National Retail Properties
Annual Report 2005

Plain-text annual report

The Dividends Are Here 2 0 0 5 A N N U A L R E P O R T EVERY QUARTER, all around the country, people from many different walks of life go to their mailboxes to pick up their NNN dividend check. For some, it helps plan for the future. For others, it supplements their current income. But for all of them, it has proven to be reliable. The NNN REIT Commercial Net Lease Realty is a real estate • Sales of 16 Exchange Inventory properties investment trust (REIT) listed on the New with net proceeds of $17.7 million, York Stock Exchange (ticker symbol: NNN). resulting in a gain of $2.6 million; and, • Our second acquisition of another publicly traded company when we merged with National Properties Corporation in June for $61 million. The NNN REIT has an unwavering commitment to being a powerful partner for our retail customers and a proven investment for our shareholders. The company has $1.7 billion in assets and acquires and develops primarily single-tenant net-leased retail properties nationwide. We offer a broad range of services including sale-leaseback acquisitions, in-house development, joint venture development, 1031 exchange properties and asset management. Highlights as of December 31, 2005 included: • Our sixteenth consecutive year of increased annual dividends; • An increase in Investment Portfolio occupancy to 98.3%; • Investment of $332.4 million in the Investment Portfolio, including acquiring 170 properties with an aggregate of 1.15 million square feet of gross leasable area; • Investment of $67.8 million in the Development Inventory Portfolio, including the acquisition of 15 properties; PROVEN INVESTMENT 1 To Our Shareholders: I am pleased to report that we had a record year in 2005, generating total revenue of our focus on retail properties, we recently announced the execution of an agreement $145.2 million; net income of $85.4 million; to sell our largest asset, an office building and Funds From Operations (FFO), the complex in the Washington, D.C. area primary supplemental measure of the leased to the U.S. government. We expect real estate investment trust industry, of to complete this sale by April 2006 and $84.1 million. On a diluted per share basis, to harvest a considerable gain reflecting our FFO grew by 4.1 percent to $1.54 per both the value created by our team as well share, an all-time high. Also in 2005, we as the intense demand for high-quality increased our dividend for the sixteenth properties in the Washington, D.C. market. consecutive year to $1.30 per share. PORTFOLIO SUMMARY Our portfolio remains in extremely good condition. As of year-rr end, we owned 524 properties. Our occupancy rate as of December 31, 2005 was 98.3 percent, reflecting the high quality of our portfolio as well as the strong performance of our asset management team. The average lease maturity of our portfolio is approximately 11 years and we have few leases expiring in 2006 and 2007. As of year-rr end, our properties were leased to 176 corporations operating in 61 different industry classifications. Consistent with Maintaining a diversified portfolio of carefully underwritten properties is a cornerstone of our conservative investment strategy. We mitigate our risk by owning properties in numerous states, leased to many different retailers operating in a wide variety of lines of trade. Periodically, the acquisition of an entire portfolio may result in a specific tenant or industry concentration briefly rising above our internal diversification targets. However, history has proven that as the company grows, these minor ebbs and flows of portfolio concentration are acceptable. The key is to maintain our rigorous underwriting of the tenant’s credit and the underlying real estate. In the past we have had concentrations SIXTEEN CONSECUTIVE YEARS OF INCREASED DIVIDENDS (One of 198 Companies) A shareholder who bought one share at $10 in 1984 has received $24.82 in total dividends; in addition, as of December 31, 2005, their one share was worth $20.37. 2 POWERFUL PARTNER in restaurants, bookstores and drugstores, which, over time, have moderated. We have recently increased our concentration of gas and convenience stores and we are very pleased with the caliber of our tenants and the quality of their real estate. “Having admired the consistent performance of Commercial Net Lease Realty, I was confident that NNN was the company with which I wanted to entrust my capital and my shareholders. Having a personal appreciation for the benefits of well-located, long-term net lease assets and having met the A priority for our company is active portfolio NNN management, I hope to be a stockholder for a long time.” Raymond Di Paglia, Founder National Properties Corporation management and over the past three years we have selectively sold $97 million of properties. Some of the properties we sold were at or close to peak value and others we determined were better owned by third parties. It is our core competency in proactively managing our • Expanding our portfolio of net-leased portfolio that allows us to maximize its value. retail properties through carefully FINANCIAL OBJECTIVE The virtue of our focus on net-leased retail properties is that a very high percentage of our rental revenue flows through to net operating income because the tenant pays for the property’s maintenance, insurance underwritten accretive acquisitions; and, • Developing single-tenant and multi- tenant retail properties for sale to third parties and/or selective ownership in our own portfolio. BALANCE SHEET MANAGEMENT and real estate taxes. As a result, we have As of year-end, our total debt comprised historically had a highly predictable and 49 percent of our undepreciated reliable revenue stream. This stable revenue assets. Given the highly predictable stream has allowed our shareholders to depend on our dividend because it has proven to be more than adequately covered by the cash flow that our portfolio generates. revenue stream we have, this is arguably a conservative level of debt. We continued our longstanding approach of extending our debt-repayment obligations Our compound annual FFO per share over longer periods with the issuance of growth has steadily improved over the last two years and we believe we will be able to continue this trend. We strive to accomplish this goal by: • Continuing our active portfolio management and targeted property dispositions; • Maintaining occupancy in the high 90 percent range; • Maintaining a strong and flexible balance sheet; $150 million in unsecured 10-year notes in November. As of year-end, 79 percent of our debt was fixed-rate, which is consistent with our policy of prudent fiscal management. In December 2006, assuming that there are no material changes in the current interest rate environment, we intend to take advantage of the opportunity to redeem $45 million of our 9% Series A Preferred Stock. PROVEN INVESTMENT 3 ACQUISITIONS In 2005, we acquired 170 retail properties for $332 million. These new properties strengthened and diversified our tenant base as we added several new high-quality tenants. By acquiring properties in a sale-leaseback transaction with retailers, we are able to structure acquisitions with terms that are mutually advantageous. Going forward, one of our goals is to structure leases so they do not have meaningful fixed contractual Our acquisition strategy has evolved to baseline increases that require “straight- primarily purchasing property portfolios line” accounting, but provide for variable which frequently originate through the annual rental increases. At present, the direct calling efforts of our acquisitions team. amount of these annual rent increases is Last summer, we consummated a merger not significant in relation to the total size with National Properties Corporation (NAPE) of our portfolio but in a couple of years they will become clearly recognizable. BALANCE SHEET December 31, 2005 (Gross Book Basis) Common Equity 47% Preferred Equity 4% DEVELOPMENT We have an enviable record as a value-added developer of retail properties. Throughout our history, we have built approximately Secured Debt 10% 200 properties both for our investment portfolio and directly for sale. In the past 18 months, we have strengthened the fabric of our development group by selectively Unsecured Debt 39% adding experienced development officers and gradually increasing our presence in multi- tenant retail development as a complement to our freestanding store development capability. whereby we acquired 43 high-quality retail In 2005, we sold $61 million of retail properties at a strong yield. These properties properties that we developed, generating had been diligently acquired by Raymond gains before taxes of $13 million. We are Di Paglia, the founder of NAPE, over nearly encouraged by the pipeline of projects four decades and we welcome him and the that we will deliver to our retail tenants entire NAPE family as NNN shareholders. in 2006 and that we have lined up for We ended the year with a significant transaction involving the purchase of 74 Circle K convenience stores operated by SSP Partners, the largest independent convenience store operator and non- refiner fuel distributor in Texas. 2007. These development tenants include companies such as Walgreens, The Pantry and Kohl’s. We expect that in 2006 we will own approximately $20-25 million of retail properties that we self-develop at yields measurably better than if we had acquired these properties from third parties. 4 POWERFUL PARTNER 2006 AND BEYOND We are well-positioned to accomplish our multi-year objective of building value for our shareholders by paying predictable dividends and growing FFO per share. In the short-term, we are encouraged about our ability to reinvest the proceeds from the sale of our Washington, D.C. office building into higher yielding, carefully underwritten retail properties. Finally, I would like to thank our talented employees, each of whom make an impact on building the value of NNN every day. I appreciate their hard work, commitment to our core values and the daily contribution they make to the company. Thank you for your continued support and investment in NNN. We are proud of our track record and look forward to continuing to thoughtfully grow the company and build shareholder value. Sincerely, Craig Macnab Chief Executive Officer “I selected NNN as my strategic sale-leaseback partner because I believed in the integrity of their approach and was one hundred percent comfortable that they could accomplish everything they said they would do in the tight timeframe we established. They more than fulfilled their commitment and we look forward to transacting additional business with them in the future.” Sam L. Susser, CEO, SSP Partners ANNUAL TOTAL RETURN COMPARISON For Periods Ending December 31, 2005 (quarterly) 1 Year 3 Years 5 Years 10 Years Commercial Net Lease Realty (NNN) 5.6% 17.9% 24.1% 14.1% Russell 2000 (RTY) S&P 600 Index (SML) 4.6% 22.2% 8.3% 9.3% 7.7% 22.4% 10.8% 12.1% NAREIT Equity REIT Index (NRIXETR) 12.2% 26.5% 19.1% 14.5% S&P 500 Index (SPX) Nasdaq (CCMP) 4.9% 14.4% 0.6% 9.1% 2.1% 18.9% -1.8% 8.1% PROVEN INVESTMENT 5 Dividend Reinvestment and Direct Stock Purchase As an enhanced benefit to our shareholders, In addition, investors now have the we revised our dividend reinvestment plan ability to make optional cash purchases to include a direct stock purchase option. of NNN common shares ranging This new plan provides a convenient and from $100 to $10,000 per month. efficient way for shareholders to increase their investment in NNN common stock. The plan rewards investors with a To learn more about the plan, please review the prospectus posted on our website at www.nnnreit.com or request one by filling 1% discount on reinvested dividends. out and mailing the enclosed comment card. 6 POWERFUL PARTNER Our Core Values LAST SEPTEMBER, we gathered a group of key managers for a strategy session to identify operational efficiencies, address existing concerns and plan a road map for the company’s future growth. One of the critical sessions of that meeting involved fine tuning our company’s vision, mission and core values. We believe that a successful company must truly embody the spirit of the core values it claims and not merely pay lip service to the buzzwords of the day. Our core values: • Trustworthiness – Be honest and truthful. Honor commitments and deliver what is promised; • Quality – Strive to exceed expectation in all endeavors. Establish a culture where quality is non-negotiable; • Teamwork – Cooperate, share, assist and continually look for ways to create synergy among fellow associates, customers and partners; • Long-Term Perspective – Act and make decisions with concern for the overall benefit of the company; weigh long-term benefits against short-term gain. We believe that our associates at every level genuinely personify the essence of each of these core values. This is evident in how we conduct ourselves and how we conduct our business. PROVEN INVESTMENT 7 Real Estate Services We offer a broad array of real estate services: ACQUISITIONS Our Acquisitions department focuses on purchasing and financing single-tenant, net-leased retail properties nationwide through sale-leaseback transactions. By selling the property and building and then leasing it back from us, retailers are able to redeploy the proceeds into their company’s core operation and yield a higher return than they would otherwise get from owning their own real estate. Our access to public markets allows us to make all-cash purchases and execute quick and efficient transactions, giving us a competitive advantage over companies that rely on obtaining debt to finance acquisitions. DISPOSITIONS Our Property Disposition division, called NNN1031.com, sells properties from our REIT portfolio as well as properties that were developed directly for resale. NNN1031.com has quickly become a leading source for single-tenant properties for 1031 exchanges or other buyers. The website www.nnn1031.com features: • a list of available 1031 replacement properties, updated daily; • 24-hour access to property status and full marketing brochures; • online confidentiality agreements and letters of intent; • up-to-date industry news including tenant financial information; • easy access to online due diligence documents; • automated email updates through our Preferred Property Alert. 8 POWERFUL PARTNER JOINT VENTURE DEVELOPMENT Our Development group offers joint venture programs that allow entrepreneurial developers access to the strengths of a publicly-traded REIT while maintaining their independence. Our JV programs reduce the financial risks of the developer and allow both sides to benefit from our national network of contacts. Each program is tailored to meet the developer’s needs by offering flexibility in capital structures, risk/reward allocations and product types. Some properties are developed for inclusion in our REIT portfolio but most are developed directly for sale. IN-HOUSE DEVELOPMENT Our Development group provides complete turn-key, build-to-suit services, ranging from market analysis, site selection and acquisition to entitlements, permitting and construction management. Our national network of resources means that we have local knowledge of most markets, allowing us to secure the best sites for our clients. It also means that we understand local ordinances and can solve zoning and permitting issues quickly. Our access to capital allows us to provide competitive rates and complete construction in less time and with greater predictability than smaller development companies. PROVEN INVESTMENT 9 Historical Financial Highlights (dollars in thousands, except per share data) 2005 2004 2003 2002 2001 Gross revenues(1) $ 173,458 $ 157,277 $ 124,248 $ 109,812 $ 85,554 23,079 28,963 54,136 89,400 49,307 64,934 40,401 53,473 33,075 48,058 1,733,416 1,300,048 1,213,778 958,300 1,010,009 861,045 828,087 524,241 756,998 467,419 730,754 386,912 549,141 435,333 564,640 69,018 4,008 66,272 4,008 55,473 4,008 51,178 4,010 1,675 1,675 502 – 38,637 – – Basic Diluted 52,984,821 51,312,434 43,108,213 40,383,405 31,539,857 54,640,143 51,742,518 43,896,800 40,588,957 31,717,043 0.91 0.92 1.58 1.56 1.30 2.25 0.85 0.85 1.15 1.15 1.29 2.25 0.84 0.83 1.14 1.13 1.28 2.25 0.72 0.72 1.09 1.09 1.27 2.25 167.50 167.50 50.25 – 0.73 0.73 0.92 0.91 1.26 – – 112,267 (2,700 ) (8,878 ) 32,034 44,616 (6) 30,930 (242,487) 217,844 81,803 85,800 (69,963) (19,225) 73,065 54,215 (256,870 ) 111,589 (15,142) 205,965 (101,654 ) 61,749 54,595 54,595 Funds from operations – operations(2) 84,185 (3) 76,806 (4) 64,162 (5) Earnings from continuing operations Net earnings Total assets Total debt Total equity Cash dividends paid to: Common stockholders Series A Preferred Stock stockholders Series B Convertible Preferred Stock stockholders Weighted average common shares: Per share information: Earnings from continuing operations: Basic Diluted Net earnings: Basic Diluted Dividends paid to: Common stockholders Series A Preferred Stock stockholders Series B Convertible Preferred Stock stockholders Other data: Cash flows provided by (used in): Operating activities Investing activities Financing activities Funds from operations – diluted (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 financial accounting and reporting for the impairment or disposal of long-lived assets and broadens the presentation of discontinued operations in the income statement to include a component of an entity. Accordingly, the results of operations related to these certain properties that have been classified as held for sale or have been disposed of subsequent to December 31, 2001, the effective date of SFAS No. 144, have been reclassified as earnings from discontinued operations. (2) Funds from Operations, commonly referred to as FFO, is a relative non-GAAP financial measure of operating performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO is defined 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. (3) Excludes extraordinary gain of $14,786 ($0.27 per share) and impairment charge of $2,382 ($0.04 per share) related to acquisition and REIT conversion of Orange Avenue Mortgage Investment, Inc. for the year ended December 31, 2005. (4) Excludes transition costs of $3,741 ($0.07 per share) for the year ended December 31, 2004. (5) Excludes expenses incurred for the dissenting shareholders’ settlement of $2,413 ($0.05 per share) for the year ended December 31, 2003. (6) Excludes expense incurred in the acquisition of the advisor of $12,582 ($0.40 per share) for the year ended December 31, 2001. 10 POWERFUL PARTNER EXECUTIVE OFFICERS Craig Macnab Chief Executive Officer & President Julian E. Whitehurst Chief Operating Officer & Executive Vice President Kevin B. Habicht Chief Financial Officer & Executive Vice President Dennis E. Tracy Chief Development Officer & Executive Vice President Directors & Officers DIRECTORS Clifford R. Hinkle Chairman G. Nicholas Beckwith III CEO & Chairman Arch Street Management, LLC Kevin B. Habicht Chief Financial Officer & Executive Vice President Commercial Net Lease Realty, Inc. Richard B. Jennings† President Realty Capital International, LLC Ted B. Lanier† Retired Chairman & Chief Executive Officer Triangle Bank and Trust Company Robert C. Legler Retired Chairman First Marketing Corporation Craig Macnab Chief Executive Officer & President Commercial Net Lease Realty, Inc. Robert Martinez† Fortieth Governor of Florida & Managing Director Carlton Fields Government Consulting † Member audit committee Committees as of February 08, 2006 PROVEN INVESTMENT 11 FORM 10-K: A copy of the Company’s Form 10-K as filed with the Securities and Exchange Commission (SEC) for fiscal 2005, which includes as Exhibits the Chief Executive Officer and Chief Financial Officer certifications required to be filed with the SEC pursuant to Section 302 of the Sarbanes- Oxley Act, has been filed with the SEC and is included in this annual report and may also be obtained by stockholders without charge upon written request to the Company’s Secretary at the above address, or on our website. During fiscal 2005, the Company filed with the New York Stock Exchange (NYSE) the Certification of its Chief Executive Officer confirming that the Chief Executive Officer was not aware of any violations by the Company of the NYSE’s corporate governance listing standards. Shareholder Information For General Information American Stock Transfer & Trust Company Operations Center 6201 15th Avenue Brooklyn, NY 11219 www.amstock.com Shareholder Toll-free line: 1-866-668-6550 Worldwide: 718-921-8346 Fax: 718-236-2641 For Dividend Reinvestment American Stock Transfer & Trust Company P.O. Box 922 Wall Street Station New York, NY 10269-0560 Independent Registered Public Accounting Firm: KPMG LLP Orlando, FL Counsel: Pillsbury Winthrop Shaw Pittman Washington, D.C. Corporate Offices Commercial Net Lease Realty, Inc. 450 S. Orange Avenue, Suite 900 Orlando, FL 32801 (800) NNN-REIT (407) 265-7348 www.nnnreit.com 12 POWERFUL PARTNER UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 2005. OR ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to . Commission file number 001-11290 COMMERCIAL NET LEASE REALTY, INC. (Exact name of registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 56-1431377 (I.R.S. Employer Identification No.) 450 South Orange Avenue, Suite 900 Orlando, Florida 32801 (Address of principal executive offices, 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: Common Stock, $0.01 par value 9% Non-Voting Series A Preferred Stock Name of exchange on which registered: 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È. Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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 file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘. Indicate by check mark if disclosure of delinquent filers 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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer È Accelerated filer ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È. The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2005 was Non-accelerated filer ‘ $1,089,922,632. The number of shares of common stock outstanding as of February 21, 2006 was 55,828,748. DOCUMENTS INCORPORATED BY REFERENCE: 1. Registrant incorporates by reference portions of the Commercial Net Lease Realty, Inc. Proxy Statement for the 2006 Annual Meeting of Shareholders (Items 10, 11, 12, 13 and 14 of Part III). TABLE OF CONTENTS PAGE REFERENCE Part I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Item 6. Item 7. Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Item 9. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A. Item 9B. Part III Item 10. Item 11. Item 12. Item 13. Item 14. Part IV Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 8 14 14 16 16 17 18 20 45 46 86 86 88 89 89 89 89 89 90 94 PART I Statements contained in this annual report on Form 10-K, including the documents that are incorporated by reference, that are not historical facts are 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. Also, when the Company uses any of the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” or similar expressions, the Company is making forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements. Certain factors that could cause actual results or events to differ materially from those the Company anticipates or projects are described in Item 1A. “Risk Factors” of this Annual Report on Form 10-K. Given these uncertainties, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Form 10-K or any document incorporated herein by reference. 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 qualified REIT subsidiaries of Commercial Net Lease Realty, Inc., as well as the taxable REIT subsidiaries and their majority owned and controlled subsidiaries (the “NNN TRS”). Prior to January 1, 2005, the Company held a 98.7 percent, non-controlling and non-voting interest in Commercial Net Lease Realty Services, Inc. and its majority owned and controlled subsidiaries (collectively, “Services”). Kevin B. Habicht, an officer and director of the Company, James M. Seneff, Jr. and Gary M. Ralston, each a former officer and director of the Company, (collectively, the “Services Investors”), owned the remaining 1.3 percent interest, which was 100 percent of the voting interest in Services. Effective January 1, 2005, the Company acquired the remaining 1.3 percent interest in Services, increasing the Company’s ownership in Services to 100 percent. Effective November 1, 2005, Commercial Net Lease Realty Services, Inc. merged into Commercial Net Lease Realty, Inc. CNLRS Exchange I, Inc., a taxable REIT subsidiary (“TRS”), became the TRS holding company for the Company’s development and exchange activities. The Company’s executive offices 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 filings with the Securities and Exchange Commission can be downloaded free of charge. The Company’s operations are divided into two primary business segments: (i) investment assets, including real estate assets, structured finance investments and mortgage residual interest assets (“Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). The Investment Assets are operated through Commercial Net Lease Realty, Inc. and its wholly owned qualified REIT subsidiaries. The Inventory Assets are operated through the NNN TRS. Properties Investment Assets The Company, directly and indirectly, through investment interests, acquires, owns, invests in, manages and develops primarily retail properties that are generally leased to established tenants under long-term commercial net leases (the “Investment Properties” or “Investment Portfolio”). As of December 31, 2005, the Company owned 524 Investment Properties, with an aggregate gross leasable area of 9,227,000 square feet, located in 41 states and leased to established tenants, including Academy, Barnes & Noble, Best Buy, Borders, Susser (Circle K), CVS, Eckerd, OfficeMax, The Sports Authority and the United States of America. Approximately 98 percent of the gross leasable area of the Company’s Investment Portfolio was leased at December 31, 2005. 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 2005, 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. On February 9, 2006, the Company and its wholly owned subsidiary, CNLR DC Acquisitions I, LLC, entered into an agreement with Brookfield Financial Properties, L.P., an affiliate of Brookfield Properties Corporation, to sell the property leased to the USA. The Company expects to complete the transaction by April 2006, subject to certain conditions. Structured Finance Investments Structured finance agreements are typically loans secured by a borrower’s pledge of ownership interests in the entity that owns the real estate. These agreements are typically subordinated to senior loans secured by first 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 entered into structure finance agreements with principal balances of $5,988,000 and $6,857,000 during the years ended December 31, 2005 and 2004, respectively. As of December 31, 2005, the structured finance agreements had an outstanding principal balance of $27,805,000. Mortgage Residual Interests Orange Avenue Mortgage Investments, Inc. (“OAMI”), a majority owned and consolidated subsidiary of the Company holds the residual interests from seven commercial real estate loan securitizations. Each of the mortgage residual interests is recorded at fair value based upon a third party valuation, with adjustments subsequent to the initial acquisition of the Company’s interest in OAMI recorded through earnings. The mortgage residual interests had a fair value of $55,184,000 at December 31, 2005. Inventory Assets The NNN TRS, directly and indirectly, through investment interests, owns 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 different investment objectives (“Inventory Properties” or “Inventory Portfolio”). The NNN TRS, develops Inventory Properties (“Development Properties” or “Development Portfolio”) and also acquires existing Inventory Properties (“Exchange Properties” or “Exchange Portfolio”). As of December 31, 2005, the NNN TRS owned 17 Development Properties (one completed, 12 under construction and four land parcels) and 46 Exchange Properties. Investments in Consolidated Subsidiaries As of December 31, 2005, the Company had 48 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 affiliates. Investments in Unconsolidated Affiliates For additional disclosures regarding investment in unconsolidated affiliate, see “Business Combinations.” 2 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 office building and an interest in an adjacent parking garage. Affiliates of James M. Seneff, Jr. and Robert A. Bourne, each a former 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 office space from Plaza. The Company’s lease expires in October 2014. In addition, the Company has severally guaranteed 41.67 percent of a $14,000,000 unsecured promissory note on behalf of Plaza. The maximum obligation of the Company under this guarantee is $5,834,000 plus interest. Interest accrues based on a tiered rate structure with a maximum of 300 basis points above LIBOR (the current interest rate is 200 basis points above LIBOR). This guarantee will continue through the loan maturity in December 2010. 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 33 1⁄ 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 accounted for its interest under the equity method of accounting. In August 2005, WXI was dissolved. 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 October 2003, CTA exercised its right to convert its interest and in February 2004, 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. Business Combinations Captec Net Lease Realty, Inc.—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, beneficial owners of shares of Captec stock held of record by Cede & Co. who alleged that they did not vote for the merger (and who alleged that they caused a written demand for appraisal of their Captec shares to be served on Captec), filed in the Chancery Court of the State of Delaware in and for New Castle County a Petition for Appraisal of Stock (“Appraisal Action”). The Appraisal Action alleged that 1,037,946 shares of Captec dissented from the merger and sought to require the Company to pay to all Captec stockholders who demanded appraisal of their shares the fair value of those shares, with interest from the date of the merger. As a result of this action, the plaintiffs were not entitled to receive the Company’s common and Series A Preferred Stock shares as offered in the original merger consideration. Accordingly, the Company reduced the number of common and Series A Preferred Stock shares issued and outstanding by 474,911 and 218,385, respectively, which represents the number of shares that would have been issued to the plaintiffs had they accepted the original merger consideration. 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 3 Company entered into a settlement agreement with the beneficial 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 filed a stipulation and order of dismissal and the Court entered the order of dismissal, dismissing the Appraisal Action with prejudice. Orange Avenue Mortgage Investments, Inc.—On May 2, 2005, the Company exercised its option to acquire 78.9 percent of the common shares of OAMI for $9,379,000. In December 2004, OAMI sold its loan origination, securitization and servicing operations and the majority of its assets and liabilities to a third party, resulting in OAMI becoming a passive owner in a pool of seven commercial real estate loan securitization residual interests. The loans in each of the securitizations are secured by first mortgages on commercial real estate and generally borrower personal guarantees. As a result of the option exercise, the Company has consolidated OAMI in its consolidated financial statements. According to Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” under the purchase method of accounting, the Company recorded the assets and liabilities of OAMI at fair value. The Company recognized an extraordinary gain of $14,786,000, equal to the excess fair value over the option price, as all assets acquired were financial assets and current assets. Based upon independent appraisals and management’s evaluation, the following table summarizes the estimated fair values of the assets and liabilities of OAMI on May 2, 2005 (dollars in thousands): Mortgage residual interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,327 3,272 10,285 17,427 6,794 Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $106,105 Notes payable—secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,000 1,028 14,787 47,815 27,315 Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,975 The following table summarizes the extraordinary gain recognized by the Company (dollars in thousands) during the year ended December 31, 2005: Company’s share of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less option price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basis of option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,434 (9,379) (269) Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,786 The Company’s net earnings for the year ended December 31, 2005, includes 78.9 percent of OAMI’s net earnings since the date of the acquisition in the amount of $1,411,000. Between June 2001 and July 2003, a wholly owned subsidiary of the Company, Net Lease Funding, Inc. (“NLF”), entered into five limited liability company agreements with OAMI to create five limited liability companies (collectively, the “LLCs”). Kevin B. Habicht, an officer and director of the Company is an officer, director and indirect shareholder of OAMI. Craig Macnab, an officer and director of the Company and Julian E. Whitehurst, an officer of the Company, are each an officer and director of OAMI. Each of the LLCs holds an 4 interest in mortgage loans and is 100 percent equity financed. Prior to the acquisition of the 78.9 percent equity interest in OAMI, the Company held a non-voting and non-controlling interest in each of the LLCs ranging between 36.7 and 44.0 percent and accounted for its investment under the equity method of accounting. As a result of the Company’s acquisition of 78.9 percent equity interest in OAMI, the Company’s interest in the LLCs is no longer accounted for as an equity investment and is now included as part of OAMI in the Company’s consolidated financial statements. In addition, certain officers and directors of the Company own preferred shares of OAMI. Prior to the acquisition of 78.9 percent equity interest in OAMI, the Company received $2,749,000 in distributions from the LLCs. During the year ended December 31, 2004, the company received $10,562,000 in distributions from the LLCs. For the years ended December 31, 2005 and 2004, the Company recognized $1,467,000 and $5,042,000 of earnings, respectively, from the LLCs. 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 notes payable-secured (see “Capital Resources—Notes Payable—Secured”). As a result of the independent valuations of the mortgage residual interests (“Residuals”), the Company reduced the carrying value of the Residuals during the year ended December 31, 2005. The reduction in the Residuals’ value that related to the Residuals acquired at the time of the option exercise was recorded as a purchase price allocation adjustment. The reduction in the Residuals’ value acquired at the time of the option exercise that related to the period subsequent to the option exercise, as well as the reduction in the value related to the portion of the Residuals owned by NLF, were recorded as an aggregate impairment of $2,382,000 for the year ended December 31, 2005. The Company merged certain of its wholly owned subsidiaries into Commercial Net Lease Realty, Inc. and elected to convert OAMI to a REIT. As a result, effective January 1, 2005, OAMI was taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. Upon making the REIT conversion, a portion of OAMI’s tax liability was eliminated and recorded as an adjustment to the net assets acquired at the time of the option exercise. The remaining tax liability will be reduced over the next ten years in proportion to the reduction of the basis of the respective mortgage residual assets. National Properties Corporation—On June 16, 2005, the Company acquired 100 percent of National Properties Corporation (“NAPE”), a publicly traded company, which owned 43 freestanding properties located in 12 states. Results of NAPE operations have been included in the consolidated financial statements since the date of acquisition. NAPE shareholders received 1,636,532 newly issued shares of the Company’s common stock. According to SFAS No. 141, “Business Combinations,” under the purchase method of accounting, the acquisition price of $32,199,000 was allocated to the assets acquired and liabilities assumed at their fair values. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the acquisition (dollars in thousands): Real estate, Investment Portfolio: Accounted for using the operating method . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,542 1,276 6,757 $66,575 $28,200 6,176 Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,376 Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,199 The Company’s net earnings for the year ended December 31, 2005, includes NAPE’s net earnings since the date of acquisition in the amount of $1,867,000. 5 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 financial institutions, in the acquisition, leasing, financing, development and disposition of investments in net-leased properties. There are numerous other REITs that own, manage, finance or develop retail properties. Employees As of December 31, 2005, the Company employed 79 full-time persons including executive, administrative and field personnel. Reference is made to “Item 10. Directors and Executive Officers of the Registrant” for a listing of the Company’s Executive Officers. Business Strategies and Policies The following is a discussion of the Company’s operating strategy and certain of its investment, financing 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 management and/or the Board of Directors without a vote of the Company’s stockholders. Operating Strategies The Company’s strategy is to invest primarily in retail properties that typically are located along high-traffic 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 flexibility in use and tenant selection when the properties are re-leased. As of December 31, 2005, the Company owned Investment Properties in 41 states. In the past, the Company also has made opportunistic investments in single-tenant office properties, but has now refocused its strategy on retail properties. In some limited cases, the Company’s investment in properties is in the form of structured finance investments, which are typically loans secured by a borrower’s pledge of ownership interests in the entity that owns the real estate. These agreements are typically subordinated to senior loans secured by first 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. 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 flow, potential use of sale proceeds and federal income tax considerations. With respect to inventory real estate, the strategy of the NNN TRS 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 different investment objectives. The Company’s management team focuses on certain key indicators to evaluate the financial condition and operating performance of the Company. The key indicators for the Company include items such as: the composition of the Company’s Investment Portfolio and structured finance investments (such as tenant, geographic and industry classification diversification), the occupancy rate of the Company’s Investment 6 Portfolio, certain financial performance ratios and profitability measures, industry trends, and performance compared to that of the Company and returns the Company receives on its invested capital. Investment in Real Estate or Interests in Real Estate Management believes that attractive acquisition opportunities for 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 may 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-financial terms of the proposed acquisition; (vi) the availability of funds or other consideration for the proposed acquisition and the cost thereof; (vii) the “fit” 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 financial 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, 2005, the Company owned Investment Properties located in 41 states. The Investment Properties consist of single-story buildings averaging 17,000 square feet, constructed on land parcels averaging 101,000 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 financings and other indebtedness or to new indebtedness which may be incurred in connection with acquiring or refinancing these investments. Investments in Real Estate Mortgages, Mortgage Residual Interests, 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 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, mortgage residual interests 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. 