are leased to established tenants, including Academy, Barnes & Noble, Best Buy, Borders, CVS, Eckerd, OÇceMax, The Sports Authority, United Rentals and the United States of America. The real estate held for sale is operated through Services. Services acquires and develops real estate directly and indirectly, through investment interests, primarily for the purpose of selling the real estate to purchasers who are looking for replacement like-kind exchange property or to other purchasers with diÅerent investment objectives. As of December 31, 2004, Services owned 21 properties that were held for sale (""Inventory Properties''). Principles of Consolidation Ì In January 2003, the Financial Accounting Standards Board (""FASB'') issued FASB Interpretation No. 46 (revised December 2003), ""Consolidation of Variable Interest Entities'' (""FIN 46R''). 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 required existing unconsolidated variable interest entities to be consolidated by their primary beneÑciaries if the variable interest entities do not eÅectively disperse risks among parties involved. EÅective January 1, 2004, the Company implemented FIN 46R and under the guidelines of this interpretation, Services met the criteria of a variable interest entity which required consolidation by the Company. Accordingly, eÅective January 1, 2004, the Company consolidated Services and all prior period comparable condensed consolidated Ñnancial statements have been restated to include Services as a consolidated subsidiary. The adoption of this interpretation did not have a signiÑcant impact on the Ñnancial position or results of operations of the Company. Therefore, the Company's consolidated Ñnancial statements include the accounts of each of the respective majority owned and controlled aÇliates. All signiÑcant intercompany account balances and transactions have been eliminated. The Company applies the equity method of accounting to investments in partnerships and joint ventures that are not subject to control by the Company due to the signiÑcance of rights held by other parties. The Company holds a variable interest in, but is not the primary beneÑciary of, CNL Plaza Ltd., a variable interest entity. The Company's maximum exposure to loss as a result of its involvement with CNL 47 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Plaza Ltd. as of December 31, 2004, is $6,076,000. As of December 31, 2004, CNL Plaza, Ltd. had total assets and liabilities of $58,913,000 and $62,473,000, respectively. A wholly-owned subsidiary of Services, CNLRS Equity Ventures, Inc. (""Equity Ventures''), develops real estate through various joint venture development aÇliate agreements. Equity Ventures consolidates the joint venture development entities listed in the table below, eliminating signiÑcant intercompany balances and transactions and recording a minority interest for its other partners' ownership percentage. The following table summarizes each of the investments as of December 31, 2004: Date of Agreement November 2002 February 2003 February 2003 April 2003 June 2003 January 2004 February 2004 September 2004 October 2004 November 2004 December 2004 December 2004 Entity Name Agreement Type Equity Ventures' Ownership % WG Grand Prairie TX, LLC KK-Seminole FL, LLC Gator Pearson, LLC MAC Boise ID, LLC CNLRS WG Grapevine TX, LLC CNLRS WG Crowley TX, LLC CNLRS Yosemite Park CO, LLC CNLRS Bismarck ND, LLC CNLRS WG Ennis TX, LLC CNLRS WG Dallas TX, LLC CNLRS WG Long Beach MS, LLC CNLRS Arcadian Commons, LLC Limited Liability Company Limited Liability Company Limited Liability Company Limited Liability Company Limited Liability Company Limited LiabilityCompany Limited Liability Company Limited Liability Company Limited Liability Company Limited Liability Company Limited Liability Company Limited Liability Company 60% 40% 50% 60% 60% 60% 50% 50% 60% 60% 50% 50% Real Estate Held for Investment Ì 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 Ñnancing method. Such methods are described below: Operating method Ì 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 diÅerence between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis. Direct Ñnancing method Ì Leases accounted for using the direct Ñnancing 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. 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 Ñnancing leases are removed from 48 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) the accounts and gains and losses from the dispositions are reÖected 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. 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 Öows (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 Ì For purchases of real estate that were consum- mated subsequent to June 30, 2001, the eÅective 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 identiÑed 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 a qualiÑed appraiser. In allocating the fair value of the identiÑed intangible assets and liabilities of an acquired property, above- market and below-market in-place lease values are recorded as other assets based on the present value (using an interest rate which reÖects the risks associated with the leases acquired) of the diÅerence 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 are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term and any Ñxed rate renewal periods in the respective leases. The Company's leases do not currently include Ñxed-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 oÅ. Real Estate Held for Sale Ì Services acquires, develops and currently owns properties that it intends to sell. The properties that are classiÑed as held for sale at any given time may consist of properties that have been acquired in the marketplace with the intent to resell the properties that have been, or are currently being, constructed by Services. Services' records the acquisition of the real estate at cost, including the acquisition and closing costs. The cost of the real estate developed by Services includes direct and indirect costs of construction, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. The asset is not depreciated. In accordance with SFAS No. 144, ""Accounting for the Impairment or Disposal of Long-Lived Assets,'' Services classiÑes 49 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) its real estate held for sale as discontinued operations for each property in which rental revenues are generated (see Note 3). When real estate held for sale is disposed of, the related costs are removed from the accounts and gains and losses from the dispositions are reÖected in earnings. Investment in Unconsolidated AÇliates Ì The Company accounts for each of its investments in unconsolidated aÇliates under the equity method of accounting (see Note 4). The Company exercises inÖuence over these unconsolidated aÇliates, but does not control them. Cash and Cash Equivalents Ì 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 and money market accounts. Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash accounts maintained on behalf of the Company in demand deposits at commercial banks and money market funds may exceed federally insured levels; however, the Company has not experienced any losses in such accounts. The Company limits investment of temporary cash investments to Ñnancial institutions with high credit standing; therefore, management believes it is not exposed to any signiÑcant credit risk on cash and cash equivalents. Debt Costs Ì Debt costs incurred in connection with the Company's $225,000,000 line of credit 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 eÅective interest method. Debt costs incurred in connection with the term note payable, which matured in November 2004, were amortized over the term using the straight-line method which approximated the eÅective interest rate. 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 eÅective interest method. Earnings Per Share Ì Basic net earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted net earnings per common share is computed by dividing net earnings available to common stockholders for the period by the number of common shares that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the periods. 50 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following is a reconciliation of the denominator of the basic net earnings per common share computation to the denominator of the diluted net earnings per common share computation for each of the years ended December 31: 2004 2003 2002 Weighted average number of common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,546,814 (234,380) Restricted stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43,167,433 (59,220) 40,419,876 (36,471) Weighted average number of common shares outstanding used in basic earnings per share ÏÏÏÏÏÏÏÏ 51,312,434 43,108,213 40,383,405 Weighted average number of common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,546,814 43,167,433 40,419,876 EÅect of dilutive securities: Common stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Assumed conversion of Series B Convertible Preferred Stock to common stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Directors' deferred fee planÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 192,370 229,495 169,081 Ì 3,334 499,872 Ì Ì Ì Weighted average number of common shares outstanding used in diluted earnings per share ÏÏÏÏÏÏÏ 51,742,518 43,896,800 40,588,957 The following represents the number of shares of potentially issuable common stock which were not included in computing diluted earnings per common share because their eÅects were antidilutive: 2004 2003 2002 Common stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 398,500 454,500 Stock-Based Compensation Ì At December 31, 2004, the Company had one stock-based compensation plan, which is described more fully in Note 19. Prior to 2003, the Company accounted for the plan under the recognition and measurement provisions of APB Opinion No. 25, ""Accounting for Stock Issued to Employees,'' and related Interpretations. No stock-based compensation costs are reÖected in 2002 net earnings, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock at the date of grant. EÅective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, ""Accounting for Stock-Based Compensation,'' prospectively to all employee and director awards granted, modiÑed, or settled after January 1, 2003. Therefore, the cost related to stock-based employee compensation included in the determination of net earnings for 2004 and 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 eÅective date of SFAS No. 123. 51 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following table illustrates the eÅect 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): 2004 2003 2002 Net earnings available to common stockholders Ì basic, as reported: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $59,251 $48,963 $44,048 Add: stock-based employee compensation expense included in reported net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20 3 Ì Deduct: total stock-based employee compensation expense determined under the fair value based method for all awards ÏÏ (65) (74) (27) Pro forma net earnings available to common stockholders Ì basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $59,206 $48,892 $44,021 Net earnings available to common stockholders Ì diluted, as reported: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $59,251 $49,465 $44,048 Add: stock-based employee compensation expense included in reported net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20 3 Ì Deduct: total stock-based employee compensation expense determined under the fair value based method for all awards ÏÏ (65) (74) (27) Pro forma net earnings available to common stockholders Ì diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $59,206 $49,394 $44,021 Earnings available to common stockholders per common share as reported: Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.15 $ 1.14 Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.15 $ 1.13 Pro forma earnings available to common stockholders per common share: Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.15 $ 1.13 Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.14 $ 1.13 $ $ $ $ 1.09 1.09 1.09 1.08 There were no options granted in 2004. The fair value of each option grant in 2003 and 2002 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (i) risk free rate of 5.5% for the 2003 grant and 5.4% and 5.5% for the 2002 grants, (ii) expected volatility of 18.0% and 18.0%, respectively, (iii) dividend yields of 9.3% and 9.3%, respectively, and (iv) expected lives of 10 years for each of the 2003 and 2002 grants. Income Taxes Ì The Company has 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 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 REIT. For each of the years in the three-year period ended December 31, 2004, the Company believes it has qualiÑed as a REIT. Not withstanding the Company's qualiÑcation for taxation as a real estate investment trust, the Company is subject to certain state taxes on its income and real estate. EÅective January 1, 2001, Commercial Net Lease Realty, Inc. elected for Services to be treated as a TRS pursuant to the provisions of the REIT Modernization Act. As a TRS, Services is able to engage in 52 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) activities resulting in income that previously would have been disqualiÑed from being eligible REIT income under the federal income tax regulations. As a result, certain activities of the Company which occur within Services are subject to federal and state income taxes (See ""Real Estate Held for Sale''). All provisions for federal income taxes in the accompanying consolidated Ñnancial statements are attributable to Services. Income taxes are accounted for under the asset and liability method as required by SFAS No. 109, ""Accounting for Income Taxes.'' Deferred tax assets and liabilities are recognized for the temporary diÅerences based on estimated future tax consequences attributable to diÅerences between the Ñnancial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in eÅect for the year in which those temporary diÅerences are expected to be recovered or settled. The eÅect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. New Accounting Standards Ì In December 2004, FASB issued SFAS No. 153, ""Exchanges of Nonmonetary Assets.'' This statement is eÅective for the Ñscal years beginning after June 15, 2005. This statement addresses Ñnancial accounting and reporting obligations associated with the exchange of nonmone- tary assets. The statement eliminates the exception to fair value for exchanges of similar productive assets issued in APB Opinion No. 29, ""Accounting for Nonmonetary Transactions,'' and replaces it with a general exception for exchange transactions that do not have commercial substance, that is, transactions that are not expected to result in signiÑcant changes in the cash Öows of the reporting entity. The adoption of this interpretation is not expected to have a signiÑcant impact on the Ñnancial position or results of operations of the Company. In December 2004, FASB revised SFAS No. 123, ""Accounting for Stock-Based Compensation.'' This revision, SFAS No. 123R, is eÅective for the Ñrst interim or annual reporting period beginning after June 15, 2005. This revision to the statement eliminates the alternative to use APB Opinion No. 25, ""Accounting for Stock Issued to Employees,'' intrinsic value method of accounting that was provided in Statement 123 as originally issued. An enterprise will initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. The adoption of this interpretation is not expected to have a signiÑcant impact on the Ñnancial position or results of operations of the Company. Use of Estimates Ì 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 Ñnancial statements in conformity with accounting principles generally accepted in the United States of America. SigniÑcant estimates include provision for impairment and allowances for certain assets, accruals, useful lives of assets and capitalization of costs. Actual results could diÅer from those estimates. ReclassiÑcation Ì Certain items in the prior year's consolidated Ñnancial statements and notes to consolidated Ñnancial statements have been reclassiÑed to conform with the 2004 presentation. These reclassiÑcations had no eÅect on stockholders' equity or net earnings. 2. Real Estate Held for Investment: Leases Ì The Company generally leases its Investment Properties to established tenants. As of December 31, 2004, 302 of the Investment Property leases have been classiÑed as operating leases and 69 leases have been classiÑed as direct Ñnancing leases. For the Investment Property leases classiÑed as direct Ñnancing leases, the building portions of the property leases are accounted for as direct Ñnancing leases 53 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) while the land portions of 46 of these leases are accounted for as operating leases. Substantially all leases have initial terms of 10 to 20 years (expiring between 2005 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 property and liability insurance coverage. Certain of the Company's Investment Properties are subject to leases under which the Company retains responsibility for certain costs and expenses of the property. As of December 31, 2004, the weighted average remaining lease term was approximately 10 years. Generally, the leases of the Investment Properties provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions as the initial lease. Accounted for Using the Operating Method Ì Real estate subject to operating leases consisted of the following as of December 31 (dollars in thousands): 2004 2003 Land and improvementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 431,867 631,306 Buildings and improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,532 Leasehold interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $384,134 544,246 3,381 Less accumulated depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Construction in progressÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less provision for loss on impairment of real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,065,705 (61,720) 931,761 (48,863) 1,003,985 7,025 882,898 6,482 1,011,010 (1,613) 889,380 (2,256) $1,009,397 $887,124 In August 2003, the Company acquired two oÇce buildings and a related parking garage located in the Washington, D.C. metropolitan area (""DC OÇce Properties'') for $142,800,000. In addition, pursuant to the lease agreement, the Company has agreed to fund an additional $27,322,000 for building and tenant improvements, of which $23,850,000 had been funded as of December 31, 2004. The Company anticipates the remaining building and improvements to be substantially completed and funded by June 30, 2005. 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, 2004, 2003 and 2002, the Company recognized collectively in continuing and discontinued operations, $3,452,000, $6,756,000 and $3,223,000, respectively, of such income. At December 31, 2004 and 2003, the balance of accrued rental income, net of allowances of $1,620,000 and $1,320,000, respectively, was $28,619,000 and $25,322,000, respectively. 54 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2004 (dollars in thousands): 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2008ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2009ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 105,235 105,333 104,579 102,673 98,336 612,181 $1,128,337 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 amounts for potential variable rent increases that are based on the Consumer Price Index (""CPI'') or 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 Ì The following lists the components of net investment in direct Ñnancing leases at December 31 (dollars in thousands): 2004 2003 Minimum lease payments to be received ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Estimated unguaranteed residual values ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less unearned income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $166,849 32,623 (97,161) $ 175,236 32,354 (104,620) Net investment in direct Ñnancing leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $102,311 $ 102,970 The following is a schedule of future minimum lease payments to be received on direct Ñnancing leases at December 31, 2004 (dollars in thousands): 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 13,559 13,580 13,631 13,635 13,738 98,706 $166,849 The above table does not include future minimum lease payments for renewal periods, potential variable CPI rent increases or for contingent rental payments that may become due in future periods (See Real Estate Ì Accounted for Using the Operating Method). 3. Real Estate Held for Sale: As of December 31, 2004, the portfolio of Inventory Properties consisted of 10 completed inventory properties, seven properties under construction and four land parcels. 55 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Real estate held for sale consisted of the following at December 31 (dollars in thousands): 2004 2003 Inventory: Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $16,449 17,660 Buildings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (81) Accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $13,644 17,129 (246) Under construction: Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Work in process ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,028 30,527 13,826 10,195 24,021 7,226 8,069 15,295 $58,049 $45,822 In connection with the development of seven Inventory Properties by Services, the Company has agreed to fund construction commitments of $26,409,000, of which $12,248,000 has been funded as of December 31, 2004. The following table summarizes the number of inventory properties sold and the corresponding gain recognized on the disposition of real estate held for sale included in earnings from continuing and discontinued operations for the years ended December 31 (dollars in thousands): Continuing operations ÏÏÏÏÏÏÏÏ Discontinued operations: Gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intersegment eliminations ÏÏ Minority interest ÏÏÏÏÏÏÏÏÏÏ Total discontinued operations 2004 2003 2002 # of Properties Gain # of Properties Gain # of Properties Gain 7 $ 4,700 3 $ 3,247 4 $1,290 17,885 817 18,702 (6,422) 12,280 $16,980 26 29 7,891 1,037 8,928 (986) 7,942 $11,189 21 25 4,489 1,966 6,455 Ì 6,455 $7,745 17 24 4. Investments in Unconsolidated AÇliates: In September 1997, the Company entered into a partnership, 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''). Under the terms of the limited partnership agreement of the Partnership, CTA had the option 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 of and calculation deÑned in the limited partnership agreement, the Company issued 953,551 shares of common stock to CTA in a private transaction in February 2004 in exchange for CTA's 80 percent limited partnership interest, increasing the Company's ownership in the Partnership to 100 percent. Prior to CTA's exercise, the Company accounted for its 20 percent interest in the Partnership under the equity method of accounting. Net income 56 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) and losses of the Partnership were allocated to the partners in accordance with their respective percentage interest during the Partnership's term. The Company received $116,000 in distributions from the Partnership for the year ended December 31, 2003. For the years ended December 31, 2004, 2003 and 2002, the Company recognized earnings of $26,000, $280,000 and $270,000, respectively, from the Partnership. The Company managed the Partnership and pursuant to a management agreement, the Partnership paid the Company $17,000, $193,000 and $193,000 in asset management fees during the years ended December 31, 2004, 2003 and 2002, respectively. The Company did not recognize earnings or receive asset management fees from the Partnership subsequent to increasing its ownership in the Partnership to 100 percent in February 2004. The Company has entered into Ñve limited liability company (""LLC'') agreements (collectively, ""CCMH LLCs'') with Orange Avenue Mortgage Investments, Inc. (""OAMI''), formerly known as CNL Commercial Finance, Inc. Each of the LLCs holds an interest in mortgage loans and is 100 percent equity Ñnanced. The Company holds a non-voting and non-controlling interest in each of the LLCs and accounts for its investment under the equity method of accounting. The following table summarizes each of the investments as of December 31, 2004: Date of Agreement LLC Agreement Investment Interest June 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CCMH I, LLC December 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CCMH II, LLC June 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CCMH III, LLC December 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CCMH IV, LLC July 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CCMH V, LLC 42.7% 44.0% 36.7% 38.3% 38.4% During the years ended December 31, 2004 and 2003, the Company received $10,562,000 and $4,211,000, respectively, in distributions from the CCMH LLC's. In 2003, in connection with a loan to OAMI, the Company pledged a portion of its interest in two of the LLC's as partial collateral for the loan. The following presents the combined condensed Ñnancial information of the CCMH LLCs (dollars in thousands): December 31, 2004 2003 Mortgage assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $59,840 Ì Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $70,472 1 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $59,840 $70,473 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì 70,473 Members' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59,840 Total liabilities and members' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $59,840 $70,473 Year Ended December 31, 2003 2002 2004 Revenues/net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $9,898 $9,110 $5,035 For the years ended December 31, 2004, 2003 and 2002, the Company recognized earnings of $5,042,000, $4,583,000 and $2,445,000, respectively, from the CCMH LLCs. In May 2002, the Company purchased a combined 25 percent partnership interest in CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, ""Plaza'') for $750,000. The remaining partnership interests in 57 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Plaza are owned by aÇliates of James M. SeneÅ, Jr. and Robert A. Bourne, both members of the Company's board of directors. Plaza owns a 346,000 square foot oÇce 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 of the Company under this guarantee 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, which was extended from the original maturity of November 2004 to May 2005. The fair value of the Company's guarantee is $73,000. During the years ended December 31, 2004, 2003 and 2002 the Company received $446,000, $372,000 and $411,000, respectively, in distributions from Plaza. For the years ended December 31, 2004, 2003 and 2002, the Company recognized a loss from Plaza of $276,000, $306,000 and $159,000, respectively. Since November 1999, the Company has leased its oÇce space from Plaza. The Company's lease expires in October 2014. In addition, other aÇliates of James M. SeneÅ, Jr. also lease oÇce space from Plaza. The Company and other aÇliates lease an aggregate of 66 percent of the 346,000 square foot oÇce building. During the years ended December 31, 2004, 2003 and 2002, the Company incurred rental expenses in connection with the lease of $1,018,000, $1,001,000 and $1,222,000, respectively. In May 2000, the Company subleased a portion of its oÇce space to aÇliates of James M. SeneÅ, Jr. During the years ended December 31, 2004, 2003 and 2002, the Company earned $345,000, $338,000 and $270,000, respectively, in rental and accrued rental income from these aÇliates. The following is a schedule of the Company's future minimum lease payments and the future minimum sublease income from the aÇliates related to the oÇce space leased from Plaza at December 31, 2004 (dollars in thousands): Lease Payments Sublease Income 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2008ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2009ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,165 1,200 1,236 1,273 1,311 6,910 $ 522 538 554 571 588 3,099 Net $ 643 662 682 702 723 3,811 $13,095 $5,872 $7,223 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 Ñve-year periods subject to similar terms and conditions as the initial lease. In 1999, a wholly-owned subsidiary of the Company entered into a membership arrangement, WXI/ SMC Real Estate LLC (""WXI''), with Whitehall Street Real Estate Limited Partnership XI. The Company is the sole managing member and holds a 331/3 percent interest in WXI. WXI was organized for the purpose of owning, developing, redeveloping, operating, leasing and selling a portfolio of real estate. The Company accounts for its interest under the equity method of accounting. During the years ended December 31, 2004, 2003, and 2002, the Company recognized a loss of $68,000, 570,000, and $1,438,000, respectively. 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 $14,000, $52,000 and $86,000 in fees during the years ended December 31, 2004, 2003 and 2002, respectively. 58 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following presents a reconciliation of investments in and receivables from unconsolidated aÇliates at December 31 (dollars in thousands): 2004 2003 CCMH LLCs investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $29,672 Other: $35,193 InvestmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (365) Ì 4,396 17 $29,307 $39,606 The following presents a reconciliation of equity in earnings of unconsolidated aÇliates for the years ended December 31 (dollars in thousands): 2004 2003 2002 CCMH LLCs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,042 (318) Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,583 (242) $2,445 (645) $4,724 $4,341 $1,800 5. Note Receivable: Structured Ñnance agreements are typically loans secured by a pledge of ownership interests in the borrowers (or their subsidiaries) that own the underlying real estate. These agreements are typically subordinated to senior loans secured by Ñrst mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. In 2004 and 2003, the Company made structured Ñnance investments of $6,857,000 and $43,433,000, respectively. As of December 31, 2004, the structured Ñnance investments bear a weighted average interest rate of 14.3% per annum, of which 12.5% is payable monthly and the remaining 1.8% accrues and is due at maturity. The principal balance of each structured Ñnance investment is due in full at maturity, which range between November 2006 and November 2007. The structured Ñnance investments are secured by the borrowers' pledge of their respective membership interests in the certain subsidiaries which own real estate. In December 2004, the Company received $20,900,000 in principal payments and a $418,000 prepayment fee. As of December 31, 2004 and 2003, the outstanding receivable balance of the structured Ñnance investments was $29,390,000 and $43,433,000, respectively. 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 Ñnancial covenants of the Company. The principal balance is due in full upon expiration of the Credit Facility in May 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, 2004 and 2003, $17,900,000 and $27,800,000, respectively, was outstanding 59 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) under the Credit Facility. The Credit Facility had a weighted average interest rate of 2.72% and 2.41% for the years ended December 31, 2004 and 2003, respectively. In accordance with the terms of the Credit Facility, the Company is required to meet certain restrictive Ñnancial covenants, which, among other things, require the Company to maintain certain (i) maximum leverage ratios, (ii) debt service coverage and (iii) cash Öow coverage. At December 31, 2004, the Company was in compliance with those covenants. For the years ended December 31, 2004, 2003 and 2002, interest cost incurred was $1,084,000, $2,103,000 and $2,562,000, respectively, of which $369,000, $177,000 and $1,000, respectively, was capitalized by the Company as a cost of buildings constructed for its own use, and $813,000, $2,001,000 and $3,162,000, respectively, was charged to operations. 7. Mortgages Payable: In January 1996, the Company entered into a long-term, Ñxed 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 Ñrst mortgage lien on certain of the Company's properties. As of December 31, 2004, the aggregate carrying value of these properties totaled $58,049,000. The outstanding principal balance as of December 31, 2004 and 2003 was $22,466,000 and $26,118,000, respectively. In February 2004, the Company increased its ownership in the Partnership to 100 percent (see Note 4). In October 1997, the Partnership entered into a long-term, Ñxed rate loan for $12,000,000. The loan bears interest at a rate of 7.37% per annum with monthly principal and interest payments of $103,000 and the principal balance due in September 2007. The loan is secured by a Ñrst mortgage lien on certain of the Partnership's properties. As of December 31, 2004, the aggregate carrying value of the properties totaled $28,893,000 and the outstanding principal balance was $8,606,000. 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 maturities between December 2007 and December 2009. In December 2004, the Company sold one of the properties and the related mortgage was simultaneously paid, which accounted for $2,455,000 of the original principal balance. The remaining Mortgages bear interest at a weighted average rate of 8.45% per annum and have a weighted average maturity of 2.4 years, with an aggregate monthly payment of principal and interest of $60,000. In addition to the Mortgages, the Company has letters of credit that also secure two of the loans, which collectively total $2,426,000. As of December 31, 2004, the aggregate carrying value of these three properties and letters of credit totaled $10,751,000. As of December 31, 2004 and 2003, the outstanding principal balances secured by the Mortgages totaled $2,189,000 and $4,244,000, 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 with an 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 7.4 years, with an aggregate monthly payment of principal and interest of $25,000. As of December 31, 2004, the aggregate carrying value of these three properties totaled $4,003,000. As of December 31, 2004 and 2003, the outstanding principal balances of the loans secured by the Captec Mortgages totaled $1,328,000 and $1,497,000, respectively. In June 2002, the Company entered into a long-term, Ñxed 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 Ñrst mortgage lien on Ñve of the Company's properties. As of December 31, 2004, the aggregate carrying value of these properties totaled 60 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) $27,111,000. As of December 31, 2004 and 2003, the outstanding principal balance was $20,508,000 and $20,721,000, respectively. In July 2002, Services entered into a long-term, Ñxed rate loan for $2,340,000. The loan bore interest at a rate of 7.42% per annum with monthly principal and interest payments of $18,000 and the principal balance due in July 2012. The loan was secured by a Ñrst mortgage lien on one of Services' properties. As of December 31, 2003, the outstanding principal balance was $2,281,000. In August 2004, the Company disposed of the property, at which time the buyer assumed the loan. In November 2003, the Company entered into a long-term, Ñxed 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 Ñrst mortgage lien on the DC OÇce Properties. As of December 31, 2004, the aggregate carrying value of these properties totaled $155,601,000. As of December 31, 2004 and 2003, the outstanding principal balance was $95,000,000. In February 2004, the Company acquired a property subject to a mortgage securing a loan for $6,952,000. The loan bears interest at a rate of 6.90% per annum with monthly principal and interest payments of $68,000 and the balance due in January 2017. As of December 31, 2004, the aggregate carrying value of the property was $12,358,000. The outstanding principal balance as of December 31, 2004, was $6,665,000. In December 2004, the Company acquired a property subject to a mortgage securing loan for $408,000. The loan bears interest at a rate of 9.375% per annum with monthly principal and interest payments of $5,000 and the balance due in September 2014. As of December 31, 2004, the aggregate carrying value of this property was $697,000. The outstanding principal balance as of December 31, 2004, was $406,000. The following is a schedule of the annual maturities of the Company's mortgages payable (dollars in thousands): 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,070 22,376 8,776 1,156 964 119,826 $157,168 61 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. Notes Payable: The Company Ñled a prospectus supplement to its shelf registration for each issuance of notes outlined in the table below (dollars in thousands). Issue Date Purchase Price Discount(3) Discounted Purchase Stated EÅective Rate(4) Rate Price Commencement Day of Semi- Annual Interest Payments Maturity Date 2008 Notes(1) ÏÏÏÏÏÏÏÏ March 1998 $100,000 $271 $ 99,729 7.125% 7.163% September 1998 March 2008 2004 Notes(1)(5) ÏÏÏÏÏ June 1999 2010 Notes(1) ÏÏÏÏÏÏÏÏ September 2000 2012 Notes(1) ÏÏÏÏÏÏÏÏ June 2002 2014 Notes(1)(2)(6) ÏÏ June 2004 100,000 20,000 50,000 150,000 392 126 287 440 99,608 8.125% 7.547% December 1999 June 2004 19,874 8.500% 8.595% March 2001 September 2010 49,713 7.750% 7.833% December 2002 June 2012 149,560 6.250% 5.910% June 2004 June 2014 (1) The proceeds from the note issuance were used to pay down outstanding indebtedness of the Company's Credit Facility. (2) The proceeds from the note issuance were used to repay the obligation of the 2004 Notes. (3) The note discounts are amortized to interest expense over the respective term of each debt obligation using the eÅective interest method. (4) Includes the eÅects of the discount, treasury lock gain and swap gain (as applicable). (5) The Company entered into a treasury rate lock agreement which Ñxed 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 was deferred and amortized as an adjustment to interest expense over the term of the 2004 Notes using the eÅective interest method. (6) The Company entered into a forward starting interest rate swap agreement which Ñxed a swap rate of 4.61% on a notional amount of $94,000,000. Upon issuance of the 2014 Notes, the Company terminated the forward starting interest rate swap agreement resulting in a gain of $4,148,000. The gain has been deferred and is being amortized as an adjustment to interest expense over the term of the 2014 Notes using the eÅective interest method. Each issuance of notes is redeemable at the option of the Company, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the notes being redeemed plus accrued interest thereon through the redemption date and (ii) the make-whole amount, as deÑned in the respective supplemental indenture notes. In connection with the debt oÅerings, the Company incurred debt issuance costs totaling $4,193,000 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 respective notes using the eÅective interest method. 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 Ñnancial covenants, which, among other things, require the Company to maintain (i) certain leverage ratios and (ii) certain interest coverage. At December 31, 2004, the Company was in compliance with those covenants. In November 2001, the Company entered into an unsecured $70,000,000 term note (""Term Note''), due November 30, 2004, to Ñnance the acquisition of Captec and for the repayment of indebtedness and related expenses in connection therewith. As of December 31, 2003, the Term Note had an outstanding principal balance of $20,000,000. The Term Note bore interest at a rate of 175 basis points above LIBOR. In November 2004, the Company used proceeds from the Credit Facility to repay the obligation of the Term 62 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note. In connection with the Term Note, the Company incurred debt costs of $376,000 consisting primarily of bank commitment fees. The Term Note costs were deferred and amortized over the term of the loan commitment using the straight-line method which approximated the eÅective interest method. 9. Financing Lease Obligation: In July 2004, the Company sold Ñve investment properties for approximately $26,041,000 and subse- quently leased back the properties under a 10-year Ñnancing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the Ñnancing lease. In accordance with the provisions of SFAS No. 66, ""Accounting for Sales of Real Estate,'' the Company has recorded this transaction as a Ñnancing transaction. The 10-year Ñnancing lease bears an interest rate of 5% annually with monthly interest payments of $109,000 and expires in June 2014 unless either the put or call option is exercised. 10. 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. 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 Ñxed 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 2004, 2003 and 2002, as a result of a legal action in connection with the merger of Captec, the Company reduced the number of Series A Preferred Stock shares issued and outstanding by 56, 379 and 217,950, respectively. In August 2003, the Company Ñled a prospectus supplement to its shelf registration statement and issued 10,000 shares of 6.70% Non-Voting Series B Cumulative Convertible Perpetual Preferred Stock (the ""Series B Convertible Preferred Stock'') and received gross proceeds of $25,000,000. In connection with this oÅering, the Company incurred stock issuance costs totaling approximately $687,000, consisting primarily of placement fees and legal and accounting fees. The Series B Convertible 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 Ñrst anniversary from the date on which the shares were issued. Holders of the Series B Convertible 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 Ñxed annual amount of $167.50 per share). The Series B Convertible 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 Convertible 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. 11. Common Stock: In 2004, 2003 and 2002, as a result of a legal action in connection with the merger of Captec, the Company reduced the number of common stock issued and outstanding by 51, 823 and 474,037, respectively. 63 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) In July 2003, the Company Ñled a prospectus supplement to its shelf registration statement and issued 5,600,000 shares of common stock and received gross proceeds of $100,800,000. In connection with this oÅering, 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. In December 2003, the Company Ñled a prospectus supplement to its 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 oÅerings, the Company incurred stock issuance costs totaling approximately $671,000, consisting primarily of underwriters' commissions and fees, legal and accounting fees and printing expenses. Under the terms of the limited partnership agreement of the Partnership, CTA had the right to convert its 80 percent limited partnership interest into shares of the Company's common stock (see Note 4). In February 2004, CTA exercised its right to convert and the Company issued 953,551 shares of common stock to CTA in a private transaction in exchange for CTA's 80 percent limited partnership interest. 12. Employee BeneÑt Plan: EÅective January 1, 1998, the Company adopted a deÑned 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 deÑned 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, 2004, 2003 and 2002 totaled $140,000, $150,000 and $113,000, respectively. 