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 finance 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 the authority to offer equity or debt securities in exchange for cash or other 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 without a vote of the Company’s stockholders. 7 Item 1A. Risk Factors. You should carefully consider the following risks and all of the other information set forth in this Annual Report on Form 10-K, including the consolidated financial statements and the notes thereto. If any of the events or developments described below were actually to occur, the Company’s business, financial condition or results of operations could be adversely affected. Loss of revenues from tenants would reduce the Company’s cash flow. The United States of America (“USA”) accounted for approximately 13 percent of the annualized base rental income from the Company’s investment properties, or base rent, as of December 31, 2005. The Company’s next five largest tenants—Susser (Circle K), CVS, Best Buy, OfficeMax and Barnes & Noble, accounted for an aggregate of approximately 24 percent of the Company’s base rent as of December 31, 2005. The default, financial distress or bankruptcy of one or more of our tenants could cause substantial vacancies among the Company’s investment properties. Vacancies reduce the Company’s revenues until the Company is able to re-lease the affected properties and could decrease the ultimate sale value of each such vacant property. Upon the expiration of the leases that are currently in place, the Company may not be able to re-lease a vacant property at a comparable lease rate or without incurring additional expenditures in connection with such re-leasing. On February 9, 2006, the Company and its wholly owned subsidiary, CNLR DC Acquisitions I, LLC, entered into an agreement with Brookfield Financial Properties, L.P., an affiliate of Brookfield Properties Corporation, to sell the property leased to the USA. The Company expects to complete the transaction by April 2006, subject to certain conditions. Following the transaction, the USA will not be a Company tenant. Risks associated with the Company’s August 2003 acquisition of two single-tenant office buildings and a related parking garage in the Washington D.C. metropolitan area (“DC Office Properties”): Until the completion of the DC Office Properties sale transaction, the Company is subject to the following risks: Risks related to the acquisition of property from a bankrupt estate. In August 2003, the Company acquired the DC Office Properties originally owned and occupied by MCI, Inc. (formerly MCI WorldCom, Inc.). Because MCI WorldCom was in bankruptcy, the properties were sold by order of the U.S. Bankruptcy Court in the Southern District of New York for the benefit of the creditors of MCI WorldCom. The purchase contract for these properties from bankruptcy did not contain many of the representations and warranties regarding the properties that are customarily obtained from private sellers, and the Company acquired the properties on an “as-is, where-is” basis from a bankrupt seller. As a result, the Company may have no recourse if there are pre-existing problems or conditions with the DC Office Properties. Risks related to a U.S. Government lease. The DC Office Properties are substantially leased to the USA, initially to be used by the Transportation Security Administration, a federal agency. U.S. Government leases differ in many respects from leases with other commercial tenants and differ from the leases the Company has with other tenants, particularly tenants in retail properties. For example, among other things, the lease with the USA provides that: • • • the Company cannot provide for acceleration of the government’s payment obligations under the lease even if the government does not make a payment when due or otherwise defaults under the lease; the Company is required to maintain and repair the buildings in accordance with specific standards and criteria set forth in the lease; in performing maintenance and other obligations under the lease, the Company must comply with various federal statutes pertaining to government contracts; 8 • • • • • • • the Company must comply with certain statutes relating to, among other things, gratuities to government officials and contingent fees and kickbacks, equal opportunity, use of small businesses, a drug-free workplace, small disadvantaged business concerns and women-owned small businesses, and affirmative action for special disabled and Vietnam-era veterans and handicapped workers. If the Company fails to comply with such standards, the government may be entitled to terminate the lease or to seek offset against the lease payments; in the event the Company fails to perform obligations under the lease, the government may be entitled to offset from the lease payments the costs incurred by the government in performing such obligations or deduct from lease payments the value of the services not being performed; the government may substitute as a tenant any federal government agency or agencies at any time; the Company must pay a base amount of real estate taxes on the property each year; the presence of a U.S. Government tenant may increase insurance premiums in the future or may result in increased security costs; the government is only required to pay increases in operating expenses in excess of a base year amount up to the amount of the annual increases in the consumer price index (“CPI”) cap, and the Company is responsible for increases in operating expenses above the amount of the CPI increase; and that it expires in 2014, which will increase the risk of re-leasing and could result in substantial costs to re-configure the buildings for a new tenant or tenants. There are a number of risks inherent in owning real estate and indirect interests in real estate. Factors beyond the Company’s control affect the Company’s performance and value. Changes in national, regional and local economic and market conditions may affect the Company’s economic performance and the value of the Company’s real estate assets. Local real estate market conditions may include excess supply and intense competition for tenants, including competition based on: (i) rental rates, (ii) attractiveness and location of the property, and (iii) quality of maintenance, insurance and management services. In addition, other factors may adversely affect the performance and value of the Company’s properties, including changes in laws and governmental regulations, including those governing: (i) usage, (ii) zoning and taxes, (iii) changes in interest rates, and (iv) the availability of financing. Illiquidity of real estate investments. Because real estate investments are relatively illiquid, the Company’s ability to adjust the portfolio promptly in response to economic or other conditions is limited. Certain significant expenditures generally do not change in response to economic or other conditions, including: (i) debt service (if any), (ii) real estate taxes, and (iii) operating and maintenance costs. This combination of variable revenue and relatively fixed expenditures may result, under certain market conditions, in reduced income from investment. Such reduction in investment income could have an adverse effect on the Company’s financial condition. 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 substantial environmental liability on the part of the owner of such property from the presence or discharge of hazardous substances on the property, regardless of fault. 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, however, not all properties have been subjected to these site assessments. In such cases that the Company intends to acquire real estate where contamination or potential 9 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 files identifying potential areas of concern, whereas Phase II assessments involve some degree of soil and/or groundwater testing. The Company has 16 investment properties currently under some level of environmental remediation. In general, the seller or the tenant or an adjacent land owner is contractually responsible for the cost of the environmental remediation for 15 of these investment properties. In the event of a bankruptcy or other inability on the part of these sellers and/ or tenant to cover these costs, the Company may have to cover the costs of remediation, fines or other environmental liabilities at these and other properties. The Company may also own properties where required remediation has not begun or detected adverse environmental conditions that may require remediation or otherwise subject the Company to liability. The Company cannot provide assurance that it will not be required to undertake or pay for removal or remediation of any contamination of properties currently or previously owned by the Company, that the Company will not be subject to fines by governmental authorities or litigation or that the costs of such removal, remediation fines or litigation would not be material. The Company may not be able to successfully execute its acquisition or development strategies. The Company cannot assure that it will be able to implement its investment strategies successfully. Additionally, the Company cannot assure that its property portfolio will expand at all, or if it will expand at any specified rate or to any specified size. In addition, investment in additional real estate assets is subject to a number of risks. Because the Company expects to invest in markets other than the ones in which its current properties are located, the Company will also be subject to the risks associated with investment in new markets that may be relatively unfamiliar to the Company’s management team. The Company’s development activities are subject to the risks normally associated with these activities. These risks include, without limitation, risks relating to the availability and timely receipt of zoning and other regulatory approvals, the cost and timely completion of construction (including risks from factors beyond the Company’s control, such as weather or labor conditions or material shortages) and the ability to obtain both construction and permanent financing on favorable terms. These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent completion of development activities once undertaken or provide a tenant the opportunity to terminate a lease. Any of these situations delay or eliminate proceeds or cash flows the Company expects from these projects, which could have an adverse effect on the Company’s financial condition. The Company may not be able to dispose of properties consistent with its operating strategy. The Company may not be able to sell Inventory Properties at a profit due to interest rate increases, or other demands for Inventory Properties may wane, thereby, rendering NNN TRS unable to sell these properties. A change in the assumptions used to determine the value of mortgage residual interests could adversely affect the Company’s financial position. As of December 31, 2005, the mortgage residual interests had a carrying value of $55,184,000. The value of these mortgage residual interests is based on delinquency, loss, prepayment and interest rate assumptions made by the Company to determine their value. If actual experience differs materially from these assumptions, the actual future cash flow could be less than expected and the value of the mortgage residual interests, as well as the Company’s earnings, could decline. The Company may suffer a loss in the event of a default or bankruptcy of a structured finance loan borrower. If a borrower defaults on a structured finance loan and does not have sufficient assets to satisfy the loan, the Company may suffer a loss of principal and interest. In the event of the bankruptcy of a borrower, the Company may not be able to recover against all of the assets of the borrower, or the assets of the borrower may not be sufficient to satisfy the balance due on the loan. In addition, certain of our loans may be subordinate to other debt of a borrower. The structured finance agreements are typically loans secured by a borrower’s pledge of 10 ownership interests in the entity that owns the real estate. These agreements are typically subordinated to senior loans secured by first 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. As of December 31, 2005, the structured finance agreements had an outstanding principal balance of $27,805,000. If a borrower defaults on the loan or on debt senior to the Company’s loan, or in the event of the bankruptcy of a borrower, the Company’s loan will be satisfied only after the borrower’s senior creditors’ claims are satisfied. Where debt senior to the Company’s loans exists, the presence of intercreditor arrangements may limit the Company’s ability to amend loan documents, assign the loans, accept prepayments, exercise remedies and control decisions made in bankruptcy proceedings relating to borrowers. Bankruptcy proceedings and litigation can significantly increase the time needed for the Company to acquire underlying collateral in the event of a default, during which time the collateral may decline in value. In addition, there are significant costs and delays associated with the foreclosure process. Certain provisions of the structured leases or finance loan agreements may be unenforceable. The Company’s rights and obligations with respect to its leases or structured finance loans are governed by written agreements. A court could determine that one or more provisions of an agreement are unenforceable, such as a particular remedy, a loan prepayment provision or a provision governing the Company’s security interest in the underlying collateral of a borrower. The Company could be adversely impacted if this were to happen with respect to a material asset or group of assets. Property ownership through joint ventures and partnerships could limit the Company’s control of those Joint ventures or partnerships involve risks not otherwise present for investments the Company investments. makes on its own. It is possible that the Company’s co-venturers or partners may have different interests or goals than the Company at any time and that they may take actions contrary to the Company’s requests, policies or objectives, including the Company’s policy with respect to maintaining its qualification as a REIT. Other risks of joint venture investment include impasses on decisions, because no single co-venturer or partner has full control over the joint venture or partnership. Uninsured losses may adversely affect our ability to pay outstanding indebtedness. The Company’s properties are generally covered by comprehensive liability, fire, flood, extended coverage and rental loss insurance with policy specifications and insured limits customarily carried for similar properties. The Company believes that the insurance carried on its properties is adequate in accordance with industry standards. There are, however, types of losses (such as from hurricanes, wars or earthquakes) which may be uninsurable, or the cost of insuring against these losses may not be economically justifiable. If an uninsured loss occurs, the Company could lose both the invested capital in and anticipated revenues from the property. In that event, the Company’s cash flow could be reduced. Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war may affect the markets in which the Company operates, its financial condition and results of operations. Terrorist attacks may negatively affect the Company’s operations. There can be no assurance that there will not be further terrorist attacks against the United States or U.S. businesses. These attacks may directly impact the Company’s physical facilities or the businesses of the Company’s tenants. Also, the United States has entered into armed conflict, which could have a further impact on the Company’s tenants. The consequences of armed conflict are unpredictable, and the Company may not be able to foresee events that could have an adverse effect on its business. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economies. They also could result in, or cause a deepening of, economic recession in the United States or abroad. Any of these occurrences could have a significant adverse impact on the Company’s financial condition or results of operations. 11 Vacant properties or bankrupt tenants could adversely affect the Company. As of December 31, 2005, the Company owns 9 vacant, unleased Investment Properties and 3 unleased land parcels, which account for approximately two percent of the total gross leasable area of the Company’s portfolio of Investment Properties. The Company is actively marketing these properties for sale or re-lease but may not be able to sell or re-lease these properties on favorable terms or at all. The lost revenues and increased property expenses resulting from the rejection by any bankrupt tenant of any of their respective leases with the Company could have a material adverse effect on the liquidity and results of operations of the Company if the Company is unable to re-lease the Investment Properties at comparable rental rates and in a timely manner. Additionally, 0.5 percent of the total gross leasable area of the Company’s Investment Portfolio is leased to two tenants that have filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, the tenants have the right to reject or affirm its leases with the Company. The amount of debt the Company has and the restrictions imposed by that debt could adversely affect the Company’s business and financial condition. As of December 31, 2005, the Company had total mortgage debt and secured notes payable outstanding of approximately $179.3 million, total unsecured notes payable of $493.3 million, and total draws outstanding on our line of credit of $162.3 million. The Company’s organizational documents does not limit the level or amount of debt that it may incur. It is the Company’s current policy to maintain a ratio of total indebtedness to total assets (before accumulated depreciation) of not more than 60 percent. However, this policy is subject to reevaluation and modification without the approval of the Company’s security holders. If the Company incurs additional indebtedness and permits a higher degree of leverage, debt service requirements would increase accordingly. Such an increase could adversely affect the Company’s financial condition and results of operations, as well as the Company’s ability to pay principal and interest on the outstanding indebtedness. In addition, increased leverage could increase the risk that the Company may default on its debt obligations. The amount of Company debt outstanding at any time could have important consequences to the Company’s stockholders. For example, it could: • • require the Company to dedicate a substantial portion of its cash flow from operations to payments on Company debt, thereby reducing funds available for operations, real estate investments and other appropriate business opportunities that may arise in the future; limit the Company’s ability to obtain any additional financing it may need in the future for working capital, debt refinancing, capital expenditures, real estate investments, development or other general corporate purposes; • make it difficult to satisfy the Company’s debt service requirements; • • • • limit the Company’s ability to make distributions on its outstanding common and preferred stock; require the Company to dedicate increased amounts of cash flow from operations to payments on its variable rate, unhedged debt if interest rates rise; limit the Company’s flexibility in planning for, or reacting to, changes in its business and the factors that affect the profitability of its business; and limit the Company’s flexibility in conducting its business, which may place the Company at a disadvantage compared to competitors with less debt or debt with less restrictive terms. The Company’s ability to make scheduled payments of principal or interest on, or to refinance its debt will depend primarily on its future performance, which to a certain extent is subject to the creditworthiness of its tenants, and economic, financial, competitive and other factors beyond its control. There can be no assurance that the Company’s business will continue to generate sufficient cash flow from operations in the future to service its debt or meet its other cash needs. If the Company is unable to generate this cash flow from its business, it may be required to refinance all or a portion of its existing debt, sell assets or obtain additional financing to meet its debt 12 obligations and other cash needs. The Company cannot assure you that any such refinancing, sale of assets or additional financing would be possible on terms and conditions, including but not limited to the interest rate, which the Company would find acceptable. The Company is obligated to comply with financial and other covenants in its debt that could restrict its operating activities, and the failure to comply could result in defaults that accelerate the payment under its debt. unsecured debt include, among others, provisions restricting our ability to: The Company’s unsecured debt generally contains various restrictive covenants. The covenants in our • incur or guarantee additional debt; • make certain distributions, investments and other restricted payments, including distribution payments on its outstanding common and preferred stock; • • • • limit the ability of restricted subsidiaries to make payments to the Company; enter into transactions with certain affiliates; create certain liens; and consolidate, merge or sell the Company’s assets. The Company’s secured debt generally contains customary covenants, including, among others, provisions: • • • • • relating to the maintenance of the property securing the debt; restricting its ability to sell, assign or further encumber the properties securing the debt; restricting its ability to incur additional debt; restricting its ability to amend or modify existing leases; and relating to certain prepayment restrictions. The Company’s ability to meet some of the covenants in its debt, including covenants related to the condition of the property or payment of real estate taxes, may be dependent on the performance by the Company’s tenants under their leases. In addition, certain covenants in the Company’s debt, including its unsecured line of credit, require the Company and its subsidiaries, among other things, to: • maintain certain maximum leverage ratios, and • maintain certain minimum interest and debt service coverage ratios. The Company’s failure to qualify as a real estate investment trust for federal income tax purposes could result in significant tax liability. The Company intends to operate in a manner that will allow the Company to continue to qualify as a real estate investment trust. The Company believes it has been organized as, and its past and present operations qualify the Company as, a real estate investment trust. However, the IRS could successfully assert that the Company is not qualified as such. In addition, the Company may not remain qualified as a real estate investment trust in the future. This is because qualification as a real estate investment trust involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within the Company’s control. If the Company fails to qualify as a real estate investment trust, it would not be allowed a deduction for dividends paid to shareholders in computing taxable income and would become subject to federal income tax at regular corporate rates. In this event, the Company could be subject to potentially significant tax liabilities. Unless entitled to relief under certain statutory provisions, the Company would also be disqualified from treatment as a real estate investment trust for the four taxable years following the year during which the qualification was lost. 13 Item 1B. Unresolved Staff Comments. None. Item 2. Properties Investment Portfolio As of December 31, 2005, the Company owned 524 Investment Properties, with an aggregate gross leasable area of 9,227,000 square feet, located in 41 states, of which 98 percent of the gross leasable area is leased to established retail and office tenants. Reference is made to the Schedule of Real Estate and Accumulated Depreciation and Amortization filed with this report for a listing of the Investment Properties and their respective carrying costs. Description of Retail and Office Investment Properties Retail Investment Properties Land. The Company’s retail Investment Property sites range from approximately 7,000 to 774,000 (average of 101,000) square feet depending upon building size and local demographic factors. Land costs range from approximately $25,000 to $10,197,000 (average of $1,092,000). 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 17,000) square feet. Building costs range from $44,000 to $9,211,000 (average of $1,477,000) 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 specific 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, 2005, the weighted average remaining lease term was approximately 11 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 $11,000 to $1,635,000 (average of $237,000). 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 ten percent after every one to five years of the lease term. In addition, for those leases which provide for the payment of percentage rent, such rent is generally one to five 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, 2005, 86 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) 62 percent include contractual increases, (ii) six percent include percentage rent provisions and (iii) ten 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 first must offer the lessee the right to purchase the Investment Property on the same terms and conditions as any offer 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. 14 Office Investment Properties As of December 31, 2005, the Company’s Investment Portfolio included four office properties with an aggregate gross leasable area of 687,000 square feet. These office Investment Properties represent 14 percent of the current annual base rent of the entire portfolio of Investment Properties. In August 2003, the Company acquired two office buildings and a related parking garage in the Washington, D.C., metropolitan area (“DC Office Properties”), for $142,800,000. In addition, the Company funded an additional $27,322,000 for building and tenant improvements, and other costs related to the lease. The DC Office Properties include two office buildings which have an aggregate of 555,000 rentable square feet and a two-level garage with approximately 1,000 parking spaces. The DC Office 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 beginning in January 2003. The lease will expire in 2014. The USA executed a lease (under 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 Office Properties is approximately $18,827,000. 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 2005, the USA was the Company’s only tenant that accounted for more than 10 percent of the Company’s total rental income. On February 9, 2006, the Company and its wholly owned subsidiary, CNLR DC Acquisitions I, LLC, entered into an agreement with Brookfield Financial Properties, L.P., an affiliate of Brookfield Properties Corporation, to sell the DC Office Properties. The Company expects to complete the transaction by April 2006, subject to certain conditions. In May 2004, the Company acquired an office building in St. Louis, Missouri for $15,956,000, with 132,000 rentable square feet. The lease was executed in January 2004, with rent commencement in July 2004. The lease expires in January 2015. The tenant is responsible for the amount of real estate taxes and operating expenses from rent commencement date. Structured Finance Investments Notes Receivable. Structured finance agreements are typically loans secured by a borrower’s pledge of ownership interests in the entity that owns the real estate. These agreements are typically subordinated to senior loans secured by first 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 2005 and 2004, the Company made structured finance investments of $5,988,000 and $6,857,000, respectively. As of December 31, 2005, the structured finance investments bear a weighted average interest rate of 13.8% per annum, of which 11.4% is payable monthly and the remaining 2.4% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which range between January and November 2007. The structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the certain subsidiaries which own real estate. As of December 31, 2005 and 2004, the outstanding principal balance of the structured finance investments was $27,805,000 and $29,390,000, respectively. Inventory Portfolio The Inventory Portfolio may consist of properties that have been acquired with the intent to resell and properties that have been, or are currently being, developed by the NNN TRS. The Company’s Inventory Properties are typically sold to purchasers who are looking for replacement like-kind exchange property or to other purchasers with different investment objectives. As of December 31, 2005, the NNN TRS owned (i) 17 Development Properties (1 completed, 12 under construction and 4 land parcels) and (ii) 46 Exchange Properties. 15 Reference is made to the Schedule of Real Estate and Accumulated Depreciation and Amortization filed 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, 2005 were comprised of sites that range from approximately 7,000 to 85,000 (average of 30,000) square feet depending upon building size and local demographic factors. Land costs range from approximately $75,000 to $1,606,000 (average of $562,000). The buildings generally are single-story structures ranging in size from approximately 1,000 to 16,000 (average of 4,000) square feet. Building costs range from $75,000 to $2,435,000 (average of $792,000) 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 12 Inventory Properties by the NNN TRS, the Company has agreed to fund construction commitments of $57,279,000, of which $38,450,000 has been funded as of December 31, 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, 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 files identifying potential areas of concern, whereas Phase II assessments involve some degree of soil and/or groundwater testing. The Company has 16 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 properties. Item 3. Legal Proceedings In the ordinary course of its business, the Company is a party to various legal actions that management believes are routine in nature and incidental to the operation of the business of the Company. Management believes that the outcome of these proceedings will not have a material adverse effect upon its operations, financial condition or liquidity. Item 4. Submission of Matters to a Vote of Security Holders None. 16 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 reflects respective high, low and closing sales prices for the common stock as quoted by the NYSE and the dividends paid per share in each such period. 2005 High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First Quarter $20.880 18.000 18.450 Second Quarter $20.990 18.300 20.470 Third Quarter $21.650 18.530 20.000 Fourth Quarter $20.970 18.060 20.370 Year $21.650 18.000 20.370 Dividends paid per share . . . . . . . . . . . . . . . 0.325 0.325 0.325 0.325 1.300 2004 High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19.750 17.530 19.750 $20.080 14.800 17.200 $18.340 16.400 18.220 $21.250 18.210 20.600 $21.250 14.800 20.600 Dividends paid per share . . . . . . . . . . . . . . . 0.320 0.320 0.325 0.325 1.290 The following presents the characterizations for tax purposes of such common stock dividends for the years ended December 31: Ordinary dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualified dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecaptured Section 1250 gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nontaxable distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004 82.19% 70.99% 17.27% — — 3.13% 3.21% 0.17% 0.37% 22.67% 100.00% 100.00% In February 2006 the Company paid dividends to its stockholders of $16,048,000 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 financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, and such other factors as the board of directors deems relevant. On February 15, 2006, there were 1,535 stockholders of record of common stock. 17 Item 6. Selected Financial Data You should read the selected financial data presented below in conjunction with the consolidated financial statements, the notes to the consolidated financial statements and with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. Historical Financial Highlights (dollars in thousands, except per share data) Gross revenues(1) . . . . . . . . . . . . . . . . . . . $ Earnings from continuing operations . . . Net earnings . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . Total debt . . . . . . . . . . . . . . . . . . . . . . . . . Total equity . . . . . . . . . . . . . . . . . . . . . . . Cash dividends paid to: Common stockholders . . . . . . . . . . . Series A Preferred Stock stockholders . . . . . . . . . . . . . . . . . Series B Convertible Preferred Stock stockholders . . . . . . . . . . . . Weighted average common shares: 2005 2004 2003 2002 2001 173,458 $ 54,136 89,400 1,733,416 861,045 828,087 157,277 $ 49,307 64,934 1,300,048 524,241 756,998 124,248 $ 40,401 53,473 1,213,778 467,419 730,754 109,812 $ 33,075 48,058 958,300 386,912 549,141 85,554 23,079 28,963 1,010,009 435,333 564,640 69,018 66,272 55,473 51,178 38,637 4,008 1,675 4,008 1,675 4,008 502 4,010 — — — Basic . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . 52,984,821 54,640,143 51,312,434 51,742,518 43,108,213 43,896,800 40,383,405 40,588,957 31,539,857 31,717,043 Per share information: Earnings from continuing operations: Basic . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . Net earnings: Basic . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . Dividends paid to: Common stockholders . . . . . . . Series A Preferred Stock stockholders . . . . . . . . . . . . . Series B Convertible Preferred Stock stockholders . . . . . . . . Other data: Cash flows provided by (used in): Operating activities . . . . . . . . . Investing activities . . . . . . . . . Financing activities . . . . . . . . . Funds from operations— diluted(2) . . . . . . . . . . . . . . . . 0.91 0.92 1.58 1.56 1.30 2.25 0.85 0.85 1.15 1.15 1.29 2.25 0.84 0.83 1.14 1.13 1.28 2.25 167.50 167.50 50.25 0.72 0.72 1.09 1.09 1.27 2.25 — 0.73 0.73 0.92 0.91 1.26 — — 30,930 (242,487) 217,844 85,800 (69,963) (19,225) 54,215 (256,870) 205,965 111,589 (15,142) (101,654) 112,267 (2,700) (8,878) 81,803 73,065 61,749 54,595 32,034 (1) Gross revenues include revenues from the Company’s continuing and discontinued operations. The Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and broadens the presentation of discontinued operations in the income statement to include a component of an entity. Accordingly, the results of operations related to these certain properties that have been classified as held for sale or have been disposed of subsequent to December 31, 2001, the effective date of SFAS No. 144, have been reclassified as earnings from discontinued operations. 18 (2) The National Association of Real Estate Investment Trusts (“NAREIT”) developed FFO as a relative non-GAAP financial measure of performance of a REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO is defined by NAREIT 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 flow 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 differ 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, investment assets and inventory assets, real estate held for investment and real estate held for sale. All property dispositions from the Company’s investment segment are classified as discontinued operations. In addition, certain properties in the Company’s inventory segment that have generated revenues before disposition are classified as discontinued operations. These inventory properties have not historically been classified as discontinued operations, therefore, prior period comparable consolidated financial 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 affected. The following table reconciles FFO to their most directly comparable GAAP measure, net earnings for the years ended December 31: Reconciliation of funds from operations: Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate, investment assets depreciation and amortization: Continuing operations . . . . . . . . . . . . . . . . . . Discontinued operations . . . . . . . . . . . . . . . . Partnership real estate depreciation . . . . . . . . . . . . . . . Gain on disposition of investment assets . . . . . . . . . . . Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . FFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series A Preferred Stock dividends . . . . . . . . . . . . . . . Series B Convertible Preferred Stock dividends . . . . . . FFO available to common stockholders—basic . . . . . . Series B Convertible Preferred Stock dividends, if 2005 2004 2003 2002 2001 $ 89,400 $64,934 $53,473 $48,058 $28,963 20,354 53 606 (9,816) (14,786) 85,811 (4,008) (1,675) 15,004 711 622 (2,523) — 78,748 (4,008) (1,675) 11,041 831 699 (287) — 65,757 (4,008) (502) 9,075 1,253 479 (260) — 58,605 (4,010) — 80,128 73,065 61,247 54,595 6,865 791 63 (4,648) — 32,034 — — 32,034 dilutive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,675 — 502 — — FFO available to common stockholders—diluted . . . . $ 81,803 $73,065 $61,749 $54,595 $32,034 For a discussion of material events affecting the comparability of the information reflected in the selected financial data, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 19 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with Item 6. “Selected Financial Data,” and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K, and the forward-looking disclaimer language in italics before Item 1. “Business”. The term “Company” refer to Commercial Net Lease Realty, Inc. and its majority owned and controlled subsidiaries. These subsidiaries include the wholly owned qualified REIT subsidiaries of the Company, as well as the taxable REIT subsidiaries and their majority owned and controlled subsidiaries (collectively, “NNN TRS”). Overview The Company’s operations are divided into two primary business segments: (i) investment assets, including real estate assets, structured finance investments and mortgage residual interests (“Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). The real estate investment assets and structured finance investments (included in mortgages and notes receivable on the balance sheet) are operated through Commercial Net Lease Realty, Inc. and its wholly owned qualified REIT subsidiaries. The Company directly and indirectly, through investment interests, acquires, owns, invests in, manages and develops primarily retail properties that are generally leased to established tenants under long-term commercial net leases (the “Investment Properties” or “Investment Portfolio”). As of December 31, 2005, the Company owned 524 Investment Properties, with an aggregate gross leasable area of 9,227,000 square feet, located in 41 states and leased to established tenants, including Academy, Barnes & Noble, Best Buy, Borders, Susser (Circle K), CVS, Eckerd, OfficeMax, The Sports Authority and the United States of America. In addition to the Investment Properties, as of December 31, 2005, the Company had $27,805,000 and $55,184,000 in structured finance investments and mortgage residual interests, respectively. As of October 31, 2005, the Inventory Assets were operated through Commercial Net Lease Realty Services, Inc. (“Services”) and its majority owned and controlled subsidiaries. Effective November 1, 2005, Services merged with and into Commercial Net Lease Realty, Inc., and a former Services subsidiary, CNLRS Exchange I, Inc., became the holding company for the Company’s development and exchange activities. Subsequent to the merger, the Inventory Assets were operated through the NNN TRS. The NNN TRS, directly and indirectly, through investment interests, owns 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 different investment objectives (“Inventory Properties” or “Inventory Portfolio”). The NNN TRS, develops Inventory Properties (“Development Properties” or “Development Portfolio”) and also acquires existing Inventory Properties (“Exchange Properties” or “Exchange Portfolio”). As of December 31, 2005, the NNN TRS owned 17 Development Properties (one completed, 12 under construction and four land parcels) and 46 Exchange Properties. The Company’s management team focuses on certain key indicators to evaluate the financial condition and operating performance of the Company. The key indicators for the Company include items such as: the composition of the Company’s Investment Portfolio and structured finance investments (such as tenant, geographic and industry classification diversification), the occupancy rate of the Company’s Investment Portfolio, certain financial performance ratios and profitability measures, industry trends and performance compared to that of the Company, and returns the Company receives on its invested capital. Liquidity General. Historically, the Company’s demand for funds has been primarily for (i) payment of operating expenses and dividends, (ii) property acquisitions, structured finance 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. 