13. Dividends: The following presents the characterization for tax purposes of common stock dividends paid to stockholders for the years ended December 31: 2004 2003 2002 Ordinary income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.916 Capital gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.040 QualiÑed 5-year Gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrecaptured Section 1250 Gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Nontaxable distributionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.969 Ì Ì 0.005 0.037 0.269 0.041 0.293 $1.174 0.006 Ì 0.005 0.085 $1.290 $1.280 $1.270 The Series A Preferred Stock dividends of $2.25 per share paid in each of the years ended December 31, 2004, 2003 and 2002, were characterized as ordinary income for tax purposes. The Series B Convertible Preferred Stock dividends of $167.50 and $50.25 per share paid during the years ended December 31, 2004 and 2003, respectively, were characterized as ordinary income for tax purposes. 14. 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 Ñscal year ended December 31, 2002, that arose as a result of the merger with 64 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Captec in December 2001 (the ""Appraisal Action''). In February 2003, the Company entered into a settlement agreement with the beneÑcial 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 Ñled a stipulation and order of dismissal and the Court entered the order of dismissal, dismissing the Appraisal Action with prejudice. 15. Transition Costs: During the year ended December 31, 2004, the Company recorded a transition cost of $3,741,000 including severance, accelerated vesting of restricted stock, and recruitment costs in connection with the appointment of Craig Macnab as Chief Executive OÇcer in February 2004, and the resignation of Gary M. Ralston as President and Chief Operating OÇcer in May 2004. 16. Income Taxes: For income tax purposes, the Company has one TRS, Services, in which certain real estate activities are conducted. Services treats depreciation expense and certain other items diÅerently for tax than for Ñnancial reporting purposes. The principal diÅerences between Services' eÅective tax rates for the years ended December 31, 2004, 2003 and 2002, and the statutory rates relate to state taxes and nondeductible expenses such as meals and entertainment expenses. The components of the net income tax asset (liability) consist of the following at December 31 (dollars in thousands): Temporary diÅerences: 2004 2003 $ (249) DepreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(211) 13 Stock based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59 (40) (97) Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 2,867 Net operating loss carryforwardÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net deferred income tax asset (liability)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(192) (510) Current income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,534 Ì Income tax asset (liability) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(702) $2,534 In assessing the ability to realize a deferred tax asset, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary diÅerences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize all of the beneÑts of these deductible diÅerences that existed as of December 31, 2004. 65 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The income tax (expense) beneÑt has been allocated to earnings (loss) from continuing operations and to earnings (loss) from discontinued operations for the years ended December 31, 2004, 2003 and 2002. The income tax (expense) beneÑt consists of the following components for the years ended December 31, 2004, 2003 and 2002 (dollars in thousands): Net loss from continuing operations of Services before income taxes Provision for income taxes: Current: Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred: Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 2003 2002 $(8,092) $(7,644) $(8,025) Ì Ì 2,141 401 2,542 Ì Ì 2,443 459 2,902 Ì Ì 2,561 481 3,042 Services' net loss from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(5,550) $(4,742) $(4,983) Net earnings from discontinued operations of Services before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $15,383 $10,118 $ 9,033 Provision for income taxes: Current: Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (420) (90) Ì Ì Ì Ì Deferred: Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,497) (832) (3,234) (607) (2,887) (542) Total provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,839) (3,841) (3,429) Services' net earnings from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,544 $ 6,277 $ 5,604 Total Services' net earnings (loss) from operations ÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,994 $ 1,535 $ 621 66 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 17. Earnings from Discontinued Operations: Real Estate, Held for Investment Ì In accordance with SFAS No. 144, ""Accounting for the Impairment or Disposal of Long-Lived Assets,'' the Company has classiÑed the revenues and expenses related all investment properties that were sold and leasehold interests that expired as discontinued operations. The following is a summary of the earnings from discontinued operations from real estate held for investment for each of the years ended December 31 (dollars in thousands): 2004 2003 2002 Revenues: Rental income from operating leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earned income from direct Ñnancing leasesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate expense reimbursement from tenants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Contingent rental incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest and other income from real estate transactionsÏÏÏÏÏÏÏÏÏ $2,198 246 3 Ì 236 $4,226 455 10 12 85 $10,302 578 119 72 3 Operating expenses: General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for loss on impairment of real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other expenses (revenues): Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,683 4,788 11,074 (5) 119 256 Ì 370 (56) 126 70 24 95 582 Ì 701 28 403 1,069 1,672 3,172 (100) 144 44 (19) 158 139 Earnings before gain on disposition of real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gain on disposition of real estate, net of losses on disposition of 2,243 4,043 7,763 $544,000, $969,000 and $1,806,000, respectivelyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,523 287 260 Earnings from discontinued operations from real estate held for investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,766 $4,330 $ 8,023 67 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Real Estate, Held for Sale Ì During the years ended December 31, 2004, 2003 and 2002, the Company has classiÑed the revenues and expenses related to its held for sale properties, which generated rental revenues, as discontinued operations. In addition, the Company also classiÑed revenues and expenses related to the Inventory Properties that were held for sale as of December 31, 2004, as discontinued operations. The following is a summary of the earnings from discontinued operations from real estate held for sale for each of the years ended December 31 (dollars in thousands): 2004 2003 2002 Revenues: Rental income from operating leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate expense reimbursement from tenants ÏÏÏÏÏÏÏÏÏÏÏÏ Gain on disposition of real estate held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest and other from real estate transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,313 183 18,702 224 $ 3,294 123 8,928 54 $ 4,868 102 6,455 (100) Operating expenses: General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other expenses (revenues): Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,422 12,399 11,325 33 343 4 380 (28) 531 503 3 146 Ì 149 Ì 1,007 1,007 Ì 89 728 817 Ì 1,475 1,475 Earnings before provision for income taxes and minority interest Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,539 (5,839) (5,156) 11,243 (3,841) (1,125) 9,033 (3,429) Ì Earnings from discontinued operations from real estate held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,544 $ 6,277 $ 5,604 18. Derivatives: SFAS No. 133, ""Accounting for Derivative Instruments and Hedging Activities'', as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS No. 133, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or Ñrm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash Öows, or other types of forecasted transactions, are considered cash Öow hedges. The Company's objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identiÑed risks. To accomplish this objective, the Company primarily uses interest rate swaps as part of its cash Öow hedging strategy. Interest rate swaps designated as 68 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) cash Öow hedges involve the receipt of variable rate amounts in exchange for Ñxed-rate payments over the life of the agreements without exchange of the underlying principal amount. To date, such derivatives have been used to hedge the variable cash Öows associated with Öoating rate debt and forecasted interest payments of a forecasted issuance of debt. For derivatives designated as cash Öow hedges, the eÅective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassiÑed to earnings when the hedged transaction aÅects earnings, and the ineÅective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company had no outstanding derivatives as of December 31, 2004. Additionally, the Company does not use derivatives for trading or speculative purposes or currently have any derivatives that are not designated as hedges. The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer eÅective in oÅsetting changes in the cash Öows of the hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is re-designated as a hedging instrument or management determines that designation of the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued, the Company continues to carry the derivative at its fair value on the balance sheet, and recognizes any changes in its fair value in earnings or may choose to cash settle the derivative at that time. In June 2004, the Company terminated its forward-starting interest rate swaps with a notional amount of $94,000,000 that were hedging the risk of changes in forecasted interest payments on a forecasted issuance of long-term debt. The fair value of the interest rate swaps when terminated was an asset of $4,148,000, which had been deferred in other comprehensive income. The hedged forecasted interest payments that were designated in the hedging relationships are still probable of occurring and therefore, the Company reclassiÑed the $4,148,000 gain that was deferred in other comprehensive income as the hedged forecasted interest payments aÅect earnings. During the year ended December 31, 2004, the Company amortized $169,000 to interest expense from unamortized interest rate hedge gain. During the year ended December 31, 2005, the Company expects to reclassify $326,000 to interest expense. The Company has no derivative Ñnancial instruments outstanding at December 31, 2004. 19. Performance Incentive Plan: The Company's 2000 Performance Incentive Plan (""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 aÇliates stock options, stock awards, stock appreciation rights, Phantom Stock Awards, Performance Awards 69 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) and Leveraged Stock Purchase Awards, each as deÑned in the 2000 Plan. The following summarizes the stock-based compensation activity for the years December 31: Number of Shares 2003 2004 2002 Outstanding, January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,608,144 Ì Options granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (886,962) Options exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (81,417) Options surrendered ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 205,579 Restricted stock grantedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (205,579) Restricted stock issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (29,926) Restricted stock surrendered ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,926 Restricted stock cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,747,851 15,000 1,692,158 359,300 (132,357) (180,640) (122,967) (22,350) 64,000 76,407 (64,000) (76,407) Ì (5,950) Ì 5,950 Outstanding, December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 639,765 1,608,144 1,747,851 Exercisable, December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 537,244 1,372,184 1,293,284 Available for grant, December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,460,636 1,561,192 1,628,809 The 205,579, 76,407 and 64,000 shares of restricted stock granted during the years ended December 31, 2004, 2003 and 2002, respectively, had a weighted average grant price of $16.97, $14.94 and $15.35, respectively, per share. The following represents the weighted average option exercise price information for the years ended December 31: 2004 2003 2002 Outstanding, January 1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $14.51 Ì Granted during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13.69 Exercised during the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.33 Outstanding, December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.36 Exercisable, December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $14.44 14.57 13.51 14.51 14.40 $ 15.79 15.25 12.17 14.44 14.58 The following summarizes the outstanding options and the exercisable options at December 31, 2004: $10.1875 to $13.6875 Option Price Range $14.5700 to $17.8750 Total Outstanding options: Number of shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted-average exercise price ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted-average remaining contractual life in years ÏÏÏÏÏ 144,435 12.13 $ 3.3 495,330 16.27 $ 5.1 639,765 $ 15.33 4.7 Exercisable options: Number of shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted-average exercise price ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 141,096 12.10 $ 396,148 16.52 $ 537,244 $ 15.36 One-third of the grant to each individual becomes exercisable at the end of each of the Ñrst 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 oÇcers and directors of the 70 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Company. The following is a summary of the restricted stock grants during the years ended December 31, 2004, 2003 and 2002: Shares Annual Vesting Rate Number of Years For Vesting Shares are 100% Vested on OÇcers: June 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 2003 ÏÏÏÏÏÏÏÏÏÏÏÏ March 2003 ÏÏÏÏÏÏÏÏÏÏÏÏ April 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏ April 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏ April 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏ September 2004 ÏÏÏÏÏÏÏÏÏ 58,000 40,407 30,000 100,000 35,000 50,211 15,000 Total issued ÏÏÏÏÏÏÏÏÏÏ 328,618 Directors: June 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ June 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ August 2004 ÏÏÏÏÏÏÏÏÏÏÏÏ December 2004 ÏÏÏÏÏÏÏÏÏ 6,000 6,000 4,500 868 Total issued ÏÏÏÏÏÏÏÏÏÏ 17,368 15% Ó 30% 25% 15% Ó 30% 20% 20% 14.3% 14.3% 50% 50% 50% 50% 5 4 5 4 5 6 6 2 2 2 2 January 1, 2007 January 1, 2007 January 1, 2008 January 1, 2008 January 1, 2009 January 1, 2010 January 1, 2011 January 1, 2004 January 1, 2005 January 1, 2006 January 1, 2006 During 2004 and 2003, the Company cancelled 29,926 and 5,950, respectively, shares of restricted stock. Compensation expense for the restricted stock is determined based upon the fair value at the date of grant and is recognized as the greater of the amount amortized over a straight lined basis or the amount vested over the vesting periods. For the years ended December 31, 2004, 2003 and 2002, the Company recognized $1,113,000, $1,151,000 and $853,000, respectively, of such expense. In addition, in 2004, the Company recognized $1,397,000 of transition cost related to the vesting of restricted stock. 20. Fair Value of Financial Instruments: The Company believes the carrying value of its Credit Facility approximates fair value based upon its nature, terms and variable interest rate. The Company believes the carrying value of its Ñnancing lease obligation approximates fair value based upon its nature, terms and interest rate. The Company believes that the carrying value of its cash and cash equivalents, line of credit, note and accrued interest receivable from related party, mortgages, notes and accrued interest receivable, receivables, mortgages payable, accrued interest payable and other liabilities at December 31, 2004 and 2003 approximate fair value, based upon current market prices of similar issues. At December 31, 2004 and 2003, the fair value of the Company's notes payable was $353,647,000 and $295,139,000, respectively, based upon the quoted market price. 21. Related Party Transactions: For additional related party disclosures see Note 4. The Company has revolving lines of credit with Services that allow for an aggregate borrowing capacity of $105,000,000. The lines of credit each bear interest at prime rate plus 0.25% per annum and expire on May 9, 2006 and are secured by a pledge of the real estate and/or the other assets owned by the respective borrower. The outstanding aggregate principal balance of the lines of credit at December 31, 2004 and 2003 was 71 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) $42,473,000 and $55,234,000, respectively, and bore interest at a rate of 5.50% and 4.25%, respectively, per annum. In connection with the lines of credit from Services, the Company earned $3,819,000, $3,327,000, and $6,018,000 in interest and fees during the years ended December 31, 2004, 2003 and 2002, respectively, each of which was eliminated in consolidation. In 2004, the Company provided disposition and development services to an aÇliate of James M. SeneÅ Jr. and Robert A. Bourne, each a member of the Company's board of directors. In connection therewith, the Company received an aggregate of $175,000 in fees. In September 2000, a wholly-owned subsidiary of Services entered into a $6,000,000 promissory note with an aÇliate in which James M. SeneÅ, Jr., a director of the Company, and Kevin B. Habicht, a director and oÇcer of the Company, own a majority equity interest. The note was secured by the aÇliate's common stock in OAMI, formerly know as CNL Commercial Finance, Inc. In July 2003, the promissory note was paid in full. In addition, the wholly-owned subsidiary of Services has an option with the aÇliate to purchase up to approximately 79 percent of all the common shares of OAMI equal to the purchase price paid by the aÇliate for such common stock. The option expires on December 31, 2010. In September 2000, a wholly-owned subsidiary of the Services entered into a $15,000,000 line of credit agreement with OAMI. Interest is payable monthly and the principal balance was due in full upon termination of the line of credit. In March 2004, the maturity date of the line of credit agreement was extended to March 31, 2005. In December 2003, the line of credit was amended to have a borrowing capacity of $35,000,000. In May 2004, the line of credit agreement was amended to temporarily increase the available credit to $45,000,000 until September 2004, at which time the available credit decreased to $35,000,000. In December 2004, the credit agreement was terminated. During the years ended December 31, 2004, 2003 and 2002, the Company recognized $1,732,000, $927,000 and $1,898,000, respectively of interest and fee income related to the line of credit. An aÇliate of James M. SeneÅ, Jr., a director of the Company, provides certain administrative, tax and technology services to the Company. In connection therewith, the Company paid $999,000, $1,363,000 and $1,258,000 in fees relating to these services during the years ended December 31, 2004, 2003 and 2002, 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 aÇliates of James M. SeneÅ, Jr. and Robert A. Bourne, each members of the Company's board of directors. The mortgage loans bear interest at a weighted average of 8.9%, per annum with interest payable monthly or quarterly. As of December 31, 2004 and 2003, the aggregate principal balance of the four mortgages, included in mortgages, notes and accrued interest receivable on the balance sheet, was $2,482,000 and $2,935,000, respectively. In connection therewith, the Company recorded $243,000, $281,000 and $663,000 as interest from unconsoli- dated aÇliates and other mortgage receivables during the years ended December 31, 2004, 2003 and 2002, respectively. 22. Segment Information: The Company has identiÑed two primary Ñnancial segments: (i) real estate held for investment and (ii) real estate held for sale. The following tables represent the segment data and a reconciliation to the 72 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Company's condensed consolidated totals for the years ended December 31, 2004, 2003 and 2002 (dollars in thousands): Real Estate Held for Investment Real Estate Held for Sale Eliminations (Intercompany) 2004 External revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 116,895 3,819 Intersegment revenues ÏÏÏÏÏÏÏÏÏ 8,056 Interest revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,027 Other revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,001 Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,974 Depreciation and amortizationÏÏÏ 28,387 Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏ Equity in earnings of unconsolidated aÇliates ÏÏÏÏÏÏ Provision for income taxes ÏÏÏÏÏÏ Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings (loss) from continuing 8,733 Ì Ì $ 4,695 Ì 2,096 319 2,295 164 10,679 (68) 2,542 (1,179) $ Ì (3,819) Ì Ì (2,833) Ì (168) (3,941) Ì (52) operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60,168 (4,733) (4,811) Condensed Consolidated Totals $ 121,590 Ì 10,152 1,346 32,463 17,138 38,898 4,724 2,542 (1,231) 50,624 14,310 Earnings from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,766 Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 64,934 Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,294,755 9,544 $ 4,811 $70,980 Additions to long-lived assets: Ì $ (4,811) $ 64,934 $(65,687) $1,300,048 Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 134,565 $74,024 $ Ì $ 208,589 73 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Real Estate Held for Investment Real Estate Held for Sale Eliminations (Intercompany) 2003 External revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Intersegment revenues ÏÏÏÏÏÏÏÏÏ Interest revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation and amortizationÏÏÏ Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏ Equity in earnings of unconsolidated aÇliates ÏÏÏÏÏÏ Provision for income taxes ÏÏÏÏÏÏ Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings (loss) from continuing 97,978 3,327 2,820 702 27,587 12,987 21,264 6,154 Ì Ì $ 3,247 471 1,922 291 1,263 230 10,986 (216) 2,902 157 $ Ì (3,798) Ì Ì (2,096) Ì (747) (1,597) Ì (20) operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49,143 (3,705) (2,572) Condensed Consolidated Totals $ 101,225 Ì 4,742 993 26,754 13,217 31,503 4,341 2,902 137 42,866 10,607 Earnings from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,330 Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 53,473 Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,208,310 6,277 $ 2,572 $80,945 Additions to long-lived assets: Ì $ (2,572) $ 53,473 $(75,477) $1,213,778 Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 215,730 $58,612 $ Ì $ 274,342 74 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2002 External revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏ Intersegment revenues ÏÏÏÏÏÏÏÏÏ Interest revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation and amortizationÏÏÏ Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏ Equity in earnings of unconsolidated aÇliates ÏÏÏÏÏÏ Provision for income taxes ÏÏÏÏÏÏ Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings (loss) from continuing Real Estate Held for Investment $ 80,968 6,018 1,852 629 26,562 10,673 15,412 3,215 Ì Ì Real Estate Held for Sale Eliminations (Intercompany) $ 1,290 Ì 3,182 Ì 2,518 170 7,087 (756) 3,042 Ì $ Ì (6,018) Ì Ì (3,901) Ì (197) (659) Ì (8) operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40,035 (3,017) (2,587) Condensed Consolidated Totals $ 82,258 Ì 5,034 629 25,179 10,843 22,302 1,800 3,042 (8) 34,431 13,627 Earnings from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,023 Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 48,058 Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $954,108 5,604 $ 2,587 $77,320 Additions to long-lived assets: Ì $ (2,587) $ 48,058 $(73,128) $958,300 Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 44,437 $27,229 $ Ì $ 71,666 23. Major Tenants: For the years ended December 31, 2004, the Company recorded rental and earned income from one of the Company's tenants, the United States of America, of $18,181,000. During the years ended December 31, 2003 and 2002, the Company recorded rental and earned income from Eckerd Corporation, of $11,278,000 and $12,467,000, respectively. The rental and earned income from Eckerd Corporation and the United States of America represents more than 10 percent of the Company's rental and earned income for each of the respective years. 24. Commitments and Contingencies: In January 2002, Calapasas Investment Partnership No. 1 Limited Partnership (""Calapasas''), a Captec stockholder, Ñled a class action complaint against Captec, certain former Captec directors, and the Company (as successor in interest to Captec). 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 Ñnancial statements in 2000 and 2001. In July 2004, the parties entered into a Stipulation of Settlement which was Ñled with the court. Pursuant to the Stipulation of Settlement, the total settlement amount paid to the plaintiÅs was $225,000, which included payment of attorneys' fees and costs to plaintiÅs' counsel. In July 2004, a Ñnal judgment of dismissal was entered by the court. 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. 75 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Management believes that the outcome of the proceedings will not have a material adverse eÅect upon its operations, Ñnancial condition or liquidity. 25. Subsequent Events: In January 2005, the Company entered into a purchase agreement with James M. SeneÅ, Jr., a director of the Company, Kevin B. Habicht, an oÇcer and director of the Company, and Gary M. Ralston, a former oÇcer and director of the Company, which provided that the Company would acquire their collective 1.3 percent voting interest in Services. EÅective, January 1, 2005, the Company acquired the remaining interest in Services increasing the Company's ownership in Services to 100 percent. In January 2005, the Company entered into an agreement with National Properties Corporation (""NAPE''), which provided that NAPE would merge with and into a subsidiary of the Company. At the time of the merger agreement, NAPE owned 43 properties located in 12 states which were leased to 17 tenants. If the acquisition is consummated, the Company will issue approximately 1,637,000 shares of common stock to holders of NAPE common stock. Total consideration for the merger transaction is estimated to be approximately $61,000,000 based on the Company's closing stock price on the date of the merger agreement. Completion of the merger is subject to customary closing conditions, including the approval of the holders of a majority of the outstanding shares of NAPE common stock. The Company has entered into a shareholders' agreement with the holders of approximately 53 percent of the outstanding NAPE common stock whereby these holders have agreed to vote in favor of the merger. However, the Company may terminate the merger agreement if a majority of the NAPE shareholders who are not bound by the shareholders' agreement do not approve the merger. The merger does not require approval by the Company's shareholders. The Company anticipates that the merger will be completed not later than the second quarter of 2005. 76 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Process for Assessment and Evaluation of Disclosure Controls and Procedures and Internal Control over Financing Reporting. The Company carried out an assessment as of December 31, 2004 of the eÅectiveness of the design and operation of its disclosure controls and procedures and its internal control over Ñnancial reporting. This assessment was done under the supervision and with the participation of management, including the Company's Chief Executive OÇcer and Chief Financial OÇcer. Rules adopted by the Commission require the Company to present the conclusions of the Chief Executive OÇcer and Chief Financial OÇcer about the eÅectiveness of the Company's disclosure controls and procedures and the conclusions of the Company's management about the eÅectiveness of the Company's internal control over Ñnancial reporting as of the end of the period covered by this annual report. CEO and CFO CertiÑcations. Included as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K are forms of ""CertiÑcation'' of the Company's Chief Executive OÇcer and Chief Financial OÇcer. The forms of CertiÑcation are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Annual Report on Form 10-K that you are currently reading is the information concerning the assessment referred to in the Section 302 certiÑcations and this information should be read in conjunction with the Section 302 certiÑcations for a more complete understanding of the topics presented. Disclosure Controls and Procedures and Internal Control over Financial Reporting. Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in the Company's reports Ñled or submitted under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods speciÑed in the Commission's rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to the Company's management, including the Chief Executive OÇcer and Chief Financial OÇcer, as appropriate, to allow timely decisions regarding required disclosure. Internal control over Ñnancial reporting is a process designed by, or under the supervision of, the Company's Chief Executive OÇcer and Chief Financial OÇcer, and aÅected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of Ñnancial reporting and the preparation of Ñnancial statements for external purposes in accordance with generally accepted accounting principles (""GAAP'') and includes those policies and procedures that: ‚ pertain to the maintenance of records that in reasonable detail accurately and fairly reÖect the transactions and dispositions of the Company's assets; ‚ provide reasonable assurance that transactions are recorded as necessary to permit preparation of Ñnancial statements in accordance with generally accepted accounting principles, and that the Company's receipts and expenditures are being made in accordance with authorizations of manage- ment or the board of directors; and ‚ provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material adverse eÅect on the Company's Ñnancial statements. Scope of the Assessments. The assessment by the Company's Chief Executive OÇcer and Chief Financial OÇcer of the Company's disclosure controls and procedures and the assessment by the Company's management, including the Company's Chief Executive OÇcer and Chief Financial OÇcer, of the Company's internal control over Ñnancial reporting included a review of procedures and discussions with the Company's management and others at the Company. In the course of the assessments, the Company sought 77 to identify data errors, control problems or acts of fraud and to conÑrm that appropriate corrective action, including process improvements, were being undertaken. The Company's internal control over Ñnancial reporting is also assessed on an ongoing basis by personnel in the Company's Accounting department and by the Company's internal auditors in connection with their internal audit activities. The overall goals of these various assessment activities are to monitor the Company's disclosure controls and procedures and the Company's internal control over Ñnancial reporting and to make modiÑcations as necessary. The Company's intent in this regard is that the disclosure controls and procedures and the internal control over Ñnancial reporting will be maintained and updated (including with improvements and corrections) as conditions warrant. Among other matters, management sought in its assessment to determine whether there were any ""signiÑcant deÑciencies'' or ""material weaknesses'' in the Company's internal control over Ñnancial reporting, or whether management had identiÑed any acts of fraud involving personnel who have a signiÑcant role in the Company's internal control over Ñnancial reporting. In the Public Company Accounting Oversight Board's Auditing Standard No. 2, a ""signiÑcant deÑciency'' is a ""control deÑciency,'' or a combination of control deÑciencies, that adversely aÅects the ability to initiate, authorize, record, process or report external Ñnancial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the annual or interim Ñnancial statements that is more than inconsequential will not be prevented or detected. A ""control deÑciency'' exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A ""material weakness'' is deÑned in Auditing Standard No. 2 as a signiÑcant deÑciency, or a combination of signiÑcant deÑciencies, that results in more than a remote likelihood that a material misstatement of the annual or interim Ñnancial statements will not be prevented or detected. Management also sought to deal with other control matters in the assessment, and in each case if a problem was identiÑed, management considered what revision, improvement and/or correction was necessary to be made in accordance with the Company's on-going procedures. The assessments of the Company's disclosure controls and procedures and the Company's internal control over Ñnancial reporting is done on a quarterly basis so that the conclusions concerning eÅectiveness of those controls can be reported in the Company's Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. Assessment of EÅectiveness of Disclosure Controls and Procedures. Based upon the assessments, the Company's Chief Executive OÇcer and Chief Financial OÇcer have concluded that, as of December 31, 2004, the Company's disclosure controls and procedures were eÅective. Management's Report on Internal Control Over Financial Reporting. Management, including the Company's Chief Executive OÇcer and Chief Financial OÇcer, are responsible for establishing and maintaining adequate internal control over Ñnancial reporting for the Company. Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control Ì Integrated Framework to assess the eÅectiveness of the Company's internal control over Ñnancial reporting. Based upon the assessments, the Company's Chief Executive OÇcer and Chief Financial OÇcer have concluded that, as of December 31, 2004, the Company's internal control over Ñnancial reporting was eÅective. The Company's independent registered public accounting Ñrm has audited the consolidated Ñnancial statements in this Annual Report on Form 10-K and have issued an attestation report on management's assessment of the Company's internal control over Ñnancial reporting and its opinion on the eÅectiveness of internal control over Ñnancial reporting, which appears on page 37 of this Annual Report on Form 10-K. Changes in Internal Control Over Financial Reporting. During the three months ended December 31, 2004, there were no changes in the Company's internal control over Ñnancial reporting that has materially aÅected, or are reasonably likely to materially aÅect, the Company's internal control for Ñnancial reporting. 78 Limitations on the EÅectiveness of Controls. Management, including the Company's Chief Executive OÇcer and Chief Financial OÇcer, do not expect that the Company's disclosure controls and procedures or the Company's internal control over Ñnancial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reÖect the fact that there are resource constraints, and the beneÑts of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management's override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-eÅective control system, misstate- ments due to error or fraud may occur and not be detected. 79 Item 9B. Other Information. None. PART III Item 10. Directors and Executive OÇcers of the Registrant Reference is made to the Registrant's deÑnitive proxy statement to be Ñled with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the sections thereof captioned ""Proposal I: Election of Directors Ì Nominees,'' ""Proposal I: Election of Directors Ì Executive OÇcers,'' ""Proposal I: Election of Directors Ì Code of Business Conduct'' and ""Security Ownership,'' and the information in such sections is incorporated herein by reference. Item 11. Executive Compensation Reference is made to the Registrant's deÑnitive proxy statement to be Ñled with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned ""Proposal I: Election of Directors Ì Compensation of Directors,'' ""Executive Compensation,'' ""Compensa- tion Committee Report'' and ""Performance Graph,'' and the information in such sections is incorporated herein by reference. Item 12. Security Ownership of Certain BeneÑcial Owners and Management and Related Stockholder Matters Reference is made to the Registrant's deÑnitive proxy statement to be Ñled with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned ""Executive Compensation Ì Equity Compensation Plan Information,'' ""Security Ownership,'' and the information in such section is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Reference is made to the Registrant's deÑnitive proxy statement to be Ñled with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned ""Certain Transactions,'' and the information in such section is incorporated herein by reference. Item 14. Principal Accounting Fees and Services Reference is made to the Registrant's deÑnitive proxy statement to be Ñled with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned ""Audit Committee Report,'' and the information in such section is incorporated herein by reference. PART IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are Ñled as part of this report. (1) Financial Statements Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2004 and 2003 Consolidated Statements of Earnings for the years ended December 31, 2004, 2003 and 2002 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2004, 2003 and 2002 80 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 Notes to Consolidated Financial Statements (2) Financial Statement Schedules Schedule III Ì Real Estate and Accumulated Depreciation and Amortization and Notes as of December 31, 2004 Schedule IV Ì Mortgage Loans on Real Estate and Notes as of December 31, 2004 All other schedules are omitted because they are not applicable or because the required information is shown in the Ñnancial statements or the notes thereto. (3) Exhibits (a) The following exhibits are Ñled as a part of this report. 2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession. 2.1 Agreement and Plan of Merger, dated January 14, 2005, among Commercial Net Lease Realty, Inc., NAPE Acquisition, Inc., National Properties Corporation and Raymond Di Paglia (Ñled as Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated January 19, 2005, and incorporated herein by reference). Articles of Incorporation and By-laws First Amended and Restated Articles of Incorporation of the Registrant, as amended (Ñled herewith). 3 3.1 3.2 Articles Supplementary Establishing and Fixing the Rights and Preferences of a Series of Preferred Stock (9% Series A Non-Voting Preferred Stock, par value $0.01 per share (the ""Series A Preferred Stock'') (Ñled as Exhibit 3 to the Registrant's Form 8-A dated November 26, 2001 and Ñled with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference). 4 3.4 3.3 Articles Supplementary Classifying and Designating 10,000 Preferred Shares as the Series B Preferred Stock (Ñled as Exhibit 3 to the Registrant's Form 8-A dated August 12, 2003 and Ñled with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference). Second Amended and Restated Bylaws of the Registrant (Ñled as Exhibit 3.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, and incorporated herein by reference). Instruments DeÑning the Rights of Security Holders, Including Indentures Specimen CertiÑcate of Common Stock, par value $0.01 per share, of the Registrant (Ñled as Exhibit 3.4 to the Registrant's Registration Statement No. 1-11290 on Form 8-B and incorporated herein by reference). Form of Indenture dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (Ñled as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference). 4.2 4.1 81 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Form of Supplemental Indenture No. 1 dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (Ñled as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference). Form of 7.125% Note due 2008 (Ñled as Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference). Form of Supplemental Indenture No. 3 dated September 20, 2000, by and among Registrant and First Union National Bank, Trustee, relating to $20,000,000 of 8.5% Notes due 2010 (Ñled as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated September 20, 2000, and incorporated herein by reference). Form of 8.5% Notes due 2010 (Ñled as Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated September 20, 2000, and incorporated herein by reference). Form of Supplemental Indenture No. 4 dated as of May 30, 2002, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $50,000,000 of 7.75% Notes due 2012 (Ñled as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated June 4, 2002, and incorporated herein by reference). Form of 7.75% Notes due 2012 (Ñled as Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated June 4, 2002, and incorporated herein by reference). Form of Supplemental Indenture No. 5 dated as of June 18, 2004, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $150,000,000 of 6.25% Notes due 2014 (Ñled as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated June 15, 2004, and incorporated herein by reference). 4.10 Form of 6.25% Notes due 2014 (Ñled as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated June 15, 2004, and incorporated herein by reference). 4.11 Articles Supplementary Establishing and Fixing the Rights and Preferences of a Series of Preferred Stock (the Series A Preferred Stock) (Ñled as Exhibit 3 to the Registrant's Form 8-A dated November 26, 2001 and Ñled with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference). 4.12 Specimen Stock CertiÑcate relating to the Series A Preferred Stock (Ñled as Exhibit 4 to the Registrant's Form 8-A dated November 26, 2001 and Ñled with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference). 4.13 Articles Supplementary Classifying and Designating 10,000 Preferred Shares as the Series B Preferred Stock (Ñled as Exhibit 3 to the Registrant's Form 8-A dated August 12, 2003 and Ñled with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference). 4.14 Specimen Stock CertiÑcate relating to the Series B Preferred Stock (Ñled as Exhibit 4 to the Registrant's Form 8-A dated August 12, 2003 and Ñled with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference). Material Contracts 10 82 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 2000 Performance Incentive Plan (Ñled as Exhibit 99 to the Registrant's Registration Statement No. 333-64794 on Form S-8 and incorporated herein by reference). Form of Restricted Stock Agreement between the Company and the Participant of the Company (Ñled herewith). Employment Agreement dated February 16, 2004, between the Registrant and Craig Macnab (Ñled herewith). Employment Agreement dated February 1, 2003, between the Registrant and Julian E. Whitehurst (Ñled herewith). Employment Agreement dated January 1, 2003, as amended, between the Registrant and Kevin B. Habicht (Ñled herewith). Employment Agreement dated January 1, 2003, between the Registrant and Dennis E. Tracy (Ñled herewith). Third Renewal Promissory Note dated as of April 1, 2001, by Commercial Net Lease Realty Services, Inc. in favor of Registrant relating to an $85,000,000 line of credit (Ñled as Exhibit 10.13 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, and incorporated herein by reference). Separation Agreement and General Release, dated as of April 23, 2004, by and between Gary M. Ralston and the Registrant, as amended (Ñled herewith). Third ModiÑcation of Amended and Restated Secured Revolving Line of Credit and Security Agreement and Other Loan Documents eÅective as of April 1, 2001, by and between Registrant as lender and Commercial Net Lease Realty Services, Inc., as borrower, relating to an $85,000,000 line of credit (Ñled as Exhibit 10.14 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, and incorporated herein by reference). 