20 Contractual Obligations and Commercial Commitments. The information in the following table summarizes the Company’s contractual obligations and commercial commitments outstanding as of December 31, 2005. The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of December 31, 2005. As the table incorporates only those exposures that exist as of December 31, 2005, it does not consider those exposures or positions which may arise after that date. Expected Maturity Date (dollars in thousands) Total 2006 2007 2008 2009 2010 Thereafter Long-term debt (1) . . . . . . . . . . . . . Revolving credit facility . . . . . . . . Operating lease . . . . . . . . . . . . . . . $696,225 162,300 11,930 $23,991 — 1,200 $20,913 — 1,236 $113,190 — 1,273 $ 21,800 162,300 1,311 $21,022 — 1,351 $495,309 — 5,559 Total contractual cash obligations(2) . . . . . . . . . . . . . . . $870,455 $25,191 $22,149 $114,463 $185,411 $22,373 $500,868 (1) (2) Includes amounts outstanding under the mortgages payable, secured notes payable, notes payable and financing lease obligation and excludes unamortized note discounts and unamortized interest rate hedge gain. Excludes $5,539,000 of accrued interest payable. In addition to the contractual obligations outlined in the table above, in connection with the development of 12 Inventory Properties by the NNN TRS, the Company has agreed to fund construction commitments of $57,279,000, of which $38,450,000 has been funded as of December 31, 2005. The Company anticipates funding the additional costs from borrowings under the Company’s revolving credit facility. In connection with the development of 3 Investment Properties, the Company has agreed to fund construction commitments of $4,644,000, of which $2,830,000 has been funded as of December 31, 2005. The Company anticipates funding the additional costs from borrowings under the Company’s revolving credit facility. Management anticipates satisfying these obligations with a combination of the Company’s current capital resources, cash on hand, its revolving credit facility and debt or equity financings. In addition, as of December 31, 2005, the Company had outstanding letters of credit totalling $13,163,000 under its Credit Facility. As of December 31, 2005, the Company does not have any other contractual cash obligations, such as purchase obligations, financing lease obligations or other long-term liabilities other than those reflected in the table. In addition to items reflected in the table, the Company has two series of preferred stock with cumulative preferential cash distributions (see “Liquidity—Dividends”). Off Balance Sheet Arrangements. The Company has guaranteed 41.67 percent of a $14,000,000 unsecured promissory note on behalf of an unconsolidated affiliate. The maximum obligation to the Company is $5,834,000 plus interest, and the guarantee continues through the loan maturity in December 2010. In the event the Company is required to perform under this guarantee, the Company would use proceeds from its revolving credit facility to fulfill any obligation. 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 21 Investment Properties, including the DC Office 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 significant capital expenditures. The lost revenues and increased property expenses resulting from the rejection by any bankrupt tenant of any of their respective leases with the Company could have a material adverse effect on the liquidity and results of operations of the Company if the Company is unable to re-lease the Investment Properties at comparable rental rates and in a timely manner. As of January 31, 2006, the Company owns nine vacant, unleased Investment Properties and three unleased land parcels which account for approximately two percent of the total gross leasable area of the Company’s portfolio of Investment Properties. Additionally, 0.5 percent of the total gross leasable area of the Company’s Investment Portfolio is leased to two tenants that have filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, the tenants have the right to reject or affirm its leases with the Company. 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, provided that it distributes 100 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 qualification is lost. Such an event could materially affect the Company’s income and its ability to pay dividends. The Company believes it has been organized as, and its past and present operations qualify the Company as, a real estate investment trust. Additionally, the Company intends to continue to operate so as to remain qualified as a REIT for federal income tax purposes. One of the Company’s primary objectives, consistent with its policy of retaining sufficient cash for reserves and working capital purposes and maintaining its status as a REIT, is to distribute a substantial portion of its funds available from operations to its stockholders in the form of dividends. During the years ended December 31, 2005, 2004 and 2003, the Company declared and paid dividends to its common stockholders of $69,018,000, $66,272,000 and $55,473,000, respectively, or $1.30, $1.29 and $1.28 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 dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualified dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualified 5-year Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecaptured Section 1250 gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nontaxable distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004 2003 82.19% 70.99% 75.71% 17.27% — — 3.13% — — 0.37% — — 2.88% 3.21% 0.17% 0.37% 22.67% 21.04% 100.00% 100.00% 100.00% In February 2006, the Company paid dividends to its common stockholders of $16,048,000, 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 fixed annual amount of $2.25 per 22 share). For each of the years ended December 31, 2005, 2004 and 2003, the Company declared and paid dividends to its Series A Preferred Stock stockholders of $4,008,000, or $2.25 per share of stock. In February 2006, the Company declared dividends of $1,002,000 or $0.5625 per share of Series A Preferred Stock, payable in March 2006. 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 fixed annual amount of $167.50 per share). For the years ended December 31, 2005, 2004 and 2003, the Company declared and paid dividends to its Series B Convertible Preferred Stock stockholders of $1,675,000, $1,675,000 and $502,000, respectively, or $167.50, $167.50 and $50.25 per share of stock. In February 2006, the Company declared dividends of $419,000 or $41.875 per share of Series B Convertible Preferred Stock, payable in March 2006. Restricted Cash. Restricted cash consists of amounts held in restricted accounts in connection with the sale of certain assets of OAMI to a third party (the “Buyer”) (see Item 1. “Business—Business Combinations”). The use of the cash is restricted pursuant to agreements with the Buyer and will be released to OAMI in December 2007 subject to any pending indemnity claims. The amount held in these accounts at December 31, 2005 was $30,530,000. The carrying value of $30,191,000 is calculated as the present value of the expected release of monies. 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 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 files identifying potential areas of concern, whereas Phase II assessments involve some degree of soil and/or groundwater testing. The Company has 16 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 finance investments, capital expenditures, development and other investments have been funded by equity and debt offerings, bank borrowings, the sale of properties and, to a lesser extent, from internally generated funds. Cash needs for other items have been met from operations. Potential future sources of capital include proceeds from the public or private offering of the Company’s debt or equity securities, secured or unsecured borrowings from banks or other lenders, proceeds from the sale of properties, as well as undistributed funds from operations. For the years ended December 31, 2005, 2004 and 2003, the Company generated $30,930,000, $85,800,000 and $54,215,000, respectively, of net cash from operating activities. The change in cash provided by operations for the years ended December 31, 2005, 2004 and 2003, is primarily the result of changes in revenues and expenses as discussed in “Results of Operations.” Cash generated from operations could be expected to fluctuate in the future. 23 Indebtedness. The Company expects to use indebtedness primarily for property acquisitions and development of single-tenant retail either directly or through investment interests and structured finance investments. In December 2005, the Company entered into an amended and restated loan agreement for a $300,000,000 revolving credit facility (the “Credit Facility”) which amended the Company’s existing loan agreement by (i) increasing the borrowing capacity to $300,000,000 from $225,000,000, (ii) lowering the interest rates of the tiered rate structure from a maximum of 135 points above LIBOR to a maximum rate of 112.5 basis points above LIBOR (based upon the debt rating of the Company, the current interest rate is 80 basis points above LIBOR), (iii) requiring the Company to pay a commitment fee based on a tiered rate structure to a maximum of 25 basis points per annum (based upon the debt rating of the Company the current commitment fee is 20 basis points), (iv) providing for a competitive bid option for up to 50 percent of the facility amount, (v) extending the expiration date to May 8, 2009 and (vi) amending certain of the financial covenants of the Company. The principal balance is due in full upon expiration of the Credit Facility in May 2009, which the Company may request to be extended for an additional 12 months. As of December 31, 2005, $162,300,000 was outstanding and approximately $137,700,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totalling $13,163,000. In accordance with the terms of the Credit Facility, the Company is required to meet certain restrictive financial covenants, which, among other things, require the Company to maintain certain (i) maximum leverage ratios, (ii) debt service coverage, (iii) cash flow coverage and (iv) investment limitations. At December 31, 2005, the Company was in compliance with those covenants. In the event that the Company violates any of these restrictive financial covenants, its access to the debt or equity markets may become impaired. Mortgages Payable. The Company’s consolidated financial statements include the following mortgages payable as of December 31 (dollars in thousands): Date Entered Jan 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jun 1996(2) . . . . . . . . . . . . . . . . . Jun 1996(2) Jun 1996(2) . . . . . . . . . . . . . . . . . Dec 1999 . . . . . . . . . . . . . . . . . . Dec 2001 . . . . . . . . . . . . . . . . . . Dec 2001 . . . . . . . . . . . . . . . . . . Dec 2001 . . . . . . . . . . . . . . . . . . Jun 2002 . . . . . . . . . . . . . . . . . . . Jul 2002 . . . . . . . . . . . . . . . . . . . Nov 2003 . . . . . . . . . . . . . . . . . . Feb 2004(2) . . . . . . . . . . . . . . . . . Feb 2004(3) . . . . . . . . . . . . . . . . . Dec 2004(2) . . . . . . . . . . . . . . . . . Mar 2005(2) . . . . . . . . . . . . . . . . . Balance $39,450 2,391 1,916 2,557 350 623 698 485 21,000 2,340 95,000 6,952 12,000 408 1,015 Interest Rate Monthly Payment Amount(4) 7.435% $330 26 8.875% 23 8.250% 32 8.625% 4 8.500% 8 9.000% 9 9.000% 8 9.000% 138 6.900% 18 7.420% 435 5.420% 68 6.900% 103 7.370% 5 9.375% 11 8.140% Maturity Feb 2006 Feb 2010(5) Dec 2008 Dec 2007(8) Dec 2009 Apr 2014 Apr 2019 Apr 2019 Jul 2012 Jul 2012(6) Nov 2013 Jan 2017 Sep 2007 Sep 2014(7) Sep 2016 Carrying Value of Encumbered Asset(s)(1) Outstanding Principal Balance 2005 2004 $ 53,034 — 1,819(9) — 3,357 1,076 1,414 1,395 26,660 — 163,723 12,221 28,464 — 1,418 $ 18,538 — 729 — 175 435 482 246 20,276 — 95,000 6,299 7,979 — 974 $ 22,466 — 935 1,044 210 485 537 306 20,508 — 95,000 6,665 8,606 406 — $151,133 $157,168 (1) (2) Each loan is secured by a first mortgage lien on certain of the Company’s properties. The carrying values of the assets are as of December 31, 2005. “Date Entered” represents the date that the Company acquired real estate subject to a mortgage securing a loan. The corresponding original principal balance represents the outstanding principal balance at the time of acquisition. 24 (3) The Company assumed this long term fixed rate loan when the Company increased its ownership in the Partnership. (4) Monthly payments include interest and principal, if any; the balance is due at maturity. (5) In December 2004, the Company disposed of the property that secured the loan, and simultaneously paid the outstanding principal in full. In August, 2004, the Company disposed of the property that secured the loan, at which time the buyer assumed the loan. In January 2005, the Company disposed of the property that secured the loan, at which time the buyer assumed the loan. In September 2005, the Company disposed of the property that secured the loan, and simultaneously paid the outstanding principal in full. The Company has a $864,000 letter of credit that also secures the loan. (6) (7) (8) (9) 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 offerings of the Company’s debt or equity securities, the Company’s secured or unsecured borrowings from banks or other lenders or proceeds from the sale of one or more of its properties. Notes Payable—Secured. The Company’s consolidated financial statements include the following notes payable as of December 31, 2005, as a result of the acquisition of equity interest of OAMI (dollars in thousands) (see “Business Combinations”): 02-1 Notes(1)(2) 03-1 Notes(2)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stated Rate Maturity Date 10% December 2007 10% June 2008 Principal Balance $12,250 16,000 $28,250 (1) (2) (3) Interest is payable quarterly with annual principal payments of $2,000,000 payable June 30 of each year Secured by certain mortgage residual interests owned by the Company Interest is payable quarterly with annual principal payments of $1,750,000 payable December 31 of each year Each issuance of notes can be prepaid at the option of OAMI, in whole or in part, without premium or penalty after the pre-payment date, as defined in each respective private placement memorandum relating to the notes. Note Payable. In connection with the acquisition of National Properties Corporation (“NAPE”), the Company assumed a $20,800,000 term note payable (“Term Note”), and a line of credit with an outstanding balance of $7,400,000, which was paid in full with proceeds from the Company’s existing line of credit in June 2005. The principal balance on the Term Note is due in full upon its expiration in June 2009. The Term Note bears interest based on a tiered rate structure to a maximum rate of 165 basis points above LIBOR. Based on the current debt rating of the Company, the current interest rate is 120 basis points above LIBOR or 5.57% at December 31, 2005. In accordance with the terms of the Term Note, the Company is required to meet certain restrictive financial covenants, which, among other things, require the Company to maintain certain (i) maximum leverage ratios, (ii) debt service coverage and (iii) cash flow coverage. In November 2001, the Company entered into an unsecured $70,000,000 term note (“Term Note”), due November 30, 2004, to finance the acquisition of Captec Net Lease Realty, Inc. (“Captec”) and for the repayment of indebtedness and related expenses in connection therewith. 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. 25 Debt and Equity Securities. The Company has used, and expects to use in the future, issuances of debt and equity securities primarily to pay down its outstanding indebtedness and to finance investment acquisitions. The Company has maintained investment grade debt ratings from Standard and Poor’s, Moody’s Investor Service and Fitch Ratings on its senior, unsecured debt since 1998. In May 2003, the Company filed a shelf registration statement with the Securities and Exchange Commission, which permits the issuance by the Company of up to $600,000,000 in debt and equity securities; as of December 31, 2005, the Company had $109,167,000 available for issuance under this shelf registration statement. The Company filed a prospectus supplement to its shelf registration for each issuance of notes outlined in the table below (dollars in thousands). Issue Date Principal Discount(3) Net Price Stated Rate Effective Rate(4) Commencement of Semi- Annual Interest Payments Maturity Date . . . . . June 1999 $100,000 2008 Notes(1) . . . . . . . March 1998 2004 Notes(1)(5) 100,000 2010 Notes(1) . . . . . . . September 2000 20,000 2012 Notes(1) . . . . . . . June 2002 50,000 2014 Notes(1)(2)(6) . . . . June 2004 150,000 2015 Notes(1) . . . . . . . November 2005 150,000 $271 392 126 287 440 390 $ 99,729 7.125% 7.163% September 1998 March 2008 99,608 8.125% 7.547% December 1999 June 2004 19,874 8.500% 8.595% March 2001 49,713 7.750% 7.833% December 2002 June 2012 June 2014 149,560 6.250% 5.910% June 2004 December 2015 149,610 6.150% 6.185% June 2006 September 2010 (1) (2) (3) (4) (5) (6) The proceeds from the note issuance were used to pay down outstanding indebtedness of the Company’s Credit Facility. The proceeds from the note issuance were used to repay the obligation of the 2004 Notes. The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest method. Includes the effects of the discount, treasury lock gain and swap gain (as applicable). The Company entered into a treasury rate lock agreement which fixed a treasury rate of 5.1854% on a notional amount of $92,000,000. Upon issuance of the 2004 Notes, the Company terminated the treasury rate lock agreement resulting in a gain of $2,679,000. The gain was deferred and amortized as an adjustment to interest expense over the term of the 2004 Notes using the effective interest method. The Company entered into a forward starting interest rate swap agreement which fixed 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 effective 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 defined in the respective supplemental indenture relating to the notes. In connection with the debt offerings, the Company incurred debt issuance costs totaling $5,512,000 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 effective 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 financial covenants, which, among other things, require the Company to maintain (i) certain leverage ratios and (ii) certain interest coverage. At December 31, 2005, the Company was in compliance with those covenants. In the event that the Company violates any of the certain restrictive financial covenants, its access to the debt or equity markets may become impaired. In July 2003, the Company filed 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 offering, the Company incurred stock issuance costs totaling approximately $5,374,000, consisting primarily of underwriters’ commissions and fees, legal and accounting fees and printing expenses. Net proceeds from the offering were used to fund a portion of the acquisition of the DC Office Properties (see “Results of Operations— Property Analysis—Investment Portfolio”). 26 In August 2003, the Company filed 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 offering, 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 first 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 fixed 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 offering were used to pay down outstanding indebtedness of the Company’s Credit Facility. In December 2003, the Company filed a prospectus supplement to its shelf registration statement and issued 3,250,000 shares of common stock and received gross proceeds of $56,517,000. In addition, the Company issued an additional 487,500 shares of common stock in connection with the underwriters’ over-allotment option and received gross proceeds of $8,478,000. In connection with these offerings, the Company incurred stock issuance costs totaling approximately $671,000, consisting primarily of underwriters’ commissions and fees, legal and accounting fees and printing expenses. Net proceeds from these offerings were used to pay down outstanding indebtedness of the Company’s Credit Facility. During the year ended December 31, 2005, the Company issued 912,334 shares of common stock pursuant to the Company’s Dividend and Stock Purchase Plan and received gross proceeds of $18,063,000. The proceeds were used to pay down outstanding indebtedness of the Company’s credit facility. In December 2001, the Company issued 4,349,918 shares of common stock and 1,999,974 shares of Series A Preferred Stock in connection with the acquisition of Captec (see “Results of Operations—Business Combinations”). Holders of the Series A Preferred Stock are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions at the rate of nine percent of the $25.00 liquidation preference per annum (equivalent to a fixed annual amount of $2.25 per share). The Series A Preferred Stock 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. As a result of the appraisal action arising out of the Captec merger (see “Results of Operations—Merger Transactions”), the Company reduced the number of common and Series A Preferred Stock shares issued and outstanding by 474,911 and 218,385, respectively. The reduction in shares represent the number of shares that would have been issued to the plaintiffs had they accepted the original merger consideration. As of December 31, 2002, the Company had recorded the value of these shares at the original consideration share price in addition to the cash portion of the original merger consideration as other liabilities totaling $13,278,000. In 2003, the Company used proceeds from its Credit Facility to fund the settlement of the appraisal action. In connection with the acquisition of National Properties Corporation in June 2005 (see “Results of Operations—Business Combination”), the Company issued 1,636,532 newly issued shares of the Company’s common stock in exchange for 100% of the common stock of NAPE. Financing Lease Obligation. In July 2004, the Company sold five investment properties for approximately $26,041,000 and subsequently leased back the properties under a 10-year financing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the financing lease. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 66, 27 “Accounting for Sales of Real Estate,” the Company has recognized the sale as a financing transaction. The 10-year financing 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, officers 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 and unrestricted stock to certain officers, directors and key associates of the Company. The following information is a summary of the restricted stock grants for the years ended December 31, 2005, 2004 and 2003: Shares Annual Vesting Rate Number of Years for Vesting Shares are 100% Vested on Officers and Associates: March 2003 . . . . . . . . . . . . . . . . . . . . . . March 2003 . . . . . . . . . . . . . . . . . . . . . . April 2004 . . . . . . . . . . . . . . . . . . . . . . . April 2004 . . . . . . . . . . . . . . . . . . . . . . . April 2004 . . . . . . . . . . . . . . . . . . . . . . . September 2004 . . . . . . . . . . . . . . . . . . March 2005 . . . . . . . . . . . . . . . . . . . . . . April 2005 . . . . . . . . . . . . . . . . . . . . . . . July 2005 . . . . . . . . . . . . . . . . . . . . . . . October 2005 . . . . . . . . . . . . . . . . . . . . December 2005 . . . . . . . . . . . . . . . . . . . December 2005 . . . . . . . . . . . . . . . . . . . Directors: June 2003 . . . . . . . . . . . . . . . . . . . . . . . August 2004 . . . . . . . . . . . . . . . . . . . . . December 2004 . . . . . . . . . . . . . . . . . . . June 2005 . . . . . . . . . . . . . . . . . . . . . . . October 2005 . . . . . . . . . . . . . . . . . . . . 40,407 30,000 100,000 35,000 50,211 15,000 92,900 7,000 500 7,300 67,462 44,306 6,000 4,500 868 3,000 1,000 1/4 1/5 1/5 1/5 1/7 1/7 1/5 1/7 1/7 1/5 1/2 1/2 1/2 1/2 1/2 (2) (1) 4 5 4 5 6 6 5 7 7 (2) 5 5 2 2 2 2 2 January 1, 2007 January 1, 2008 January 1, 2008 January 1, 2009 January 1, 2010 January 1, 2011 January 1, 2010 January 1, 2012 January 1, 2012 (2) January 1, 2010 (1) January 1, 2005 January 1, 2006 January 1, 2006 January 1, 2007 January 1, 2007 (1) Vesting of shares is contingent upon achievement of certain performance goals by January 1, 2010 (2) Immediate vesting of shares at date of grant During 2005, 2004 and 2003, the Company cancelled 30,135, 29,926 and 5,950 shares of restricted stock, respectively. Investments in Unconsolidated Affiliates. 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 interest into shares of the Company’s common stock. In October 2003, CTA exercised that right, and, based on the terms of and calculation defined in the limited partnership agreement, the Company issued 953,551 shares of common stock to CTA in a private transaction in February 2004 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. 28 In May 2002, the Company purchased a combined 25 percent partnership interest for $750,000 in CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”), which owns a 346,000 square foot office building and an interest in an adjacent parking garage. Affiliates of James M. Seneff, Jr. and Robert A. Bourne, each former members of the Company’s board of directors, own the remaining partnership interests. Since November 1999, the Company has leased its office space from Plaza. The Company’s lease expires in October 2014. In addition, the Company has severally guaranteed 41.67 percent of a $14,000,000 unsecured promissory note on behalf of Plaza. The maximum obligation of the Company is $5,834,000 plus interest. Interest accrues based on a tiered rate structure with a maximum of 200 basis points above LIBOR (the current interest rate is 200 basis points above LIBOR). This guarantee will continue through the loan maturity in December 2010. Notes Receivable. Structured finance agreements are typically loans secured by a borrower’s pledge of ownership interests in the entity that owns the real estate. These agreements are typically subordinated to senior loans secured by first 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 2005 and 2004, the Company made structured finance investments of $5,988,000 and $6,857,000, respectively. As of December 31, 2005, the structured finance investments bear a weighted average interest rate of 13.8% per annum, of which 11.4% is payable monthly and the remaining 2.4% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which range between January and November 2007. The structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the certain subsidiaries which own real estate. As of December 31, 2005 and 2004, the outstanding principal balance of the structured finance investments was $27,805,000 and $29,390,000, respectively. Business Combinations. Captec Net Lease Realty, Inc.—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, beneficial owners of shares of Captec stock held of record by Cede & Co. who alleged that they did not vote for the merger (and who alleged that they caused a written demand for appraisal of their Captec shares to be served on Captec), filed in the Chancery Court of the State of Delaware in and for New Castle County a Petition for Appraisal of Stock (“Appraisal Action”). The Appraisal Action alleged that 1,037,946 shares of Captec dissented from the merger and sought to require the Company to pay to all Captec stockholders who demanded appraisal of their shares the fair value of those shares, with interest from the date of the merger. As a result of this action, the plaintiffs were not entitled to receive the Company’s common and Series A Preferred Stock shares as offered in the original merger consideration. Accordingly, the Company reduced the number of common and Series A Preferred Stock shares issued and outstanding by 474,911 and 218,385, respectively, which represents the number of shares that would have been issued to the plaintiffs had they accepted the original merger consideration. 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 beneficial 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 29 shares had been issued at the time of the merger. On February 13, 2003, the parties filed a stipulation and order of dismissal and the Court entered the order of dismissal, dismissing the Appraisal Action with prejudice. Orange Avenue Mortgage Investments, Inc.—On May 2, 2005, the Company exercised its option to acquire 78.9 percent of the common shares of OAMI for $9,379,000. In December 2004, OAMI sold its loan origination, securitization and servicing operations and the majority of its assets and liabilities to a third party, resulting in OAMI becoming a passive owner in a pool of seven commercial real estate loan securitization residual interests. The loans in each of the securitizations are secured by first mortgages on commercial real estate and generally borrower personal guarantees. As a result of the option exercise, the Company has consolidated OAMI in its consolidated financial statements. According to SFAS No. 141, “Business Combinations,” under the purchase method of accounting, the Company recorded the assets and liabilities of OAMI at fair value. The Company recognized an extraordinary gain of $14,786,000, equal to the excess fair value over the option price, as all assets acquired were financial assets and current assets. Based upon independent appraisals and management’s evaluation, the following table summarizes the estimated fair values of the assets and liabilities of OAMI on May 2, 2005 (dollars in thousands): Mortgage residual interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,327 3,272 10,285 17,427 6,794 Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $106,105 Notes payable—secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,000 1,028 14,787 47,815 27,315 Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,975 The following table summarizes the extraordinary gain recognized by the Company (dollars in thousands) during the year ended December 31, 2005: Company’s share of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less option price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basis of option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,434 (9,379) (269) Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,786 The Company’s net earnings for the year ended December 31, 2005, includes 78.9 percent of OAMI’s net earnings since the date of the acquisition in the amount of $1,411,000. Between June 2001 and July 2003, a wholly owned subsidiary of the Company, Net Lease Funding, Inc. (“NLF”), entered into five limited liability company agreements with OAMI to create five limited liability companies (collectively, the “LLCs”). Kevin B. Habicht, an officer and director of the Company is an officer, director and indirect shareholder of OAMI. Craig Macnab, an officer and director of the Company and Julian E. Whitehurst, an officer of the Company, are each an officer and director of OAMI. Each of the LLCs holds an interest in mortgage loans and is 100 percent equity financed. Prior to the acquisition of the 78.9 percent equity interest in OAMI, the Company held a non-voting and non-controlling interest in each of the LLCs ranging between 36.7 and 44.0 percent and accounted for its investment under the equity method of accounting. 30 As a result of the Company’s acquisition of 78.9 percent equity interest in OAMI, the Company’s interest in the LLCs is no longer accounted for as an equity investment and is now included as part of OAMI in the Company’s consolidated financial statements. In addition, certain officers and directors of the Company own preferred shares of OAMI. Prior to the acquisition of 78.9 percent equity interest in OAMI, the Company received $2,749,000 in distributions from the LLCs. During the year ended December 31, 2004, the company received $10,562,000 in distributions from the LLCs. For the years ended December 31, 2005 and 2004, the Company recognized $1,467,000 and $5,042,000 of earnings, respectively, from the LLCs. 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 notes payable-secured (see “Capital Resources—Notes Payable—Secured”). As a result of the independent valuations of the mortgage residual interests (“Residuals”), the Company reduced the carrying value of the Residuals during the year ended December 31, 2005. The reduction in the Residuals’ value that related to the Residuals acquired at the time of the option exercise was recorded as a purchase price allocation adjustment. The reduction in the Residuals’ value acquired at the time of the option exercise that related to the period subsequent to the option exercise, as well as the reduction in the value related to the portion of the Residuals owned by NLF, were recorded as an aggregate impairment of $2,382,000 for the year ended December 31, 2005. The Company merged certain of its wholly owned subsidiaries into Commercial Net Lease Realty, Inc. and elected to convert OAMI to a REIT. As a result, effective January 1, 2005, OAMI was taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. Upon making the REIT conversion, a portion of OAMI’s tax liability was eliminated and recorded as an adjustment to the net assets acquired at the time of the option exercise. The remaining tax liability will be reduced over the next ten years in proportion to the reduction of the basis of the respective mortgage residual assets. National Properties Corporation—On June 16, 2005, the Company acquired 100 percent of National Properties Corporation (“NAPE”), a publicly traded company, which owned 43 freestanding properties located in 12 states. Results of NAPE operations have been included in the consolidated financial statements since the date of acquisition. NAPE shareholders received 1,636,532 newly issued shares of the Company’s common stock. According to SFAS No. 141, “Business Combinations,” under the purchase method of accounting, the acquisition price of $32,199,000 was allocated to the assets acquired and liabilities assumed at their fair values. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the acquisition (dollars in thousands): Real estate, Investment Portfolio: Accounted for using the operating method . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,542 1,276 6,757 Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $66,575 Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28,200 6,176 Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,376 Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,199 The Company’s net earnings for the year ended December 31, 2005, includes NAPE’s net earnings as of the date of acquisition, which were $1,867,000. 31 Results of Operations Critical Accounting Policies and Estimates. In response to SEC Release Numbers 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” and 33-8056, “Commission Statement About Analysis of Financial Condition and Results of Operations,” the Company’s management has identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments on assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments. A summary of the Company’s accounting policies and procedures are included in Note 1 of the Company’s consolidated financial statements. Management believes the following critical accounting policies among others affect its more significant judgment of estimates used in the preparation of the Company’s consolidated financial statements. Real Estate 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 financing method. Such methods are described below: Operating method—Leases accounted for using the operating method are recorded at the cost of the real estate. Revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives (generally 35 to 40 years). Leasehold interests are amortized on the straight-line method over the terms of their respective leases. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the aggregate difference between the scheduled rents, which vary during the lease term, and the income recognized on a straight-line basis. Direct financing method—Leases accounted for using the direct financing method are recorded at their net investment (which at the inception of the lease generally represents the cost of the property). Unearned income is deferred and amortized into income over the lease terms so as to produce a constant periodic rate of return on the Company’s net investment in the leases. 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 flows (undiscounted and without interest charges), including the residual value of the real estate, with the carrying cost of the individual asset. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Intangible Assets and Liabilities. 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 qualified appraiser. 32 In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above- market and below-market in-place lease values are recorded as other assets or liabilities based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values 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 fixed rate renewal periods in the respective leases. The Company’s leases do not currently include fixed-rate renewal periods. The aggregate value of other acquired intangible assets, consisting of in-place leases, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as-if-vacant, determined as set forth above. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off. Inventory Real Estate. The NNN TRS acquires, develops and owns properties that it intends to sell. The properties that are classified 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 the NNN TRS. The NNN TRS records the acquisition of the real estate at cost, including the acquisition and closing costs. The cost of the real estate developed by the NNN TRS 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. Real estate held for sale is not depreciated. In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the NNN TRS classifies 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 reflected in earnings. Income Taxes. The Company, including OAMI, 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, provided that it distributes 100 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, 2005, the Company believes it has qualified as a REIT. Notwithstanding the Company’s qualification for taxation as a REIT, the Company is subject to certain state taxes on its income and real estate. The Company and its taxable REIT subsidiaries have made timely TRS election. A TRS is able to engage in activities resulting in income that previously would have been disqualified from being eligible REIT income under the federal income tax regulations. As a result, certain activities of the Company which occur within its TRS entities are therefore subject to federal and state income taxes. All provisions for federal income taxes in the accompanying consolidated financial statements are attributable to the Company’s taxable REIT subsidiaries and to OAMI’s built-in-gain tax liability. 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 differences based on estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 33 Use of Estimates. Additional critical accounting policies of the Company include management’s estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Additional critical accounting policies include management’s estimates of the useful lives used in calculating depreciation expense relating to the Company’s real estate assets, the recoverability of the carrying value of long-lived assets, the collectibility of receivables from tenants, including accrued rental income, and capitalized overhead relating to development projects. Actual results could differ from those estimates. Property Analysis Property Analysis—Investment Portfolio General. As of December 31, 2005, the Company owned 524 Investment Properties that are leased to established tenants, including Academy, Barnes & Noble, Best Buy, Borders, Susser (Circle K), CVS, Eckerd, OfficeMax, The Sports Authority and the United States of America. Approximately 98 percent of the gross leasable area of the Company’s Investment Portfolio was leased at December 31, 2005. The following table summarizes the Company’s portfolio of Investment Properties as of December 31: 2005 2004 2003 Investment Properties Owned: Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total gross leasable area (square feet) . . . . . . . . . . . . . . . . . . . . . . . 