10.10 Fourth ModiÑcation of Amended and Restated Secured Revolving Line of Credit and Security Agreement and Other Loan Documents eÅective as of July 1, 2001, by and between Registrant as lender and Commercial Net Lease Realty Services, Inc., as borrower, relating to an $85,000,000 line of credit (Ñled as Exhibit 10.15 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, and incorporated herein by reference). 10.11 Seventh Amended and Restated Line of Credit and Security Agreement, dated May 9, 2003, by and among Registrant, certain lenders and Wachovia Bank, N.A., as the Agent, relating to a $225,000,000 loan (Ñled as Exhibit 10.11 to the Registrant's Current Report on Form 8-K dated July 11, 2003, and incorporated herein by reference). 10.12 Real Estate Purchase Contract, dated as of July 23, 2003, by an between MCI WorldCom Network Services, Inc. and the Company (Ñled as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated July 25, 2003, and incorporated herein by reference). 10.13 U.S. Government Lease for Real Property, dated as of December 17, 2002, between MCI WorldCom Network Services, Inc. and the United States of America (Ñled as Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated July 25, 2003, and incorporated herein by reference). Statement of Computation of Ratios of Earnings to Fixed Charges (Ñled herewith). Subsidiaries of the Registrant (Ñled herewith). 12 21 83 23 24 31 31.1 31.2 32 32.1 32.2 99 99.1 Consent of Independent Accountants dated March 9, 2005 (Ñled herewith). Power of Attorney (included on signature page). Section 302 CertiÑcations CertiÑcation of Chief Executive OÇcer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Ñled herewith). CertiÑcation of Chief Financial OÇcer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Ñled herewith). Section 906 CertiÑcations CertiÑcation of Chief Executive OÇcer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (Ñled herewith). CertiÑcation of Chief Financial OÇcer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (Ñled herewith). Additional Exhibits CertiÑcation of Chief Executive OÇcer pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company Manual (Ñled herewith). 84 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of March, 2005. SIGNATURES COMMERCIAL NET LEASE REALTY, INC. By: /s/ Craig Macnab Craig Macnab Director, President, and Chief Executive OÇcer 85 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose signature appears below hereby constitutes and appoints each of Craig Macnab and Kevin B. Habicht as his attorney-in-fact and agent, with full power of substitution and resubstitution for him in any and all capacities, to sign any or all amendments to this report and to Ñle same, with exhibits thereto and other documents in connection therewith, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and conÑrming all that such attorney-in-fact and agent or his substitutes may do or cause to be done by virtue hereof. Signature Title Date /s/ James M. SeneÅ, Jr. James M. SeneÅ, Jr. /s/ Robert A. Bourne Robert A. Bourne /s/ CliÅord R. Hinkle CliÅord R. Hinkle /s/ Richard B. Jennings Richard B. Jennings /s/ Ted B. Lanier Ted B. Lanier /s/ Robert C. Legler Robert C. Legler /s/ Robert Martinez Robert Martinez /s/ Craig Macnab Craig Macnab /s/ Kevin B. Habicht Kevin B. Habicht Chairman of the Board of Directors March 14, 2005 Vice Chairman of the Board of Directors March 14, 2005 Director March 14, 2005 Director March 14, 2005 Director March 14, 2005 Director March 14, 2005 Director March 14, 2005 Director, President and Chief Executive OÇcer Director, Chief Financial OÇcer (Principal Financial and Accounting OÇcer), Executive Vice President, Assistant Secretary and Treasurer March 14, 2005 March 14, 2005 86 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2004 Initial Cost to Company Building, Improve- ments and Leasehold Interests Land Encum- brances(k) Costs Capitalized Subsequent to Acquisition Improve- ments Carrying Costs Gross Amount at Which Carried at Close of Period(b) Building, Improve- ments and Leasehold Interests Total Land Life on Which Depreciation and Amortization in Latest Income Statement is Computed Accumulated Depreciation Date of Con- and Amortization Date struction Acquired Real Estate Held for Investment the Company has Invested in Under Operating Leases: Academy: Houston, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Houston, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N. Richland Hills, TX ÏÏÏÏÏÏÏÏ Houston, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Houston, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Baton Rouge, LA ÏÏÏÏÏÏÏÏÏÏÏÏ Houston, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pasadena, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Beaumont, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ San Antonio, TX ÏÏÏÏÏÏÏÏÏÏÏÏ Ace Hardware and Lighting: Bourbonnais, IL ÏÏÏÏÏÏÏÏÏÏÏÏÏ Advanced Auto Parts: Miami, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Albertsons: Sonora, CA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ American Signature Home: White Marsh, MD ÏÏÏÏÏÏÏÏÏÏÏ Amoco: Miami, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sunrise, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Applebee's: Ballwin, MO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Arby's: Colorado Springs, CO ÏÏÏÏÏÏÏÏ Thomson, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Whitmore Lake, MI ÏÏÏÏÏÏÏÏÏÏ Albuquerque, NMÏÏÏÏÏÏÏÏÏÏÏÏ Albuquerque, NMÏÏÏÏÏÏÏÏÏÏÏÏ Santa Fe, NMÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Washington Courthouse, OH ÏÏ Ashley Furniture: Altamonte Springs, FLÏÏÏÏÏÏÏÏ Babies ""R'' Us: Arlington, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Independence, MO ÏÏÏÏÏÏÏÏÏÏÏ Ì $ Ì Ì Ì Ì Ì Ì Ì Ì 831,369(t) 1,074,232 699,165 1,307,655 2,098,895 795,005 1,547,501 2,310,845 899,768 1,423,700 973,123 $ Ì $ Ì Ì Ì Ì Ì 1,627,872 2,180,574 2,449,261 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 3,006,391 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì $Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì $ $ 1,074,232 699,165 1,307,655 2,098,895 795,005 1,547,501 2,310,845 899,768 1,423,700 973,123 $ (c) (c) (c) (c) (c) (c) 1,627,872 2,180,574 2,449,261 (c) 1,074,232 699,165 1,307,655 2,098,895 795,005 1,547,501 3,938,717 3,080,342 3,872,961 973,123 (c) (c) (c) (c) (c) (c) 235,702 315,729 354,633 (c) 1994 1995 1996 1996 1996 1997 1976 1994 1992 1996 05/95 06/95 08/95(f) 02/96(f) 06/96(f) 08/96(f) 03/99 03/99 03/99 09/97 (c) (c) (c) (c) (c) (c) 40 years 40 years 40 years (c) 298,192 1,329,492 1,627,684 121,672 1997 11/98 37.4 years 866,927 Ì 866,927 Ì (e) 12/04 (e) 587,782 1,620,311 2,208,093 48,947 1984 03/99 40 years 3,762,030 3,006,391 6,768,421 510,460 1998 03/98(g) 40 years 969,156 949,185 Ì Ì 969,156 949,185 Ì Ì (e) (e) 05/03 05/03 (e) (e) 1,496,173 1,403,581 2,899,754 106,731 1995 12/01 40 years 205,957 267,842 170,515 442,991 250,881 450,358 156,875 533,540 503,550 468,916 507,790 513,970 341,960 545,841 739,497 771,392 639,431 950,781 764,851 792,318 702,716 40,571 38,291 35,657 38,613 39,083 26,003 41,507 1998 1997 1993 1993 1988 1998 1998 12/01 12/01 12/01 12/01 12/01 12/01 12/01 40 years 40 years 40 years 40 years 40 years 40 years 40 years 2,906,409 5,192,225 8,098,634 909,246 1997 09/97 40 years 830,689 1,678,794 2,611,867 2,301,909 3,442,556 3,980,703 555,566 175,041 1996 1996 06/96 12/01 40 years 40 years 298,192 1,329,492 866,927 Ì 587,782 1,620,311 3,762,030 969,156 949,185 Ì Ì Ì 1,496,173 1,403,581 205,957 267,842 170,515 442,991 250,881 450,358 156,875 533,540 503,550 468,916 507,790 513,970 341,960 545,841 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 2,906,409 4,877,225 315,000 830,689 1,678,794 2,611,867 2,301,909 Ì Ì See accompanying report of independent registered public accounting Ñrm. F-1 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION Ì (Continued) December 31, 2004 Initial Cost to Company Building, Improve- ments and Leasehold Interests Land Encum- brances(k) Costs Capitalized Subsequent to Acquisition Improve- ments Carrying Costs Gross Amount at Which Carried at Close of Period(b) Building, Improve- ments and Leasehold Interests Total Land Life on Which Depreciation and Amortization in Latest Income Statement is Computed Accumulated Depreciation Date of Con- and Amortization Date struction Acquired Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Barnes & Noble: Brandon, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,048,316(j)$ Denver, CO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Houston, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Plantation, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Freehold, NJ(r) ÏÏÏÏÏÏÏÏÏÏÏÏÏ Dayton, OHÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Redding, CA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Marlton, NJÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Memphis, TN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Beall's: Sarasota, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,002,757(p) 1,615,585(t) 1,206,303(t) Ì Ì Ì Ì $ 1,476,407 3,244,785 3,307,562 3,616,357 2,917,219 1,412,614 497,179 2,831,370 1,573,875 $ 1,527,150 2,722,087 2,396,024 Ì 2,260,663 3,223,467 1,625,702 4,318,554 2,241,639 1,077,802 1,795,173 Beautiful America Dry Cleaners: Orlando, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bed, Bath & Beyond: Richmond, VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Los Angeles, CAÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Glendale, AZÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bedford Furniture: Everett, PA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bennigan's: Milford, CT(r) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Altamonte Springs, FLÏÏÏÏÏÏÏÏÏ Schaumburg, IL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Wichita Falls, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏ Best Buy: Brandon, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Evanston, IL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cuyahoga Falls, OHÏÏÏÏÏÏÏÏÏÏÏ Rockville, MDÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fairfax, VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ St. Petersburg, FL ÏÏÏÏÏÏÏÏÏÏÏÏ North Fayette, PA ÏÏÏÏÏÏÏÏÏÏÏÏ Denver, CO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Big D's: Eden Prairie, MNÏÏÏÏÏÏÏÏÏÏÏÏÏ BJ's Wholesale: Orlando, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Blockbuster: Conyers, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mobile, AL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mobile, AL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gainesville, GAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Glasgow, KY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Alice, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Kingsville, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BMW: Duluth, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bodyworks Unlimited: Rincon, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 79,983(u) 40,200 110,531 2,867,434(p) Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 4,575,692(p) Ì Ì Ì 1,184,144 6,318,023 1,082,092 2,842,759 3,089,396 Ì Ì Ì 2,758,452 226,366 1,159,833 7,830 921,200 1,088,282 2,064,964 818,611 2,985,156 1,850,996 3,708,980 6,233,342 3,052,477 4,031,744 2,330,847 8,881,890 697,298 924,425 1,311,190 1,107,418 2,772,137 Ì 2,359,377 3,418,783 3,218,018 2,610,980 2,292,932 4,372,684 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 64,916 180,538 80,809 6,192,000(u) 3,137,500 8,626,657 Ì Ì Ì Ì Ì Ì Ì Ì Ì 320,029 491,453 843,121 294,882 302,859 318,285 498,849 556,282 498,488 562,498 611,570 560,904 578,268 457,695 4,433,613 4,080,186 244,607 1,166,045 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì $Ì Ì Ì Ì Ì Ì Ì Ì Ì $ $ 1,476,407 3,244,785 3,307,562 3,616,457 2,917,219 1,412,614 497,179 2,831,370 1,573,875 $ 1,527,150 2,722,087 2,396,024 (c) 2,260,663 3,223,467 1,625,702 4,318,554 2,241,639 3,003,557 5,966,872 5,703,586 3,616,457 5,177,882 4,636,081 2,122,881 7,149,924 3,815,514 380,950 697,647 554,089 (c) 504,253 614,473 306,513 661,279 51,363 1995 1994 1995 1996 1995 1996 1997 1998 1997 08/94(f) 09/94 10/94(f) 05/95(f) 01/96 05/97 06/97 11/98 09/97 40 years 40 years 40 years (c) 40 years 40 years 40 years 40 years 40 years Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 1,077,802 1,795,173 2,872,975 43,054 1996 09/97 40 years 40,200 110,531 150,731 2,418 2001 02/04 40 years 1,184,144 6,318,023 1,082,092 2,842,759(o) 3,089,396 2,758,452 4,026,903 9,407,419 3,840,544 183,595 473,064 376,414 1997 1975 1999 06/98 11/98 12/98(g) 33 years 40 years 40 years 226,366 817,667 1,044,033 83,888 1998 11/98 40 years 921,200 1,088,282 2,064,964 818,611 2,985,156 1,850,996 3,708,980 6,233,342 3,052,477 4,031,744 2,330,847 8,881,890 697,298 924,425 1,311,190 1,107,418 2,772,137 (c) 2,359,377 3,418,783 3,218,018 2,610,980(o) 2,292,932 4,372,684 1,618,498 2,012,707 3,376,154 1,926,029 5,757,293 1,850,996 6,068,357 9,652,125 6,270,495 6,642,724 4,623,779 13,254,574 53,024 70,295 99,705 84,210 545,764 (c) 444,841 637,460 593,322 387,165 374,990 192,715 1988 1988 1988 1993 1996 1994 1970 1995 1995 1997 1997 1991 12/01 12/01 12/01 12/01 02/97 02/97 06/97 07/97 08/97 09/97 06/98 06/01 40 years 40 years 40 years 40 years 40 years (c) 40 years 40 years 40 years 33 years 40 years 40 years 64,916 261,347 326,263 16,627 1997 12/01 40 years 3,137,500 8,626,657 11,764,157 189,066 2001 02/04 40 years 320,029 491,453 843,121 294,882 302,859 318,285 498,849 556,282 498,488 562,498 611,570 560,904 578,268 457,695 876,311 989,941 1,405,619 906,452 863,763 896,553 956,544 104,882 37,906 42,773 46,505 42,652 43,973 34,804 1997 1997 1997 1997 1997 1995 1995 06/97 12/01 12/01 12/01 12/01 12/01 12/01 40 years 40 years 40 years 40 years 40 years 40 years 40 years 4,433,613 4,080,186 8,513,799 310,264 1984 12/01 40 years 244,607 791,808 1,036,415 82,570 1997 11/98 37.4 years See accompanying report of independent registered public accounting Ñrm. F-2 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION Ì (Continued) December 31, 2004 Initial Cost to Company Building, Improve- ments and Leasehold Interests Land Encum- brances(k) Costs Capitalized Subsequent to Acquisition Improve- ments Carrying Costs Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Borders Books & Music: Wilmington, DE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,173,813(j)$ 1,667,451(j) Richmond, VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ft. Lauderdale, FL ÏÏÏÏÏÏÏÏÏÏÏÏ 4,819,730(p) Bangor, MEÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Altamonte Springs, FLÏÏÏÏÏÏÏÏÏ Boston Market: Geneva, IL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Orland Park, IL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Wheaton, IL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Burton, MI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Novi, MI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ North Olmsted, OH ÏÏÏÏÏÏÏÏÏÏÏ Warren, OH ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BuÅalo Wild Wings: Michigan City, IN ÏÏÏÏÏÏÏÏÏÏÏÏ Burger King: Colonial Heights, VA ÏÏÏÏÏÏÏÏÏÏ Carino's: Beaumont, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lewisville, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lubbock, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CarMax: Albuquerque, NMÏÏÏÏÏÏÏÏÏÏÏÏÏ CertiÑed Auto Sales: Albuquerque, NMÏÏÏÏÏÏÏÏÏÏÏÏÏ Champps: Alpharetta, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Irving, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Charhut: Sunrise, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Checkers: Orlando, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ China Star: Montgomery, AL ÏÏÏÏÏÏÏÏÏÏÏÏÏ Circuit City: Gastonia, NC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Claim Jumper: Tempe, AZ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Roseville, CA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CompUSA: Baton Rouge, LA(r) ÏÏÏÏÏÏÏÏÏÏ Miami, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cora Rehabilitation Clinics: Orlando, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corpus Christi Flea Market: Corpus Christi, TXÏÏÏÏÏÏÏÏÏÏÏÏ 1,598,675(j) 159,966(u) Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 3,030,769 2,177,310 3,164,984 1,546,915 1,947,198 1,125,347 562,384 1,115,457 619,778 835,669 601,800 562,446 $ 6,061,538 2,599,587 3,319,234 2,486,761 Ì 1,036,952 556,201 1,014,184 707,242 651,108 460,521 467,592 162,538 492,007 662,345 609,787 439,076 1,369,836 1,007,432 10,197,135 1,112,876 1,363,447 1,018,659 1,205,512 Ì Ì 3,032,965 1,760,020 1,641,820 1,724,220 286,834 423,837 256,568 Ì 1,418,158 1,140,080 2,548,040 3,879,911 2,530,892 1,556,732 2,920,575 2,013,650 609,069 2,713,192 913,603 1,866,676 80,400 221,063 223,998 2,158,955 $ Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 8,128,062 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì $ $Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Gross Amount at Which Carried at Close of Period(b) Building, Improve- ments and Leasehold Interests Total Land Accumulated Depreciation Date of Con- and Amortization Date struction Acquired 2,994,400 2,177,310 3,164,984 1,546,915 1,947,198 1,125,347 562,384 1,115,457 619,778 835,669 601,800 562,446 $ $ 6,061,538 2,599,587 3,319,234(o) 2,486,761 (c) 893,485 377,244 872,736 707,242 297,567 389,065 467,592 9,055,938 4,776,897 6,484,218 4,033,676 1,947,198 2,018,832 939,628 1,988,193 1,327,020 1,133,236 990,865 1,030,038 1,519,458 621,374 259,839 530,164 (c) 70,323 31,655 68,711 53,780 28,494 30,771 35,556 1994 1995 1995 1996 1997 1996 1995 1995 1997 1995 1996 1997 12/94 06/95 02/96 06/96 09/97 12/01 12/01 12/01 12/01 12/01 12/01 12/01 Life on Which Depreciation and Amortization in Latest Income Statement is Computed 40 years 40 years 33 years 40 years (c) 40 years 40 years 40 years 40 years 40 years 40 years 40 years 162,538 492,007 654,545 37,413 1996 12/01 40 years 662,345 609,787 1,272,132 46,369 1997 12/01 40 years 439,076 1,369,836 1,007,432 1,363,447 1,018,659 1,205,512 1,802,523 2,388,495 2,212,944 103,679 77,460 91,669 2000 1994 1995 12/01 12/01 12/01 40 years 40 years 40 years 10,197,135 8,128,062 18,325,197 25,400 2004 04/04(f) 40 years 1,112,876 Ì 1,112,876 Ì (e) 04/04 (e) 3,032,965 1,760,020 1,641,820 1,724,220 4,674,785 3,484,240 124,847 131,112 1999 2000 12/01 12/01 40 years 40 years 286,834 423,837 710,671 6,477 1979 05/04 40 years 256,568 (c) 256,568 (c) 1988 07/92 (c) 1,418,158 1,140,080 2,558,238 86,693 1999 12/01 40 years 2,547,163 3,874,009 6,421,172 4,042 2004 12/04 40 years 2,530,892 1,556,732 2,920,575 2,013,650 609,069 2,713,192 913,603 1,866,676 5,451,467 3,570,382 1,522,672 4,579,868 222,085 153,121 205,622 499,464 2000 2001 1995 1994 12/01 12/01 12/95 04/94 40 years 40 years 40 years 40 years 80,400 221,063 301,463 4,836 2001 02/04 40 years 223,998 2,158,955 2,382,953 312,599 1983 03/99 40 years See accompanying report of independent registered public accounting Ñrm. F-3 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION Ì (Continued) December 31, 2004 Initial Cost to Company Building, Improve- ments and Leasehold Interests Land Encum- brances(k) Costs Capitalized Subsequent to Acquisition Improve- ments Carrying Costs Gross Amount at Which Carried at Close of Period(b) Building, Improve- ments and Leasehold Interests Total Land Life on Which Depreciation and Amortization in Latest Income Statement is Computed Accumulated Depreciation Date of Con- and Amortization Date struction Acquired CVS: San Antonio, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Dallas, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Arlington, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amarillo, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amarillo, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Kissimmee, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tampa, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lafayette, LA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Moore, OK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Midwest City, OK ÏÏÏÏÏÏÏÏÏÏÏÏ Irving, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Jasper, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Williston, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pantego, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Norman, OK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Arlington, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Leavenworth, KS ÏÏÏÏÏÏÏÏÏÏÏÏÏ Lewisville, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Forest Hill, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Del City, OKÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Arlington, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Garland, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Garland, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Oklahoma City, OK ÏÏÏÏÏÏÏÏÏÏÏ Dallas, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gladstone, MO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ellenwood, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Flower Mound, TXÏÏÏÏÏÏÏÏÏÏÏÏ Ft. Worth, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dave & Buster's: Utica, MIÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ DD's Discount: Moreno Valley, CA ÏÏÏÏÏÏÏÏÏÏÏ Denny's: Columbus, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dick's Clothing: Taylor, MI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ White Marsh, MD ÏÏÏÏÏÏÏÏÏÏÏÏ Dollar Tree: Garland, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Copperas Cove, TX ÏÏÏÏÏÏÏÏÏÏÏ Donato's: Medina, OH ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 427,591(j)$ 411,959(j) 350,823(j) 402,520(j) 523,141(j) 578,142(j) Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 210,025 464,968(t) 469,783(t) 570,753(t) 440,985 541,493 368,964 329,231 650,864 715,480 604,683 967,528 414,738 673,369 1,000,222 291,147 622,403 1,016,062 1,065,562 2,078,542 726,438 789,237 692,165 1,387,362 414,568 522,461 1,476,838 1,581,480 2,617,656 1,851,374 616,289 932,233 558,657 $ Ì $ Ì Ì Ì Ì Ì Ì Ì Ì 1,103,351 Ì Ì Ì 1,448,911 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 921,173 881,448 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 1,396,508 1,330,830 1,335,426 1,174,549 Ì Ì 1,418,531 1,400,278 1,471,105 2,570,569 1,739,568 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 3,776,169 Ì Ì 516,154 1,123,471 147,214 428,429 816,644 1,920,032 2,680,532 3,526,868 3,916,889 Ì Ì Ì 239,014 241,650 626,170 511,624 Ì 194,167 405,113 463,582 Ì $Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì $ 440,985 541,493 368,964 329,231 650,864 715,480 604,683 967,528 414,738 673,369 1,000,222 291,147 622,403 1,016,062 1,065,562 2,078,542 726,438 789,237 692,165 1,387,362 414,568 522,461 1,476,838 1,581,480 2,617,656 1,851,374 616,289 932,233 558,657 $ (c) (c) (c) (c) (c) (c) (c) (c) (c) 1,103,351 (c) (c) (c) 1,448,911 (c) 1,396,508 1,330,830 1,335,426 1,174,549 (c) (c) 1,418,531 1,400,278 1,471,105 2,570,569 1,739,568 921,173 881,448 Ì 440,985 541,493 368,964 329,231 650,864 715,480 604,683 967,528 414,738 1,776,720 1,000,222 291,147 622,403 2,464,973 1,065,562 3,475,050 2,057,268 2,124,663 1,866,714 1,387,362 414,568 1,940,992 2,877,116 3,052,585 5,188,225 3,590,942 1,537,462 1,813,681 558,657 (c) (c) (c) (c) (c) (c) (c) (c) (c) 243,434 (c) (c) (c) 273,180 (c) 222,568 217,646 210,051 187,194 (c) (c) 214,257 214,418 219,133 77,653 190,265 21,104 20,194 (c) 1993 1994 1994 1994 1994 1995 1995 1995 1995 1996 1996 1994 1995 1997 1997 1998 1998 1998 1998 1998 1998 1998 1998 1999 2003 2000 1996 1996 1996 12/93 01/94 02/94 12/94 12/94 04/95 12/95 01/96 01/96 03/96 12/96 01/97 01/97 06/97 06/97 11/97(g) 11/97(g) 04/98(g) 04/98(g) 05/98 05/98 06/98(g) 06/98(g) 08/98(g) 06/99 12/99(g) 09/97 09/97 09/97 (c) (c) (c) (c) (c) (c) (c) (c) (c) 40 years (c) (c) (c) 40 years (c) 40 years 40 years 40 years 40 years (c) (c) 40 years 40 years 40 years 40 years 40 years 40 years 40 years (c) 3,776,169 (c) 3,776,169 (c) 1998 06/98 (c) 516,154 1,270,685 1,786,839 163,027 1983 03/99 40 years 428,429 816,644 1,245,073 62,099 1997 12/01 40 years 1,920,032 2,680,532 3,526,868 3,916,889 5,446,900 6,597,421 731,446 812,333 239,014 241,650 626,170 705,791 865,184 947,441 54,790 90,645 1996 1996 1994 1972 08/96 08/96 02/94 11/98 40 years 40 years 40 years 40 years 405,113 463,582 868,695 35,252 1996 12/01 40 years See accompanying report of independent registered public accounting Ñrm. F-4 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION Ì (Continued) December 31, 2004 Initial Cost to Company Building, Improve- ments and Leasehold Interests Land Encum- brances(k) Costs Capitalized Subsequent to Acquisition Improve- ments Carrying Costs Gross Amount at Which Carried at Close of Period(b) Building, Improve- ments and Leasehold Interests Total Land Life on Which Depreciation and Amortization in Latest Income Statement is Computed Accumulated Depreciation Date of Con- and Amortization Date struction Acquired Eckerd: Millville, NJ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Atlanta, GAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mantua, NJ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Glassboro, NJ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Douglasville, GAÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Conyers, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chattanooga, TN ÏÏÏÏÏÏÏÏÏÏÏÏÏ Augusta, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Riverdale, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Warner Robins, GA ÏÏÏÏÏÏÏÏÏÏÏ Vineland, NJ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Falls Church, VA ÏÏÏÏÏÏÏÏÏÏÏÏÏ West MiÉin, PA ÏÏÏÏÏÏÏÏÏÏÏÏÏ Norfolk, VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thorndale, PAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Enterprise Rent-A-Car: Wilmington, NC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Family Dollar: Cohoes, NYÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Hudson Falls, NYÏÏÏÏÏÏÏÏÏÏÏÏÏ Fantastic Sams: Eden Prairie, MNÏÏÏÏÏÏÏÏÏÏÏÏÏ Fazoli's Restaurant: Bay City, MIÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Food 4 Less: Lemon Grove, CA ÏÏÏÏÏÏÏÏÏÏÏÏ Chula Vista, CA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gander Mountain: Amarillo, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ GCS Wireless: Orlando, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gen-X Clothing: Federal Way, WAÏÏÏÏÏÏÏÏÏÏÏÏÏ Golden Corral: LeitchÑeld, KY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Atlanta, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Abbeville, LA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lake Placid, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tampa, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Brandon, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dallas, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Good Guys, The: Foothill Ranch, CA ÏÏÏÏÏÏÏÏÏÏÏ East Palo Alto, CAÏÏÏÏÏÏÏÏÏÏÏÏ GymKix: Copperas Cove, TX ÏÏÏÏÏÏÏÏÏÏÏ H&R Block: Swansea, ILÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 435,126(j)$ 388,853(j) 452,361(j) 496,281(j) Ì Ì Ì Ì Ì Ì 471,020(j) Ì Ì Ì Ì 417,603 445,593 344,022 534,243 413,438 574,666 474,267 568,606 1,088,896 707,488 2,068,089 3,127,139 1,401,632 2,742,194 2,260,618 $ Ì $ Ì Ì Ì 995,209 998,900 Ì 1,326,748 1,707,448 Ì Ì Ì 2,043,862 1,796,508 2,472,039 Ì Ì Ì Ì Ì Ì Ì Ì Ì 1,227,330 Ì 2,424,664 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 218,126 327,329 95,644 51,055 515,502 379,789 Ì Ì Ì 64,916 180,538 80,809 647,055 633,899 3,695,816 3,568,862 Ì Ì 1,513,714 5,781,294 73,318(u) 36,850 101,320 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 2,037,392 1,661,577 257,414 73,660 88,457 98,577 115,113 1,187,614 1,329,793 1,138,129 306,642 368,317 362,416 305,074 1,339,000 1,390,502 1,024,747 1,456,113 2,271,634 2,505,022 3,404,843 Ì Ì Ì 43,797 Ì Ì Ì Ì Ì 203,908 431,715 171,477 45,842 132,440 69,029 $Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì $ 417,603 445,593 344,022 534,243 413,438 574,666 457,659 568,606 1,088,896 707,488 2,068,089 3,127,139 1,401,632 2,742,194 2,260,618 $ (c) (c) (c) (c) 995,209 998,900 (c) 1,326,748 1,707,448 1,227,330 (c) 2,412,036(q) 2,043,862 1,796,508 2,472,039 417,603 445,593 344,022 534,243 1,408,647 1,573,566 457,659 1,895,354 2,796,344 1,934,818 2,068,089 5,539,175 3,445,494 4,538,702 4,732,657 (c) (c) (c) (c) 221,987 188,334 (c) 233,563 300,582 182,821 (c) 165,827 146,903 129,124 177,678 1994 1994 1994 1994 1996 1997 1997 1997 1997 1999 1999 2002 2002 2002 2002 03/94 03/94 06/94 12/94 01/96 06/97 09/97 12/97 12/97 03/98(g) 09/98 10/01 02/02 02/02 02/02 (c) (c) (c) (c) 40 years 40 years (c) 40 years 40 years 40 years (c) 40 years 40 years 40 years 40 years 218,126 327,329 545,455 24,891 1995 12/01 40 years 95,644 51,055 515,502 379,789 611,146 430,844 3,759 2,769 1994 1993 09/04 09/04 40 years 40 years 64,916 261,347 326,263 16,627 1997 12/01 40 years 647,055 633,899 1,280,954 48,203 1997 12/01 40 years 3,695,816 3,568,862 (c) (c) 3,695,816 3,568,862 (c) (c) 1996 1995 07/95(f) 11/98 (c) (c) 1,513,714 5,781,294 7,295,008 18,067 2004 11/04 40 years 36,850 101,320 138,170 2,216 2001 02/04 40 years 2,037,392 1,918,991 3,956,383 279,513 1995 12/95 40 years 73,660 88,457 98,577 115,113 1,187,614 1,329,793 1,138,129 306,642 368,317 362,416 348,871 1,339,000 1,390,502 1,024,747 1,456,113 2,271,634 2,505,022 3,404,843 380,302 456,774 460,993 463,984 2,526,614 2,720,295 2,162,876 3,961,135 5,676,477 180,789 216,781 209,684 176,744 101,820 105,736 77,923 501,341 492,993 1984 1985 1985 1985 1997 1998 1994 1995 1999 12/84 01/85 04/85 05/85 12/01 12/01 12/01 35 years 35 years 35 years 35 years 40 years 40 years 40 years 12/96 12/98(f) 40 years 40 years 203,908 603,192 807,100 76,998 1972 11/98 40 years 45,842 201,469 247,311 14,099 1997 12/01 40 years See accompanying report of independent registered public accounting Ñrm. F-5 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION Ì (Continued) December 31, 2004 Initial Cost to Company Building, Improve- ments and Leasehold Interests Land Encum- brances(k) Costs Capitalized Subsequent to Acquisition Improve- ments Carrying Costs Gross Amount at Which Carried at Close of Period(b) Building, Improve- ments and Leasehold Interests Total Land Life on Which Depreciation and Amortization in Latest Income Statement is Computed Accumulated Depreciation Date of Con- and Amortization Date struction Acquired Halloween Adventure: Plymouth Meeting, PA ÏÏÏÏÏÏÏÏ $ Hancock Fabrics: Arlington, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Hastings: Nacogdoches, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏ Haverty's: Clearwater, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Orlando, FL(r) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pensacola, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bowie, MD ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Heilig-Meyers: Baltimore, MD ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Glen Burnie, MD ÏÏÏÏÏÏÏÏÏÏÏÏÏ Hollywood Video: Cincinnati, OH ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Clifton, CO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Home Depot: Sunrise, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ HomeGoods: Fairfax, VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Hooters: Tampa, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Humana: Sunrise, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Hy-Vee: St. Joseph, MOÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ International House of Pancakes: StaÅord, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sunset Hills, MO ÏÏÏÏÏÏÏÏÏÏÏÏÏ Las Vegas, NV ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ft. Worth, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Arlington, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Matthews, NCÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Phoenix, AZ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Midwest City, OK ÏÏÏÏÏÏÏÏÏÏÏÏ Jared Jewelers: Richmond, VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Brandon, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lithonia, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Houston, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Jo-Ann etc: Corpus Christi, TXÏÏÏÏÏÏÏÏÏÏÏÏ Kane Realty: Raleigh, NC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Kash N' Karry: Palm Harbor, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏ Brandon, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sarasota, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì $ 2,911,111 $ Ì $ 2,250,620 $Ì $ 2,911,111 $ 2,250,620 $ 5,161,731 321,182 1999 10/98(g) 40 years Ì Ì Ì 1,048,984(j) 934,546 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 317,838 1,680,428 242,483 397,074 1,257,402 Ì 1,184,438 820,397 633,125 1,965,508 469,781 631,712 282,200 245,462 2,526,207 2,184,721 1,595,405 4,221,074 813,073 931,931 520,623 732,477 44,005 Ì Ì Ì Ì Ì 261,238 Ì 5,148,657 Ì Ì 977,839 1,414,261 937,301 783,923 504,768 800,271 252,717 1,579,583 2,849,246 332,979(j) 351,927(j) 395,676(j) 368,103(j) 353,479(j) 361,531(j) 363,964(j) Ì 382,084 271,853 519,947 430,896 404,512 380,043 483,374 407,268 Ì Ì Ì Ì Ì Ì Ì Ì 955,134 1,196,900 1,270,517 1,675,739 1,336,152 1,182,150 1,215,818 1,439,597 Ì Ì Ì Ì Ì Ì Ì 3,242,641(p) Ì 818,448 896,395 12,222 793,017 876,727 335,851 322,476 470,600 1,925,276 1,221,661 1,343,746 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 317,838 1,922,911 2,240,749 314,616 1996 06/96 40 years 397,074 1,257,402 1,654,476 192,540 1997 11/98 40 years 1,184,438 820,397 603,111 1,965,508 469,781 631,712 543,438 245,462 2,570,212 2,184,721 1,595,405 4,221,074 813,073 931,931 520,623 732,477 3,754,651 3,005,118 2,198,516 6,186,582 1,282,854 1,563,643 1,064,061 977,939 737,322 633,345 339,467 598,442 124,502 142,655 39,589 55,699 1992 1992 1994 1997 1968 1968 1998 1998 05/93 05/93 06/96 12/97 11/98 11/98 12/01 12/01 40 years 40 years 40 years 38.5 years 40 years 40 years 40 years 40 years 5,148,657 Ì 5,148,657 Ì (e) 05/03 40 years 977,839 2,351,562 3,329,401 108,326 1995 12/95 40 years 783,923 504,768 1,288,691 38,383 1993 12/01 40 years 800,271 252,717 1,052,988 3,890 1984 05/04 40 years 1,579,583 2,849,246 4,428,829 163,244 2002 09/02 40 years 331,756 271,853 519,947 430,896 404,512 380,043 483,374 407,268 955,134 1,196,900 1,270,517 1,675,739 (c) (c) (c) (c) (c) (c) (c) Ì 1,336,152 1,182,150 1,215,818 1,439,597 331,756 271,853 519,947 430,896 404,512 380,043 483,374 407,268 2,291,286 2,379,050 2,486,335 3,115,336 (c) (c) (c) (c) (c) (c) (c) Ì 101,603 77,656 79,867 73,479 1992 1993 1993 1993 1993 1993 1993 (i) 1998 2002 2002 2002 10/93 10/93 12/93 12/93 12/93 12/93 12/93 03/96 12/01 05/02 05/02 12/02 (c) (c) (c) (c) (c) (c) (c) (i) 40 years 40 years 40 years 40 years 818,448 908,617 1,727,065 252,117 1967 11/93 40 years 793,017 876,727 1,669,744 66,668 1993 12/01 40 years 335,851 322,476 470,600 1,925,276 1,221,661 1,343,746 2,261,127 1,544,137 1,814,346 58,159 36,904 40,592 1983 1983 1983 03/99 03/99 03/99 40 years 40 years 40 years See accompanying report of independent registered public accounting Ñrm. F-6 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION Ì (Continued) December 31, 2004 Initial Cost to Company Building, Improve- ments and Leasehold Interests Land Encum- brances(k) Costs Capitalized Subsequent to Acquisition Improve- ments Carrying Costs Gross Amount at Which Carried at Close of Period(b) Building, Improve- ments and Leasehold Interests Total Land Life on Which Depreciation and Amortization in Latest Income Statement is Computed Accumulated Depreciation Date of Con- and Amortization Date struction Acquired Keg Steakhouse: Bellingham, WA(r) ÏÏÏÏÏÏÏÏÏÏÏ $ Lynnwood, WAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tacoma, WAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ KFC: Marysville, WAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Erie, PAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lee County: Ft. Myers, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lowe's: Memphis, TN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Magic China Cafπe: Orlando, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Magic Dollar: Memphis, TN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ MCI: Arlington, VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merryland Chinese BuÅet: Red Oak, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mi Pueblo Foods: Watsonville, CA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Michaels: Fairfax, VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Grapevine, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage Marketing: Swansea, ILÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mountain Jack's: Centerville, OHÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ New Covenant Church: Augusta, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇce Depot: Arlington, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Richmond, VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Hartsdale, NYÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì Ì 397,443 1,255,513 526,792 646,779 516,508 $ 455,605 649,236 794,722 545,592 496,092 1,956,579 4,045,196 3,214,835 9,169,885 79,983(u) 40,200 110,531 Ì 549,309 539,643 364,460 1,425,276(s) 222,721 1,088,680 73,290 520,950 805,056 1,648,934 986,131 1,017,934 1,426,254 2,066,715 706,501 Ì 91,709 264,956 850,625 1,059,430 176,656 674,253 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 700,734(j) Ì 2,038,174(t) 596,024 888,772 4,508,753 1,411,432 1,948,036 2,327,448 $Ì Ì Ì $ $ 397,443 1,255,513 526,792 646,779 516,508 $ 455,605 649,236 794,722 545,592 496,092 853,048 1,904,749 1,321,514 1,192,371 1,012,600 34,645 49,369 60,432 41,488 37,724 1981 1992 1981 1996 1996 12/01 12/01 12/01 12/01 12/01 40 years 40 years 40 years 40 years 40 years 1,956,579 4,045,196 6,001,775 712,123 1997 12/97 40 years 3,214,835 9,169,885 12,384,720 583,249 2002 06/02 40 years 40,200 110,531 150,731 2,418 2001 02/04 40 years 549,309 904,103 1,453,412 105,743 1998 11/98 40 years 222,721 1,088,680 1,311,401 38,557 1982 08/03 40 years 73,290 520,950 594,240 39,614 1986 12/01 40 years 805,056 1,648,934 2,453,990 49,812 1984 03/99 40 years 986,131 1,017,934 2,132,755 2,066,715 3,118,886 3,084,649 246,669 337,994 1995 1998 12/95 06/98 40 years 40 years 91,709 264,956 356,665 20,162 1997 12/01 40 years 850,625 1,059,430 1,910,055 80,561 1986 12/01 40 years 176,656 674,253 850,909 51,271 1998 12/01 40 years 596,024 888,772 4,508,753 1,411,432 1,948,036 2,327,448 2,007,456 2,836,808 6,836,201 385,123 418,278 53,329 1991 1996 1996 01/94 05/96 09/97 40 years 40 years 40 years See accompanying report of independent registered public accounting Ñrm. F-7 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION Ì (Continued) December 31, 2004 Initial Cost to Company Building, Improve- ments and Leasehold Interests Land Encum- brances(k) Costs Capitalized Subsequent to Acquisition Improve- ments Carrying Costs Gross Amount at Which Carried at Close of Period(b) Building, Improve- ments and Leasehold Interests Total Land Life on Which Depreciation and Amortization in Latest Income Statement is Computed Accumulated Depreciation Date of Con- and Amortization Date struction Acquired OÇceMax: Corpus Christi, TXÏÏÏÏÏÏÏÏÏÏÏÏ $ Dallas, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cincinnati, OH ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Evanston, IL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Altamonte Springs, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cutler Ridge, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏ Sacramento, CA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Salinas, CA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Redding, CA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Kelso, WAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lynchburg, VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Leesburg, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tigard, OR ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dover, NJ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ GriÇn, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pal Joey's Sports Pub: Gresham, OR ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Party City: Memphis, TN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Perfect Teeth: Rio Rancho, NM ÏÏÏÏÏÏÏÏÏÏÏÏÏ Petco: Grand Forks, ND ÏÏÏÏÏÏÏÏÏÏÏÏÏ PETsMART: Chicago, IL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Picture Factory: Sarasota, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pier 1 Imports: Anchorage, AK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Memphis, TN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sanford, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Knoxville, TN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mason, OH ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Harlingen, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Valdosta, GAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pizza Hut: Monroeville, AL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pizza Place, The: Cohoes, NYÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Popeye's: Snellville, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Print & Pack Plus: Eden Prairie, MNÏÏÏÏÏÏÏÏÏÏÏÏÏ Quizno's: Rio Rancho, NM ÏÏÏÏÏÏÏÏÏÏÏÏÏ Rally's: Toledo, OH ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì $ 987,295(j) 739,335(j) 1,265,520(j) 893,270 1,118,500 543,489 1,867,831 $ 978,344 1,709,891 1,574,551 1,757,618 $ 76,664 Ì Ì Ì $Ì Ì Ì Ì $ $ 893,270 1,118,500 543,489 1,867,831 $ 1,055,008 1,709,891 1,574,551 1,757,618 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 1,689,793 989,370 1,144,167 1,353,217 667,174 868,003 561,509 640,019 1,539,873 1,138,296 685,470 3,050,160 1,479,119 2,961,206 1,829,325 2,181,563 Ì Ì Ì 2,247,321 3,238,083 Ì Ì Ì Ì Ì Ì 1,805,539 1,851,326 1,929,028 Ì Ì 1,801,905 817,311 108,294 Ì 266,383 Ì 1,136,334 61,517 122,142 306,629 909,671 2,724,138 3,565,721 1,167,618 1,903,810 928,321 713,319 738,051 467,169 593,571 316,640 390,838 1,662,584 821,770 803,082 734,833 885,047 756,406 805,912 547,300 44,237 16,396 88,372 642,169 436,512 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 75,736 210,628 94,277 48,566 96,428 13,398 125,882 319,770 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 1,948,278 2,828,391 2,118,040 3,625,449 4,739,953 2,468,489 4,105,373 3,182,542 2,848,737 2,673,542 2,412,835 2,569,047 3,787,194 4,376,379 2,487,375 292,987 470,337 412,645 420,119 677,014 314,621 592,438 360,148 411,315 314,089 291,198 291,364 344,121 495,831 257,147 1967 1993 1994 1995 1995 1995 1996 1995 1997 1998 1998 1998 1995 1995 1999 11/93 12/93 07/94 06/95 01/96 06/96 12/96 02/97 06/97 09/97(g) 02/98 08/98 11/98 11/98 11/98(g) 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 1,689,793 989,370 1,144,167 1,353,217 667,174 868,003 561,509 640,019 1,539,873 1,138,296 685,470 3,050,160 1,479,119 2,961,206 1,829,325 2,181,563 1,805,539 1,851,326 1,929,028 2,247,321 3,238,083 1,801,905 817,311 108,294 925,605 8,235 1993 12/01 40 years 266,383 1,136,334 1,402,717 157,430 1999 12/98 40 years 61,517 122,142 183,659 9,295 1997 12/01 40 years 306,629 909,671 1,216,300 160,164 1996 12/97 40 years 2,724,138 3,565,721 6,289,859 560,850 1998 09/98 40 years 1,167,618 1,903,810 3,071,428 45,549 1996 09/97 40 years 928,321 713,319 738,051 467,169 593,571 316,640 390,838 1,662,584 821,770 803,082 734,833 885,047 756,406 805,912 2,590,905 1,535,089 1,541,133 1,202,002 1,478,618 1,073,046 1,196,750 367,393 154,938 136,357 109,459 122,616 98,490 103,257 1995 1997 1998 1999 1999 1999 1999 02/96 09/96(f) 06/97(f) 01/98(f) 06/98(f) 11/98(f) 01/99(f) 40 years 40 years 40 years 40 years 40 years 40 years 40 years 547,300 44,237 591,537 3,364 1996 12/01 40 years 16,396 88,372 104,768 644 1994 09/04 40 years 642,169 436,512 1,078,681 33,193 1995 12/01 40 years 75,736 304,905 380,641 19,287 1997 12/01 40 years 48,566 109,826 158,392 7,921 1997 12/01 40 years 125,882 319,770 445,652 103,112 1989 07/92 38.8 years See accompanying report of independent registered public accounting Ñrm. F-8 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION Ì (Continued) December 