524 9,227,000 362 8,542,000 348 7,907,000 Investment Properties Leased: Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total gross leasable area (square feet) . . . . . . . . . . . . . . . . . . . . . . . Percent of total gross leasable area . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average remaining lease term (years) . . . . . . . . . . . . . . . 512 9,066,000 351 8,322,000 337 7,669,000 98% 11 97% 10 97% 11 The Company regularly evaluates its (i) portfolio of Investment Properties, (ii) financial 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 offerings 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: 2005 2004 2003 Acquisitions: Number of Investment Properties . . . . . . . . . . . . . . . . . . . . Gross leasable area (square feet) . . . . . . . . . . . . . . . . . . . . . 170 1,150,000 36 825,000 23 1,439,000 Total dollars invested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $332,461,000 $139,303,0000 $212,317,000 Property acquisitions for 2005 include (i) the 43 properties with an aggregate gross leasable area of 399,000 square feet acquired as a result of the NAPE merger in June 2005 and (ii) the 53 properties with an aggregate gross leasable area of 222,000 square feet acquired from SSP Partners, a subsidiary of Susser Holdings, LLC, in December 2005. In August 2003, the Company acquired the DC Office Properties. Pursuant to the lease agreement, the Company paid $27,322,000 for building and tenant improvements. The properties include two office buildings containing an aggregate of 555,000 rentable square feet and a two-level garage with approximately 1,000 parking spaces. 34 Property Dispositions. The Company typically uses the proceeds from property sales to either pay down the outstanding indebtedness of the Company’s Credit Facility or reinvest in real estate. The following table summarizes the Investment Properties sold by the Company for each of the years ended December 31: Number of properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross leasable area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net sales proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 476,000 $40,377,000 $ 9,816,000 20 155,000 $32,544,000 $ 2,523,000 14 345,000 $25,023,000 287,000 $ 2005 2004 2003 During 2005, the Company used the proceeds from the dispositions to pay down the outstanding indebtedness of the Company’s Credit Facility and to reinvest in real estate. During 2004 and 2003, the Company used the proceeds from the dispositions to pay down the outstanding indebtedness of the Company’s Credit Facility. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has classified its Investment Properties sold during the years ended December 31, 2005, 2004 and 2003, as discontinued operations. In addition, the Company has classified 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 effective date of SFAS No. 144, have been reclassified to discontinued operations. Property Analysis—Inventory Portfolio General. The Company’s inventory real estate assets are operated through the NNN TRS. The NNN TRS, directly and indirectly, through investment interests, owns 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 different investment objectives. The following summarizes the number of properties held for sale in the Company’s Inventory Portfolio as of December 31: Development Portfolio: Completed Inventory Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties under construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land parcels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exchange Portfolio: Completed Inventory Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Inventory Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004 2003 1 12 4 17 46 63 4 7 4 4 5 4 15 13 6 21 2 15 Property Acquisitions. Inventory Property acquisitions are typically funded using funds from the Company’s credit facility and proceeds from debt or equity offerings. The following table summarizes the Inventory Property acquisitions for each of the years ended December 31: Acquisitions: 2005 2004 2003 Number of properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dollars invested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 $ 66,527,000 33 $48,318,000 23 $38,836,000 Completed construction: Number of properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dollars invested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 $ 10,714,000 8 $26,366,000 8 $23,169,000 Total dollars invested in real estate held for sale . . . . . . . . . . . . . . . $134,373,000 $76,647,000 $63,469,000 35 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): Development . . . . . . . . . . . . . . . . . . . . . . . . Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . Intercompany eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest 12 16 — — 28 2005 2004 2003 # of Properties Gain # of Properties Gain # of Properties 16 8 $18,065 2,641 921 — (5,999) — $20,673 1,912 817 11 18 — (6,422) — Gain $ 8,322 2,816 1,037 (986) $15,628 24 $16,980 29 $11,189 During the years ended December 31, 2005, 2004 and 2003, the Company used the proceeds from the sale of the inventory properties to pay down the outstanding indebtedness of the Company’s Credit Facility. Business Combinations. Captec Net Lease Realty, Inc.—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, beneficial owners of shares of Captec stock held of record by Cede & Co. who alleged that they did not vote for the merger (and who alleged that they caused a written demand for appraisal of their Captec shares to be served on Captec), filed in the Chancery Court of the State of Delaware in and for New Castle County a Petition for Appraisal of Stock (“Appraisal Action”). The Appraisal Action alleged that 1,037,946 shares of Captec dissented from the merger and sought to require the Company to pay to all Captec stockholders who demanded appraisal of their shares the fair value of those shares, with interest from the date of the merger. As a result of this action, the plaintiffs were not entitled to receive the Company’s common and Series A Preferred Stock shares as offered in the original merger consideration. Accordingly, the Company reduced the number of common and Series A Preferred Stock shares issued and outstanding by 474,911 and 218,385, respectively, which represents the number of shares that would have been issued to the plaintiffs had they accepted the original merger consideration. 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 beneficial 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 filed a stipulation and order of dismissal and the Court entered the order of dismissal, dismissing the Appraisal Action with prejudice. Orange Avenue Mortgage Investments, Inc.—On May 2, 2005, the Company exercised its option to acquire 78.9 percent of the common shares of OAMI for $9,379,000. OAMI sold its loan origination, securitization and servicing operations and the majority of its assets and liabilities to a third party, resulting in OAMI becoming a passive owner in a pool of seven commercial real estate loan securitization residual interests. The loans in each 36 of the securitizations are secured by first mortgages on commercial real estate and generally borrower personal guarantees. As a result of the option exercise, the Company has consolidated OAMI in its consolidated financial statements. According to SFAS No. 141, “Business Combinations,” under the purchase method of accounting, the Company recorded the assets and liabilities of OAMI at fair value. The Company recognized an extraordinary gain of $14,786,000, equal to the excess fair value over the option price, as all assets acquired were financial assets and current assets. Based upon independent appraisals and management’s evaluation, the following table summarizes the estimated fair values of the assets and liabilities of OAMI on May 2, 2005 (dollars in thousands): Mortgage residual interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,327 3,272 10,285 17,427 6,794 Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $106,105 Notes payable—secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,000 1,028 14,787 47,815 27,315 Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,975 The following table summarizes the extraordinary gain recognized by the Company (dollars in thousands) during the year ended December 31, 2005: Company’s share of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less option price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basis of option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,434 (9,379) (269) Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,786 The Company’s net earnings for the year ended December 31, 2005, includes 78.9 percent of OAMI’s net earnings since the date of the acquisition in the amount of $1,411,000. Between June 2001 and July 2003, a wholly owned subsidiary of the Company, Net Lease Funding, Inc. (“NLF”), entered into five limited liability company agreements with OAMI to create five limited liability companies (collectively, the “LLCs”). Kevin B. Habicht, an officer and director of the Company is an officer, director and indirect shareholder of OAMI. Craig Macnab, an officer and director of the Company and Julian E. Whitehurst, an officer of the Company, are each an officer and director of OAMI. Each of the LLCs holds an interest in mortgage loans and is 100 percent equity financed. Prior to the acquisition of the 78.9 percent equity interest in OAMI, the Company held a non-voting and non-controlling interest in each of the LLCs ranging between 36.7 and 44.0 percent and accounted for its investment under the equity method of accounting. As a result of the Company’s acquisition of 78.9 percent equity interest in OAMI, the Company’s interest in the LLCs is no longer accounted for as an equity investment and is now included as part of OAMI in the Company’s consolidated financial statements. In addition, certain officers and directors of the Company own preferred shares of OAMI. Prior to the acquisition of 78.9 percent equity interest in OAMI, the Company received $2,749,000 in distributions from the LLCs. During the year ended December 31, 2004, the company received $10,562,000 in 37 distributions from the LLCs. For the years ended December 31, 2005 and 2004, the Company recognized $1,467,000 and $5,042,000 of earnings, respectively, from the LLCs. 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 notes payable-secured (see “Capital Resources-Notes Payable-Secured”). As a result of the independent valuations of the mortgage residual interests (“Residuals”), the Company reduced the carrying value of the Residuals during the year ended December 31, 2005. The reduction in the Residuals’ value that related to the Residuals acquired at the time of the option exercise was recorded as a purchase price allocation adjustment. The reduction in the Residuals’ value acquired at the time of the option exercise that related to the period subsequent to the option exercise, as well as the reduction in the value related to the portion of the Residuals owned by NLF, were recorded as an aggregate impairment of $2,382,000 for the year ended December 31, 2005. The Company merged certain of its wholly owned subsidiaries into Commercial Net Lease Realty, Inc. and elected to convert OAMI to a REIT. As a result, effective January 1, 2005, OAMI was taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. Upon making the REIT conversion, a portion of OAMI’s tax liability was eliminated and recorded as an adjustment to the net assets acquired at the time of the option exercise. The remaining tax liability will be reduced over the next ten years in proportion to the reduction of the basis of the respective mortgage residual assets. National Properties Corporation—On June 16, 2005, the Company acquired 100 percent of National Properties Corporation (“NAPE”), a publicly traded company, which owned 43 freestanding properties located in 12 states. Results of NAPE operations have been included in the consolidated financial statements since the date of acquisition. NAPE shareholders received 1,636,532 newly issued shares of the Company’s common stock. According to SFAS No. 141, “Business Combinations,” under the purchase method of accounting, the acquisition price of $32,199,000 was allocated to the assets acquired and liabilities assumed at their fair values. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the acquisition (dollars in thousands): Real estate, Investment Portfolio: Accounted for using the operating method . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,542 1,276 6,757 Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $66,575 Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28,200 6,176 Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,376 Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,199 The Company’s net earnings for the year ended December 31, 2005, includes NAPE’s net earnings since the date of acquisition in the amount of $1,867,000. Revenue From Operations Analysis General. During the year ended December 31, 2005, the Company’s rental income increased primarily due to the acquisition of Investment Properties (See “Results of Operations—Property Analysis—Investment Portfolio—Property Acquisitions”) and an increase in occupancy rate to 98 percent as of December 31, 2005. The Company anticipates any significant increase in rental income will continue to come primarily from additional property acquisitions. 38 During the year ended December 31, 2005, the Company capitalized certain overhead costs included in general and administrative, real estate and interest expenses and deferred certain rental income related to the construction of tenant improvements on one of the Company’s Investment Properties related to prior periods. The net effect of the deferred revenue and the expense capitalization (collectively, the “TI Completion”) did not have a material impact on the Company’s consolidated financial statements for the year ended December 31, 2005. The following summarizes the Company’s revenues (dollars in thousands): Rental income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate expense reimbursement from 2005 2004 2003 Percent of Total Percent of Total Percent of Total $123,252 84.9% $109,036 85.7% $ 90,030 89.5% tenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,350 4.4% 5,756 4.5% 4,975 4.9% Gain on disposition of real estate, Inventory Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,010 1.4% 4,700 3.7% 3,247 3.2% Interest and other income from real estate transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income on mortgage residual interests . . . 6,216 7,349 4.3% 5.0% 7,698 — 6.1% — 2,366 — 2.4% — Total revenues from continuing operations . . . . . . $145,177 100.0% $127,190 100.0% $100,618 100.0% (1) Includes rental income from operating leases, earned income from direct financing leases and contingent rental income from continuing operations (“Rental Income”). Revenue From Operations Analysis by Source of Income. The Company has identified two primary business segments, and thus, sources of revenue: (i) earnings from the Company’s Investment Assets and (ii) earnings from the Company’s Inventory Assets. 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 financial information is available that is evaluated regularly by the chief 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): Investment Assets . . . . . . . . . . . . . . . . . . . . . . . . . Inventory Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $142,047 3,130 97.8% $122,257 4,933 2.2% 96.1% $ 96,764 3,854 3.9% 96.2% 3.8% Total revenue from continuing operations . . . . . . . $145,177 100.0% $127,190 100.0% $100,618 100.0% 2005 2004 2003 Percent of Total Percent of Total Percent of Total The Company evaluates its ability to pay dividends to stockholders by considering the combined effect of income from continuing and discontinued operations. Comparison of Year Ended December 31, 2005 to Year Ended December 31, 2004. Rental Income increased 13.0 percent for the year ended December 31, 2005, as compared to the year ended December 31, 2004, primarily due to the addition of an aggregate gross leasable area of 1,150,000 square feet to the Company’s Investment Portfolio resulting from the acquisition of 170 Investment Properties during the year ended December 31, 2005. However, this increase is partially offset by the TI Completion. Real estate expense reimbursements from tenants increased 10.3 percent for the year ended December 31, 2005, as compared to the year ended December 31, 2004, primarily due to a full year of reimbursements during 2005 from certain tenants acquired during 2004. 39 The gain on disposition of real estate Inventory Portfolio included in continuing operations, decreased 57.2 percent for the year ended December 31, 2005, as compared to the year ended December 31, 2004, primarily due to the varying gross margin on sales of Inventory Properties. The following table summarizes the property dispositions included in continuing operations for the year ended December 31: Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest Total continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . 2005 # of Properties — 6 6 Gain 2,010 — 2,010 2004 # of Properties — 7 7 Gain 4,700 (1,717) 2,983 Interest and other income from real estate transactions decreased 19.3 percent for the year ended December 31, 2005 as compared to the year ended December 31, 2004, primarily due to a decrease in interest earned on the structured finance investments for the year ended December 31, 2005. The weighted average outstanding principal balance of the structured finance investments during the year ended December 31, 2005 and 2004, was $27,298,000 and $44,424,000, respectively. However, the decrease was partially offset by the $886,000 and $175,000 of fee income received during the year ended December 31, 2005 and 2004, respectively, in connection with the disposition and development services the Company provided to an affiliate of James M. Seneff, Jr. and Robert A. Bourne, each a former member of the Company’s board of directors. During the year ended December 31, 2005, the Company recorded $7,349,000 in interest income from mortgage residual interests resulting from the acquisition of 78.9 percent of OAMI in May 2005 (see “Business Combinations”). Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003. Rental Income increased 21.1 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 leasable 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 leasable area of 1,453,000 during the year ended December 31, 2003. Real estate expense reimbursements from tenants increased 15.7 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—Property Analysis—Investment Portfolio—Property Acquisitions.” 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 number of properties sold and the varying gross margin on sales of inventory properties. The following table summarizes the property dispositions included in continuing operations for the year ended December 31: Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest Total continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . — 7 7 2004 # of Properties 2003 # of Properties — 3 3 Gain 3,247 — 3,247 Gain 4,700 (1,717) 2,983 Interest and other income from real estate transactions increased 225.4 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 finance investments entered into since October 2003. 40 Expense Analysis General. During 2005 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): 2005 2004 2003 Percent of Total Percent of Total Percent of Total General and administrative . . . . . . . . . . . . . . . . . . . . . Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . Impairment—real estate . . . . . . . . . . . . . . . . . . . . . . . . Impairment—mortgage residual interests . . . . . . . . . . Dissenting shareholders’ settlement . . . . . . . . . . . . . . Transition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,411 11,534 22,276 1,673 2,382 — — 38.2% $22,995 18.8% 11,870 36.4% 16,682 — — — 3,741 2.7% 3.9% — — 41.6% $21,680 21.5% 7,161 30.2% 12,968 — — — — 2,413 — — 6.7% 49.0% 16.2% 29.3% — — 5.5% — Total operating expenses from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $61,276 100.0% $55,288 100.0% $44,222 100.0% Comparison of Year End December 31, 2005 to Year Ended December 31, 2004. In general, operating expenses increased 10.8 percent for the year ended December 31, 2005, over the year ended December 31, 2004, but decreased as a percentage of total revenues by 1.3 percent to 42.2 percent. General and administrative expenses increased 1.8 percent for the year ended December 31, 2005, but decreased as a percentage of total revenues by 2.0 percent to 16.1 percent. General and administrative expenses increased for the year ended December 31, 2005, primarily as a result of (i) an increase in professional services provided to the Company, and (ii) increases in expenses related to personnel. The increase in general and administrative expenses was partially offset by the TI Completion. Real estate expenses decreased 2.8 percent for the year ended December 31, 2005, and decreased as a percentage of total revenues by 1.4 percent to 7.9 percent. Real estate expenses for the year ended December 31, 2005, decreased primarily due to the (i) a decrease in tenant reimbursable real estate expenses, (ii) a decrease in property expenses related to vacant properties due to an increased Investment Property occupancy rate from 97 percent as of December 31, 2004 to 98 percent as of December 31, 2005, and (iii) the TI Completion. Depreciation and amortization expense increased 33.5 percent for the year ended December 31, 2005, and increased 2.2 percent to 15.3 percent of total revenues for the year ended December 31, 2005. The increase in depreciation and amortization expense for the year ended December 31, 2005, is primarily attributable to (i) the depreciation on the 170 Investment Properties with an aggregate gross leasable area of 1,150,000 square feet acquired during the year ended December 31, 2005, (ii) a full year of depreciation on the 36 Investment Properties with an aggregate gross leasable area of 825,000 square feet acquired during the year ended December 31, 2004, and (iii) the TI Completion. 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. Events or circumstances that may occur include changes in real estate market conditions, the ability of the Company to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, the Company calculates a possible impairment by comparing the future cash flows and the current net book value. Impairments are measured as the amount by which the current book value of the asset exceeds the fair value of the asset. After such review, the Company recognized a $1,673,000 impairment on its Investment Portfolio during the year ended December 31, 2005. 41 As a result of the independent valuations of Residuals, the Company reduced the carrying value of the Residuals during the year ended December 31, 2005. The reduction in the Residuals’ value that related to the Residuals acquired at the time of the option exercise was recorded as a purchase price allocation adjustment. The reduction in of the Residuals’ value acquired at the time of the option exercise that related to the period subsequent to the option exercise, as well as the reduction in value related to the portion of the Residuals previously owned by NLF, were recorded as an aggregate impairment of $2,382,000 for the year ended December 31, 2005 (see “Business Combinations”). 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 Officer in February 2004, and the resignation of Gary M. Ralston as President and Chief Operating Officer in May 2004. Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003. In general, operating expenses increased 25.0 percent for the year ended December 31, 2004, over the year ended December 31, 2003, but decreased as a percentage of total revenues by 0.5 percent to 43.4 percent. General and administrative expenses increased 6.1 percent for the year ended December 31, 2004, but decreased as a percentage of total revenues by 3.4 percent to 18.1 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 offset by a decrease in state taxes paid by the Company. Real estate expenses increased 65.8 percent for the year ended December 31, 2004, and increased as a percentage of total revenues by 2.2 percent to 9.3 percent. Real estate expenses for the year ended December 31, 2004, increased primarily due to the August 2003 acquisition of the DC Office Properties. The DC Office 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 Office Properties were 61.1 and 53.8 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 28.6 percent for the year ended December 31, 2004, and increased 0.2 percent to 13.1 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 with an aggregate gross leasable area of 825,000 square feet and the tenant improvements on four Investment Properties during the year ended December 31, 2004, and (ii) the amortization of additional lease costs. The increase is partially offset by a decrease in the amortization of debt costs and the decrease in depreciation resulting from the disposition of 20 and 14 Investment Properties during each of the years ended December 31, 2004 and 2003, respectively. 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 “Business Combinations”). 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 Officer in February 2004, and the resignation of Gary M. Ralston as President and Chief Operating Officer in May 2004. 42 Analysis of Other Expenses and Revenues General. During the year ended December 31, 2005, the combined interest and other income and interest expense increased with the acquisition of additional properties but remained generally proportionate to the Company’s total revenue and expenses. The following summarizes the Company’s other expenses (revenues) from continuing operations (dollars in thousands): 2005 2004 2003 Percent of Total Percent of Total Percent of Total Interest and other income . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,054) 35,941 (6.1)% $ (3,761) 106.1% 32,381 (13.1)% $ (3,346) 113.1% 26,628 (14.4)% 114.4% Total other expenses (revenues) from continuing operations . . . . . . . . . . . . . . . . . . $33,887 100.0% $28,620 100.0% $23,282 100.0% Comparison of Year Ended December 31, 2005 to Year Ended December 31 2004. In general, other expenses (revenues) increased 18.4 percent for the year ended December 31, 2005, over the year ended December 31, 2004. However, other expenses (revenues) remained relatively proportionate to total revenues (23.3 and 22.5 percent of total revenues for the years ended December 31, 2005 and 2004, respectively). Interest expense increased 11.0 percent for the year ended December 31, 2004, but decreased as a percentage of total revenues by 0.7 percent to 24.8 percent for the year ended December 31, 2005. The increase in interest expense for the year ended December 31, 2005, was primarily due to (i) an increase to $512,539,000 in the average long-term fixed rate debt outstanding during the year ended December 31, 2005, (ii) the $26,041,000 financing lease obligation entered into in July 2004, (iii) the $32,000,000 secured notes payable assumed in May 2005 in connection with the 78.9 percent equity interest in OAMI (see “Business Combinations”), and (iv) the $150,000,000 of notes payable issued in November 2005 with an effective interest rate of 6.185% due in December 2015. In addition, the average variable rate debt outstanding increased to $14,994,000 during the year ended December 31, 2005 and the weighted average interest rate was approximately 195 basis points higher during the year ended December 31, 2005 compared to the year ended December 31, 2004. The increase in interest expense was partially offset by (i) the TI Completion, and (ii) the Company’s refinancing of $100,000,000 of notes payable with an effective interest rate of 7.547% in June 2004 with a new issuance of notes payable with an effective interest rate of 5.910%. Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003. In general, other expenses (revenues) increased 22.9 percent for the year ended December 31, 2004, over the year ended December 31, 2003, but decreased as a percentage of total revenues by 0.6 percent to 22.5 percent. Interest expense increased 21.6 percent for the year ended December 31, 2004, but remained relatively proportionate to total revenues, 25.5 percent and 26.5 percent for the years ended December 31, 2004 and 2003, respectively. The increase in interest expense for the year ended December 31, 2004, was primarily attributable to an increase in the long-term fixed rate average debt outstanding to $457,551,000 as of December 31, 2004, including the addition of the $95,000,000 fixed rate mortgage loan entered into in November 2003. However, the increase in interest expense was partially offset by a lower average debt outstanding of $58,120,000 as of December 31, 2004 on the Company’s short-term variable interest rate debt. Unconsolidated Affiliates For details on each of the Company’s unconsolidated affiliates, see “Capital Resources—Investments in Unconsolidated Affiliates.” During the years ended December 31, 2005, 2004 and 2003, the Company recognized equity in earnings of unconsolidated affiliates of $1,209,000, $4,724,000 and $4,341,000, respectively. The increase in equity in 43 earnings of unconsolidated affiliates for the year ended December 31, 2004 compared to the year ended December 31, 2003, was primarily attributable to the income earned on investments in mortgage residual interests. The decrease in equity in earnings of unconsolidated affiliates for the year ended December 31, 2005, was primarily attributable to a decrease in the income earned on investments in mortgage residual interests as a result of the acquisition of 78.9 percent equity interest in OAMI in May 2005 (See “Business Combinations”). The Company’s interest in the LLCs is no longer accounted for as an equity investment and is now included as a part of OAMI in the Company’s consolidated financial statements. Earnings from Discontinued Operations The Company records discontinued operations by the Company’s identified segments: (i) Investment Assets and (ii) Inventory Assets. As a result, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company classified the revenues and expenses related to its Investment Properties that were sold and its leasehold interests that expired subsequent to December 31, 2001, as discontinued operations, as well as, the revenues and expenses related to any Investment Property that was held for sale at December 31, 2005. The Company also classified the revenues and expenses of its Inventory Properties that were sold which generated rental revenues as discontinued operations, as well as, the revenues and expenses related to its Inventory Properties held for sale which generated rental revenues as of December 31, 2005. The following table summarizes the earnings from discontinued operations for the years ended December 31 (dollars in thousands): Investment Portfolio . . . . Inventory Portfolio, net of . . . . . minority interest 2005 2004 2003 # of Sold Properties 12 22 34 Gain Earnings $ 9,816 $11,102 13,618 9,376 $23,434 $20,478 # of Sold Properties 20 17 37 Gain Earnings $ 2,523 $ 6,080 13,997 9,547 $16,520 $15,627 # of Sold Properties Gain Earnings 14 26 40 $ 287 $ 6,702 7,942 6,370 $8,229 $13,072 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 effect of income from continuing and discontinued operations. Extraordinary Gain During the year ended December 31, 2005, the Company recognized an extraordinary gain of $14,786,000, which resulted from the difference between the Company’s portion of the fair value of net assets acquired in the acquisition of 78.9 percent equity interest in OAMI and the purchase price (see “Business Combinations”). 44 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, fixed rate debt used to finance the Company’s development and acquisition activities and for general corporate purposes. The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows at both fixed and variable rates on its long-term debt. The Company entered into a forward starting interest rate swap in February 2004 and terminated the swap effective June 2004 for a swap gain of $4,148,000. The Company had no outstanding derivatives as of December 31, 2005 and 2004. The information in the table below summarizes the Company’s market risks associated with its debt obligations outstanding as of December 31, 2005 and 2004. The table presents principal cash flows and related interest rates by year for debt obligations outstanding as of December 31, 2005. 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, 2005, it does not consider those exposures or positions which could arise after this date. Moreover, because firm commitments are not presented in the table below, the information presented therein has limited predictive value. As a result, the Company’s ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the Company’s hedging strategies at that time and interest rates. Variable Rate Credit Facility & Term Note(1) Fixed Rate Mortgages Fixed Rate Notes(3)(4) Financing Lease Obligation(5) Debt Obligations (dollars in thousands) Debt Obligation 2006 . . . . . . . . . . . . . . . $ — — 2007 . . . . . . . . . . . . . . . — 2008 . . . . . . . . . . . . . . . 183,100 2009 . . . . . . . . . . . . . . . — 2010 . . . . . . . . . . . . . . . — Thereafter . . . . . . . . . . . Total . . . . . . . . . . . . . . . $183,100 Fair Value: December 31, 2005 . . . . $183,100 Weighted Average Interest Rate(2) — — — 4.81% — — Weighted Average Interest Rate Weighted Average Interest Rate Debt Obligation Debt Obligation 3,750 5.99% $ 5.93% 12,500 5.86% 112,000 — 5.84% 5.93% 20,000 5.74% 350,000 6.77% $ — — 6.75% — 6.52% — 6.43% 6.39% — 6.30% 26,041 $498,250 $26,041 Weighted Average Interest Rate 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Debt Obligation $ 20,241 8,413 1,190 1,000 1,022 119,267 $151,133 4.81% $151,133 6.18% $522,353 6.74% $26,041 5.00% December 31, 2004 . . . . $ 17,900 2.72% $157,168 6.27% $353,647 7.04% $26,041 5.00% (1) (2) (3) Includes $20,800 Term Note that was assumed in connection with the acquisition of NAPE in June 2005. The Credit Facility interest rate varies based upon a tiered rate structure ranging from 55 to 112.5 basis points above LIBOR based upon the debt rating of the Company. The Term Note interest rate varies based upon a tiered rate structure ranging from 85 to 165 basis points above LIBOR based upon the debt rating of the Company. Fixed rate notes include both the Company’s secured and unsecured notes payable. (4) Net of unamortized note discounts and unamortized interest rate hedge gain. (5) In July 2004, the Company sold five investment properties for $26,041 and subsequently leased back the properties under a 10-year financing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the financing lease. 45 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.: We have audited the accompanying consolidated balance sheets of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedules III and IV. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Effective January 1, 2004, the Commercial Net Lease Realty, Inc. implemented Financial Accounting Standards Board Interpretation No. 46, revised December 2003, Consolidation of Variable Interest Entities (FIN 46R) and has restated all prior period consolidated financial statements to reflect its adoption. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Commercial Net Lease Realty, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 17, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting. Orlando, Florida February 17, 2006 Certified Public Accountants 46 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Commercial Net Lease Realty, Inc.: We have audited management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting, that Commercial Net Lease Realty, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control – 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 effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness 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 financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial 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 effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness 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 effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control – 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, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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, 2005 and 2004, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005, and the related financial statement schedules III and IV and our report dated February 17, 2006 expressed an unqualified opinion on those consolidated financial statements and the related financial statement schedules III and IV. Orlando, Florida February 17, 2006 Certified Public Accountants 47 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) Real estate, Investment Portfolio: ASSETS Accounted for using the operating method, net of accumulated depreciation and December 31, 2005 December 31, 2004 amortization and impairment Accounted for using the direct financing method . . . . . . . . . . . . . . . . . . . . . . . . . . Held for sale, net of impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate, Inventory Portfolio, held for sale, net of accumulated depreciation . . . . . . . Mortgages, notes and accrued interest receivable, net of allowance of $676 and $896, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,296,793 95,704 1,600 131,074 respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in unconsolidated mortgage residual interests . . . . . . . . . . . . . . . . . . . . . . . Mortgage residual interests, net of impairment of $2,382 . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables, net of allowance of $847 and $924, respectively . . . . . . . . . . . . . . . . . . . . Accrued rental income, net of allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt costs, net of accumulated amortization of $9,567 and $8,063, respectively . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,086 — 55,184 8,234 30,191 8,547 27,999 6,096 20,908 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,733,416 LIABILITIES AND STOCKHOLDERS’ EQUITY Line of credit payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 162,300 151,133 Mortgages payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes payable—secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,250 Notes payable, net of unamortized discount of $1,133 and $847, respectively, and an unamortized interest rate hedge gain of $3,653 and $3,979, respectively . . . . . . . . . . Financing lease obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity: Preferred stock, $0.01 par value. Authorized 15,000,000 shares Series A, 1,781,589 shares issued and outstanding, stated liquidation value 493,321 26,041 5,539 20,058 13,748 900,390 4,939 $1,009,397 102,311 — 58,049 45,564 29,672 — 1,947 — 6,636 28,619 3,926 13,927 $1,300,048 $ 17,900 157,168 — 323,132 26,041 4,334 11,745 702 541,022 2,028 of $25 per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,540 44,540 Series B Convertible, 10,000 shares issued and outstanding, stated liquidation value of $2,500 per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock, $0.01 par value. Authorized 190,000,000 shares; 55,130,876 and 52,077,825 shares issued and outstanding December 31, 2005 and 2004, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess stock, $0.01 par value. Authorized 205,000,000 shares; none issued or outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated dividends in excess of net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 25,000 551 521 — 783,268 (20,489) (4,783) 828,087 $1,733,416 — 725,337 (35,188) (3,212) 756,998 $1,300,048 See accompanying notes to consolidated financial statements. 48 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands, except per share data) Revenues: Rental income from operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earned income from direct financing leases . . . . . . . . . . . . . . . . . . . . . . . Contingent rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate expense reimbursement from tenants . . . . . . . . . . . . . . . . . . . Gain on disposition of real estate, Inventory Portfolio . . . . . . . . . . . . . . . Interest and other income from real estate transactions . . . . . . . . . . . . . . . Interest income on mortgage residual interests . . . . . . . . . . . . . . . . . . . . . Operating expenses: General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment—real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment—mortgage residual interests . . . . . . . . . . . . . . . . . . . . . . . . . Dissenting shareholders’ settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses (revenues): Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings from continuing operations before income tax benefit, minority interest and equity in earnings of unconsolidated affiliates . . . . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in earnings of unconsolidated affiliates . . . . . . . . . . . . . . . . . . . . . . . . . Earnings from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings from discontinued operations: Real estate, Investment Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate, Inventory Portfolio, net of income tax expense and minority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . interest Earnings before extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series A preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series B convertible preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . Net earnings available to common stockholders—basic . . . . . . . . . . . . . . . . . . Series B convertible preferred stock dividends, if dilutive . . . . . . . . . . . . . . . . Net earnings available to common stockholders—diluted . . . . . . . . . . . . . . . . . Year Ended December 31, 2005 2004 2003 $112,384 10,388 480 6,350 2,010 6,216 7,349 145,177 $ 97,903 10,723 410 5,756 4,700 7,698 — 127,190 $ 79,109 10,531 390 4,975 3,247 2,366 — 100,618 23,411 11,534 22,276 1,673 2,382 — — 61,276 83,901 (2,054) 35,941 33,887 50,014 2,776 137 1,209 54,136 22,995 11,870 16,682 — — — 3,741 55,288 71,902 (3,761) 32,381 28,620 43,282 2,544 (1,243) 4,724 49,307 21,680 7,161 12,968 — — 2,413 — 44,222 56,396 (3,346) 26,628 23,282 33,114 2,958 (12) 4,341 40,401 11,102 6,080 6,702 9,376 20,478 74,614 14,786 89,400 (4,008) (1,675) 83,717 1,675 $ 85,392 9,547 15,627 64,934 — 64,934 (4,008) (1,675) 59,251 — $ 59,251 6,370 13,072 53,473 — 53,473 (4,008) (502) 48,963 502 $ 49,465 See accompanying notes to consolidated financial statements. 49 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS—CONTINUED (dollars in thousands, except per share data) Year Ended December 31, 2005 2004 2003 Net earnings per share of common stock: Basic: Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted: Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ 0.91 0.39 0.28 1.58 0.92 0.37 0.27 1.56 $ $ $ $ 0.85 0.30 — 1.15 0.85 0.30 — 1.15 $ $ $ $ 0.84 0.30 — 1.14 0.83 0.30 — 1.13 Weighted average number of common shares outstanding: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,984,821 51,312,434 43,108,213 Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,640,143 51,742,518 43,896,800 See accompanying notes to consolidated financial statements. 50 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Years Ended December 31, 2005, 2004 and 2003 (dollars in thousands, except per share data) Series A Preferred Stock Series B Convertible Preferred Stock Common Stock Capital in Excess of Par Value Accumulated Dividends in Excess of Net Earnings Deferred Compensation on Restricted Stock Accumulated Other Comprehensive Income Balances at December 31, 2002 . . . . . . . . . . . . . . . . . . . . $44,551 $ — $404 $528,888 $(21,657) $(3,045) — — — — — — — (1,141) 91 — 1,271 Total $549,141 53,473 (4,008) (502) (55,473) (21) 168,607 25,000 — — (6,734) 1,271 730,754 $— — — — — — — — — — — — — — — — — — — Net earnings . . . . . . . . . . . . . . . . Dividends declared and paid ($2.25 per share of Series A Preferred Stock) . . . . . . . . . . . Dividends declared and paid ($50.25 per share of Series B Convertible Preferred Stock) . . . . . . . . . . . . . . . . . . . Dividends declared and paid ($1.28 per share of common stock) . . . . . . . . . . . . . . . . . . . Reversal of 379 shares of preferred stock and 823 shares of common stock originally offered to the dissenting stockholders in connection with the merger in 2001 . . . . . Issuance of 9,528,653 shares of common stock . . . . . . . . . . . . Issuance of 10,000 shares of preferred stock . . . . . . . . . . . . Issuance of 76,407 shares of restricted common stock . . . . Cancellation of 5,950 shares of restricted common stock . . . . Stock issuance costs . . . . . . . . . . Amortization of deferred compensation . . . . . . . . . . . . . Balances at December 31, — — — — (10) — — — — — — — — — — — — — 53,473 (4,008) (502) — (55,473) — (11) 95 168,512 25,000 — — — — — — 1 1,140 — — — (91) (6,734) — — — — — — — — 2003 . . . . . . . . . . . . . . . . . . . . 44,541 25,000 500 691,704 (28,167) (2,824) See accompanying notes to consolidated financial statements. 51 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—CONTINUED Years Ended December 31, 2005, 2004 and 2003 (dollars in thousands, except per share data) Series A Preferred Stock Series B Convertible Preferred Stock Common Stock Capital in Excess of Par Value Accumulated Dividends in Excess of Net Earnings Deferred Compensation on Restricted Stock Accumulated Other Comprehensive Income Balances at December 31, 2003 . . . . . . . . . . . . . . . . 44,541 25,000 500 — — — 64,934 691,704 (28,167) (2,824) Net earnings . . . . . . . . . . . Dividends declared and paid ($2.25 per share of Series A Preferred Stock) . . . . . . . . . . . . . . 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) . . . . . . . Deferred changes in fair value of interest rate swap . . . . . . . . . . . . . . . . Reversal of 56 shares of preferred stock and 51 shares of common stock originally offered to the dissenting stockholders in connection with the merger in 2001 . . . . . . . Issuance of 886,962 shares of common stock . . . . . . Issuance of 953,551 shares of common stock in exchange for a partnership interest . . . . Issuance of 205,579 shares of restricted common stock . . . . . . . . . . . . . . . Cancellation of 29,926 shares of restricted common stock . . . . . . . . Stock issuance costs . . . . . Amortization of deferred compensation . . . . . . . . . Termination and reclass of interest rate swap . . . . . . Balances at December 31, — — — — — (1) — — — — — — — — — — (4,008) — — — — — — — — — — — — — (1,675) 1 1,056 (66,272) — — — — — 9 9 2 — — — — 12,129 17,440 3,487 (473) (6) — — — — — — — — — — Total 730,754 64,934 — — — (4,008) — — (1,675) (65,215) (4,148) (4,148) — — — — — — — 4,148 (1) 12,138 17,449 — — (6) 2,628 4,148 — — — — — — — — (3,489) 473 — 2,628 — 2004 . . . . . . . . . . . . . . . . 44,540 25,000 521 725,337 (35,188) (3,212) — 756,998 See accompanying notes to consolidated financial statements. 52 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—CONTINUED Years Ended December 31, 2005, 2004 and 2003 (dollars in thousands, except per share data) Series A Preferred Stock Series B Convertible Preferred Stock Common Stock Capital in Excess of Par Value Accumulated Dividends in Excess of Net Earnings Deferred Compensation on Restricted Stock Accumulated Other Comprehensive Income — — — — — — — — — — — — — Balances at December 31, 2004 . . . . . . . . . . . . . . . . . . . . . 44,540 25,000 Net earnings . . . . . . . . . . . . . . . . . Dividends declared and paid ($2.25 per share of Series A Preferred Stock) . . . . . . . . . . . . Dividends declared and paid ($167.50 per share of Series B Convertible Preferred Stock) . . . . . . . . . . . . . . . . . . . . Dividends declared and paid ($1.30 per share of common stock) . . . . . . . . . . . . . . . . . . . . Issuance of 1,636,532 shares of common stock in connection with the business combination . . . . . . . . . . . . . . . Issuance of 180,580 shares of common stock . . . . . . . . . . . . . Issuance of 912,334 shares of common stock under discounted stock purchase program . . . . . . . . . . . . . . . . . . Issuance of 216,168 shares of restricted common stock . . . . . Cancellation of 30,135 shares of restricted common stock . . . . . Stock issuance costs . . . . . . . . . . . Amortization of deferred compensation . . . . . . . . . . . . . . Balances at December 31, — — — — — — — — — — — — — — — — — — — — — — 725,337 (35,188) (3,212) 521 — — — — — 89,400 (4,008) — (1,675) 1 2,684 (69,018) 16 31,143 2 9 2 — — — 2,649 18,063 3,861 (461) (8) — — — — — — — — — — — — — — — (3,863) 461 — 1,831 2005 . . . . . . . . . . . . . . . . . . . . . 44,540 25,000 551 783,268 (20,489) (4,783) See accompanying notes to consolidated financial statements. 53 Total 756,998 89,400 (4,008) (1,675) (66,333) 31,159 2,651 18,072 — — (8) 1,831 828,087 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Cash flows from operating activities: Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net earnings to net cash provided by operating activities: Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment—real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment—mortgage residual interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of notes payable discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of deferred interest rate hedge gains . . . . . . . . . . . . . . . . . . . . . . Equity in earnings of unconsolidated affiliates, net of deferred intercompany profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distributions received from unconsolidated affiliates . . . . . . . . . . . . . . . . . . . Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on disposition of real estate, Investment Portfolio . . . . . . . . . . . . . . . . . . Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations: Additions to real estate, Inventory Portfolio . . . . . . . . . . . . . . . . . . . . . . . Proceeds from disposition of real estate, Inventory Portfolio . . . . . . . . . . Gain on disposition of real estate, Inventory Portfolio . . . . . . . . . . . . . . . Decrease in real estate leased to others using the direct financing method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in mortgages, notes and accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease (increase) in receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease in mortgage residual interests . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in accrued rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . Cash flows from investing activities: Proceeds from the disposition of real estate, Investment Portfolio . . . . . . . . . . . . . . Additions to real estate, Investment Portfolio: Accounted for using the operating method . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounted for using the direct financing method . . . . . . . . . . . . . . . . . . . . . . . Investment in unconsolidated affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in mortgages and notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage and notes payments received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in mortgages and other receivables from unconsolidated affiliates . . . . . . Payments received on mortgages and other receivables from unconsolidated affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business combination, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition of 1.3 percent interest in Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consideration due to the dissenting shareholders in connection with the merger of Captec Net Lease Realty, Inc. (“Captec”) in December 2001 . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2005 2004 2003 $ 89,400 $ 64,934 $ 53,473 1,971 22,350 3,729 2,382 105 (326) (1,209) 3,293 (5,854) (9,816) (14,786) (2,938) — 978 17,398 — — 123 (457) (5,064) 11,008 1,828 (2,523) — 3,236 1,929 1,905 13,799 — — 146 (596) (4,674) 5,684 341 (287) — 941 — (137,286) 79,065 (21,627) (74,024) 87,321 (23,402) (58,612) 72,262 (12,175) 2,915 (4,355) 6,465 7,730 11,704 593 877 913 (4,365) 30,930 2,770 (2,093) 6,243 (1,642) — (3,438) (1,456) 485 1,646 85,800 2,368 (2,679) (9,798) (2,614) — (6,548) (1,682) 246 2,715 54,215 38,982 32,639 25,024 (267,488) (309) — (17,738) 16,846 — — 2,183 (12,764) (829) (1,253) — (117) (242,487) (134,565) — (4) (6,857) 23,301 (115,600) 132,200 1,068 — — (1,491) — (654) (69,963) (215,730) — (9,362) (48,328) 1,785 (119,700) 125,900 — — — (3,127) (13,278) (54) (256,870) See accompanying notes to consolidated financial statements. 54 COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED (dollars in thousands) Cash flows from financing activities: Proceeds from line of credit payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of line of credit payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from mortgages payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of mortgages payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from financing lease obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from forward starting interest rate swap . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of debt costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from issuance of Series B Convertible Preferred Stock . . . . . . . . . . . . . . Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of Series A Preferred Stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of Series B Convertible Preferred Stock dividends . . . . . . . . . . . . . . . . . . Payment of common stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) financing activities . . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2005 2004 2003 373,500 (229,100) — (6,644) — 149,610 — (11,150) (3,073) — 23,268 (4,008) (1,675) (69,018) (3,858) (8) — 350,900 (360,800) 406 (9,163) 26,041 149,560 4,148 (120,000) (1,450) — 13,230 (4,008) (1,675) (66,272) (140) (2) 352,800 (363,900) 95,000 (2,944) — — — — (1,900) 25,000 168,579 (4,010) (502) (55,472) (6,686) — 217,844 6,287 1,947 8,234 $ (19,225) (3,388) 5,335 1,947 $ 205,965 3,310 2,025 5,335 $ Supplemental disclosure of cash flow information—interest paid, net of amount capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,684 $ 33,855 $ 28,948 Supplemental disclosure of non-cash investing and financing activities: Issued 223,468, 205,579 and 76,407 shares of restricted and unrestricted common stock in 2005, 2004 and 2003, respectively, pursuant to the Company’s 2000 Performance Incentive Plan, including grants in connection with transition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common and preferred stock dividends for non-dissenting, unexchanged shares held by the Company in connection with the merger of Captec . . . . . . . . . . . . . . Cash consideration for non-dissenting, unexchanged shares held by the Company in connection with the merger of Captec . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in lease classification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note and mortgage notes accepted in connection with real estate transactions . . . . Acquisition of real estate held for investment and assumption of related mortgage payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issued 953,551 shares of common stock in exchange for a partnership interest . . . Disposition of real estate held for sale and transfer of related mortgage payable . . $ $ $ $ $ $ $ $ $ Issued 1,636,532 shares of common stock in connection with the acquisition of National Properties Corporation (“NAPE”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,159 Surrender of 30,135 shares of restricted common stock . . . . . . . . . . . . . . . . . . . . . . $ 461 See accompanying notes to consolidated financial statements. 55 4,003 $ 3,016 $ 1,050 — $ — $ — $ — $ (1) (2) 1,254 2,158 2,415 $ $ $ — $ — $ — — — $ 17,123 — $ 7,357 — $ 17,449 406 2,251 $ $ $ $ $ $ — $ — $ — — — — — COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONSOLIDATED QUARTERLY FINANCIAL DATA (unaudited) (dollars in thousands, except for per share data) 2005 First Quarter Second Quarter Third Quarter Fourth Quarter Revenues as originally reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassified to discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . $33,081 (164) $36,378 (90) $34,994 (58) $41,036 — Adjusted revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,917 36,288 34,936 41,036 Net earnings before extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,004 — 16,888 11,805 16,530 — 15,192 2,981 Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net earnings per share(1): 26,004 28,693 16,530 18,173 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.47 0.47 0.52 0.51 0.28 0.28 0.31 0.31 2004 First Quarter Second Quarter Third Quarter Fourth Quarter Revenues as originally reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassified to discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . $35,891 (6,255) $33,260 (824) $33,439 (742) $33,095 (674) Adjusted revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,636 32,436 32,697 32,421 Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net earnings per share(1): 16,268 12,735 17,005 18,926 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.29 0.29 0.22 0.22 0.30 0.30 0.34 0.34 (1) Calculated independently for each period and consequently, the sum of the quarters may differ from the annual amount. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2005, 2004 and 2003 1. Organization and Summary of Significant Accounting Policies: Organization and Nature of Business—Commercial Net Lease Realty, Inc., a Maryland corporation, is a fully integrated real estate investment trust (“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 qualified REIT subsidiaries of Commercial Net Lease Realty, Inc., as well as the taxable REIT subsidiaries and their majority owned and controlled subsidiaries (collectively, “NNN TRS”). Prior to January 1, 2005, the Company held a 98.7 percent, non-controlling and non-voting interest in Commercial Net Lease Realty Services, Inc. and its majority owned and controlled subsidiaries (“Services”). Kevin B. Habicht, an officer and director of the Company, James M. Seneff, Jr. and Gary M. Ralston, each a former officer and director of the Company, (collectively the “Services Investors”) owned the remaining 1.3 percent interest, which was 100 percent of the voting interest in Services. Effective January 1, 2005, the Company acquired the remaining 1.3 percent interest in Services increasing the Company’s ownership in Services to 100 percent. Effective November 1, 2005, Commercial Net Lease Realty Services, Inc. merged into Commercial Net Lease Realty, Inc. CNLRS Exchange I, Inc., a taxable REIT subsidiary (“TRS”), became the TRS holding company for the Company’s development and exchange activities. The Company’s operations are divided into two primary business segments: (i) investment assets, including real estate assets, structured finance investments and mortgage residual interests (“Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). The real estate investment assets and structured finance investments (included in mortgages and notes receivable on the balance sheet), are operated through Commercial Net Lease Realty, Inc. and its wholly owned qualified REIT subsidiaries. The Company, directly and indirectly, through investment interests, acquires, owns, invests in, manages and develops primarily retail properties that are generally leased to established tenants under long-term commercial net leases (the “Investment Properties” or “Investment Portfolio”). As of December 31, 2005, the Company owned 524 Investment Properties, with aggregate gross leasable area of 9,227,000 square feet, located in 41 states and leased to established tenants, including Academy, Barnes & Noble, Best Buy, Borders, Susser (Circle K), CVS, Eckerd, OfficeMax, The Sports Authority and the United States of America. In addition to the Investment Properties, as of December 31, 2005, the Company had $27,805,000 and $55,184,000 in structured finance investments and mortgage residual interests, respectively. The inventory assets are operated through the NNN TRS. The NNN TRS, 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 different investment objectives (“Inventory Properties” or “Inventory Portfolio”). As of December 31, 2005, the NNN TRS owned 63 Inventory Properties. Principles of Consolidation—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 beneficiaries if the variable interest entities do not effectively disperse risks among parties involved. Effective 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, effective January 1, 2004, the Company consolidated Services, and all prior period comparable consolidated financial statements have been restated to include Services as a consolidated subsidiary. The adoption of this interpretation did not have a significant impact on the financial position or results of operations of the Company. 57 The Company’s consolidated financial statements include the accounts of each of the respective majority owned and controlled affiliates. All significant 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 significance of rights held by other parties. Subsidiaries of the NNN TRS develop real estate through various joint venture development affiliate agreements. The NNN TRS subsidiaries consolidate the joint venture development entities listed in the table below based upon either the Company being the primary beneficiary of the respective variable interest entity or the Company having a controlling interest over the respective entity. The Company eliminates significant intercompany balances and transactions and records a minority interest for its other partners’ ownership percentage. The following table summarizes each of the investments, as of December 31, 2005: Date of Agreement November 2002 February 2003 February 2003 February 2004 September 2004 October 2004 November 2004 December 2004 December 2004 March 2005 December 2005 Entity Name WG Grand Prairie TX, LLC KK-Seminole FL, LLC Gator Pearson, 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 CNLRS RGI Bloomingdale Exchange LLC CNLRS P&P, L.P. Equity Ventures’ Ownership % 60% 40% 50% 50% 50% 60% 60% 50% 50% 50% 50% The Company holds a variable interest in, but is not the primary beneficiary of, CNL Plaza Ltd., a variable interest entity. The Company’s maximum exposure to loss as a result of its involvement with CNL Plaza Ltd. as of December 31, 2005, is $5,096,005. As of December 31, 2005, CNL Plaza, Ltd. had total assets and liabilities of $55,982,000 and $61,338,000, respectively. In May 2005, the Company (through a wholly owned subsidiary of the Services) exercised its option to purchase 78.9 percent of the common shares of Orange Avenue Mortgage Investments, Inc. (“OAMI”) (formerly CNL Commercial Finance, Inc.). As a result, the Company has consolidated OAMI in its consolidated financial statements (see Note 22). Real Estate—Investment Portfolio—The Company records the acquisition of real estate at cost, including acquisition and closing costs. The cost of properties developed by the Company includes direct and indirect costs of construction, property taxes, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. Real estate is generally leased to tenants on a net lease basis, whereby the tenant is responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance and repairs. The leases are accounted for using either the operating or the direct financing method. Such methods are described below: Operating method—Leases accounted for using the operating method are recorded at the cost of the real estate. Revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives (generally 35 to 40 years). Leasehold interests are amortized on the straight-line method over the terms of their respective leases. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis. 58 Direct financing method—Leases accounted for using the direct financing method are recorded at their net investment (which at the inception of the lease generally represents the cost of the property). Unearned income is deferred and amortized into income over the lease terms so as to produce a constant periodic rate of return on the Company’s net investment in the leases. When real estate is disposed of, the related cost, accumulated depreciation or amortization and any accrued rental income for operating leases and the net investment for direct financing leases are removed from the accounts and gains and losses from the dispositions are reflected in income. 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 flows (undiscounted and without interest charges), including the residual value of the real estate, with the carrying cost of the individual asset. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Purchase Accounting for Acquisition of Real Estate—For purchases of real estate that were consummated subsequent to June 30, 2001, the effective date of SFAS No. 141, “Business Combinations,” the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below- market leases, other value of in-place leases and value of tenant relationships, based in each case on their relative fair values. The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on the determination of the relative fair values of these assets. Management uses the as-if-vacant fair value of a property provided by a qualified appraiser. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above- market and below-market in-place lease values are recorded as other assets or liabilities based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values 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 fixed rate renewal periods in the respective leases. The Company’s leases do not currently include fixed-rate renewal periods. The aggregate value of other acquired intangible assets, consisting of in-place leases, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as-if-vacant, determined as set forth above. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off. Real Estate—Inventory Portfolio—The NNN TRS acquires, develops and owns properties that it intends to sell. The properties that are classified as held for sale at any given time may consist of properties that have been 59 acquired in the marketplace with the intent to resell the properties that have been, or are currently being, constructed by the NNN TRS. The NNN TRS records the acquisition of the real estate at cost, including the acquisition and closing costs. The cost of the real estate developed by the NNN TRS 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. Real estate held for sale is not depreciated. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the NNN TRS classifies its real estate held for sale as discontinued operations for each property in which rental revenues are generated (see Note 19). 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 reflected in earnings. Valuation of Mortgages, Notes and Accrued Interest—The allowance related to the mortgages, notes and accrued interest is the Company’s best estimate of the amount of probable credit losses. The allowance is determined on an individual note basis in reviewing any payment past due for over 90 days. Any outstanding amounts are written off against the allowance when all possible means of collection have been exhausted. Investment in Unconsolidated Affiliates—The Company accounts for each of its investments in unconsolidated affiliates under the equity method of accounting (see Note 4). The Company exercises influence over these unconsolidated affiliates, but does not control them. Mortgage Residual Interests, at Fair Value—Mortgage residual interests are classified as available for sale and are reported at their market values. The Company engaged a third party valuation firm to determine the fair value of the mortgage residual interests as of December 31, 2005. Adjustments to the fair value subsequent to the initial acquisition of the net assets are recorded through earnings. The residual interests were acquired in connection with the acquisition of 78.9 percent equity interest of OAMI (see Note 22). The Company recognizes the excess of all cash flows attributable to the residual interests estimated at the acquisition/transaction date over the initial investment (the accretable yield) as interest income over the life of the beneficial interest using the effective yield method. Losses are considered permanent if and when there has been a change in the timing or amount of estimated cash flows that leads to a loss in value. Certain of the residual interests have been pledged as security for notes payable (see Note 9). Cash and Cash Equivalents—The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash 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 financial institutions with high credit standing; therefore, management believes it is not exposed to any significant credit risk on cash and cash equivalents. Restricted Cash—Restricted cash consists of amounts held in restricted escrow accounts in connection with the sale of certain assets of OAMI to a third party (the “Buyer”) in December 2004 (prior to the Company exercising its option) (see Note 22). The use of the cash is restricted pursuant to agreements with the Buyer and will be released to OAMI in December 2007 subject to any pending indemnity claims. The amount held in these accounts at December 31, 2005 was $30,530,000. The carrying value of $30,191,000 is calculated as the present value of the expected release of monies. Valuation of Receivables—The Company makes estimates of the uncollectability of its accounts receivable related to base rents, expense reimbursements and other revenues. The Company analyzes accounts receivable and historical bad debt levels, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims. 60 Debt Costs—Debt costs incurred in connection with the Company’s $300,000,000 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 effective interest method. Debt costs incurred in connection with the issuance of the Company’s notes payable have been deferred and are being amortized over the term of the respective debt obligation using the effective interest method. Revenue Recognition—Rental revenues for non-development real estate assets are recognized when earned in accordance with SFAS 13, “Accounting for Leases,” based on the terms of the lease at the time of acquisition of the leased asset. Rental revenues for properties under construction commence upon completion of construction of the leased asset and delivery of the leased asset to the tenant. Earnings Per Share—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. 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: 2005 2004 2003 Weighted average number of common shares outstanding . . . . . . . . . . . . Unvested restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,272,997 (288,176) 51,546,814 (234,380) 43,167,433 (59,220) Weighted average number of common shares outstanding used in basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,984,821 51,312,434 43,108,213 Weighted average number of common shares outstanding used in basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,984,821 51,312,434 43,108,213 Effect of dilutive securities: Restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assumed conversion of Series B Convertible Preferred Stock to 221,337 128,944 234,380 192,370 common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Directors’ deferred fee plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,293,996 11,045 — 3,334 59,220 229,495 499,872 — Weighted average number of common shares outstanding used in diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,640,143 51,742,518 43,896,800 The following represents shares of potentially dilutive common shares which were not included in computing diluted earnings per common share because their effects were antidilutive: Common stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 10,000 shares of Series B convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . . . — 1,293,996 — 398,500 — 2005 2004 2003 Stock-Based Compensation—At December 31, 2005, the Company had one stock-based compensation plan, which is described more fully in Note 21. 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. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” prospectively to all employee and director awards granted, modified, or settled after January 1, 2003. Therefore, the cost related to stock-based employee compensation included in the determination of net earnings for each of the years ending December 31, 2005, 61 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 effective date of SFAS No. 123. The following table illustrates the effect on net earnings available to common stockholders and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period (dollars in thousands, except per share data): Net earnings available to common stockholders—basic, as reported: . . . . . . . . . . . Add: stock-based employee compensation expense included in reported net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deduct: total stock-based employee compensation expense determined under the fair value based method for all awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004 2003 $83,717 $59,251 $48,963 3 20 3 (28) (65) (74) Pro forma net earnings available to common stockholders—basic . . . . . . . . . . . . . $83,692 $59,206 $48,892 Net earnings available to common stockholders—diluted, as reported: Add: stock-based employee compensation expense included in reported net . . . . . . . . . earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deduct: total stock-based employee compensation expense determined under the fair value based method for all awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $85,392 $59,251 $49,465 3 20 3 (28) (65) (74) Pro forma net earnings available to common stockholders—diluted . . . . . . . . . . . $85,367 $59,206 $49,394 Earnings available to common stockholders per common share as reported: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma earnings available to common stockholders per common share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ 1.58 1.56 1.58 1.56 $ $ $ $ 1.15 $ 1.14 1.15 $ 1.13 1.15 $ 1.13 1.14 $ 1.13 There were no options granted in 2005 or 2004. The fair value of the option grant in 2003 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%, (ii) expected volatility of 18.0%, (iii) dividend yield of 9.3% and (iv) expected life of 10 years. 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 100 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, 2005, the Company believes it has qualified as a REIT. Notwithstanding the Company’s qualification for taxation as a REIT, the Company is subject to certain state taxes on its income and real estate. The Company and its taxable REIT subsidiaries have made timely TRS elections pursuant to the provisions of the REIT Modernization Act. A TRS is able to engage in activities resulting in income that previously would have been disqualified from being eligible REIT income under the federal income tax regulations. As a result, certain activities of the Company which occur within its TRS entities are subject to federal and state income taxes (See “Real Estate—Inventory Portfolio”). All provisions for federal income taxes in the accompanying consolidated financial statements are attributable to the Company’s taxable REIT subsidiaries and to OAMI’s built-in-gain tax liability. 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 differences based on estimated future tax consequences attributable to differences between the financial statement carrying 62 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 effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. New Accounting Standards—In December 2004, FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets.” This statement is effective for the fiscal years beginning after June 15, 2005. This statement addresses financial accounting and reporting obligations associated with the exchange of nonmonetary 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 significant changes in the cash flows of the reporting entity. The adoption of this interpretation is not expected to have a significant impact on the financial position or results of operations of the Company. In May 2005, FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” a replacement of APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” This statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. This statement requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this statement is not expected to have a significant impact on the financial position or results of operations of the Company. In December 2004, FASB revised SFAS No. 123, “Accounting for Stock-Based Compensation.” This revision, SFAS No. 123R, is effective for the 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 will not have a significant impact on the financial position or results of operations of the Company. In June 2005, FASB issued an Emerging Issues Task Force (“EITF”) Consensus in Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,” and an amendment to Issue No. 96-16, “Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholders Have Certain Approval or Veto Rights.” The EITF consensus is limited to limited partnerships or similar entities that are not variable interest entities under FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities.” The consensus states that the general partners in a limited partnership should determine whether they control a limited partnership based on certain criteria. The consensus provides a framework that makes it more difficult for a general partner to overcome the presumption that it controls the limited partnership, therefore making it more likely that the general partner would be required to consolidate the limited partnership. For existing limited partnership agreements that have not been modified, the guidance should be applied in financial statements issued for the first reporting period in fiscal years beginning after December 15, 2005. For all new limited partnerships formed and for existing limited partnerships for which the partnership agreements are modified, the guidance is effective after June 29, 2005. The adoption of this consensus is not expected to have a significant impact on the financial position or results of operations of the Company. In June 2005, FASB issued an EITF Consensus in Issue No. 04-10, “Determining Whether to Aggregate Operating Segments that do not meet the Quantitative Thresholds”. The EITF provides clarification regarding 63 FASB Statement No. 131, “Disclosure about Segments of an Enterprise and Related Information”. The consensus states that operating segments that do not meet the quantitative thresholds can be aggregated only if aggregation is consistent with the objective and basic principles provided in Statement No. 131; the segments have similar economic characteristics, and the segments share a majority of the aggregation criteria listed in Statement No. 131. This should be applied for fiscal years ending after September 15, 2005. The corresponding information for earlier periods, including interim periods, should be restated unless it is impractical to do so. Early application of the consensus is permitted. The adoption of this consensus does not have a significant impact on the financial position or results of the operations of the Company. In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”. This interpretation clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligation”, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Thus, the timing and (or) method of settlement may be conditional on a future event. This interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This interpretation is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of this interpretation does not have a significant impact on the financial position or results of operations of the Company. Use of Estimates—Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Significant estimates include provision for impairment and allowances for certain assets, accruals, useful lives of assets and capitalization of costs. Actual results could differ from those estimates. Reclassification—Certain items in the prior year’s consolidated financial statements and notes to consolidated financial statements have been reclassified to conform with the 2005 presentation. These reclassifications had no effect on stockholders’ equity or net earnings. 2. Real Estate—Investment Portfolio: Leases—The Company generally leases its Investment Properties to established tenants. As of December 31, 2005, 470 of the Investment Property leases have been classified as operating leases and 68 leases have been classified as direct financing leases. For the Investment Property leases classified as direct financing leases, the building portions of the property leases are accounted for as direct financing leases while the land portions of 45 of these leases are accounted for as operating leases. Substantially all leases have initial terms of 10 to 20 years (expiring between 2006 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, 2005, the weighted average remaining lease term was approximately 11 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. 