31, 2004 Initial Cost to Company Building, Improve- ments and Leasehold Interests Land Encum- brances(k) Costs Capitalized Subsequent to Acquisition Improve- ments Carrying Costs Gross Amount at Which Carried at Close of Period(b) Building, Improve- ments and Leasehold Interests Total Land Life on Which Depreciation and Amortization in Latest Income Statement is Computed Accumulated Depreciation Date of Con- and Amortization Date struction Acquired Red Lion Chinese Restaurant: Cohoes, NYÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Reliable: St. Louis, MO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Rent-A-Center: Rio Rancho, NM ÏÏÏÏÏÏÏÏÏÏÏÏÏ Rite Aid: Mobile, AL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Orange Beach, AL ÏÏÏÏÏÏÏÏÏÏÏÏ Albany, NY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Albany, NY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cohoes, NYÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Hudson Falls, NYÏÏÏÏÏÏÏÏÏÏÏÏÏ Saratoga Springs, NYÏÏÏÏÏÏÏÏÏÏ Ticonderoga, NY ÏÏÏÏÏÏÏÏÏÏÏÏÏ Rite Rug: Columbus, OH ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Roadhouse Grill: Cheektowaga, NYÏÏÏÏÏÏÏÏÏÏÏÏÏ Robb & Stucky: Ft. Myers, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Roger & Marv's: Kenosha, WI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Rooms To Go: Pembroke Pines, FL ÏÏÏÏÏÏÏÏÏÏÏ Ross Dress For Less: Coral Gables, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏ Lodi, CA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Schlotzsky's Deli: Phoenix, AZ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Scottsdale, AZ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7-Eleven: Land 'O Lakes, FLÏÏÏÏÏÏÏÏÏÏÏÏ Tampa Palms, FLÏÏÏÏÏÏÏÏÏÏÏÏÏ Shoes on a Shoestring: Albuquerque, NMÏÏÏÏÏÏÏÏÏÏÏÏÏ Shop & Save: Homestead, PAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Skinney's BBQ: Hammond, LA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Skipper's Fish & Chips: Salem, ORÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Spokane, WA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sofa Express: Buford, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Spa and Nails Club: Orlando, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Spencer's A/C & Appliances: Glendale, AZÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì $ 27,327 $ 147,286 $ 2,078,777 13,877,631 Ì Ì 145,698 289,284 40,193 1,136,618 1,409,980 24,707 33,794 107,451 56,737 762,303 88,867 1,694,187 1,996,043 867,257 823,923 579,237 780,091 590,978 688,622 1,596,197 934,236 689,040 386,251 2,188,440 6,225,401 1,917,606 3,431,364 1,550,202 Ì 1,782,346 613,710 1,661,174 1,414,592 706,306 717,138 315,469 310,610 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 1,076,572 1,080,670 Ì Ì 816,944 917,432 1,441,777 2,335,475 1,139,419 Ì 247,600 813,514 555,951 470,840 735,651 530,289 1,925,129 5,034,846 79,983(u) 40,200 110,531 Ì 341,713 982,429 Ì Ì Ì Ì Ì Ì Ì Ì $Ì $ 27,327 $ 147,286 $ 174,613 1,074 1994 09/04 40 years Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 2,078,777 13,877,631 15,956,408 153,995 1975 05/04 40 years 145,698 329,477 475,175 24,082 1997 12/01 40 years 1,136,618 1,409,980 24,707 33,794 107,451 56,737 762,303 88,867 1,694,187 1,996,043 867,257 823,923 579,237 780,091 590,978 688,622 2,830,805 3,406,023 891,964 857,717 686,688 836,828 1,353,281 777,489 128,829 151,782 6,324 6,008 4,224 5,688 4,309 5,021 2000 2000 1994 1992 1994 1990 1980 1993 12/01 12/01 09/04 09/04 09/04 09/04 09/04 09/04 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 1,596,197 934,236 2,530,433 2,919 1970 11/04 40 years 689,040 386,251 1,075,291 29,371 1994 12/01 40 years 2,188,440 6,225,401 8,413,841 1,108,398 1997 12/97 40 years 1,917,606 3,431,363 5,348,969 670,861 1992 02/97 40 years 1,550,202 Ì 1,550,202 Ì (e) 10/04 (e) 1,782,346 613,710 1,661,174 1,414,592 3,443,520 2,028,302 297,282 42,732 706,306 717,138 1,076,572 1,080,670 315,469 310,610 816,944 917,432 1,021,775 1,027,748 23,989 23,619 1,893,516 1,998,102 121,691 132,837 1994 1984 1995 1995 1999 1999 06/96 03/99 12/01 12/01 40 years 40 years 40 years 40 years 10/98(g) 12/98(g) 40 years 40 years 1,441,777 2,335,475 3,777,252 440,334 1997 06/97 40 years 1,139,419 (c) 1,139,419 (c) 1994 02/97 (c) 247,600 813,514 1,061,114 61,861 1997 12/01 40 years 555,951 470,840 735,651 530,289 1,291,602 1,001,129 55,940 40,324 1996 1996 12/01 12/01 40 years 40 years 1,925,129 5,034,846 6,959,975 57,691 2004 07/04 40 years 40,200 110,531 150,731 2,418 2001 02/04 40 years 341,713 982,429 1,324,142 133,619 1999 12/98(g) 40 years See accompanying report of independent registered public accounting Ñrm. F-9 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION Ì (Continued) December 31, 2004 Initial Cost to Company Building, Improve- ments and Leasehold Interests Land Encum- brances(k) Costs Capitalized Subsequent to Acquisition Improve- ments Carrying Costs Gross Amount at Which Carried at Close of Period(b) Building, Improve- ments and Leasehold Interests Total Land Life on Which Depreciation and Amortization in Latest Income Statement is Computed Accumulated Depreciation Date of Con- and Amortization Date struction Acquired Sports Authority: Dallas, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Tampa, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sarasota, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bradenton, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Memphis, TN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Little Rock, AR ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Woodbridge, NJ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Steak & Ale: Jacksonville, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stillwater Medical: Stillwater, OK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stone Mountain Chevrolet: Lilburn, GAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stop & Go: Grand Prairie, TXÏÏÏÏÏÏÏÏÏÏÏÏÏ Kennedale, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subway: Eden Prairie, MNÏÏÏÏÏÏÏÏÏÏÏÏÏ Cohoes, NYÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SuperValu: Huntington, WV ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Warwick, RI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Maple Heights, OH ÏÏÏÏÏÏÏÏÏÏÏ Swansea Quick Cash: Swansea, ILÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taco Bell: Ocala, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ormond Beach, FLÏÏÏÏÏÏÏÏÏÏÏÏ Phoenix, AZ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taco Bron Restaurant: Tucson, AZ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Target: Chico, CA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Victorville, CA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ San Diego, CA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Texas Roadhouse: Grand Junction, CO ÏÏÏÏÏÏÏÏÏÏÏ Thornton, CO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TGI Friday's: Corpus Christi, TXÏÏÏÏÏÏÏÏÏÏÏÏ Thomasville: Buford, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Top's: Lacey, WA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì $ Ì 854,466(t) Ì Ì Ì Ì 1,311,440 2,127,503 1,427,840 1,526,340 820,340 3,113,375 3,749,990 $ Ì $ 1,521,730 1,702,852 4,139,363 Ì 2,660,206 5,982,660 Ì Ì Ì Ì 2,573,264 Ì Ì $Ì Ì Ì Ì Ì Ì Ì $ $ 1,311,440 2,127,503 1,427,840 1,526,340 820,340 3,113,375 3,749,990 $ (c) 1,521,730 1,702,852 4,139,363 2,573,264 2,660,206 5,982,660 1,311,440 3,649,233 3,130,692 5,665,703 3,393,604 5,773,581 9,732,650 (c) 323,685 39,012 99,172 399,392 418,428 292,901 1994 1994 1996 1997 1998 1998 1994 03/94 06/96 09/97 01/04 12/97(g) 09/98 01/03 (c) 40 years 40 years 40 years 40 years 40 years 40 years Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 986,565 855,523 253,603 1,086,792 3,027,056 4,685,189 421,254 399,988 54,097 21,862 684,568 692,190 150,449 117,829 1,254,238 1,699,330 1,034,758 760,602 Ì 2,874,414 45,815 132,365 275,023 632,337 593,718 754,990 525,616 282,777 Ì Ì Ì Ì Ì 67,341 Ì Ì Ì Ì Ì Ì Ì Ì 827,002 305,209 17,814 1,269,272 1,908,815 2,672,390 4,213,165 4,029,669 4,270,693 584,237 598,556 920,143 1,019,164 1,209,702 1,532,125 1,266,527 2,405,629 2,777,449 7,082,150 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 986,565 855,523 1,842,088 65,055 1996 12/01 40 years 253,603 1,086,792 1,340,395 101,434 1998 11/98 37.5 years 3,027,056 4,685,189 7,712,245 43,924 2004 08/04 40 years 421,254 399,988 54,097 21,862 684,568 692,190 217,790 117,829 1,254,238 1,699,330 1,034,758 760,602 (c) 2,874,414 1,105,822 1,092,178 271,887 139,691 2,014,840 1,699,330 3,909,172 52,056 52,635 13,967 860 149,744 (c) 565,900 1986 1985 1997 1994 1971 1992 1985 12/01 12/01 12/01 09/04 02/97 02/97 02/97 40 years 40 years 40 years 40 years 40 years (c) 40 years 45,815 132,365 178,180 10,067 1997 12/01 40 years 275,023 632,337 593,718 754,990 525,616 282,777 1,030,013 1,157,953 876,495 57,411 39,969 21,503 2001 2001 1995 12/01 12/01 12/01 40 years 40 years 40 years 844,816 305,209 1,150,025 25,792 1974 12/01 40 years 1,269,272 1,908,815 2,672,390 4,213,165 4,029,669 4,270,693 584,237 598,556 920,143 1,019,164 5,482,437 5,938,484 6,943,083 1,504,380 1,617,720 127,273 121,730 129,011 69,969 77,499 1983 1983 1984 1997 1998 03/99 03/99 03/99 12/01 12/01 40 years 40 years 40 years 40 years 40 years 1,209,702 1,532,125 2,741,827 116,505 1995 12/01 40 years 1,266,527 2,405,629 3,672,156 27,565 2004 07/04 40 years 2,777,449 7,082,150 9,859,599 1,394,298 1992 02/97 40 years See accompanying report of independent registered public accounting Ñrm. F-10 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION Ì (Continued) December 31, 2004 Life on Which Depreciation and Amortization in Latest Income Statement is Computed 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years Initial Cost to Company Building, Improve- ments and Leasehold Interests Land Encum- brances(k) Costs Capitalized Subsequent to Acquisition Improve- ments Carrying Costs Gross Amount at Which Carried at Close of Period(b) Building, Improve- ments and Leasehold Interests Total Land Accumulated Depreciation Date of Con- and Amortization Date struction Acquired United Rentals: Carrollton, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Cedar Park, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Clearwater, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fort Collins, CO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Irving, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ La Porte, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Littleton, COÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Oklahoma City, OK ÏÏÏÏÏÏÏÏÏÏÏ Perrysberg, OH ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Plano, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Temple, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ United States of America: Arlington, VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ United Trust Bank: Bridgeview, ILÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Vacant Property: Vernon, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Arlington, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tampa, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gainesville, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Moreno Valley, CA ÏÏÏÏÏÏÏÏÏÏÏ Mesa, AZ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Indianapolis, IN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chandler, AZ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Columbus, OH ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SouthÑeld, MIÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Jackson, MS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bonham, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Albany, NY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Value City: Florissant, MO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Walgreens: Sunrise, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Wal-Mart: Sealy, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Aransas Pass, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏ WinÑeld, AL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Beeville, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corpus Christi, TXÏÏÏÏÏÏÏÏÏÏÏÏ Waremart: Eureka, CA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Washington Bike Center: Fairfax, VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Wendy's Old Fashioned Hamburger: Fenton, MOÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sacramento, CA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ New Kensington, PA ÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 477,893 535,091 1,173,292 2,057,322 708,389 1,114,553 1,743,092 744,145 641,867 1,030,426 1,159,775 $ 534,807 829,241 1,810,665 977,971 910,786 2,125,426 1,943,650 1,264,885 1,119,085 1,148,065 1,360,379 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 93,574,724(s) 24,077,279 117,691,770 16,825,046 Ì 673,238 744,154 Ì Ì Ì 1,044,505 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 105,798 435,002 1,454,908 317,386 242,896 195,652 639,584 654,765 1,032,008 366,448 132,821 54,999 2,734 328,943 2,299,881 2,045,833 1,248,404 528,692 512,566 1,015,173 765,164 1,107,250 643,759 672,413 202,085 66,667 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 2,490,210 2,937,449 1,957,974 1,400,970 1,344,244 190,505 419,811 507,231 630,043 1,483,362 2,640,175 1,684,505 2,315,424 3,131,407 3,135,036 5,470,606 192,830 278,892 83,773 307,068 585,872 501,136 496,410 Ì 333,445 Ì Ì Ì Ì 334,059 Ì Ì 69,277 Ì Ì 7,500 Ì 38,660 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì $Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì $ $ 477,893 535,091 1,173,292 2,057,322 708,389 1,114,553 1,743,092 744,145 641,867 1,030,426 1,159,775 $ 534,807 829,241 1,810,665 977,971 910,786 2,125,426 1,943,650 1,264,885 1,119,085 1,148,065 1,360,379 1,012,700 1,364,332 2,983,957 3,035,293 1,619,175 3,239,979 3,686,742 2,009,030 1,760,952 2,178,491 2,520,154 557 864 1,886 1,019 949 2,214 2,024 1,317 1,166 1,196 1,417 1981 1990 2001 1975 1984 2000 2002 1997 1979 1996 1998 12/04 12/04 12/04 12/04 12/04 12/04 12/04 12/04 12/04 12/04 12/04 24,077,279 134,516,816 158,594,095 4,265,631 1982 08/03 40 years 673,238 744,154 1,417,392 56,587 1997 12/01 40 years 105,798 435,002 1,454,908 317,386 242,896 195,652 639,584 654,765 1,032,008 405,108 132,821 54,999 2,734 328,943 2,633,940 2,045,833 1,248,404 597,969 512,566 1,015,173 772,664 1,107,250 643,759 672,413 202,085 66,667 434,741 3,068,942 3,500,741 1,565,790 840,865 708,218 1,654,757 1,427,429 2,139,258 1,048,867 805,233 257,084 69,401 190,317 422,713 435,308 37,712 76,719 38,976 77,195 62,084 84,197 54,558 12,059 2,316 486 1985 1996 1992 1982 1983 1997 1996 1997 1998 1976 1979 1984 1992 03/85 06/96 06/96 03/99 03/99 12/01 12/01 12/01 12/01 12/01 04/04 07/04 09/04 35 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 2,490,210 2,937,449 5,427,659 125,454 1996 04/03 40 years 1,957,974 1,400,970 3,358,944 56,914 1994 05/03 40 years 1,344,244 190,505 419,811 507,231 630,043 1,483,362 2,640,175 1,684,505 2,315,424 3,131,407 2,827,606 2,830,680 2,104,316 2,822,655 3,761,450 214,778 382,275 243,902 335,254 453,402 1982 1983 1983 1983 1983 03/99 03/99 03/99 03/99 03/99 40 years 40 years 40 years 40 years 40 years 3,135,036 5,470,606 8,605,642 1,077,026 1965 02/97 40 years 192,830 362,665 555,495 15,942 1995 12/95 40 years 307,068 585,872 501,136 496,410 Ì 333,445 803,478 585,872 834,581 188,424 Ì 25,356 1985 (i) 1980 07/92 02/98 12/01 33 years (i) 40 years See accompanying report of independent registered public accounting Ñrm. F-11 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION Ì (Continued) December 31, 2004 Initial Cost to Company Building, Improve- ments and Leasehold Interests Land Encum- brances(k) Costs Capitalized Subsequent to Acquisition Improve- ments Carrying Costs Gross Amount at Which Carried at Close of Period(b) Building, Improve- ments and Leasehold Interests Total Land Life on Which Depreciation and Amortization in Latest Income Statement is Computed Accumulated Depreciation Date of Con- and Amortization Date struction Acquired Whataburger: Albuquerque, NMÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Wherehouse Music: Homewood, ALÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Winn-Dixie: Dallas, GAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Woodstock, GAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Columbus, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Leasehold Interests: ÏÏÏÏÏÏÏÏÏÏÏÏ Ì $ 624,318 $ 418,975 $ Ì Ì Ì Ì Ì 1,031,974 696,950 1,287,630 1,937,017 1,023,371 2,532,133 1,952,791 1,284,901 1,874,875 Ì Ì Ì Ì Ì Ì Ì $Ì $ 624,318 $ 418,975 $ 1,043,293 31,860 1995 12/01 40 years Ì Ì Ì Ì Ì 1,031,974 696,950 1,728,924 52,997 1997 12/01 40 years 1,287,630 1,937,017 1,023,371 2,532,133 1,952,791 1,284,901 1,874,875 Ì 3,240,421 3,221,918 2,898,246 2,532,133 79,332 52,199 68,355 912,232 1997 1997 1984 Ì 05/03 05/03 07/03 (n) 40 years 40 years 40 years (m) $152,109,562 $434,215,343 $563,573,672 $68,068,415 $Ì $434,398,959 $629,692,740 $1,064,091,700 61,720,322 Real Estate Held for investment the Company has Invested in Under Direct Financing Leases: Academy: Houston, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Houston, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N. Richland Hills, TX ÏÏÏÏÏÏÏÏ Houston, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Houston, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Baton Rouge, LA ÏÏÏÏÏÏÏÏÏÏÏÏ San Antonio, TX ÏÏÏÏÏÏÏÏÏÏÏÏ Barnes and Noble: Plantation, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Best Buy: Evanston, IL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Borders Books & Music: Altamonte Springs, FLÏÏÏÏÏÏÏÏ Checkers: Orlando, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 1,924,740 1,867,519 2,253,408 2,112,335 1,910,697 2,405,466 1,961,017 3,498,559 3,400,057 3,267,579 286,910 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) 1994 1995 1996 1996 1996 1997 1996 05/95 06/95 08/95(f) 02/96(f) 06/96(f) 08/96(f) 09/97(f) 1996 05/95 1994 02/97 1997 09/97 1988 07/92 (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) See accompanying report of independent registered public accounting Ñrm. F-12 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION Ì (Continued) December 31, 2004 Initial Cost to Company Building, Improve- ments and Leasehold Interests Land Encum- brances(k) Costs Capitalized Subsequent to Acquisition Improve- ments Carrying Costs Gross Amount at Which Carried at Close of Period(b) Building, Improve- ments and Leasehold Interests Total Land Accumulated Depreciation Date of Con- and Amortization Life on Which Depreciation and Amortization in Latest Income Statement is Computed (c) (c) (c) (c) (c) (d) (c) (c) (d) (c) (c) (c) (d) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (c) (c) (c) (c) (c) (d) (d) (d) (d) (d) (d) Date struction Acquired 1993 1994 1994 1994 1994 1994 1995 1995 1995 1995 1995 1996 1996 1995 1994 1997 1997 1997 1998 1998 1996 1996 12/93 01/94 02/94 12/94 12/94 12/94 04/95 12/95 06/95 01/96 01/96 12/96 12/96 01/97 01/97 06/97 06/97 06/97 05/98 11/98(h) 09/97 09/97 1998 06/98 1994 1994 1994 1999 1994 1996 1997 2000 2002 1996 1995 1993 1993 1994 1994 1997 1968 03/94 03/94 06/94 03/99(h) 12/94 12/96 09/97 12/00 02/02 07/95(f) 11/98 05/93 10/93 01/94 08/94 11/98 11/98 CVS: San Antonio, TX ÏÏÏÏÏÏÏÏÏÏÏÏ $ Dallas, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Arlington, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amarillo, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amarillo, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amarillo, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Kissimmee, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tampa, FLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Alice, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lafayette, LA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Moore, OK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Irving, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ft. Worth, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Williston, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Jasper, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Oklahoma City, OK ÏÏÏÏÏÏÏÏÏÏ Oklahoma City, OK ÏÏÏÏÏÏÏÏÏÏ Norman, OK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Del City, OKÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Arlington, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Haltom City, TX ÏÏÏÏÏÏÏÏÏÏÏÏ Ft. Worth, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dave & Buster's: Utica, MIÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Eckerd: Millville, NJ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Atlanta, GAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mantua, NJ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Vineland, NJ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Glassboro, NJ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ East Point, GA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chattanooga, TN ÏÏÏÏÏÏÏÏÏÏÏÏ Kennett Square, PA ÏÏÏÏÏÏÏÏÏÏ Arlington, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Food 4 Less: Lemon Grove, CA ÏÏÏÏÏÏÏÏÏÏÏ Chula Vista, CA ÏÏÏÏÏÏÏÏÏÏÏÏÏ Food Lion: Keystone Heights, FL ÏÏÏÏÏÏÏÏ Chattanooga, TN ÏÏÏÏÏÏÏÏÏÏÏÏ Lynchburg, VA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Martinsburg, WV ÏÏÏÏÏÏÏÏÏÏÏÏ Heilig-Meyers: York, PA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Marlow Heights, MD ÏÏÏÏÏÏÏÏÏ Ì $ Ì Ì Ì Ì 341,888(j) Ì Ì 346,912(j) Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 554,225(t) Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 675,300(j) 711,242(j) Ì 695,416(j) Ì Ì Ì $ Ì Ì Ì Ì 158,851 Ì Ì 189,187 Ì Ì Ì 399,592 Ì Ì (l) (l) Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 336,610 Ì (l) Ì Ì Ì 88,604 336,488 128,216 448,648 279,312 415,926 783,974 638,684 636,070 849,071 869,846 855,348 933,852 1,090,532 804,963 949,128 879,296 1,228,436 2,529,969 355,757 347,474 1,365,125 1,419,093 1,225,477 1,376,025 Ì 2,074,777 1,135,067 $ Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 78,461 Ì Ì Ì Ì Ì Ì 1,416,071 Ì Ì 4,888,743 Ì 828,942 668,390 951,795 Ì 887,497 1,173,529 1,344,240 Ì 3,201,489 4,068,179 4,266,181 1,845,988 1,701,072 1,674,167 