64 Accounted for Using the Operating Method—Real estate subject to operating leases consisted of the following as of December 31 (dollars in thousands): Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 574,572 797,832 2,532 $ 431,867 631,306 2,532 2005 2004 Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,374,936 (79,198) 1,295,738 3,012 1,298,750 (1,957) 1,065,705 (61,720) 1,003,985 7,025 1,011,010 (1,613) $1,296,793 $1,009,397 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, 2005, 2004 and 2003, the Company recognized collectively in continuing and discontinued operations, $2,053,000, $3,452,000 and $6,756,000, respectively, of such income. At December 31, 2005 and 2004, the balance of accrued rental income, net of allowances of $2,057,000 and $1,620,000, respectively, was $30,717,000 (excluding $2,718,000 in deferred rental income) and $28,619,000, respectively. The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2005 (dollars in thousands): 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter $ 131,512 131,542 130,202 127,185 125,022 915,309 $1,560,772 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. Held for Sale—the Investment Portfolio included certain properties that were held for sale, which consisted of the following as of December 31 (dollars in thousands): Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 717 1,459 $— — 2005 2004 Less impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,176 (576) — $1,600 $— 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. Events or circumstances that may occur 65 include changes in real estate market conditions, the ability of the Company to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, the Company makes a provision for impairment loss if estimated future undiscounted operating cash flows plus estimated disposition proceeds are less than the current book value. Impairment losses are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset. After such review, the Company recognized a $2,056,000 impairment on its Investment Portfolio during the year ended December 31, 2005. Accounted for Using the Direct Financing Method—The following lists the components of net investment in direct financing leases at December 31 (dollars in thousands): Minimum lease payments to be received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated unguaranteed residual values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $147,850 31,605 (83,751) $166,849 32,623 (97,161) Net investment in direct financing leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 95,704 $102,311 2005 2004 The following is a schedule of future minimum lease payments to be received on direct financing leases at December 31, 2005 (dollars in thousands): 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,089 13,140 13,144 13,247 13,297 81,933 $147,850 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— Accounted for Using the Operating Method). 3. Real Estate—Inventory Portfolio: As of December 31, 2005, the NNN TRS owned 63 Inventory Properties: 47 completed inventory, 12 under construction and 4 land parcels. As of December 31, 2004, the NNN TRS owned 21 Inventory Properties: 10 complete inventory, 7 under construction and 4 land parcels. The real estate Inventory Portfolio consisted of the following (dollars in thousands): Inventory: Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,430 37,081 — $16,449 17,660 (81) 2005 2004 Under construction: Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,511 34,028 44,168 23,395 67,563 13,826 10,195 24,021 $131,074 $58,049 66 In connection with the development of 12 Inventory Properties by the NNN TRS, the Company has agreed to fund construction commitments of $57,279,000, of which $38,450,000 has been funded as of December 31, 2005. The following table summarizes the number of Inventory Properties sold and the corresponding gain recognized on the disposition of Inventory Properties included in continuing and discontinued operations for the years ended December 31 (dollars in thousands): Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest Total continuing operations . . . . . . . . . . . . . . . . Discontinued operations . . . . . . . . . . . . . . . . . . Intersegment eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest Total discontinued operations . . . . . . . . . . . . . . 2005 2004 2003 # of Properties 6 22 # of Properties 7 17 Gain $ 2,010 — 2,010 18,696 921 (5,999) 13,618 # of Properties 3 26 Gain $ 4,700 (1,717) 2,983 17,885 817 (4,705) 13,997 Gain $ 3,247 — 3,247 7,891 1,037 (986) 7,942 28 $15,628 24 $16,980 29 $11,189 4. Investments in Unconsolidated Affiliates: 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 defined 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 during the Partnership’s term. For the years ended December 31, 2004 and 2003, the Company recognized earnings of $26,000 and $280,000, respectively, from the Partnership. The Company managed the Partnership and pursuant to a management agreement, the Partnership paid the Company $17,000 and $193,000 in asset management fees during the years ended December 31, 2004 and 2003, 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. 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 Plaza are owned by affiliates of James M. Seneff, Jr. and Robert A. Bourne, each a former member of the Company’s board of directors. Plaza owns a 346,000 square foot office building and an interest in an adjacent parking garage. The Company has severally guaranteed 41.67 percent of a $14,000,000 unsecured promissory note on behalf of Plaza. The maximum obligation of the Company under this guarantee is $5,834,000, plus interest. Interest accrues based on a tiered rate structure with a maximum of 300 basis points above LIBOR (the current rate is 200 basis points above LIBOR). This guarantee will continue through the loan maturity in December 2010. The fair value of the Company’s guarantee is $47,000. During the years ended December 31, 2005, 2004 and 2003 the Company received $471,000, $446,000 and $372,000, respectively, in distributions from Plaza. For the years ended December 31, 2005, 2004 and 2003, the Company recognized a loss from Plaza of $218,000, $276,000 and $306,000, respectively. 67 Since November 1999, the Company has leased its office space from Plaza. The Company’s lease expires in October 2014. In addition, other affiliates of James M. Seneff, Jr. also lease office space from Plaza. During the years ended December 31, 2005, 2004 and 2003, the Company incurred rental expenses in connection with the lease of $1,035,000, $1,018,000, and $1,001,000, respectively. In May 2000, the Company subleased a portion of its office space to affiliates of James M. Seneff, Jr. During the years ended December 31, 2005, 2004 and 2003, the Company earned $397,000, $345,000 and $338,000, respectively, in rental and accrued rental income from these affiliates. The following is a schedule of the Company’s future minimum lease payments and the future minimum sublease income from the affiliates related to the office space leased from Plaza at December 31, 2005 (dollars in thousands): 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease Payments Sublease Income 1,200 1,236 1,273 1,311 1,351 5,559 297 279 288 296 305 1,257 Net 903 957 985 1,015 1,046 4,302 $11,930 $2,722 $9,208 Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the initial lease terms. The Company has the option to renew its lease with Plaza for three successive five-year periods subject to similar terms and conditions as the initial lease. 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 was the sole managing member and held a 33 1/3 percent interest in WXI. WXI was organized for the purpose of owning, developing, redeveloping, operating, leasing and selling a portfolio of real estate. In August 2005, operations ceased and WXI was dissolved. Prior to the dissolution, the Company accounted for its interest under the equity method of accounting. During the years ended December 31, 2005, 2004, and 2003, the Company recognized a loss of $40,000, $68,000 and 570,000, respectively. The Company provided 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 $5,000, $14,000 and $52,000 in fees during the years ended December 31, 2005, 2004 and 2003, respectively. 5. Notes Receivable: Structured finance agreements are typically loans secured by a pledge of ownership interests by the entity that owns the real estate. These agreements are typically subordinated to senior loans secured by first 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 2005 and 2004, the Company made structured finance investments of $5,988,000 and $6,857,000, respectively. As of December 31, 2005, the structured finance investments bear a weighted average interest rate of 13.8% per annum, of which 11.4% is payable monthly and the remaining 2.4% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which range between January and November 2007. The structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the certain subsidiaries which own real estate. As of December 31, 2005 and 2004, the outstanding principal balance of the structured finance investments was $27,805,000 and $29,390,000, respectively. 68 6. Mortgage Residual Interests: OAMI holds the mortgage residual interests (“Residuals”) from seven securitizations. The following table summarizes the investment interests in each of the transactions: Securitization BYL 99-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CCMH I, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CCMH II, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CCMH III, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CCMH IV, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CCMH V, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CCMH VI, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment Interest Company(1) OAMI(2) 3rd Party — 42.7% 44.0% 36.7% 38.3% 38.4% — 59.0% 41.0% 57.3% — 56.0% — 63.3% — 61.7% — 61.6% — 100.0% — (1) (2) The Company owned these investment interests prior to its acquisition of the equity interest in OAMI. The Company owns 78.9 percent of OAMI’s investment interest. Each of the Residuals is recorded at fair value based upon a third party valuation, with adjustments subsequent to the initial acquisition of net assets, recorded through earnings. Key assumptions used in determining the value of these assets include: • 17% discount rate • Average life equivalent CPR speeds range from 18.7% to 22.9% CPR • Foreclosures • • Frequency: curve default model a 1.1% maximum rate 30% Loss severity of loans in foreclosure 30% • Yield • • LIBOR: Forward 3-month curve Prime: Forward curve The following table shows the effects on the key assumptions affecting the fair value of the Residuals (dollars in thousands). Residuals Carrying amount of retained interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $55,184 Discount rate assumption Fair value at 20% discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value at 22% discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $51,246 $48,891 Prepayment speed assumption Fair value of 1% increases above the CPR Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of 2% increases above the CPR Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $54,233 $53,392 Expected credit losses Fair value 2% adverse change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value 3% adverse change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $54,956 $54,844 Yield Assumptions Fair value of Prime/LIBOR spread contracting 25 basis points . . . . . . . . . . . . . . . . . . . Fair value of Prime/LIBOR spread contracting 50 basis points . . . . . . . . . . . . . . . . . . . $52,394 $49,607 These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on adverse variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation of 69 a particular assumption on the fair value of the retained interest is calculated without changing any other assumptions; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. 7. Line of Credit Payable: In December 2005, the Company entered into an amended and restated loan agreement for a $300,000,000 revolving credit facility (the “Credit Facility”) which amended the Company’s existing loan agreement by (i) increasing the borrowing capacity to $300,000,000 from $225,000,000, (ii) lowering the interest rates of the tiered rate structure to a maximum rate of 112.5 basis points above LIBOR (based upon the debt rating of the Company, the current interest rate is 80 basis points above LIBOR), (iii) requiring the Company to pay a commitment fee based on a tiered rate structure to a maximum of 25 basis points per annum (based upon the debt rating of the Company the current commitment fee is 20 basis points), (iv) providing for a competitive bid option for up to 50 percent of the facility amount, (v) extending the expiration date to May 8, 2009 and (vi) amending certain of the financial covenants of the Company. The principal balance is due in full upon expiration of the Credit Facility in May 2009, which the Company may request to be extended for an additional 12-month period. As of December 31, 2005 and 2004, $162,300,000 and $17,900,000, respectively, was outstanding under the Credit Facility. The Credit Facility had a weighted average interest rate of 4.77% and 2.72% for the years ended December 31, 2005 and 2004, respectively. In accordance with the terms of the Credit Facility, the Company is required to meet certain restrictive financial covenants, which, among other things, require the Company to maintain certain (i) maximum leverage ratios, (ii) debt service coverage, (iii) cash flow coverage and (iv) investment limitations. At December 31, 2005, the Company was in compliance with those covenants. For the years ended December 31, 2005, 2004 and 2003, interest cost incurred was $2,948,000, $1,084,000 and $2,103,000 respectively, of which $2,210,000, $369,000 and $177,000, respectively, was capitalized by the Company as a cost of buildings constructed for the Investment Portfolio, and $471,000, $813,000 and $2,001,000 respectively, was charged to operations. 8. Mortgages Payable: The Company’s consolidated financial statements include the following mortgages payable as of December 31 (dollars in thousands): Date Entered Balance Interest Rate Monthly Payments(4) Maturity Jan 1996 . . . . . . . . . . . . . . . . $39,450 2,391 . . . . . . . . . . . . . . Jun 1996(2) 1,916 . . . . . . . . . . . . . . Jun 1996(2) 2,557 Jun 1996(2) . . . . . . . . . . . . . . 350 Dec 1999 . . . . . . . . . . . . . . . 623 Dec 2001 . . . . . . . . . . . . . . . 698 Dec 2001 . . . . . . . . . . . . . . . 485 Dec 2001 . . . . . . . . . . . . . . . 21,000 Jun 2002 . . . . . . . . . . . . . . . . 2,340 Jul 2002 . . . . . . . . . . . . . . . . 95,000 Nov 2003 . . . . . . . . . . . . . . . 6,952 . . . . . . . . . . . . . . Feb 2004(2) 12,000 Feb 2004(3) . . . . . . . . . . . . . . 408 Dec 2004(2) . . . . . . . . . . . . . . 1,015 Mar 2005(2) . . . . . . . . . . . . . . 7.435% $330 26 8.875% 23 8.250% 32 8.625% 4 8.500% 8 9.000% 9 9.000% 8 9.000% 138 6.900% 18 7.420% 435 5.420% 68 6.900% 103 7.370% 5 9.375% 11 8.140% Feb 2006 Feb 2010(5) Dec 2008 Dec 2007(8) Dec 2009 Apr 2014 Apr 2019 Apr 2019 Jul 2012 Jul 2012(6) Nov 2013 Jan 2017 Sep 2007 Sep 2014(7) Sep 2016 Carrying Value of Encumbered Asset(s)(1) $ 53,034 — 1,819(9) — 3,357 1,076 1,414 1,395 26,660 — 163,723 12,221 28,464 — 1,418 Outstanding Principal Balance 2005 2004 — 729 — 175 435 482 246 20,276 — 95,000 6,299 7,979 — 974 $ 18,538 $ 22,466 — 935 1,044 210 485 537 306 20,508 — 95,000 6,665 8,606 406 — $151,133 $157,168 (1) Each loan is secured by a first mortgage lien on certain of the Company’s properties. The carrying values of the assets are as of December 31, 2005. 70 (2) Date entered represents the date that the Company acquired real estate subject to a mortgage securing a loan. The corresponding original principal balance represents the outstanding principal balance at the time of acquisition. The Company assumed this long term fixed rate loan when the company increased its ownership in the Partnership (see Note 4). (3) (4) Monthly payments include interest and principal, if any; the balance is due at maturity. (5) In December 2004, the Company disposed of the property that secured the loan, and simultaneously paid the outstanding principal in full. In August, 2004, the Company disposed of the property that secured the loan, at which time the buyer assumed the loan. In January 2005, the company disposed of the property that secured the loan, at which time the buyer assumed the loan. In September 2005, the company disposed of the property that secured the loan, and simultaneously paid the outstanding principal in full. The company has a $864,000 letter of credit that also secures the loan. (6) (7) (8) (9) The following is a schedule of the annual maturities of the Company’s mortgages payable (dollars in thousands): 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,241 8,413 1,190 1,000 1,022 119,267 151,133 9. Notes Payable—Secured: The Company’s consolidated financial statements included the following notes payable as a result of the acquisition of OAMI (see Note 22) (dollars in thousands): 02-1 Notes(1)(2) 03-1 Notes(2)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stated Rate Maturity Date 10% December 2007 10% June 2008 Principal Balance $12,250 16,000 $28,250 (1) (2) (3) Interest is payable quarterly with annual principal payments of $2,000,000 payable June 30 of each year Secured by certain equity investments in mortgage residual interests of the Company with a carrying value of $18,979,000 Interest is payable quarterly with annual principal payments of $1,750,000 payable December 31 of each year Each issuance of notes can be prepaid at the option of OAMI, in whole or in part, without premium or penalty after the pre-payment date, as defined in each respective note. 71 10. Notes Payable: The Company filed a prospectus supplement to its shelf registration for each issuance of notes outlined in the table below (dollars in thousands). Issue Date Principal Discount(3) Net Price Stated Rate Effective Rate(4) Commencement of Semi- Annual Interest Payments Maturity Date . . . . . June 1999 2008 Notes(1) . . . . . . . March 1998 2004 Notes(1)(5) 2010 Notes(1) . . . . . . . September 2000 2012 Notes(1) . . . . . . . June 2002 2014 Notes(1)(2)(6) . . . . June 2004 2015 Notes(1) . . . . . . . November 2005 $100,000 100,000 20,000 50,000 150,000 150,000 $271 392 126 287 440 390 $ 99,729 7.125% 7.163% September 1998 March 2008 99,608 8.125% 7.547% December 1999 June 2004 19,874 8.500% 8.595% March 2001 49,713 7.750% 7.833% December 2002 June 2012 June 2014 149,560 6.250% 5.910% June 2004 December 2015 149,610 6.150% 6.185% June 2006 September 2010 (1) (2) (3) (4) (5) (6) The proceeds from the note issuance were used to pay down outstanding indebtedness of the Company’s Credit Facility. The proceeds from the note issuance were used to repay the obligation of the 2004 Notes. The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest method. Includes the effects of the discount, treasury lock gain and swap gain (as applicable). The Company entered into a treasury rate lock agreement which fixed a treasury rate of 5.1854% on a notional amount of $92,000,000. Upon issuance of the 2004 Notes, the Company terminated the treasury rate lock agreement resulting in a gain of $2,679,000. The gain was deferred and amortized as an adjustment to interest expense over the term of the 2004 Notes using the effective interest method. The Company entered into a forward starting interest rate swap agreement which fixed 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 effective 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 defined in the respective supplemental indenture notes. In connection with the debt offerings, the Company incurred debt issuance costs totaling $5,512,000 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 effective 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 financial covenants, which, among other things, require the Company to maintain (i) certain leverage ratios and (ii) certain interest coverage. At December 31, 2005, the Company was in compliance with those covenants. In connection with the acquisition of NAPE, the Company assumed a $20,800,000 term note payable (“Term Note”). The principal balance on the Term Note is due in full upon the expiration in June 2009. The Term Note bears interest based on a tiered rate structure to a maximum rate of 165 basis points above LIBOR. Based on the current debt rating of the Company, the current interest rate is 120 basis points above LIBOR or 5.57% at December 31, 2005. In accordance with the terms of Term Note, the Company is required to meet certain restrictive financial covenants, which among other things, require the Company to maintain certain (i) maximum leverage ratios, (ii) debt service coverage and (iii) cash flow coverage. In November 2001, the Company entered into an unsecured $70,000,000 term note (“Term Note”), due November 30, 2004, to finance the acquisition of Captec and for the repayment of indebtedness and related expenses in connection therewith. 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 connection with the 72 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 effective interest method. 11. Financing Lease Obligation: In July 2004, the Company sold five investment properties for approximately $26,041,000 and subsequently leased back the properties under a 10-year financing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the financing lease. In accordance with the provisions of SFAS No. 66, “Accounting for Sales of Real Estate,” the Company has recorded this transaction as a financing transaction. The 10-year financing 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. 12. 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 fixed annual amount of $2.25 per share). The Series A Preferred Stock ranks senior to the Company’s common stock with respect to distribution rights and rights upon liquidation, dissolution or winding up of the Company. The Company may redeem the Series A Preferred Stock on or after December 31, 2006, in whole or from time to time in part, for cash, at a redemption price of $25.00 per share, plus all accumulated and unpaid distributions. In 2004 and 2003, 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 and 379 respectively. In August 2003, the Company filed 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 offering, 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 first 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 fixed 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. 13. Common Stock: In 2004 and 2003, 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 and 823 respectively. In July 2003, the Company filed 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 offering, the Company incurred stock issuance costs totaling approximately $5,374,000, consisting primarily of underwriters’ commissions and fees, legal and accounting fees and printing expenses. In December 2003, the Company filed 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 73 issued an additional 487,500 shares in connection with the underwriters’ over-allotment option and received gross proceeds of $8,478,000. In connection with these offerings, the Company incurred stock issuance costs totaling approximately $671,000, consisting primarily of underwriters’ commissions and fees, legal and accounting fees and printing expenses. 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). CTA exercised its right to convert its interest and in February 2004, 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. In June 2005, the Company issued 1,636,532 shares of common stock pursuant to the acquisition of National Properties Corporation (“NAPE”) (see note 22). During the year ended December 31, 2005, the Company issued 912,334 shares of common stock pursuant to the Company’s Dividend Reinvestment and Stock Purchase Plan and received gross proceeds of $18,063,000. 14. Employee Benefit Plan: Effective January 1, 1998, the Company adopted a defined contribution retirement plan (the “Retirement Plan”) covering substantially all of the employees of the Company. The Retirement Plan permits participants to defer up to a maximum of 60 percent of their compensation, as defined in the Retirement Plan, subject to limits established by the Internal Revenue Code. The Company matches 50 percent of the participants’ contributions up to a maximum of six percent of a participant’s annual compensation. The Company’s contributions to the Retirement Plan for the years ended December 31, 2005, 2004 and 2003 totaled $194,000, $140,000 and $150,000, respectively. 15. Dividends: The following presents the characterization for tax purposes of common stock dividends paid to stockholders for the years ended December 31: Ordinary dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualified dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualified 5-year Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecaptured Section 1250 Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nontaxable distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.068 0.225 — — 0.002 0.005 $0.916 — 0.040 — 0.041 0.293 $0.969 — — 0.005 0.037 0.269 2005 2004 2003 $1.300 $1.290 $1.280 The Series A Preferred Stock dividends of $2.25 per share paid in each of the years ended December 31, 2005, 2004 and 2003, were characterized as ordinary dividends for tax purposes. The Series B Convertible Preferred Stock dividends of $167.50, $167.50 and $50.25 per share paid during the years ended December 31, 2005, 2004 and 2003, respectively, were characterized as ordinary dividends for tax purposes. 16. Dissenting Shareholders’ Settlement: During the year ended December 31, 2003, the Company recorded a dissenting shareholders’ settlement expense of $2,413,000 related to the appraisal rights litigation disclosed in Item 3 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, that arose as a result of the merger with Captec in December 2001 (the “Appraisal Action”). In February 2003, the Company entered into a settlement agreement with the beneficial owners of the alleged 1,037,946 dissenting shares (including the petitioners in the 74 Appraisal Action) which required the Company to pay $15,569,000, which approximated the value of the original merger consideration (which included cash, common stock and Series A Preferred Stock shares) at the time of the litigation settlement plus the dividends that would have been paid if the shares had been issued at the time of the merger. In February 2003, the parties filed a stipulation and order of dismissal and the Court entered the order of dismissal, dismissing the Appraisal Action with prejudice. 17. 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 Officer in February 2004, and the resignation of Gary M. Ralston as President and Chief Operating Officer in May 2004. 18. Income Taxes: For income tax purposes, the Company has Taxable REIT Subsidiaries in which certain real estate activities are conducted. Additionally, the Company has its 78.9 percent equity interest in OAMI. The Company has consolidated OAMI in its financial statements. OAMI, upon making its REIT conversion, has remaining tax liabilities relating to the built-in-gain of its assets. As a result, the Company treats some depreciation expense and certain other items differently for tax than for financial reporting purposes. The principal differences between the Company’s effective tax rates for the years ended December 31, 2005, 2004 and 2003, 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 differences: Built-in-gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred income tax asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current income tax asset (payable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004 $(14,551) (315) 35 (180) 544 $(14,467) 719 $ — (211) 59 (40) — $(192) (510) Income tax asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(13,748) $(702) 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 differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The net operating loss carryforwards were generated by the Company’s taxable REIT subsidiaries. The net operating loss carryforwards expire in 2025. 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 benefits of these deductible differences that existed as of December 31, 2005. 75 The income tax (expense) benefit consists of the following components for the years ended December 31 (dollars in thousands): Net earnings (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes: Current: 2005 2004 2003 $92,361 $68,231 $54,412 Federal State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,401) (451) (420) (90) Deferred: Federal State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) (65) Total provision for income taxes . . . . . . . . . . . . . . . . (2,961) (2,356) (431) (3,297) — — (791) (148) (939) Total net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $89,400 $64,934 $53,473 19. Earnings from Discontinued Operations: Real Estate—Investment Portfolio—In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has classified the revenues and expenses related to (i) all Investment Properties that were sold and expired leasehold interests, and (ii) any Investment Property that was held for sale as of December 31, 2005, as discontinued operations. The following is a summary of the earnings from discontinued operations from the Investment Portfolio for each of the years ended December 31 (dollars in thousands): Revenues: Rental income from operating leases . . . . . . . . . . . . . . . . . . . . . . . Earned income from direct financing leases . . . . . . . . . . . . . . . . . Real estate expense reimbursement from tenants . . . . . . . . . . . . . Contingent rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest and other income from real estate transactions . . . . . . . . . $ 3,234 131 — — 358 $4,156 384 3 — 257 $6,971 595 83 27 109 2005 2004 2003 Operating expenses: General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairments—real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses (revenues): Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,723 4,800 7,785 20 251 53 2,056 2,380 — 57 57 (4) 411 711 — 41 328 831 — 1,118 1,200 (103) 228 125 (100) 270 170 Earnings before gain on disposition of real estate . . . . . . . . . . . . . . . . . 1,286 3,557 6,415 Gain on disposition of real estate, net of losses on disposition of $198,000, $544,000 and $969,000, respectively . . . . . . . . . . . . . . . . 9,816 2,523 287 Earnings from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . $11,102 $6,080 $6,702 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. Events or circumstances that may 76 occur include changes in real estate market conditions, the ability of the Company to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, the Company makes a provision for impairment loss if estimated future undiscounted operating cash flows plus estimated disposition proceeds are less than the current book value. Impairment losses are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset. After such review, the Company recognized a $2,056,000 impairment on its Investment Portfolio during the year ended December 31, 2005. Real Estate—Inventory Portfolio—The Company has classified the revenues and expenses related to (i) its Inventory Properties, which generated rental revenues prior to disposition, and (ii) the Inventory Properties which had generated rental revenues and were held for sale as of December 31, 2005, 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): Revenues: Rental income from operating leases . . . . . . . . . . . . . . . . . . . . . Real estate expense reimbursement from tenants . . . . . . . . . . . Gain on disposition of real estate held for sale . . . . . . . . . . . . . Contingent rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest and other from real estate transactions . . . . . . . . . . . . . $ 1,986 69 19,617 6 826 $ 2,314 183 18,702 22 202 $ 3,294 123 8,928 — 54 2005 2004 2003 Operating expenses: General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses: Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,504 21,423 12,399 37 222 21 280 815 33 343 5 381 3 146 — 149 511 1,007 Earnings before income tax expense and minority interest . . . . . . . . 21,409 20,531 11,243 Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,737) (6,296) (5,841) (5,143) (3,897) (976) Earnings from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . $ 9,376 $ 9,547 $ 6,370 20. 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 firm 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 flows, or other types of forecasted transactions, are considered cash flow 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 identified risks. To accomplish this objective, the Company primarily uses interest rate swaps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts in exchange for fixed-rate payments over the life of the agreements 77 without exchange of the underlying principal amount. To date, such derivatives have been used to hedge the variable cash flows associated with floating rate debt and forecasted interest payments of a forecasted issuance of debt. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective 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 effective in offsetting changes in the cash flows 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 reclassified the $4,148,000 gain that was deferred in other comprehensive income as the hedged forecasted interest payments affect earnings. During the years ended December 31, 2005 and 2004, the Company amortized $326,000 and $169,000 respectively to interest expense from unamortized interest rate hedge gain. The Company has no derivative financial instruments outstanding at December 31, 2005 and 2004. 21. 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 affiliates stock options, stock awards, stock appreciation rights, Phantom Stock Awards, Performance Awards and Leveraged Stock Purchase Awards, each as defined in the 2000 Plan. The following summarizes the stock-based compensation activity for the years December 31: Outstanding, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options surrendered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock surrendered . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of Shares 2005 2004 2003 639,765 — (173,280) (5,310) 216,168 (216,168) (30,135) 30,135 7,300 (7,300) 1,608,144 — (886,962) (81,417) 205,579 (205,579) (29,926) 29,926 — — 1,747,851 15,000 (132,357) (22,350) 76,407 (76,407) (5,950) 5,950 — — Outstanding, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461,175 639,765 1,608,144 Exercisable, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457,000 537,244 1,372,184 Available for grant, December 31 . . . . . . . . . . . . . . . . . . . . . . . 1,260,243 1,460,636 1,561,192 78 The 223,468, 205,579 and 76,407 shares of restricted and unrestricted stock granted during the years ended December 31, 2005, 2004 and 2003, respectively, had a weighted average grant price of $17.91, $16.97 and $14.94, respectively, per share. The following represents the weighted average option exercise price information for the years ended December 31: Outstanding, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercisable, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15.33 — 14.48 15.66 15.67 $14.51 — 13.69 15.33 15.36 $14.44 14.57 13.51 14.51 14.40 2005 2004 2003 The following summarizes the outstanding options and the exercisable options at December 31, 2005: Option Price Range $10.1875 to $13.6875 $14.5700 to $17.8750 Total Outstanding options: Number of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average exercise price . . . . . . . . . . . . . . . . . . . . . . Weighted-average remaining contractual life in years . . . . . . 72,234 $ 11.34 4.3 $ 388,941 16.46 3.9 461,175 15.66 $ 3.9 Exercisable options: Number of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average exercise price . . . . . . . . . . . . . . . . . . . . . . 72,234 $ 11.34 384,766 16.48 $ 457,000 15.67 $ One-third of the grant to each individual becomes exercisable at the end of each of the first three years of service following the date of the grant and the options’ maximum term is 10 years. Pursuant to the 2000 Plan, the Company has granted and issued shares of restricted and unrestricted stock to certain officers, directors and key associates of the Company. The following is a summary of the restricted stock and unrestricted stock grants during the years ended December 31, 2005, 2004 and 2003: Shares Annual Vesting Rate Number of Years for Vesting Shares are 100% Vested on Officers and Associates: March 2003 . . . . . . . . . . . . . . . . . . . . . . March 2003 . . . . . . . . . . . . . . . . . . . . . . April 2004 . . . . . . . . . . . . . . . . . . . . . . . April 2004 . . . . . . . . . . . . . . . . . . . . . . . April 2004 . . . . . . . . . . . . . . . . . . . . . . . September 2004 . . . . . . . . . . . . . . . . . . March 2005 . . . . . . . . . . . . . . . . . . . . . . April 2005 . . . . . . . . . . . . . . . . . . . . . . . July 2005 . . . . . . . . . . . . . . . . . . . . . . . October 2005 . . . . . . . . . . . . . . . . . . . . December 2005 . . . . . . . . . . . . . . . . . . . December 2005 . . . . . . . . . . . . . . . . . . . Directors: June 2003 . . . . . . . . . . . . . . . . . . . . . . . August 2004 . . . . . . . . . . . . . . . . . . . . . December 2004 . . . . . . . . . . . . . . . . . . . June 2005 . . . . . . . . . . . . . . . . . . . . . . . October 2005 . . . . . . . . . . . . . . . . . . . . 40,407 30,000 100,000 35,000 50,211 15,000 92,900 7,000 500 7,300 67,462 44,306 6,000 4,500 868 3,000 1,000 1/4 1/5 1/5 1/5 1/7 1/7 1/5 1/7 1/7 (2) 1/5 (1) 1/2 1/2 1/2 1/2 1/2 4 5 4 5 6 6 5 7 7 (2) 5 5 2 2 2 2 2 2 January 1, 2007 January 1, 2008 January 1, 2008 January 1, 2009 January 1, 2010 January 1, 2011 January 1, 2010 January 1, 2012 January 1, 2012 (2) January 1, 2010 (1) January 1, 2005 January 1, 2006 January 1, 2006 January 1, 2007 January 1, 2007 (1) Vesting of shares is contingent upon achievement of certain performance goals by January 1, 2010 (2) Immediate vesting of shares at date of grant 79 During 2005, 2004 and 2003, the Company cancelled 30,135, 29,926 and 5,950, respectively, shares of restricted stock. Compensation expense for the restricted stock which is not tied to performance goals 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. Compensation expense for the restricted stock grants whose vesting is contingent upon certain performance goals of the Company is based upon the fair value calculated by a third party using a Monte Carlo Simulation model coupled with a binomial lattice model using the following assumptions: (i) average interest rate of 4.43%, (ii) $0.01 increase in annual dividend, (iii) expected life of five years, and (iv) volatility of 21.26%. For the years ended December 31, 2005, 2004 and 2003, the Company recognized $1,828,000, $1,113,000 and $1,151,000, respectively, of such compensation expense. In addition, in 2004, the Company recognized $1,397,000 of transition cost related to the vesting of restricted stock. 22. Business Combinations: Captec Net Lease Realty, Inc.—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, beneficial owners of shares of Captec stock held of record by Cede & Co. who alleged that they did not vote for the merger (and who alleged that they caused a written demand for appraisal of their Captec shares to be served on Captec), filed in the Chancery Court of the State of Delaware in and for New Castle County a Petition for Appraisal of Stock (“Appraisal Action”). The Appraisal Action alleged that 1,037,946 shares of Captec dissented from the merger and sought to require the Company to pay to all Captec stockholders who demanded appraisal of their shares the fair value of those shares, with interest from the date of the merger. As a result of this action, the plaintiffs were not entitled to receive the Company’s common and Series A Preferred Stock shares as offered in the original merger consideration. Accordingly, the Company reduced the number of common and Series A Preferred Stock shares issued and outstanding by 474,911 and 218,385, respectively, which represents the number of shares that would have been issued to the plaintiffs had they accepted the original merger consideration. 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 beneficial 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 filed a stipulation and order of dismissal and the Court entered the order of dismissal, dismissing the Appraisal Action with prejudice. Orange Avenue Mortgage Investments, Inc.