1,543,573 1,109,609 1,397,178 Ì Ì Ì 1,901,335 Ì Ì Ì 1,984,435 Ì Ì Ì Ì Ì Ì Ì Ì Ì $Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì $ Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì (d) (d) (d) (l) (l) (d) (l) (d) (d) (d) (d) (d) (d) (c) (c) (c) (c) (c) (d) (c) (c) (d) (c) (c) (c) (d) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (c) (c) (c) (c) (c) (d) (d) (d) (d) (d) (d) (c) (c) (c) (c) (c) (d) (c) (c) (d) (c) (c) (c) (d) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (c) (c) (c) (c) (c) (d) (d) (d) (d) (d) (d) (c) (c) (c) (c) (c) (d) (c) (c) (d) (c) (c) (c) (d) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (c) (c) (c) (c) (c) (d) (d) (d) (d) (d) (d) See accompanying report of independent registered public accounting Ñrm. F-13 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION Ì (Continued) December 31, 2004 Gross Amount at Which Carried at Close of Period(b) Building, Improve- ments and Leasehold Interests Total Land Accumulated Depreciation Date of Con- and Amortization Initial Cost to Company Building, Improve- ments and Leasehold Interests Land Encum- brances(k) Costs Capitalized Subsequent to Acquisition Improve- ments Carrying Costs International House of Pancakes: StaÅord, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Sunset Hills, MO ÏÏÏÏÏÏÏÏÏÏÏÏ Las Vegas, NV ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ft. Worth, TXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Arlington, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Matthews, NCÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Phoenix, AZ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Jared Jewelers: Aurora, IL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Glendale, AZÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Oviedo, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Phoenix, AZ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Toledo, OH ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lewisville, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Kash N' Karry: Valrico, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Levitz: Tempe, AZ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sports Authority: Dallas, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shop & Save: Homestead, PAÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SuperValu: Warwick, RI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì $ Ì Ì Ì Ì Ì Ì Ì $ Ì Ì Ì Ì Ì Ì Ì Ì 537,223 484,886 Ì 305,469 (l) (l) (l) (l) (l) (l) $ 571,832 736,345 613,582 623,641 608,132 655,668 559,307 1,928,871 1,599,105 1,500,145 1,241,825 1,457,625 1,502,903 Ì Ì Ì Ì Ì 1,234,519 3,255,257 634,444 2,225,991 Ì Ì Ì 2,658,976 2,578,098 2,978,154 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì $ 4,652,561 $ 4,650,396 $106,082,280 $ 5,380,302 Real Estate Held for Sale the Company has Invested in: Courtyard Marriot: Charlotte, NC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CVS/pharmacy: Saginaw, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Moore, OK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Olive Garden: Findlay, OHÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PetsMart: Coral Springs, FL ÏÏÏÏÏÏÏÏÏÏÏÏ Pizza Hut: Turnersville, NJ ÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Center: Centennial, CO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bismarck, ND ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Myrtle Beach, SCÏÏÏÏÏÏÏÏÏÏÏÏ Rite Aid: Amsterdam, NY ÏÏÏÏÏÏÏÏÏÏÏÏÏ Poughkeepsie, NY ÏÏÏÏÏÏÏÏÏÏÏ Stanford's: Englewood, CO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 4,894,393 1,234,885 603,181 883,610 1,690,550 389,667 5,453,651 1,792,507 4,034,180 Ì Ì Ì Ì Ì Ì Ì Ì Ì 77,332 115,720 309,470 581,391 716,608 1,497,996 Ì 2,244,454 1,735,663 Ì Ì Ì 8,779,478 Ì Ì Ì Ì Ì $Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì $Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì $ Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì (l) (l) (l) (l) (l) (l) (d) (d) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (d) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (d) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (d) (c) (c) (c) $ Ì $ Ì $ Ì $ Ì 4,894,393 Ì 4,894,393 1,234,885 603,181 2,244,454 1,735,663 3,479,339 2,338,844 883,610 1,690,550 389,667 Ì Ì Ì 8,779,478 Ì Ì 14,233,129 1,792,507 4,034,180 883,610 1,690,550 389,667 5,453,651 1,792,507 4,034,180 77,332 115,720 309,470 581,391 386,802 697,111 716,608 1,497,996 2,214,604 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Life on Which Depreciation and Amortization in Latest Income Statement is Computed (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (d) (c) (c) (c) (e) (g) (g) (g) (e) (g) (e) (g) (g) (g) (g) (e) Date struction Acquired 1992 1993 1993 1993 1993 1993 1993 2000 1998 1998 1998 1998 1998 10/93 10/93 12/93 12/93 12/93 12/93 12/93 12/01 12/01 12/01 12/01 12/01 12/01 1997 06/02 1994 01/95 1994 03/94 1994 02/97 1992 02/97 (e) 05/04 2004 2004 12/03 02/04 (e) 07/04 (e) 06/04 (e) 07/04 (e) (e) (e) (e) (e) 03/04 10/04 12/04 09/04 12/04 1995 12/01 See accompanying report of independent registered public accounting Ñrm. F-14 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION Ì (Continued) December 31, 2004 Initial Cost to Company Building, Improve- ments and Leasehold Interests Land Encum- brances(k) Costs Capitalized Subsequent to Acquisition Improve- ments Carrying Costs Gross Amount at Which Carried at Close of Period(b) Building, Improve- ments and Leasehold Interests Total Land Life on Which Depreciation and Amortization in Latest Income Statement is Computed Accumulated Depreciation Date of Con- and Amortization Date struction Acquired Vacant Land: Grand Prairie, TXÏÏÏÏÏÏÏÏÏÏÏÏ $ Midland, MI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Florence, AL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Vacant Property: Fridley, MN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Wachovia Bank: Sunrise, FL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Walgreen's: Ennis, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dallas, TX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long Beach, MSÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì Ì 386,807 231,711 1,580,611 Ì $ Ì Ì Ì Ì Ì Ì Ì 939,073 1,637,329 1,530,197 1,020,131 1,800,730 555,519 1,364,118 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì $Ì Ì Ì Ì Ì Ì Ì Ì $ $ 386,807 231,711 1,580,611 Ì $ Ì Ì 386,807 231,711 1,580,611 Ì Ì Ì (e) (e) (e) 12/02 07/03 06/04 (e) (e) (e) 939,073 1,637,329 2,576,402 81,650 1983 12/01 40 years 1,530,197 1,020,131 2,550,328 1,800,730 555,519 1,364,118 Ì Ì Ì 1,800,730 555,519 1,364,118 Ì Ì Ì Ì (e) 05/04 (e) (e) (e) 10/04 12/04 12/04 (e) (g) (g) (g) $ Ì $ 30,275,049 $ 5,046,317 $12,759,595 $Ì $ 30,275,049 $ 17,805,912 $ 48,080,961 81,650 (a) Transactions in real estate and accumulated depreciation during 2004, 2003 and 2002, are summarized as follows: 2004 2003 2002 Land, buildings, and leasehold interests: Balance at the beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 982,075,881 $787,893,067 $ 835,266,183 Acquisitions, completed construction and tenant improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Disposition of land, buildings, and leasehold interests ÏÏÏÏÏÏÏ Provision for loss on impairment of real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏ 240,699,423 (93,648,782) Ì 278,670,366 (84,487,552) Ì 71,825,377 (115,913,000) (3,285,493) Balance at the close of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,129,126,522 $982,075,881 $ 787,893,067 Accumulated depreciation and amortization: Balance at the beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Disposition of land, buildings, and leasehold interests ÏÏÏÏÏÏÏ Depreciation and amortization expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 49,108,834 (2,118,579) 14,811,717 $ 39,488,104 (1,868,941) 11,489,671 $ 32,623,991 (4,039,258) 10,903,371 Balance at the close of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 61,801,972 $ 49,108,834 $ 39,488,104 (b) As of December 31, 2004, the leases are treated as either operating or Ñnancing leases for federal income tax purposes. As of December 31, 2004, the aggregate cost of the properties owned by the Company that under operating leases were $1,148,234,879 and Ñnancing leases were $10,710,568. (c) For Ñnancial reporting purposes, the portion of the lease relating to the building has been recorded as a direct Ñnancing lease; therefore, depreciation is not applicable. (d) For Ñnancial reporting purposes, the lease for the land and building has been recorded as a direct Ñnancing lease; therefore, depreciation is not applicable. (e) The Company owns only the land for this property. (f) Date acquired represents acquisition date of land. Pursuant to lease agreement, the Company purchased the buildings from the tenants upon completion of construction, generally within 12 months from the acquisition of the land. See accompanying report of independent registered public accounting Ñrm. F-15 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III Ì REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION Ì (Continued) December 31, 2004 (g) Date acquired represents acquisition date of land. The Company developed the buildings, generally completing construction within 12 months from the acquisition date of the land. (h) Date acquired represents date of building construction completion. The land has been recorded as operating lease. (i) The Company owns only the land for this property, which is subject to a ground lease between the Company and the tenant. The tenant funded the improvements on the property. (j) Property is encumbered as a part of the Company's $39,450,000 long-term, Ñxed rate mortgage and security agreement. (k) Encumbered properties for which the portion of the lease relating to the land is accounted for as an operating lease and the portion of the lease relating to the building is accounted for as a direct Ñnancing lease, the total amount of the encumbrance is listed with the land portion of the property. (l) The Company owns only the building for this property. The land is subject to a ground lease between the Company and an unrelated third party. (m) The leasehold interests are amortized over the life of the respective leases which range from 11.5 and 12.5 years. (n) The leasehold interest sites were acquired between August 1999 and August 2001. (o) In 2002, this property was contributed down to a wholly-owned subsidiary of the Company at the property's net book value. (p) Property is encumbered as a part of the Company's $21,000,000 long-term, Ñxed rate mortgage and security agreement. (q) In 2002, this property was owned by a wholly-owned limited liability entity that was dissolved into the Company. (r) The tenant of this property has subleased the property. The tenant continue to be responsible for complying with all the terms of the lease agreement and is continuing to pay rent on this property to the Company. (s) Property is encumbered as a part of the Company's $95,000,000 long-term, Ñxed rate mortgage and security agreement. (t) Property is encumbered as a part of the Company's $12,000,000 long-term, Ñxed rate mortgage and security agreement. (u) Property is encumbered as a part of the Company's $6,952,000 long-term, Ñxed rate mortgage and security agreement. See accompanying report of independent registered public accounting Ñrm. F-16 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE IV Ì MORTGAGE LOANS ON REAL ESTATE December 31, 2004 Description First mortgages on properties: National City, CA ÏÏÏÏ San Jose, CAÏÏÏÏÏÏÏÏÏ Rockledge, FLÏÏÏÏÏÏÏÏ Bonham, TX ÏÏÏÏÏÏÏÏÏ Duncanville, TX ÏÏÏÏÏÏ Independence, MO ÏÏÏÏ Lawton and Oklahoma City, OK(g) ÏÏÏÏÏÏÏÏÏ Burleson, TX(g) ÏÏÏÏÏÏ Bellingham, WA ÏÏÏÏÏÏ Indianapolis, IN ÏÏÏÏÏÏ Lodi, CA ÏÏÏÏÏÏÏÏÏÏÏÏ Sonora, CA ÏÏÏÏÏÏÏÏÏÏ Mira Mesa, CAÏÏÏÏÏÏÏ Roseville, MN(h) ÏÏÏÏÏ Lake Jackson, TXÏÏÏÏÏ Interest Rate Final Maturity Date Periodic Payment Terms Prior Liens Face Amount of Mortgages Carrying Amount of Mortgages(e) Principal Amount of Loans Subject to Delinquent Principal or Interest 11.5% 11.5% 10.0% 10.0% 10.0% 10.0% 8.5% 8.5% 7.2% 10.5% 8.9% 8.9% 9.3% 6.5% 7.5% 2009 2009 2018 2013 2007 2007 2007 2007 2013 2004 2004 2005 2004 2009 2008 (b) (b) (b) (b) (d) (d) (c) (c) (b) (b) (b) (b) (b) (b) (b) $ Ì $ 2,765,000 2,565,000 Ì 400,000 Ì 210,000 Ì 690,018 Ì 1,068,788 Ì $ 1,197,116 1,170,795 364,819 Ì 298,519 371,221 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 4,399,805 2,355,279 2,605,000 286,000 93,222 150,651 369,447 1,894,000 1,875,000 1,528,567 284,023 2,575,118 Ì Ì 9,962 Ì 1,883,587 1,843,831 Ì Ì Ì Ì Ì Ì Ì 1,883,587 Ì $21,727,210 $11,527,558(a) $1,883,587 (a) The following shows the changes in the carrying amounts of mortgage loans during the years: Balance at the beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ New mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deductions during the year: 2004 2003 2003 $19,773,196 $ 8,277,867 Ì 17,122,868 $12,270,022 4,344,460(f) Collections of principal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8,245,638) (5,627,539) (8,336,615) Balance at the close of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,527,558 $19,773,196 $ 8,277,867 (b) Principal and interest is payable at level amounts over the life of the loan. (c) Interest only payments are due quarterly. Principal is due at maturity. (d) Interest only payments are due monthly. Principal is due at maturity. (e) Mortgages held by the Company and its subsidiaries for federal income tax purposes for the years ended December 31, 2004, 2003 and 2002, were $11,527,558, $13,194,972, and $7,064,659, respectively. (f) Mortgages totaling $17,122,868 and $4,344,460 were accepted in connection with real estate transactions for the years ended December 31, 2003 and 2002, respectively. (g) The mortgages are aÇliates of certain members of the Company's board of directors. (h) In January 2005, the mortgagee became current with all delinquent amounts. See accompanying report of independent registered public accounting Ñrm. F-17 Exhibit 12 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES The following table sets forth the Company's consolidated ratios of earnings to Ñxed charges for the periods as shown. Net EarningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fixed Charges: Interest on Indebtedness ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of Discount Relating to Indebtedness ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of Treasury Lock GainÏÏÏÏ Amortization of Deferred Charges ÏÏÏÏÏÏ Net Earnings Before Fixed Charges ÏÏÏÏÏÏ Divided by Fixed Charges 2004 2003 2002 2001 2000 $64,933,739 $53,472,592 $48,058,349 $28,963,548 $38,250,664 33,453,678 28,356,201 27,239,152 25,522,640 27,213,199 122,859 (456,669) 1,260,198 146,195 (596,741) 1,334,224 127,375 (554,527) 963,438 107,201 (515,299) 817,170 93,600 (478,846) 812,529 34,380,066 $99,313,805 29,239,879 $82,712,471 27,775,438 $75,833,787 25,931,712 $54,895,260 27,640,482 $65,891,146 Fixed ChargesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capitalized and Deferred Interest ÏÏÏÏÏÏ $34,380,066 270,879 $29,239,879 102,544 $27,775,438 (599,902) $25,931,712 451,624 $27,640,482 646,897 $34,650,945 $29,342,423 $27,175,536 $26,383,336 $28,287,379 Ratio of Net Earnings to Fixed Charges ÏÏÏ 2.87 2.82 2.79 2.08 2.33 Preferred Stock Dividends Series A Preferred StockÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Series B Convertible Preferred Stock ÏÏÏ $ 4,008,378 1,675,000 $ 4,007,532 502,500 $ 4,009,554 Ì Total Preferred Stock Dividends ÏÏÏÏÏ $ 5,683,378 4,510,032 4,009,554 $ $ Ì $ Ì Ì $ Ì Ì Ì Combined Fixed Charges and Preferred Stock Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $40,334,323 $33,852,455 $31,185,090 $26,383,336 $28,287,379 Ratio of Net Earnings to Combined Fixed Charges and Preferred Stock Dividends 2.46 2.44 2.43 2.08 2.33 Advisor Acquisition Costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì $ Ì $12,581,769 $ 1,521,063 Net Earnings After Advisor Acquisition Costs and Fixed Charges(1)ÏÏÏÏÏÏÏÏÏÏÏ $99,313,805 $82,712,471 $75,833,787 $67,477,029 $67,412,209 Ratio of Net Earnings After Advisor Acquisition Costs to Fixed Charges(1) ÏÏ 2.87 2.82 2.79 2.56 2.38 (1) The Company's revolving credit facility and notes payable covenants provide for Ñxed charge coverage ratios to be calculated before Advisor Acquisition Costs. Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Craig Macnab, Chief Executive OÇcer of Commercial Net Lease Realty, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Commercial Net Lease Realty, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in this annual report, fairly present in all material respects the Ñnancial condition, results of operation and cash Öows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying oÇcer and I are responsible for establishing and maintaining disclosure controls and procedures (as deÑned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over Ñnancial reporting (as deÑned in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over Ñnancial reporting, or caused such internal control over Ñnancial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of Ñnancial reporting and the preparation of Ñnancial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the eÅectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the eÅectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over Ñnancial reporting that occurred during the registrant's most recent fourth Ñscal quarter that has materially aÅected, or is reasonably likely to materially aÅect, the registrant's internal control over Ñnancial reporting; and 5. The registrant's other certifying oÇcers and I have disclosed, based on our most recent evaluation of internal control over Ñnancial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All signiÑcant deÑciencies and material weaknesses in the design or operation of internal control over Ñnancial reporting which are reasonably likely to adversely aÅect the registrant's ability to record, process, summarize and report Ñnancial information; and b) Any fraud, whether or not material, that involves management or other employees who have a signiÑcant role in the registrant's internal control over Ñnancial reporting. March 14, 2005 /s/ Craig Macnab Name: Craig Macnab Title: Chief Executive OÇcer Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Kevin B. Habicht, Chief Financial OÇcer of Commercial Net Lease Realty, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Commercial Net Lease Realty, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in this annual report, fairly present in all material respects the Ñnancial condition, results of operation and cash Öows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying oÇcer and I are responsible for establishing and maintaining disclosure controls and procedures (as deÑned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over Ñnancial reporting (as deÑned in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over Ñnancial reporting, or caused such internal control over Ñnancial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of Ñnancial reporting and the preparation of Ñnancial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the eÅectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the eÅectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over Ñnancial reporting that occurred during the registrant's most recent fourth Ñscal quarter that has materially aÅected, or is reasonably likely to materially aÅect, the registrant's internal control over Ñnancial reporting; and 5. The registrant's other certifying oÇcers and I have disclosed, based on our most recent evaluation of internal control over Ñnancial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All signiÑcant deÑciencies and material weaknesses in the design or operation of internal control over Ñnancial reporting which are reasonably likely to adversely aÅect the registrant's ability to record, process, summarize and report Ñnancial information; and b) Any fraud, whether or not material, that involves management or other employees who have a signiÑcant role in the registrant's internal control over Ñnancial reporting. March 14, 2005 /s/ Kevin B. Habicht Name: Kevin B. Habicht Title: Chief Financial OÇcer Exhibit 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Craig Macnab, Chief Executive OÇcer, certiÑes that (1) this Annual Report of Commercial Net Lease Realty, Inc. (the ""Company'') on Form 10-K for the period ended December 31, 2004, as Ñled with the Securities and Exchange Commission on the date hereof (this ""Report''), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the Ñnancial condition of the Company as of December 31, 2004 and 2003 and its results of operations for the years ended December 31, 2004, 2003 and 2002. /s/ Craig Macnab Name: Craig Macnab Title: Chief Executive OÇcer March 14, 2005 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staÅ upon request. Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Kevin B. Habicht, Chief Financial OÇcer, certiÑes that (1) this Annual Report of Commercial Net Lease Realty, Inc. (the ""Company'') on Form 10-K for the period ended December 31, 2004, as Ñled with the Securities and Exchange Commission on the date hereof (this ""Report''), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the Ñnancial condition of the Company as of December 31, 2004 and 2003 and its results of operations for the years ended December 31, 2004, 2003 and 2002. /s/ Kevin B. Habicht Name: Kevin B. Habicht Title: Chief Financial OÇcer March 14, 2005 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staÅ upon request. Exhibit 99.1 ANNUAL CEO CERTIFICATION (Section 303A.12(a)) As the Chief Executive OÇcer of Commercial Net Lease Realty, Inc., and as required by Sec- tion 303A.12(a) of the New York Stock Exchange Listed Company Manual, I hereby certify that as of the date hereof, I am not aware of any violation by the Company of NYSE's Corporate Governance listing standards, other than has been notiÑed to the Exchange pursuant to Section 303A.12(b) and disclosed as an attachment hereto. By: /s/ Craig Macnab Craig Macnab Chief Executive OÇcer and President Date: August 9, 2004 

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