—On May 2, 2005, the Company exercised its option to acquire 78.9 percent of the common shares of OAMI for $9,379,000. In December 2004, OAMI sold its loan origination, securitization and servicing operations and the majority of its assets and liabilities to a third party, resulting in OAMI becoming a passive owner in a pool of seven commercial real estate loan securitization residual interests. The loans in each of the securitizations are secured by first mortgages on commercial real estate and generally borrower personal guarantees. As a result of the option exercise, the Company has consolidated OAMI in its consolidated financial statements. According to SFAS No. 141, “Business Combinations,” under the purchase method of accounting, the Company recorded the assets and liabilities of OAMI at fair value. The Company recognized an extraordinary 80 gain of $14,786,000, equal to the excess fair value over the option price, as all assets acquired were financial assets and current assets. Based upon independent appraisals and management’s evaluation, the following table summarizes the estimated fair values of the assets and liabilities of OAMI on May 2, 2005 (dollars in thousands): Mortgage residual interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,327 3,272 10,285 17,427 6,794 Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $106,105 Notes payable—secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,000 1,028 14,787 47,815 27,315 Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,975 The following table summarizes the extraordinary gain recognized by the Company (dollars in thousands) during the year ended December 31, 2005: Company’s share of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less option price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basis of option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,434 (9,379) (269) Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,786 The Company’s net earnings for the year ended December 31, 2005, includes 78.9 percent of OAMI’s net earnings since the date of the acquisition in the amount of $1,411,000. Between June 2001 and July 2003, a wholly owned subsidiary of the Company, Net Lease Funding, Inc. (“NLF”), entered into five limited liability company agreements with OAMI to create five limited liability companies (collectively, the “LLCs”). Kevin B. Habicht, an officer and director of the Company is an officer, director and indirect shareholder of OAMI. Craig Macnab, an officer and director of the Company and Julian E. Whitehurst, an officer of the Company, are each an officer and director of OAMI. Each of the LLCs holds an interest in mortgage loans and is 100 percent equity financed. Prior to the acquisition of the 78.9 percent equity interest in OAMI, the Company held a non-voting and non-controlling interest in each of the LLCs ranging between 36.7 and 44.0 percent and accounted for its investment under the equity method of accounting (see Note 6). As a result of the Company’s acquisition of 78.9 percent equity interest in OAMI, the Company’s interest in the LLCs is no longer accounted for as an equity investment and is now included as part of OAMI in the Company’s consolidated financial statements. In addition, certain officers and directors of the Company own preferred shares of OAMI. Prior to the acquisition of 78.9 percent equity interest in OAMI, the Company received $2,749,000 in distributions from the LLCs. During the year ended December 31, 2004, the company received $10,562,000 in distributions from the LLCs. For the years ended December 31, 2005 and 2004, the Company recognized $1,467,000 and $5,042,000 of earnings, respectively, from the LLCs. 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 notes payable-secured (see Note 9). 81 As a result of the independent valuations of the mortgage residual interests (“Residuals”), the Company reduced the carrying value of the Residuals during the year ended December 31, 2005. The reduction in the Residuals’ value that related to the Residuals acquired at the time of the option exercise was recorded as a purchase price allocation adjustment. The reduction in the Residuals’ value acquired at the time of the option exercise that related to the period subsequent to the option exercise, as well as the reduction in the value related to the portion of the Residuals owned by NLF, were recorded as an aggregate impairment of $2,382,000 for the year ended December 31, 2005. The Company merged certain of its wholly owned subsidiaries into Commercial Net Lease Realty, Inc. and elected to convert OAMI to a REIT. As a result, effective January 1, 2005, OAMI was taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. Upon making the REIT conversion, $3,453,000 of OAMI’s tax liability was eliminated and recorded as an adjustment to the net assets acquired at the time of the option exercise. The remaining tax liability will be reduced over the next ten years in proportion to the reduction of the basis of the respective mortgage residual assets. National Properties Corporation—On June 16, 2005, the Company acquired 100 percent of National Properties Corporation (“NAPE”), a publicly traded company, which owned 43 freestanding properties located in 12 states. Results of NAPE operations have been included in the consolidated financial statements since the date of acquisition. NAPE shareholders received 1,636,532 newly issued shares of the Company’s common stock. According to SFAS No. 141, “Business Combinations,” under the purchase method of accounting, the acquisition price of $32,199,000 was allocated to the assets acquired and liabilities assumed at their fair values. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the acquisition (dollars in thousands): Real estate, Investment Portfolio: Accounted for using the operating method . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,542 1,276 6,757 Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $66,575 Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28,200 6,176 Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,376 Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,199 The Company’s net earnings for the year ended December 31, 2005, includes NAPE’s net earnings since the date of acquisition in the amount of $1,867,000. 23. 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 financing 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, note and accrued interest receivable from related party, mortgages, notes and accrued interest receivable, receivables, mortgages payable, note payable-secured, accrued interest payable and other liabilities at December 31, 2005 and 2004 approximate fair value, based upon current market prices of similar issues. At December 31, 2005 and 2004, the fair value of the Company’s notes payable was $494,103,000 and $353,647,000, respectively, based upon the quoted market price. 82 24. Related Party Transactions: For additional related party disclosures see Note 4 and Note 22. In June 2005, James M. Seneff, Jr. and Robert A. Bourne each retired from the Board of Directors (“Retired Directors”). The Company has revolving lines of credit with the NNN TRS that allow for an aggregate borrowing capacity of $155,000,000. The lines of credit each bear interest at prime rate plus 0.25% per annum and expire on May 8, 2009 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, 2005 and 2004 was $110,067,000 and $42,473,000, respectively, and bore interest at a rate of 7.50% and 5.50%, respectively, per annum. In connection with the lines of credit from the NNN TRS, the Company earned $3,511,000, $3,819,000 and $3,327,000 in interest and fees during the years ended December 31, 2005, 2004 and 2003, respectively, each of which was eliminated in consolidation. In 2005 and 2004, the Company provided disposition and development services to an affiliate of the Retired Directors. In connection therewith, the Company received an aggregate of $886,000 and $175,000 in fees. In September 2000, a wholly owned subsidiary of Services entered into a $6,000,000 promissory note with an affiliate in which James M. Seneff, Jr., a former director of the Company, and Kevin B. Habicht, a director and officer of the Company, own a majority equity interest. The note was secured by the affiliate’s common stock in OAMI. In July 2003, the promissory note was paid in full. In May 2005, the wholly owned subsidiary of Services exercised its option with the affiliate and purchased approximately 78.9 percent of all the common shares of OAMI for $9,379,000. In September 2000, a wholly owned subsidiary of 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 and 2003, the Company recognized $1,732,000 and $927,000, respectively, of interest and fee income related to the line of credit. An affiliate of James M. Seneff, Jr., a former director of the Company, provided certain administrative, tax and technology services to the Company. In connection therewith, the Company paid $999,000 and $1,363,000 in fees relating to these services during the years ended December 31, 2004 and 2003, respectively. In 2002, the Company extended the maturity dates to dates between June and December 2007 on four mortgages securing an original aggregate principal indebtedness totaling $8,514,000 from affiliates of the Retired Directors. In June 2005, the Company received the outstanding principal balance for three of the mortgage loans. In July 2005, the Company received the entire outstanding principal balance for the remaining mortgage loan. As of December 31, 2004, the aggregate principal balance of the four mortgages, included in mortgages, notes and accrued interest receivable on the balance sheet, was $2,482,000. In connection therewith, the Company recorded $96,000, $243,000 and $281,000 as interest and other income from real estate transactions during the years ended December 31, 2005, 2004 and 2003, respectively. Prior to January 2005, the Company held a 98.7 percent, non-controlling and non-voting interest in Services. In January 2005, the Company entered into a purchase agreement with Services Investors, which provided that the Company would acquire their collective 1.3 percent interest, which was 100 percent of the voting interest in Services. Effective January 1, 2005, the Company acquired the remaining interest in Services increasing the Company’s ownership in Services to 100 percent. 83 The Company paid the Services Investors $870,000 cash for the 1.3 percent interest, as determined by a third-party valuation. The Company allocated the difference between the purchase price, including transaction costs, and the book value of the 1.3 percent interest to the fair market value of the assets and liabilities acquired. The fair value of the assets and liabilities was determined by the third-party valuation, and the excess purchase price was allocated to the acquired assets on a pro rata basis, in accordance with the third-party valuation report. 25. Segment Information: The Company has identified two primary financial segments: (i) Investment Assets and (ii) Inventory Assets. The following tables represent the segment data and a reconciliation to the Company’s condensed consolidated totals for the years ended December 31, 2005, 2004 and 2003 (dollars in thousands): Investment Assets Inventory Assets Eliminations (Intercompany) 2005 External revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in earnings of unconsolidated affiliates . . . . . . . . . Impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 137,727 3,511 5,745 35,187 22,054 25,491 2,859 4,055 835 (378) 3,250 (921) 509 3,214 222 9,583 (40) — 1,941 515 Earnings (loss) from continuing operations . . . . . . . . . . . . Earnings from discontinued operations . . . . . . . . . . . . . . . Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,512 11,102 14,786 $ (7,765) 9,376 — $ $ — (2,590) — (2,460) — (129) (1,610) — — — (1,611) — — Condensed Consolidated Totals $ 140,977 — 6,254 35,941 22,276 34,945 1,209 4,055 2,776 137 $ 54,136 20,478 14,786 Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89,400 $ 1,611 $ (1,611) $ 89,400 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,726,701 $137,196 $(130,481) $1,733,416 Additions to long-lived assets: Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 267,488 $137,286 $ — $ 404,774 Investment Assets Inventory Assets Eliminations (Intercompany) 2004 External revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in earnings of unconsolidated affiliates . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 115,838 3,819 7,976 32,899 16,518 28,095 8,733 — — Earnings (loss) from continuing operations . . . . . . . . . . . . Earnings from discontinued operations . . . . . . . . . . . . . . . 58,854 6,080 Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,934 $ 5,251 (817) 1,886 2,315 164 10,679 (68) 2,544 (1,243) (5,605) 9,547 3,942 $ — (3,002) — (2,833) — (168) (3,941) — — (3,942) — (3,942) Condensed Consolidated Totals $ 121,089 — 9,862 32,381 16,682 38,606 4,724 2,544 (1,243) 49,307 15,627 64,934 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,294,755 $ 70,980 $ (65,687) $1,300,048 Additions to long-lived assets: Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 134,565 $ 74,024 $ — $ 208,589 84 Investment Assets Inventory Assets Eliminations (Intercompany) Condensed Consolidated Totals $ 2003 External revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in earnings of unconsolidated affiliates . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings (loss) from continuing operations . . . . . . . . . . . . . Earnings from discontinued operations . . . . . . . . . . . . . . . . 95,766 3,327 2,738 27,461 12,738 21,015 6,154 — — 46,771 6,702 $ 4,145 (566) 1,315 1,263 230 10,986 (216) 2,958 (12) (4,855) 6,370 $ — $ (2,761) — (2,096) — (747) (1,597) — — (1,515) — 99,911 — 4,053 26,628 12,968 31,254 4,341 2,958 (12) 40,401 13,072 Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,473 $ 1,515 $ (1,515) $ 53,473 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,208,310 $80,945 $(75,477) $1,213,778 Additions to long-lived assets: Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 215,730 $58,612 $ — $ 274,342 26. Major Tenants: For the years ended December 31, 2005 and 2004, the Company recorded rental and earned income from one of the Company’s tenants, the United States of America, of $18,827,000 and $18,181,000, respectively. During the year ended December 31, 2003, the Company recorded rental and earned income from Eckerd Corporation of $11,278,000. 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. 27. Commitments and Contingencies: As of December 31, 2005, the Company had letters of credit totalling $13,163,000 outstanding under its Credit Facility. In the ordinary course of its business, the Company is a party to various other legal actions which management believes are routine in nature and incidental to the operation of the business of the Company. Management believes that the outcome of the proceedings will not have a material adverse effect upon its operations, financial condition or liquidity. 28. Subsequent Events: In February 2006, the Company announced it has signed a definitive agreement to sell the DC office properties for an estimated purchase price of $235,430,000. 85 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, 2005 of the effectiveness of the design and operation of its disclosure controls and procedures and its internal control over financial reporting. This assessment was done under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer. Rules adopted by the Commission require the Company to present the conclusions of the Chief Executive Officer and Chief Financial Officer about the effectiveness of the Company’s disclosure controls and procedures and the conclusions of the Company’s management about the effectiveness of the Company’s internal control over financial reporting as of the end of the period covered by this annual report. CEO and CFO Certifications. Included as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K are forms of “Certification” of the Company’s Chief Executive Officer and Chief Financial Officer. The forms of Certification 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 certifications and this information should be read in conjunction with the Section 302 certifications 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 filed 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 specified 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 Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s Chief Executive Officer and Chief Financial Officer, and affected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial 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 reflect the transactions and dispositions of the Company’s assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made in accordance with authorizations of management 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 effect on the Company’s financial statements. Scope of the Assessments. The assessment by the Company’s Chief Executive Officer and Chief Financial Officer of the Company’s disclosure controls and procedures and the assessment by the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the Company’s internal control over financial reporting included a review of procedures and discussions with the Company’s management and 86 others at the Company. In the course of the assessments, the Company sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. The Company’s internal control over financial 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 financial reporting and to make modifications as necessary. The Company’s intent in this regard is that the disclosure controls and procedures and the internal control over financial 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 “significant deficiencies” or “material weaknesses” in the Company’s internal control over financial reporting, or whether management had identified any acts of fraud involving personnel who have a significant role in the Company’s internal control over financial reporting. In the Public Company Accounting Oversight Board’s Auditing Standard No. 2, a “significant deficiency” is a “control deficiency,” or a combination of control deficiencies, that adversely affects the ability to initiate, authorize, record, process or report external financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the annual or interim financial statements that is more than inconsequential will not be prevented or detected. A “control deficiency” 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 defined in Auditing Standard No. 2 as a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial 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 identified, 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 financial reporting is done on a quarterly basis so that the conclusions concerning effectiveness 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 Effectiveness of Disclosure Controls and Procedures. Based upon the assessments, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2005, the Company’s disclosure controls and procedures were effective. Management’s Report on Internal Control Over Financial Reporting. Management, including the Company’s Chief Executive Officer and Chief Financial Officer, are responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework to assess the effectiveness of the Company’s internal control over financial reporting. Based upon the assessments, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2005, the Company’s internal control over financial reporting was effective. The Company’s independent registered public accounting firm has audited the consolidated financial 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 financial reporting and its opinion on the effectiveness of internal control over financial reporting, which appears in this Annual Report on Form 10-K. Changes in Internal Control Over Financial Reporting. During the three months ended December 31, 2005, there were no changes in the Company’s internal control over financial reporting that has materially affected, or are reasonably likely to materially affect, the Company’s internal control for financial reporting. 87 Limitations on the Effectiveness of Controls. Management, including the Company’s Chief Executive Officer and Chief Financial Officer, do not expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial 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 reflect the fact that there are resource constraints, and the benefits 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-effective control system, misstatements due to error or fraud may occur and not be detected. Item 9B. Other Information. None. 88 PART III Item 10. Directors and Executive Officers of the Registrant Reference is made to the Registrant’s definitive proxy statement to be filed 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—Nominees,” “Proposal I: Election of Directors—Executive Officers,” “Proposal I: Election of Directors—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 definitive proxy statement to be filed 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—Compensation of Directors,” “Executive Compensation,” “Compensation Committee Report” and “Performance Graph,” and the information in such sections is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Reference is made to the Registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned “Executive Compensation—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 definitive proxy statement to be filed 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 definitive proxy statement to be filed 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. 89 PART IV Item 15. Exhibits, Financial Statement Schedules (a) The following documents are filed as part of this report. (1) Financial Statements Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2005 and 2004 Consolidated Statements of Earnings for the years ended December 31, 2005, 2004 and 2003 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2005, 2004 and 2003 Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 Notes to Consolidated Financial Statements (2) Financial Statement Schedules Schedule III—Real Estate and Accumulated Depreciation and Amortization and Notes as of December 31, 2005 Schedule IV—Mortgage Loans on Real Estate and Notes as of December 31, 2005 All other schedules are omitted because they are not applicable or because the required information is shown in the financial statements or the notes thereto. (3) Exhibits (a) The following exhibits are filed as a part of this report. 2. Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession. 2.1 2.2 2.3 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 (filed as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated January 19, 2005, and incorporated herein by reference). Real Estate Purchase and Sale Agreement, dated November 28, 2005, between the Company and SSP Partners, as amended (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated December 21, 2005, and incorporated herein by reference). Real Estate Purchase and Sale Agreement, dated December 1, 2005, between the Company and SSP Partners, as amended (filed as Exhibit 2.2 to the Registrant’s Current Report on Form 8-K dated December 21, 2005, and incorporated herein by reference). 3. Articles of Incorporation and By-laws 3.1 First Amended and Restated Articles of Incorporation of the Registrant, as amended (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, and incorporated herein by reference). 90 3.2 3.3 3.4 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”) (filed as Exhibit 3 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference). Articles Supplementary Classifying and Designating 10,000 Preferred Shares as the Series B Preferred Stock (filed as Exhibit 3 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference). Third Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated August 18, 2005, and incorporated herein by reference). 4. Instruments Defining the Rights of Security Holders, Including Indentures 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Specimen Certificate of Common Stock, par value $0.01 per share, of the Registrant (filed as Exhibit 3.4 to the Registrant’s Registration Statement No. 1-11290 on Form 8-B and incorporated herein by reference). 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 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference). Form of Supplemental Indenture No. 1 dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference). Form of 7.125% Note due 2008 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference). 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 (filed 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 (filed 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 (filed 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 (filed 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 (filed 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 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 15, 2004, and incorporated herein by reference). 91 4.11 Articles Supplementary Establishing and Fixing the Rights and Preferences of a Series of Preferred Stock (the Series A Preferred Stock) (filed as Exhibit 3 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference). 4.12 Specimen Stock Certificate relating to the Series A Preferred Stock (filed as Exhibit 4 to the Registrant’s Form 8-A dated November 26, 2001 and filed 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 (filed as Exhibit 3 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference). 4.14 4.15 Specimen Stock Certificate relating to the Series B Preferred Stock (filed as Exhibit 4 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference). Form of Supplemental Indenture No. 6 dated as of November 17, 2005, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $150,000,000 of 6.15% Notes due 2015 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated November 14, 2005, and incorporated herein by reference). 4.16 Form of 6.15% Notes due 2015 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated November 14, 2005, and incorporated herein by reference). 10. Material Contracts 10.1 10.2 10.3 10.4 10.5 10.6 2000 Performance Incentive Plan (filed 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 (filed as Exhibit 10.2 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference). Employment Agreement dated February 16, 2004, between the Registrant and Craig Macnab (filed as Exhibit 10.3 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference). Employment Agreement dated February 1, 2003, between the Registrant and Julian E. Whitehurst (filed as Exhibit 10.4 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference). Employment Agreement dated January 1, 2003, as amended, between the Registrant and Kevin B. Habicht (filed as Exhibit 10.5 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference). Employment Agreement dated January 1, 2003, between the Registrant and Dennis E. Tracy (filed as Exhibit 10.6 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference). 92 10.7 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 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated July 25, 2003, and incorporated herein by reference). 10.8 10.9 Eighth Amended and Restated Line of Credit and Security Agreement, dated December 13, 2005, by and among Registrant, certain lenders and Wachovia Bank, N.A., as the Agent, relating to a $300,000,000 loan (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 15, 2005, and incorporated herein by reference). Form of Lease Agreement, between an affiliate of Commercial Net Lease Realty, Inc., as landlord and SSP Partners, as tenant (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 21, 2005, and incorporated herein by reference). 10.10 Real Estate Purchase Contract, dated February 9, 2006, among CNLR DC Acquisitions I, LLC, Brookfield Financial Properties, L.P. and the Registrant (filed herewith). 10.11 Amendment to Real Estate Purchase Contract, dated February 14, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed herewith). 10.12 Second Amendment to Real Estate Purchase Contract, dated February 15, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed herewith). 12. Statement of Computation of Ratios of Earnings to Fixed Charges (filed herewith). 21. Subsidiaries of the Registrant (filed herewith). 23. Consent of Independent Accountants dated February 24, 2006 (filed herewith). 24. Power of Attorney (included on signature page). 31. Section 302 Certifications 31.1 Certification of Chief Executive Officer 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 (filed herewith). 31.2 Certification of Chief Financial Officer 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 (filed herewith). 32. Section 906 Certifications 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 99. Additional Exhibits 99.1 Certification of Chief Executive Officer pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company Manual (filed herewith). 93 SIGNATURES 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 27th day of February, 2006. COMMERCIAL NET LEASE REALTY, INC. By: /s/ CRAIG MACNAB Craig Macnab Director, President, and Chief Executive Officer 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 file 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 confirming 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/ CLIFFORD R. HINKLE Chairman of the Board of Directors February 27, 2006 Clifford R. Hinkle /s/ G. NICHOLAS BECKWITH III Director February 27, 2006 G. Nicholas Beckwith III /s/ RICHARD B. JENNINGS Director February 27, 2006 Richard B. Jennings /s/ TED B. LANIER Director February 27, 2006 Ted B. Lanier /s/ ROBERT C. LEGLER Director February 27, 2006 Robert C. Legler /s/ ROBERT MARTINEZ Director February 27, 2006 Robert Martinez /s/ CRAIG MACNAB Craig Macnab Director, President and Chief Executive Officer /s/ KEVIN B. HABICHT Kevin B. Habicht Director, Chief Financial Officer (Principal Financial and Accounting Officer), Executive Vice President, Assistant Secretary and Treasurer February 27, 2006 February 27, 2006 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Real Estate Held for Investment the Company has Invested in Under Operating Leases: Academy: F - 1 Houston, TX . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . N. Richland Hills, TX . . . . . Houston, TX . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . Baton Rouge, LA . . . . . . . . San Antonio, TX . . . . . . . . . Beaumont, TX . . . . . . . . . . . Houston, TX . . . . . . . . . . . . Pasadena, TX . . . . . . . . . . . College Station, TX . . . . . . Franklin, TN . . . . . . . . . . . . $ — — — — — — 770,830(t) — — — — — $1,074,232 699,165 1,307,655 2,098,895 795,005 1,547,501 973,123 1,423,700 2,310,845 899,768 1,407,855 1,807,096 $ — $ — — — — — — 2,449,261 1,627,872 2,180,574 2,230,756 2,108,278 — $— $1,074,232 699,165 — 1,307,655 — 2,098,895 — 795,005 — 1,547,501 — 973,123 — 1,423,700 — 2,310,845 — 899,768 — 1,407,855 — 1,807,096 — — — — — — — — — — — — $ (c) (c) (c) (c) (c) (c) (c) 2,449,261 1,627,872 2,180,574 2,230,756 2,108,278 $1,074,232 699,165 1,307,655 2,098,895 795,005 1,547,501 973,123 3,872,961 3,938,717 3,080,342 3,638,611 3,915,374 (c) (c) (c) (c) (c) (c) (c) 415,864 276,399 370,243 30,208 38,066 1994 1995 1996 1996 1996 1997 1996 1992 1976 1994 2002 1999 05/95 06/95 08/95(f) 02/96(f) 06/96(f) 08/96(f) 09/97 03/99 03/99 03/99 06/05 06/05 (c) (c) (c) (c) (c) (c) (c) 40 years 40 years 40 years 40 years 30 years Ace Hardware and Lighting: Bourbonnais, IL . . . . . . . . . Advanced Auto Parts: Miami, FL . . . . . . . . . . . . . . AJ Petroleum: Deerfield Beach, FL . . . . . . Lake Placid, FL . . . . . . . . . . Albertsons: Sonora, CA . . . . . . . . . . . . . American Payday Loans: Des Moines, IA . . . . . . . . . . — — — — — — 298,192 1,329,492 — — 298,192 1,329,492 1,627,684 157,284 1997 11/98 37.4 years 867,177 — 1,035,275 — 867,177 1,035,275 1,902,452 14,019 2005 12/04(g) 40 years 2,531,533 769,522 1,292,535 273,756 587,782 1,620,311 108,421 379,067 — — — — — — — — 2,531,533 769,522 1,292,535 273,756 3,824,068 1,043,278 1,346 285 1980 1990 12/05 12/05 40 years 40 years 587,782 1,620,311 2,208,093 89,455 1984 03/99 40 years 108,421 379,067 487,488 5,133 1979 06/05 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed 28,465 85,396 969,156 949,185 — — 1,159,733 773,866 663,719 352,305 — — 1,496,173 1,403,581 442,991 250,881 205,957 450,358 267,842 156,875 170,515 507,790 513,970 533,540 341,960 503,550 545,841 468,916 — — — — — — — — — — — — — — — — — — — — 28,465 85,396 113,861 4,626 1949 06/05 10 years 969,156 949,185 — — 969,156 949,185 — — (i) (i) 05/03 05/03 (i) (i) 1,159,733 773,866 663,719 352,305 — — 1,512,038 773,866 663,719 1,835 — — 1981 (e) (e) 10/05 12/05 12/05 40 years (e) (e) — 1,496,173 1,403,581 2,899,754 141,820 1995 12/01 40 years — — — — — — — 442,991 250,881 205,957 450,358 267,842 156,875 170,515 507,790 513,970 533,540 341,960 503,550 545,841 468,916 950,781 764,851 739,497 792,318 771,392 702,716 639,431 51,308 51,932 53,910 34,552 50,879 55,153 47,380 1993 1988 1998 1998 1997 1998 1993 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 1,666,700 4,877,225 4,989,452 315,000 — — — 2,906,409 1,666,700 5,192,225 4,989,452 8,098,634 6,656,152 1,040,199 98,750 1997 2005 09/97 03/05 40 years 40 years AmerUs Group Warehouse: Des Moines, IA . . . . . . . . . . . . . . . Amoco: Miami, FL . . . . . . . . . . . . . . . . . . . Sunrise, FL . . . . . . . . . . . . . . . . . . Amscot: Tampa, FL . . . . . . . . . . . . . . . . . . . Orlando, FL . . . . . . . . . . . . . . . . . . Orlando, FL . . . . . . . . . . . . . . . . . . F - 2 Applebee’s: Ballwin, MO . . . . . . . . . . . . . . . . . Arby’s: Albuquerque, NM . . . . . . . . . . . . . Albuquerque, NM . . . . . . . . . . . . . Colorado Springs, CO . . . . . . . . . . Santa Fe, NM . . . . . . . . . . . . . . . . Thomson, GA . . . . . . . . . . . . . . . . Washington Courthouse, OH . . . . . . . . . . . . . . . . Whitmore Lake, MI Ashley Furniture: Altamonte Springs, FL . . . . . . . . . Louisville, KY . . . . . . . . . . . . . . . Babies "R" Us: Arlington, TX . . . . . . . . . . . . . . . . Independence, MO . . . . . . . . . . . . Barnes & Noble: — — — — — — — — — — — — — — — — — — Brandon, FL . . . . . . . . . . . . . . . . . Denver, CO . . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . 931,271(j) 1,476,407 3,244,785 3,307,562 — — 1,527,150 2,722,087 2,396,024 830,689 1,678,794 2,611,867 2,301,909 — — — — — — — — — — 830,689 1,678,794 2,611,867 2,301,909 3,442,556 3,980,703 620,863 232,589 1996 1996 06/96 12/01 40 years 40 years 1,476,407 3,244,785 3,307,562 1,527,150 2,722,087 2,396,024 3,003,557 5,966,872 5,703,586 419,129 765,699 613,989 1995 1994 1995 08/94(f) 09/94 10/94(f) 40 years 40 years 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Plantation, FL . . . . . . . . . . . . . . . Freehold, NJ(r) . . . . . . . . . . . . . . Dayton, OH . . . . . . . . . . . . . . . . . Redding, CA . . . . . . . . . . . . . . . . Memphis, TN . . . . . . . . . . . . . . . Marlton, NJ . . . . . . . . . . . . . . . . . 4,946,087(p) 3,616,357 — 2,917,219 — 1,412,614 497,179 — 1,118,462(t) 1,573,875 — 2,831,370 — 2,260,663 3,223,467 1,625,702 2,241,639 4,318,554 — — — — — — — — — — — — 3,616,457 2,917,219 1,412,614 497,179 1,573,875 2,831,370 (c) 2,260,663 3,223,467 1,625,702 2,241,639 4,318,554 3,616,457(o) 5,177,882 4,636,081 2,122,881 3,815,514 7,149,924 (c) 560,770 695,060 347,155 107,412 769,242 1996 1995 1996 1997 1997 1998 05/95(f) 01/96 05/97 06/97 09/97 11/98 (c) 40 years 40 years 40 years 40 years 40 years Bassett Furniture: Fairview Heights, IL . . . . . . . . . . — 1,257,729 2,622,952 — — 1,257,729 2,622,952 3,880,681 13,661 1980 10/05 40 years Beall’s: F - 3 Sarasota, FL . . . . . . . . . . . . . . . . 1,497,941(t) 1,077,802 1,795,174 — — 1,077,802 1,795,174 2,872,976 90,047 1996 09/97 40 years Beautiful America Dry Cleaners: Orlando, FL . . . . . . . . . . . . . . . . . 75,589(u) 40,200 110,531 — — 40,200 110,531 150,731 5,181 2001 02/04 40 years Bed, Bath & Beyond: Richmond, VA . . . . . . . . . . . . . . Los Angeles, CA . . . . . . . . . . . . . Glendale, AZ . . . . . . . . . . . . . . . . 2,834,952(p) 1,184,144 — 6,318,023 — 1,082,092 2,842,759 3,089,396 — — — 2,758,452 — — — 1,184,144 6,318,023 1,082,092 2,842,759 3,089,396 2,758,452 4,026,903(o) 254,664 550,299 9,407,419 445,375 3,840,544 1997 1975 1999 06/98 11/98 12/98(g) 40 years 40 years 40 years Bedford Furniture: Everett, PA . . . . . . . . . . . . . . . . . Beneficial: Eden Prairie, MN . . . . . . . . . . . . Bennigan’s: Milford, CT(r) . . . . . . . . . . . . . . . Altamonte Springs, FL . . . . . . . . Schaumburg, IL . . . . . . . . . . . . . Wichita Falls, TX . . . . . . . . . . . . Best Buy: — — 226,366 1,159,833 7,830 — 226,366 817,667 1,044,033 105,499 1998 11/98 40 years 75,736 210,628 94,277 — 75,736 304,905 380,641 27,123 1997 12/01 40 years Brandon, FL . . . . . . . . . . . . . . . . Evanston, IL . . . . . . . . . . . . . . . . — 2,985,156 — 1,850,996 2,772,137 — 921,200 — — 1,088,282 — 2,064,964 818,611 — 697,298 924,425 1,311,190 1,107,418 — — — — — — — — — — — — 921,200 1,088,282 2,064,964 818,611 697,298 924,425 1,311,190 1,107,418 1,618,498 2,012,707 3,376,154 1,926,029 70,456 93,405 132,485 111,895 1988 1988 1988 1993 12/01 12/01 12/01 12/01 40 years 40 years 40 years 40 years 2,985,156 1,850,996 2,772,137 (c) 5,757,293 1,850,996 615,068 (c) 1996 1994 02/97 02/97 40 years (c) See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed F - 4 Cuyahoga Falls, OH . . . . . . . . . . Rockville, MD . . . . . . . . . . . . . . Fairfax, VA . . . . . . . . . . . . . . . . . St. Petersburg, FL . . . . . . . . . . . . North Fayette, PA . . . . . . . . . . . . Denver, CO . . . . . . . . . . . . . . . . . — 3,708,980 — 6,233,342 — 3,052,477 4,523,860(p) 4,031,744 — 2,330,847 — 8,881,890 2,359,377 3,418,783 3,218,018 2,610,980 2,292,932 4,372,684 Billy Bob’s: Gresham, OR . . . . . . . . . . . . . . . — 817,311 108,294 BJ's Wholesale Club: Orlando, FL . . . . . . . . . . . . . . . . . 5,851,820(u) 3,137,500 8,626,657 Blockbuster Video: Conyers, GA . . . . . . . . . . . . . . . . Alice, TX . . . . . . . . . . . . . . . . . . Gainesville, GA . . . . . . . . . . . . . Glasgow, KY . . . . . . . . . . . . . . . Kingsville, TX . . . . . . . . . . . . . . Mobile, AL . . . . . . . . . . . . . . . . . Mobile, AL . . . . . . . . . . . . . . . . . BMW: — — — — — — — 320,029 318,285 294,882 302,859 498,849 491,453 843,121 556,282 578,268 611,570 560,904 457,695 498,488 562,498 Duluth, GA . . . . . . . . . . . . . . . . . — 4,433,613 4,080,186 Bodyworks Unlimited: Rincon, GA . . . . . . . . . . . . . . . . . — 244,607 1,166,045 Borders Books & Music: Wilmington, DE . . . . . . . . . . . . . Richmond, VA . . . . . . . . . . . . . . Ft. Lauderdale, FL . . . . . . . . . . . Bangor, ME . . . . . . . . . . . . . . . . . Altamonte Springs, FL . . . . . . . . 2,819,457(j) 3,030,764 1,481,280(j) 2,177,310 4,765,133(p) 3,164,984 — 1,546,915 — 1,947,198 6,061,538 2,599,587 3,319,234 2,486,761 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 3,708,980 6,233,342 3,052,477 4,031,744 2,330,847 8,881,890 2,359,377 3,418,783 3,218,018 2,610,980 2,292,932 4,372,684 503,825 6,068,357 722,930 9,652,125 6,270,495 673,773 6,642,724(o) 267,315 432,313 4,623,779 496,482 13,254,574 1970 1995 1995 1997 1997 1991 06/97 07/97 08/97 09/97 06/98 06/01 40 years 40 years 40 years 35 years 40 years 40 years 817,311 108,294 925,605 10,942 1993 12/01 40 years — 3,137,500 8,626,657 11,764,157 404,375 2001 02/04 40 years — — — — — — — 320,029 318,285 294,882 302,859 498,849 491,453 843,121 556,282 578,268 611,570 560,904 457,695 498,488 562,498 876,311 896,553 906,452 863,763 956,544 989,941 1,405,619 118,789 58,429 61,794 56,675 46,246 50,368 56,836 1997 1995 1997 1997 1995 1997 1997 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 8,513,799 412,269 1984 12/01 40 years — — — — — — 244,607 791,808 1,036,415 103,455 1997 11/98 37.4 years 2,994,400 2,177,310 3,164,984 1,546,915 1,947,198 6,061,538 2,599,587 3,319,234 2,486,761 (c) 1,670,996 9,055,938 4,776,897 686,363 6,484,218(o) 360,422 592,333 4,033,676 (c) 1,947,198 1994 1995 1995 1996 1997 12/94 06/95 02/96 06/96 09/97 40 years 40 years 33 years 40 years (c) See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Boston Market: . . . . . . . . . . . . . . Burton, MI Geneva, IL . . . . . . . . . . . . . . North Olmsted, OH . . . . . . . . Novi, MI . . . . . . . . . . . . . . . . Orland Park, IL . . . . . . . . . . . Warren, OH . . . . . . . . . . . . . . Wheaton, IL . . . . . . . . . . . . . Buffalo Wild Wings: Michigan City, IN . . . . . . . . . F - 5 Burger King: Colonial Heights, VA . . . . . . Carino’s: Beaumont, TX . . . . . . . . . . . . Lewisville, TX . . . . . . . . . . . Lubbock, TX . . . . . . . . . . . . . Carl’s Jr: Chandler, AZ . . . . . . . . . . . . Tucson, AZ . . . . . . . . . . . . . . CarMax: Albuquerque, NM . . . . . . . . . Certified Auto Sales: Albuquerque, NM . . . . . . . . . Champps: Alpharetta, GA . . . . . . . . . . . Irving, TX . . . . . . . . . . . . . . . Charhut: Sunrise, FL . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — 619,778 1,125,347 601,800 835,669 562,384 562,446 1,115,457 707,242 1,036,952 460,521 651,108 556,201 467,592 1,014,184 — — — — — — — — — — — — — — 619,778 1,125,347 601,800 835,669 562,384 562,446 1,115,457 707,242 893,485 389,065 297,567 377,244 467,592 872,736 1,327,020 2,018,832 990,865 1,133,236 939,628 1,030,038 1,988,193 71,461 92,591 40,463 35,764 41,001 47,246 90,462 1997 1996 1996 1995 1995 1997 1995 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 162,538 492,007 — — 162,538 492,007 654,545 49,713 1996 12/01 40 years 662,345 609,787 — — 662,345 609,787 1,272,132 61,614 1997 12/01 40 years 439,076 1,369,836 1,007,432 1,363,447 1,018,659 1,205,512 729,291 681,386 644,148 536,023 — — — — — — — — — — 439,076 1,369,836 1,007,432 1,363,447 1,018,659 1,205,512 1,802,523 2,388,495 2,212,944 137,765 102,927 121,807 2000 1994 1995 12/01 12/01 12/01 40 years 40 years 40 years 729,291 681,386 644,148 536,023 1,373,439 1,217,409 17,446 29,035 1984 1988 06/05 06/05 20 years 10 years 10,197,135 — 8,128,062 — 10,197,135 8,128,062 18,325,197 228,602 2004 04/04(f) 40 years 1,112,876 — 1,418,552 — 1,112,876 1,418,552 2,531,428 16,254 2005 04/04(f) 40 years 3,032,965 1,760,020 1,641,820 1,724,220 — — — — 3,032,965 1,760,020 1,641,820 1,724,220 4,674,785 3,484,240 165,892 174,218 1999 2000 12/01 12/01 40 years 40 years 286,834 423,837 — — 286,834 423,837 710,671 17,077 1979 05/04 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed F - 6 Checkers: Orlando, FL . . . . . . . . . . . . . . . . . . Chili’s: Camden, SC . . . . . . . . . . . . . . . . . Milledgeville, GA . . . . . . . . . . . . . Sumter, SC . . . . . . . . . . . . . . . . . . China Star: Montgomery, AL . . . . . . . . . . . . . Circle K: Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . Donna, TX . . . . . . . . . . . . . . . . . . Edinburg, TX . . . . . . . . . . . . . . . . Edinburg, TX . . . . . . . . . . . . . . . . Falfurias, TX . . . . . . . . . . . . . . . . . Freer, TX . . . . . . . . . . . . . . . . . . . . George West, TX . . . . . . . . . . . . . Harlingen, TX . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — 256,568 — 629,536 516,118 800,329 1,889,845 1,996,627 1,717,221 1,418,158 1,140,080 1,842,992 1,181,713 2,915,173 2,416,656 1,015,092 1,038,788 1,392,201 1,279,447 2,529,864 2,033,467 933,149 1,384,743 852,629 1,399,622 703,182 1,003,876 1,317,408 970,145 4,243,940 1,150,862 1,243,224 906,427 1,418,941 1,105,326 1,800,409 1,828,304 1,307,774 1,144,916 1,443,817 1,014,702 1,124,953 1,287,564 699,086 1,418,948 1,416,208 1,530,910 1,036,506 1,126,591 1,623,891 1,286,006 4,458,007 1,158,251 695,074 952,530 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 256,568 (c) 256,568 (c) 1988 07/92 (c) 629,536 516,118 800,329 1,889,845 1,996,627 1,717,221 2,519,381 2,512,745 2,517,550 13,765 14,559 1,789 2005 2005 2004 09/05 09/05 12/05 40 years 40 years 40 years — 1,418,158 1,044,075 2,462,233 114,315 1999 12/01 40 years — — — — — — — — — — — — — — — — — — — — — — 1,842,992 1,181,713 2,915,173 2,416,656 1,015,092 1,038,788 1,392,201 1,279,447 2,529,864 2,033,467 933,149 1,384,743 852,629 1,399,622 703,182 1,003,876 1,317,408 970,145 4,243,940 1,150,862 1,243,224 906,427 1,418,941 1,105,326 1,800,409 1,828,304 1,307,774 1,144,916 1,443,817 1,014,702 1,124,953 1,287,564 699,086 1,418,948 1,416,208 1,530,910 1,036,506 1,126,591 1,623,891 1,286,006 4,458,007 1,158,251 695,074 952,530 3,261,933 2,287,039 4,715,582 4,244,960 2,322,866 2,183,704 2,836,018 2,294,149 3,654,817 3,321,031 1,632,235 2,803,691 2,268,837 2,930,532 1,739,688 2,130,467 2,941,299 2,256,151 8,701,947 2,309,113 1,938,298 1,858,957 1,478 1,151 1,875 1,904 1,362 1,193 1,504 1,057 1,172 1,341 728 1,478 1,475 1,595 1,080 1,174 1,692 1,340 4,644 1,207 724 992 2000 2000 2000 2000 2003 2004 2005 1990 1990 1995 1999 1982 2005 1984 1986 1995 1999 2003 2002 1984 1996 1991 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 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 40 years 40 years 40 years 40 years 40 years 40 years 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 F - 7 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Harlingen, TX . . . . . . . . . . . . . . . . Harlingen, TX . . . . . . . . . . . . . . . . La Feria, TX . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Lawton, OK . . . . . . . . . . . . . . . . . Los Indios, TX . . . . . . . . . . . . . . . McAllen, TX . . . . . . . . . . . . . . . . . McAllen, TX . . . . . . . . . . . . . . . . . Mission, TX . . . . . . . . . . . . . . . . . Mission, TX . . . . . . . . . . . . . . . . . Olmito, TX . . . . . . . . . . . . . . . . . . Pharr, TX . . . . . . . . . . . . . . . . . . . Pharr, TX . . . . . . . . . . . . . . . . . . . Pharr, TX . . . . . . . . . . . . . . . . . . . Port Isabel, TX . . . . . . . . . . . . . . . Portland, TX . . . . . . . . . . . . . . . . . Progresso, TX . . . . . . . . . . . . . . . . Riviera, TX . . . . . . . . . . . . . . . . . . San Benito, TX . . . . . . . . . . . . . . . San Benito, TX . . . . . . . . . . . . . . . San Juan, TX . . . . . . . . . . . . . . . . . San Juan, TX . . . . . . . . . . . . . . . . . South Padre Island, TX . . . . . . . . . Wichita Falls, TX . . . . . . . . . . . . . Wichita Falls, TX . . . . . . . . . . . . . Wichita Falls, TX . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 753,595 755,002 900,096 1,552,558 840,629 736,451 459,027 1,494,871 675,128 696,670 1,386,972 975,217 987,020 880,169 1,125,457 3,687,971 981,840 784,402 2,426,134 2,062,009 655,735 1,768,974 2,351,060 1,103,210 790,629 1,123,838 1,424,383 1,366,721 905,117 484,202 439,646 1,152,311 600,721 1,346,774 1,774,827 738,907 670,332 459,946 1,400,482 533,047 964,441 1,456,932 1,029,752 893,376 1,101,301 1,213,398 2,880,099 1,177,948 804,743 1,880,867 1,298,501 914,512 1,811,221 2,158,069 1,586,235 1,857,158 1,171,582 1,545,557 1,388,764 1,350,908 827,999 751,484 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 753,595 755,002 900,096 1,552,558 840,629 736,451 459,027 1,494,871 675,128 696,670 1,386,972 975,217 987,020 880,169 1,125,457 3,687,971 981,840 784,402 2,426,134 2,062,009 655,735 1,768,974 2,351,060 1,103,210 790,629 1,123,838 1,424,383 1,366,721 905,117 484,202 439,646 1,152,311 600,721 1,346,774 1,774,827 738,907 670,332 459,946 1,400,482 533,047 964,441 1,456,932 1,029,752 893,376 1,101,301 1,213,398 2,880,099 1,177,948 804,743 1,880,867 1,298,501 914,512 1,811,221 2,158,069 1,586,235 1,857,158 1,171,582 1,545,557 1,388,764 1,350,908 827,999 751,484 Total 1,905,906 1,355,723 2,246,870 3,327,385 1,579,536 1,406,783 918,973 2,895,353 1,208,175 1,661,111 2,843,904 2,004,969 1,880,396 1,981,470 2,338,855 6,568,070 2,159,788 1,589,145 4,307,001 3,360,510 1,570,247 3,580,195 4,509,129 2,689,445 2,647,787 2,295,420 2,969,940 2,755,485 2,256,025 1,312,201 1,191,130 Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed 1,200 626 1,403 1,849 770 698 479 1,459 555 1,005 1,518 1,073 931 1,147 1,264 3,000 1,227 838 1,959 1,353 953 1,887 2,248 1,652 1,935 1,220 1,610 1,447 1,407 863 783 1999 1987 1988 2000 2001 1984 1983 1993 1993 1984 2005 2003 1999 1999 2003 2002 1988 2000 2003 1994 1983 1999 2005 2005 1994 1996 2004 1988 2000 1983 1984 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 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 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 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Circuit City: Gastonia, NC . . . . . . . . . . . . . . . . . St. Peters, MO . . . . . . . . . . . . . . . . Claim Jumper: Roseville, CA . . . . . . . . . . . . . . . . Tempe, AZ . . . . . . . . . . . . . . . . . . CompUSA: Baton Rouge, LA(r) . . . . . . . . . . . CORA Rehabilitation Clinics: — — — — — 2,548,040 1,738,168 3,879,911 5,404,185 1,556,732 2,530,892 2,013,650 2,920,575 609,069 913,603 F - 8 Orlando, FL . . . . . . . . . . . . . . . . . . 151,177(u) 80,400 221,063 Corpus Christi Flea Market: Corpus Christi, TX . . . . . . . . . . . . — 223,998 2,158,955 CVS: San Antonio, TX . . . . . . . . . . . . . . Dallas, TX . . . . . . . . . . . . . . . . . . . Arlington, TX . . . . . . . . . . . . . . . . Amarillo, TX . . . . . . . . . . . . . . . . . Amarillo, TX . . . . . . . . . . . . . . . . . Kissimmee, FL . . . . . . . . . . . . . . . Tampa, FL . . . . . . . . . . . . . . . . . . . Lafayette, LA . . . . . . . . . . . . . . . . Moore, OK . . . . . . . . . . . . . . . . . . Midwest City, OK . . . . . . . . . . . . . Irving, TX . . . . . . . . . . . . . . . . . . . Jasper, FL . . . . . . . . . . . . . . . . . . . Williston, FL . . . . . . . . . . . . . . . . . Pantego, TX . . . . . . . . . . . . . . . . . Norman, OK . . . . . . . . . . . . . . . . . Ellenwood, GA . . . . . . . . . . . . . . . 379,851(j) 365,964(j) 311,654(j) 357,579(j) 464,732(j) 513,593(j) — — — — — — — — — 431,110(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 1,065,562 616,289 — — — — — — — — — 1,103,351 — — — 1,448,911 — 921,173 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 2,547,163 1,738,168 3,879,911 5,404,185 6,427,074 7,142,353 101,039 61,947 2004 2005 12/04 06/05(g) 40 years 40 years 1,556,732 2,530,892 2,013,650 2,920,575 3,570,382 5,451,467 203,463 295,100 2001 2000 12/01 12/01 40 years 40 years 609,069 913,603 1,522,672 228,462 1995 12/95 40 years 80,400 221,063 301,463 10,362 2001 02/04 40 years 223,998 2,158,955 2,382,953 366,573 1983 03/99 40 years 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 1,065,562 616,289 (c) (c) (c) (c) (c) (c) (c) (c) (c) 1,103,351 (c) (c) (c) 1,448,911 (c) 921,173 440,985 541,493 368,964 329,231 650,864 715,480 604,683 967,528 414,738 1,776,720 1,000,222 291,147 622,403 2,464,973 1,065,562 1,537,462 (c) (c) (c) (c) (c) (c) (c) (c) (c) 271,018 (c) (c) (c) 309,403 (c) 44,140 1993 1994 1994 1994 1994 1995 1995 1995 1995 1996 1996 1994 1995 1997 1997 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 09/97 (c) (c) (c) (c) (c) (c) (c) (c) (c) 40 years (c) (c) (c) 40 years (c) 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Flower Mound, TX . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . . . . Arlington, TX . . . . . . . . . . . . . . . Leavenworth, KS . . . . . . . . . . . . Lewisville, TX . . . . . . . . . . . . . . Forest Hill, TX . . . . . . . . . . . . . . Del City, OK . . . . . . . . . . . . . . . . Arlington, TX . . . . . . . . . . . . . . . Garland, TX . . . . . . . . . . . . . . . . Garland, TX . . . . . . . . . . . . . . . . Oklahoma City, OK . . . . . . . . . . Dallas, TX . . . . . . . . . . . . . . . . . . Gladstone, MO . . . . . . . . . . . . . . Fridley, MN . . . . . . . . . . . . . . . . 435,574(t) 529,192(t) — — — — — — — — — — 174,818 — 932,233 558,657 2,078,542 726,438 789,237 692,165 1,387,362 414,568 1,476,838 522,461 1,581,480 2,617,656 1,851,374 939,073 F - 9 — — 881,448 — — — — 1,396,508 — — 1,330,830 — — 1,335,426 — — 1,174,549 — — — — — — 1,400,278 — — 1,418,531 — — 1,471,105 — — 2,570,569 — — 1,739,568 — — — — — 1,637,329 932,233 558,657 2,078,542 726,438 789,237 692,165 1,387,362 414,568 1,476,838 522,461 1,581,480 2,617,656 1,851,374 939,073 881,448 (c) 1,396,508 1,330,830 1,335,426 1,174,549 (c) (c) 1,400,278 1,418,531 1,471,105 2,570,569 1,739,568 1,637,329 Total 1,813,681 558,657 3,475,050 2,057,268 2,124,663 1,866,714 1,387,362 414,568 2,877,116 1,940,992 3,052,585 5,188,225 3,590,942 2,576,402 Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed 42,236 (c) 257,481 250,917 243,437 216,558 (c) (c) 249,425 249,720 255,911 141,917 233,754 170,555 1996 1996 1998 1998 1998 1998 1998 1998 1998 1998 1999 2003 2000 1983 09/97 09/97 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) 12/01(v) 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 Dave & Buster’s: Utica, MI . . . . . . . . . . . . . . . . . . . DD’s Discounts: Moreno Valley, CA . . . . . . . . . . Denny’s: Columbus, TX . . . . . . . . . . . . . . . Dick’s Sporting Goods: Taylor, MI . . . . . . . . . . . . . . . . . . White Marsh, MD . . . . . . . . . . . . Dollar Tree: Garland, TX . . . . . . . . . . . . . . . . Copperas Cove, TX . . . . . . . . . . Moreno Valley, CA . . . . . . . . . . Donato’s: Medina, OH . . . . . . . . . . . . . . . . — — — — — — — — — 3,776,169 — — — 3,776,169 (c) 3,776,169 (c) 1998 06/98 (c) 516,154 1,123,471 183,146 — 516,154 1,306,617 1,822,771 195,474 1983 03/99 40 years 428,429 816,644 — — 428,429 816,644 1,245,073 82,515 1997 12/01 40 years 1,920,032 2,680,532 3,526,868 3,916,889 — — — — 1,920,032 2,680,532 3,526,868 3,916,889 5,446,900 6,597,421 819,618 910,255 1996 1996 08/96 08/96 40 years 40 years 239,014 241,650 242,896 626,170 511,624 528,692 — — 194,167 — 69,277 239,014 241,650 242,896 626,170 705,791 597,969 865,184 947,441 840,865 70,444 108,804 91,988 1994 1972 1983 02/94 11/98 03/99 40 years 40 years 40 years 405,113 463,582 — — 405,113 463,582 868,695 46,841 1996 12/01 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Dr. Clean Dry Cleaners: Monticello, NY . . . . . . . . . . . . . . — 19,625 71,570 — — 19,625 71,570 91,195 1,416 1996 03/05 40 years F - 1 0 Eckerd: Millville, NJ . . . . . . . . . . . . . . . . Atlanta, GA . . . . . . . . . . . . . . . . . Mantua, NJ . . . . . . . . . . . . . . . . . Glassboro, NJ . . . . . . . . . . . . . . . Douglasville, GA . . . . . . . . . . . . Conyers, GA . . . . . . . . . . . . . . . . Chattanooga, TN . . . . . . . . . . . . . Augusta, GA . . . . . . . . . . . . . . . . Riverdale, GA . . . . . . . . . . . . . . . Warner Robins, GA . . . . . . . . . . Vineland, NJ . . . . . . . . . . . . . . . . Falls Church, VA . . . . . . . . . . . . West Mifflin, PA . . . . . . . . . . . . Norfolk, VA . . . . . . . . . . . . . . . . Thorndale, PA . . . . . . . . . . . . . . . Enterprise Rent-A-Car: Wilmington, NC . . . . . . . . . . . . . Family Dollar: Cohoes, NY . . . . . . . . . . . . . . . . . Hudson Falls, NY . . . . . . . . . . . . Monticello, NY . . . . . . . . . . . . . . Fantastic Sams: Eden Prairie, MN . . . . . . . . . . . . Fazoli’s Restaurant: Bay City, MI . . . . . . . . . . . . . . . . 386,544(j) 345,438(j) 401,855(j) 440,871(j) — — — — — — 417,603 445,593 344,022 534,243 413,438 574,666 474,267 568,606 1,088,896 707,488 418,431(j) 2,068,089 3,127,139 1,401,632 2,742,194 2,260,618 — — — — — — — — 995,209 998,900 — 1,326,748 1,707,448 — — — — — — — — — — — — — — — — — — — 1,227,330 — — — — 2,424,664 — — — — — — — — 2,043,862 1,796,508 2,472,039 417,603 445,593 344,022 534,243 413,438 574,666 457,659 568,606 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) 246,867 213,307 (c) 266,732 343,268 213,504 (c) 226,128 197,999 174,037 239,479 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 — — 218,126 327,329 545,455 33,074 1995 12/01 40 years 95,644 51,055 96,445 515,502 379,789 351,721 — — — — — — 95,644 51,055 96,445 515,502 379,789 351,721 611,146 430,844 448,166 16,646 12,264 6,961 1994 1993 1996 09/04 09/04 03/05 40 years 40 years 40 years 64,916 180,538 80,809 — 64,916 261,347 326,263 23,248 1997 12/01 40 years 647,055 633,899 — — 647,055 633,899 1,280,954 64,050 1997 12/01 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Food 4 Less: Lemon Grove, CA . . . . . . . . . . . . Chula Vista, CA . . . . . . . . . . . . . . Gander Mountain: Amarillo, TX . . . . . . . . . . . . . . . . . Gate Petroleum: Concord, NC . . . . . . . . . . . . . . . . . Rocky Mountain, NC . . . . . . . . . . GCS Wireless: — — — — — 3,695,816 3,568,862 — — — — — — 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 — — 1,513,714 5,781,294 7,295,008 162,599 2004 11/04 40 years 852,225 258,764 1,200,862 1,164,438 — — — — 852,225 258,764 1,200,862 1,164,438 2,053,087 1,423,202 16,262 15,768 2001 2002 06/05 06/05 40 years 40 years Orlando, FL . . . . . . . . . . . . . . . . . . 69,290(u) 36,850 101,320 — — 36,850 101,320 138,170 4,749 2001 02/04 40 years F - 1 1 Gen-X Clothing: Federal Way, WA . . . . . . . . . . . . . Golden Corral: Leitchfield, KY . . . . . . . . . . . . . . . Atlanta, TX . . . . . . . . . . . . . . . . . . Abbeville, LA . . . . . . . . . . . . . . . . Lake Placid, FL . . . . . . . . . . . . . . . Brandon, FL . . . . . . . . . . . . . . . . . Dallas, TX . . . . . . . . . . . . . . . . . . . Tampa, FL . . . . . . . . . . . . . . . . . . . Good Guys, The: Foothill Ranch, CA . . . . . . . . . . . . East Palo Alto, CA . . . . . . . . . . . . Goodyear Truck & Tire: Wichita, KS . . . . . . . . . . . . . . . . . . GymKix: Copperas Cove, TX . . . . . . . . . . . — — — — — — — — — — — — 2,037,392 1,661,577 257,414 — 2,037,392 1,918,991 3,956,383 327,488 1995 12/95 40 years 73,660 88,457 98,577 115,113 1,329,793 1,138,129 1,187,614 306,642 368,317 362,416 305,074 1,390,502 1,024,747 1,339,000 — — — — — — 43,797 — — — — — — — 73,660 88,457 98,577 115,113 1,329,793 1,138,129 1,187,614 306,642 368,317 362,416 348,871 1,390,502 1,024,747 1,339,000 380,302 456,774 460,993 463,984 2,720,295 2,162,876 2,526,614 189,550 226,099 220,039 188,301 140,499 103,542 135,295 1984 1985 1985 1985 1998 1994 1997 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 1,456,113 2,271,634 2,505,022 3,404,843 — — — — 1,456,113 2,271,634 2,505,022 3,404,843 3,961,135 5,676,477 563,967 578,114 1995 1999 12/96 12/98(f) 40 years 40 years 213,640 686,700 — — 213,640 686,700 900,340 18,598 1989 06/05 20 years 203,908 431,715 171,477 — 203,908 603,192 807,100 92,533 1972 11/98 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed F - 1 2 H&R Block: Swansea, IL . . . . . . . . . . . . . . . . . Halloween Adventure: Plymouth Meeting, PA . . . . . . . . Hancock Fabrics: Arlington, TX . . . . . . . . . . . . . . . Hastings: Nacogdoches, TX . . . . . . . . . . . . Haverty’s: — — — — 45,842 132,440 69,029 — 45,842 201,469 247,311 19,168 1997 12/01 40 years 2,911,111 — 2,250,620 — 2,911,111 2,250,620 5,161,731 377,448 1999 10/98(g) 40 years 317,838 1,680,428 242,483 — 317,838 1,922,911 2,240,749 366,207 1996 06/96 38 years 397,074 1,257,402 — — 397,074 1,257,402 1,654,476 223,975 1997 11/98 40 years Clearwater, FL . . . . . . . . . . . . . . Orlando, FL(r) . . . . . . . . . . . . . . . Pensacola, FL . . . . . . . . . . . . . . . Bowie, MD . . . . . . . . . . . . . . . . . — 931,865(j) 728,887 — 1,184,438 820,397 633,125 1,965,508 2,526,207 2,184,721 1,595,405 4,221,074 44,005 — 176,425 — — — — — 1,184,438 820,397 603,111 1,965,508 2,570,212 2,361,146 1,595,405 4,221,074 3,754,650 3,181,543 2,198,516 6,186,582 801,854 687,963 379,352 708,080 1992 1992 1994 1997 05/93 05/93 06/96 12/97 40 years 40 years 40 years 38.5 years Heilig-Meyers: Baltimore, MD . . . . . . . . . . . . . . Glen Burnie, MD . . . . . . . . . . . . Hollywood Video: Cincinnati, OH . . . . . . . . . . . . . . Clifton, CO . . . . . . . . . . . . . . . . . Home Depot: Sunrise, FL . . . . . . . . . . . . . . . . . HomeGoods: Fairfax, VA . . . . . . . . . . . . . . . . . Hooters: Tampa, FL . . . . . . . . . . . . . . . . . . Humana: Sunrise, FL . . . . . . . . . . . . . . . . . — — — — — — — — 469,781 631,712 813,073 931,931 — — — — 469,781 631,712 813,073 931,931 1,282,854 1,563,643 144,829 165,953 1968 1968 11/98 11/98 40 years 40 years 282,200 245,462 520,623 732,477 261,238 — — — 543,438 245,462 520,623 732,477 1,064,061 977,939 52,605 74,011 1998 1998 12/01 12/01 40 years 40 years 5,148,657 — — — 5,148,657 — 5,148,657 — (i) 05/03 (i) 977,839 1,414,261 937,301 — 977,839 2,351,562 3,329,401 183,696 1995 12/95 40 years 783,923 504,768 — — 783,923 504,768 1,288,691 51,003 1993 12/01 40 years 800,271 252,717 — — 800,271 252,717 1,052,988 10,210 1984 05/04 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Hy-Vee: St. Joseph, MO . . . . . . . . . . . . . . . — 1,579,583 2,849,246 International House of Pancakes: Stafford, TX . . . . . . . . . . . . . . . . . Sunset Hills, MO . . . . . . . . . . . . . Las Vegas, NV . . . . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . . . . . Arlington, TX . . . . . . . . . . . . . . . . Matthews, NC . . . . . . . . . . . . . . . . Phoenix, AZ . . . . . . . . . . . . . . . . . Midwest City, OK . . . . . . . . . . . . . Ankeny, IA . . . . . . . . . . . . . . . . . . Jack-in-the-Box: F - 1 3 295,802(j) 312,635(j) 351,499(j) 327,004(j) 314,013(j) 321,166(j) 323,327(j) — — 382,084 271,853 519,947 430,896 404,512 380,043 483,374 407,268 692,956 — — — — — — — — 515,035 Plano, TX . . . . . . . . . . . . . . . . . . . — 1,055,433 1,236,590 Jacobson Industrial: Des Moines, IA . . . . . . . . . . . . . . . — 60,517 112,390 — 955,134 — 1,196,900 — 1,270,517 — 1,675,739 1,336,152 1,182,150 1,215,818 1,439,597 Jared Jewelers: Richmond, VA . . . . . . . . . . . . . . . Brandon, FL . . . . . . . . . . . . . . . . . Lithonia, GA . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Jo-Ann Etc: Corpus Christi, TX . . . . . . . . . . . . Kane Realty: Raleigh, NC . . . . . . . . . . . . . . . . . Kash N’ Karry: — — — — — — — — — — — — — — — — — 1,579,583 2,849,246 4,428,829 234,476 2002 09/02 40 years — — — — — — — — — 331,756 271,853 519,947 430,896 404,512 380,043 483,374 407,268 692,956 (c) (c) (c) (c) (c) (c) (c) — 515,035 331,756 271,853 519,947 430,896 404,512 380,043 483,374 407,268 1,207,991 (c) (c) (c) (c) (c) (c) (c) — 9,299 1992 1993 1993 1993 1993 1993 1993 (i) 2002 10/93 10/93 12/93 12/93 12/93 12/93 12/93 03/96 06/05 (c) (c) (c) (c) (c) (c) (c) (i) 30 years — 1,055,433 1,236,590 2,292,023 16,745 2001 06/05 40 years — — — — — 60,517 112,390 172,907 3,044 1973 06/05 20 years 955,134 1,196,900 1,270,517 1,675,739 1,336,152 1,182,150 1,215,818 1,439,597 2,291,286 2,379,050 2,486,335 3,115,336 135,007 107,241 110,295 109,469 1998 2002 2002 2002 12/01 05/02 05/02 12/02 40 years 40 years 40 years 40 years — — 818,448 896,395 12,222 — 818,448 908,617 1,727,065 274,850 1967 11/93 40 years 793,017 — 810,059(x) — 1,603,076 — 1,603,076 (x) 1993 12/01 40 years Brandon, FL . . . . . . . . . . . . . . . . . Palm Harbor, FL . . . . . . . . . . . . . . Sarasota, FL . . . . . . . . . . . . . . . . . 3,205,909(p) — — 322,476 335,851 470,600 1,221,661 1,925,276 1,343,746 — — — — — — 322,476 335,851 470,600 1,221,661 1,925,276 1,343,746 1,544,137(o) 67,446 106,291 2,261,127 74,186 1,814,346 1983 1983 1983 03/99 03/99 03/99 40 years 40 years 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Keg Steakhouse: Bellingham, WA(r) . . . . . . . . . . . Lynnwood, WA . . . . . . . . . . . . . Tacoma, WA . . . . . . . . . . . . . . . . KFC: Erie, PA . . . . . . . . . . . . . . . . . . . . Marysville, WA . . . . . . . . . . . . . Kum & Go: Omaha, NE . . . . . . . . . . . . . . . . . F - 1 4 Lee County: Ft. Myers, FL . . . . . . . . . . . . . . . Light Restaurant: Columbus, OH . . . . . . . . . . . . . . Lil’ Champ: Gainesville, FL . . . . . . . . . . . . . . Jacksonville, FL . . . . . . . . . . . . . Lowe’s: Memphis, TN . . . . . . . . . . . . . . . Magic China Café: — — — — — — — — — — — 397,443 1,255,513 526,792 455,605 649,236 794,722 516,508 646,779 496,092 545,592 — — — — — — — — — — 397,443 1,255,513 526,792 455,605 649,236 794,722 853,048 1,904,749 1,321,514 46,035 65,600 80,300 1981 1992 1981 12/01 12/01 12/01 40 years 40 years 40 years 516,508 646,779 496,092 545,592 1,012,600 1,192,371 50,126 55,128 1996 1996 12/01 12/01 40 years 40 years 392,847 214,280 — — 392,847 214,280 607,127 5,803 1979 06/05 20 years 1,956,579 4,045,196 — — 1,956,579 4,045,196 6,001,775 813,253 1997 12/97 40 years 1,032,008 1,107,250 — — 1,032,008 1,107,250 2,139,258 111,878 1998 12/01 40 years 900,422 594,685 — 315,315 — — — — 900,422 594,685 — 315,315 900,422 910,000 — 2,956 (e) 2005 07/05 08/05 (e) 40 years 3,214,835 9,169,885 — — 3,214,835 9,169,885 12,384,720 812,736 2002 06/02 40 years Orlando, FL . . . . . . . . . . . . . . . . . 75,589(u) 40,200 110,531 — — 40,200 110,531 150,731 5,181 2001 02/04 40 years Magic Dollar: Memphis, TN . . . . . . . . . . . . . . . Majestic Liquors: Arlington, TX . . . . . . . . . . . . . . . Coffee City, TX . . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . . . . — — — — — 549,309 539,643 364,460 — 549,309 904,103 1,453,412 129,311 1998 11/98 40 years 1,235,214 1,330,427 1,461,333 1,651,570 1,222,434 3,858,445 1,673,229 2,017,770 — — — — — — — — 1,235,214 1,330,427 1,461,333 1,651,570 1,222,434 3,858,445 1,673,229 2,017,770 2,457,648 5,188,872 3,134,562 3,669,340 26,741 84,404 36,602 44,139 1990 1996 1999 2000 02/05 02/05 02/05 02/05 40 years 40 years 40 years 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Ft. Worth, TX . . . . . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . . . . . Hudson Oaks, TX . . . . . . . . . . . . . Granbury, TX . . . . . . . . . . . . . . . . Dallas, TX . . . . . . . . . . . . . . . . . . . Dallas, TX . . . . . . . . . . . . . . . . . . . — 2,505,249 977,290 — 611,366 — 361,371 — — 786,159 — 1,554,411 — 2,407,203 2,138,400 2,368,447 1,608,555 1,029,053 — 1,228,778 2,050,580 — — — — — — — — — — — — — — 2,505,249 977,290 611,366 361,371 786,159 1,554,411 2,407,203 2,138,400 2,368,447 1,608,555 1,029,053 — 1,228,778 2,050,580 Total 4,643,649 3,345,737 2,219,921 1,390,424 786,159 2,783,189 4,457,783 Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed 46,778 51,810 35,187 22,511 — 16,640 27,768 1988 1997 1974 1993 (e) 1971 1982 02/05 02/05 02/05 02/05 05/05 06/05 06/05 40 years 40 years 40 years 40 years (e) 40 years 40 years MCI: Arlington, VA . . . . . . . . . . . . . . . . 1,425,276(s) 222,721 1,088,680 — — 222,721 1,088,680 1,311,401 69,869 1982 08/03 40 years F - 1 5 Merchant's Tires: Hampton, VA . . . . . . . . . . . . . . . . Newport News, VA . . . . . . . . . . . Norfolk, VA . . . . . . . . . . . . . . . . . Rockville, MD . . . . . . . . . . . . . . . Washington, DC . . . . . . . . . . . . . . Merryland Chinese Buffet: Red Oak, TX . . . . . . . . . . . . . . . . . Mi Pueblo Foods: Watsonville, CA . . . . . . . . . . . . . . Michaels: 179,835 — 233,812 — — 398,132 — 1,030,156 623,607 — 426,895 259,046 507,743 306,147 577,948 — — — — — — — — — — 179,835 233,812 398,132 1,030,156 623,607 426,895 259,046 507,743 306,147 577,948 606,730 492,858 905,875 1,336,303 1,201,555 8,449 5,127 10,049 6,059 11,439 1986 1986 1986 1974 1983 03/05 03/05 03/05 03/05 03/05 40 years 40 years 40 years 40 years 40 years — — 73,290 520,950 — — 73,290 520,950 594,240 52,638 1986 12/01 40 years 805,056 1,648,934 — — 805,056 1,648,934 2,453,990 91,035 1984 03/99 40 years Fairfax, VA . . . . . . . . . . . . . . . . . . Grapevine, TX . . . . . . . . . . . . . . . — 986,131 — 1,017,934 1,426,254 2,066,715 706,501 — — — 986,131 1,017,934 2,132,755 2,066,715 3,118,886 3,084,649 209,645 389,662 1995 1998 12/95 06/98 40 years 40 years Mortgage Marketing: Swansea, IL . . . . . . . . . . . . . . . . . . Mountain Jack’s: Centerville, OH . . . . . . . . . . . . . . . Mr. E’s Music Supercenter: Arlington, TX . . . . . . . . . . . . . . . . — — — 91,709 264,956 — — 91,709 264,956 356,665 26,793 1997 12/01 40 years 850,625 1,059,430 — — 850,625 1,059,430 1,910,055 107,047 1986 12/01 40 years 435,002 2,299,881 334,059 — 435,002 2,633,940 3,068,942 493,076 1996 06/96 38 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed New Covenant Church: Augusta, GA . . . . . . . . . . . . . . . . — 176,656 674,253 — — 176,656 674,253 850,909 68,128 1998 12/01 40 years Office Depot: Arlington, TX . . . . . . . . . . . . . . . Richmond, VA . . . . . . . . . . . . . . Hartsdale, NY . . . . . . . . . . . . . . . 622,497(j) — 596,024 888,772 1,889,758(t) 4,508,753 1,411,432 1,948,036 2,327,448 — — — — 596,024 888,772 4,508,753 1,411,432 1,948,036 2,327,448 2,007,456 2,836,808 6,836,201 420,409 466,979 111,524 F - 1 6 OfficeMax: Corpus Christi, TX . . . . . . . . . . . Dallas, TX . . . . . . . . . . . . . . . . . . Cincinnati, OH . . . . . . . . . . . . . . Evanston, IL . . . . . . . . . . . . . . . . Altamonte Springs, FL . . . . . . . . Cutler Ridge, FL . . . . . . . . . . . . . Sacramento, CA . . . . . . . . . . . . . Salinas, CA . . . . . . . . . . . . . . . . . Redding, CA . . . . . . . . . . . . . . . . Kelso, WA . . . . . . . . . . . . . . . . . Lynchburg, VA . . . . . . . . . . . . . . Leesburg, FL . . . . . . . . . . . . . . . . Dover, NJ . . . . . . . . . . . . . . . . . . Griffin, GA . . . . . . . . . . . . . . . . . Tigard, OR . . . . . . . . . . . . . . . . . — 893,270 877,063(j) 1,118,500 543,489 656,788(j) 1,124,225(j) 1,867,831 — 1,689,793 — 989,370 — 1,144,167 — 1,353,217 667,174 — 868,003 — 561,509 — — 640,019 — 1,138,296 — 685,470 — 1,539,873 978,344 1,709,891 1,574,551 1,757,618 3,050,160 1,479,119 2,961,206 1,829,325 2,181,563 — — — — — — — — 76,664 — — — — — — — — — — 1,805,539 — — 1,851,326 — — 1,929,028 — — — 1,801,905 — — — — 2,247,321 3,238,083 893,270 1,118,500 543,489 1,867,831 1,689,793 989,370 1,144,167 1,353,217 667,174 868,003 561,509 640,019 1,138,296 685,470 1,539,873 1,055,008 1,709,891 1,574,551 1,757,618 3,050,160 1,479,119 2,961,206 1,829,325 2,181,563 1,805,539 1,851,326 1,929,028 3,238,083 1,801,905 2,247,321 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 4,376,379 2,487,375 3,787,194 319,374 513,084 452,009 464,060 753,268 351,599 666,468 405,881 465,855 359,227 337,481 339,589 576,783 302,194 400,304 1991 1996 1996 1967 1993 1994 1995 1995 1995 1996 1995 1997 1998 1998 1998 1995 1999 1995 01/94 05/96 09/97 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(g) 11/98 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 40 years 40 years 40 years Orlando Metro Gymnastics: Orlando, FL . . . . . . . . . . . . . . . . . Party City: Memphis, TN . . . . . . . . . . . . . . . Perfect Teeth: Rio Rancho, NM . . . . . . . . . . . . . — — — 427,661 1,344,660 — — 427,661 1,344,660 1,772,321 32,216 2003 01/05 40 years 266,383 — 1,136,334 — 266,383 1,136,334 1,402,717 185,838 1999 12/98 40 years 61,517 122,142 — — 61,517 122,142 183,659 12,352 1997 12/01 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Perkins Restaurant: Des Moines, IA . . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . . Newton, IA . . . . . . . . . . . . . . . . . . Urbandale, IA . . . . . . . . . . . . . . . . Petco: Grand Forks, ND . . . . . . . . . . . . . F - 1 7 PETsMART: Chicago, IL . . . . . . . . . . . . . . . . . . Picture Factory: Sarasota, FL . . . . . . . . . . . . . . . . . Pier 1 Imports: Anchorage, AK . . . . . . . . . . . . . . . Memphis, TN . . . . . . . . . . . . . . . . Sanford, FL . . . . . . . . . . . . . . . . . . Knoxville, TN . . . . . . . . . . . . . . . . Mason, OH . . . . . . . . . . . . . . . . . . Harlingen, TX . . . . . . . . . . . . . . . . Valdosta, GA . . . . . . . . . . . . . . . . Pizza Hut: Monroeville, AL . . . . . . . . . . . . . . Pizza Place, The: Cohoes, NY . . . . . . . . . . . . . . . . . . Popeye’s: Snellville, GA . . . . . . . . . . . . . . . . QuikTrip: Alpharetta, GA . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — 255,874 225,922 269,938 353,816 376,690 136,103 203,330 218,248 401,630 581,414 306,629 909,671 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 1,048,309 606,916 — — — — — — — — — — — — — — — — — — — Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed 7,372 11,014 11,822 21,755 15,747 1976 1976 1977 1979 1979 06/05 06/05 06/05 06/05 06/05 10 years 10 years 10 years 10 years 20 years Total 391,977 429,252 488,186 755,446 958,104 255,874 225,922 269,938 353,816 376,690 136,103 203,330 218,248 401,630 581,414 — — — — — — 306,629 909,671 1,216,300 182,906 1996 12/97 40 years — 2,724,138 3,565,721 6,289,859 649,993 1998 09/98 40 years — 1,167,618 1,903,810 3,071,428 95,264 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 1,196,750 408,957 175,482 156,434 127,830 144,742 117,401 123,405 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 4,470 1996 12/01 40 years 16,396 88,372 104,768 2,854 1994 09/04 40 years 642,169 436,512 1,078,681 44,106 1995 12/01 40 years — 1,048,309 606,916 1,655,225 8,219 1996 06/05 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests 623,473 258,759 379,435 592,192 856,001 394,289 373,770 948,051 844,216 966,145 792,656 1,224,843 339,566 127,250 118,012 488,383 556,970 792,448 455,322 912,962 1,612,887 385,119 1,224,099 293,896 296,867 202,430 1,391,981 649,917 764,025 542,934 453,891 1,041,883 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 623,473 258,759 379,435 592,192 856,001 394,289 373,770 948,051 844,216 966,145 792,656 1,224,843 339,566 127,250 118,012 488,383 556,970 792,448 455,322 912,962 1,612,887 385,119 1,224,099 293,896 296,867 202,430 1,391,981 649,917 764,025 542,934 453,891 1,041,883 Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed 10,056 14,308 8,221 16,484 29,122 6,954 16,576 5,306 5,360 3,655 18,850 11,735 10,346 9,803 8,195 14,109 1994 1990 1996 1989 1991 1991 1999 1993 1989 1994 1999 1990 1993 1989 1990 1997 06/05 06/05 06/05 06/05 06/05 06/05 06/05 06/05 06/05 06/05 06/05 06/05 06/05 06/05 06/05 06/05 30 years 30 years 30 years 30 years 30 years 30 years 40 years 30 years 30 years 30 years 40 years 30 years 40 years 30 years 30 years 40 years Total 1,180,443 1,051,207 834,757 1,505,154 2,468,888 779,408 1,597,869 1,241,947 1,141,083 1,168,575 2,184,637 1,874,760 1,103,591 670,184 571,903 1,530,266 48,566 96,428 13,398 — 48,566 109,826 158,392 10,676 1997 12/01 40 years 184,490 71,899 628,943 271,620 125,882 319,770 27,327 147,286 2,078,777 13,877,631 — — — — — — — — — 184,490 71,899 628,943 271,620 813,433 343,519 17,034 14,713 1976 1974 06/05 06/05 20 years 10 years 125,882 319,770 445,652 111,364 1989 07/92 38.8 years 27,327 147,286 174,613 4,756 1994 09/04 40 years — 2,078,777 13,877,631 15,956,408 500,788 1975 05/04 40 years 145,698 289,284 40,193 — 145,698 329,477 475,175 32,349 1997 12/01 40 years See accompanying report of independent registered public accounting firm. F - 1 8 Clive, IA . . . . . . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . Gainesville, GA . . . . . . . . . . . . . Herculaneum, MO . . . . . . . . . . . Johnston, IA . . . . . . . . . . . . . . . . Lee's Summit, MO . . . . . . . . . . . Norcross, GA . . . . . . . . . . . . . . . Norcross, GA . . . . . . . . . . . . . . . Norcross, GA . . . . . . . . . . . . . . . Olathe, KS . . . . . . . . . . . . . . . . . . Tulsa, OK . . . . . . . . . . . . . . . . . . Urbandale, IA . . . . . . . . . . . . . . . Wichita, KS . . . . . . . . . . . . . . . . . Wichita, KS . . . . . . . . . . . . . . . . . Woodstock, GA . . . . . . . . . . . . . Quizno’s: Rio Rancho, NM . . . . . . . . . . . . . Qwest Corporation Service Center: Cedar Rapids, IA . . . . . . . . . . . . Decorah, IA . . . . . . . . . . . . . . . . . Rally’s: Toledo, OH . . . . . . . . . . . . . . . . . Red Lion Chinese Restaurant: Cohoes, NY . . . . . . . . . . . . . . . . . Reliable: St. Louis, MO . . . . . . . . . . . . . . . Rent-A-Center: Rio Rancho, NM . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Rite Aid: Mobile, AL . . . . . . . . . . . . . . . . . . Orange Beach, AL . . . . . . . . . . . . Albany, NY . . . . . . . . . . . . . . . . . . Albany, NY . . . . . . . . . . . . . . . . . . Cohoes, NY . . . . . . . . . . . . . . . . . . Hudson Falls, NY . . . . . . . . . . . . . Saratoga Springs, NY . . . . . . . . . . Ticonderoga, NY . . . . . . . . . . . . . Monticello, NY . . . . . . . . . . . . . . . — — — — — — — — 973,787 1,136,618 1,409,980 24,707 33,794 107,451 56,737 762,303 88,867 664,400 1,694,187 1,996,043 867,257 823,923 579,237 780,091 590,978 688,622 768,795 — — — — — — — — — — — — — — — — — — 1,136,618 1,409,980 24,707 33,794 107,451 56,737 762,303 88,867 664,400 1,694,187 1,996,043 867,257 823,923 579,237 780,091 590,978 688,622 768,795 2,830,805 3,406,023 891,964 857,717 686,688 836,828 1,353,281 777,489 1,433,195 171,184 201,683 28,005 26,606 18,705 25,190 19,084 22,237 15,216 2000 2000 1994 1992 1994 1990 1980 1993 1996 12/01 12/01 09/04 09/04 09/04 09/04 09/04 09/04 03/05 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years F - 1 9 Rite Rug: Columbus, OH . . . . . . . . . . . . . . . — 1,596,197 934,236 13,345 — 1,604,615 939,163 2,543,778 26,379 1970 11/04 40 years Roadhouse Grill: Cheektowaga, NY . . . . . . . . . . . . . Robb & Stucky: Ft. Myers, FL . . . . . . . . . . . . . . . . Roger & Mary’s: Kenosha, WI . . . . . . . . . . . . . . . . . Ross Dress For Less: Coral Gables, FL . . . . . . . . . . . . . . Lodi, CA . . . . . . . . . . . . . . . . . . . . Schlotzsky’s Deli: Phoenix, AZ . . . . . . . . . . . . . . . . . Scottsdale, AZ . . . . . . . . . . . . . . . . 7-Eleven: Land O’ Lakes, FL . . . . . . . . . . . . Tampa, FL . . . . . . . . . . . . . . . . . . . — — — — — — — — — 689,040 386,251 — — 689,040 386,251 1,075,291 39,027 1994 12/01 40 years 2,188,440 6,225,401 — — 2,188,440 6,225,401 8,413,841 1,265,671 1997 12/97 40 years 1,917,606 3,431,364 — — 1,917,606 3,431,364 5,348,970 756,645 1992 02/97 40 years 1,782,346 613,710 1,661,174 1,414,592 706,306 717,138 315,469 310,610 — — — — — — — — 1,782,346 613,710 1,661,174 1,414,592 3,443,520 2,028,302 340,523 78,097 1994 1984 06/96 03/99 40 years 40 years 706,306 717,138 315,469 310,610 1,021,775 1,027,748 31,876 31,385 1995 1995 12/01 12/01 40 years 40 years 1,076,572 1,080,670 — 816,944 — — 917,432 — 1,076,572 1,080,670 816,944 917,432 1,893,516 1,998,102 142,114 155,772 1999 1999 10/98(g) 12/98(g) 40 years 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Shek’s Express: Eden Prairie, MN . . . . . . . . . . . . Shoes on a Shoestring: Albuquerque, NM . . . . . . . . . . . . Shop & Save: Homestead, PA . . . . . . . . . . . . . . Skipper’s Fish & Chips: Salem, OR . . . . . . . . . . . . . . . . . . Spokane, WA . . . . . . . . . . . . . . . Sofa Express: Buford, GA . . . . . . . . . . . . . . . . . Spa and Nails Club: F - 2 0 — — — — — — 64,916 261,347 — — 64,916 261,347 326,263 23,248 1997 12/01 40 years 1,441,777 2,335,475 — — 1,441,777 2,335,475 3,777,252 498,721 1997 06/97 40 years 1,139,419 — 2,158,167(w) — 1,139,419 2,158,167 3,297,586 28,715 1994 02/97 40 years 555,951 470,840 735,651 530,289 — — — — 555,951 470,840 735,651 530,289 1,291,602 1,001,129 74,331 53,581 1996 1996 12/01 12/01 40 years 40 years 1,925,129 5,034,846 — — 1,925,129 5,034,846 6,959,975 183,562 2004 07/04 40 years Orlando, FL . . . . . . . . . . . . . . . . . 75,589(u) 40,200 110,531 — — 40,200 110,531 150,731 5,181 2001 02/04 40 years Spencer’s A/C & Appliances: Glendale, AZ . . . . . . . . . . . . . . . . — 341,713 982,429 — — 341,713 982,429 1,324,142 158,180 1999 12/98(g) 40 years Sports Authority: Dallas, TX . . . . . . . . . . . . . . . . . . Tampa, FL . . . . . . . . . . . . . . . . . . Sarasota, FL . . . . . . . . . . . . . . . . Memphis, TN . . . . . . . . . . . . . . . Little Rock, AR . . . . . . . . . . . . . . Woodbridge, NJ . . . . . . . . . . . . . Bradenton, FL . . . . . . . . . . . . . . . Sportsman’s Warehouse: Sioux Falls, SD . . . . . . . . . . . . . . Steak & Ale: Jacksonville, FL . . . . . . . . . . . . . — — 1,311,440 2,127,503 792,245(t) 1,427,840 820,340 3,113,375 3,749,990 1,526,340 — — — — — 1,521,730 1,702,852 2,660,206 5,982,660 4,139,363 — — — — — — — 2,573,264 — — — — — — — 1,311,440 2,127,503 1,427,840 820,340 3,113,375 3,749,990 1,526,340 (c) 1,521,730 1,702,852 2,573,264 2,660,206 5,982,660 4,139,363 1,311,440 3,649,233 3,130,692 3,393,604 5,773,581 9,732,650 5,665,703 (c) 361,728 81,595 463,724 484,933 442,468 202,656 1994 1994 1996 1998 1998 1994 1997 03/94 06/96 09/97 12/97(g) 09/98 01/03 01/04 (c) 40 years 40 years 40 years 40 years 40 years 40 years — — 2,619,810 1,929,895 — — 2,619,810 1,929,895 4,549,705 34,845 1998 06/05 30 years 986,565 855,523 — — 986,565 855,523 1,842,088 86,443 1996 12/01 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Stillwater Medical: Stillwater, OK . . . . . . . . . . . . . . . . Stone Mountain Chevrolet: Lilburn, GA . . . . . . . . . . . . . . . . . . Stop & Go: Grand Prairie, TX . . . . . . . . . . . . . Kennedale, TX . . . . . . . . . . . . . . . Subway: F - 2 1 Eden Prairie, MN . . . . . . . . . . . . . Albany, NY . . . . . . . . . . . . . . . . . . Cohoes, NY . . . . . . . . . . . . . . . . . . SuperValu: Huntington, WV . . . . . . . . . . . . . . Maple Heights, OH . . . . . . . . . . . . Warwick, RI . . . . . . . . . . . . . . . . . Swansea Quick Cash: Swansea, IL . . . . . . . . . . . . . . . . . . Taco Bell: Ocala, FL . . . . . . . . . . . . . . . . . . . Ormond Beach, FL . . . . . . . . . . . . Phoenix, AZ . . . . . . . . . . . . . . . . . Taco Bron Restaurant: Tucson, AZ . . . . . . . . . . . . . . . . . . Texas Roadhouse: Grand Junction, CO . . . . . . . . . . . Thornton, CO . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — 253,603 1,086,792 3,027,056 4,685,189 421,254 399,988 684,568 692,190 — — — — — 253,603 1,086,792 1,340,395 130,415 1998 11/98 37.5 years — 3,027,056 4,685,189 7,712,245 161,053 2004 08/04 40 years — — 421,254 399,988 684,568 692,190 1,105,822 1,092,178 69,170 69,940 1986 1985 12/01 12/01 40 years 40 years 54,097 2,734 21,862 150,449 66,667 117,829 67,341 — — — — — 54,097 2,734 21,862 217,790 66,667 117,829 271,887 69,401 139,691 19,374 2,153 3,805 1,254,238 1,034,758 1,699,330 760,602 2,874,414 — 45,815 132,365 275,023 632,337 593,718 754,990 525,616 282,777 — — — — — — — — — — — — — — 1,254,238 1,034,758 1,699,330 760,602 2,874,414 (c) 2,014,840 3,909,172 1,699,330 168,759 637,761 (c) 45,815 132,365 178,180 13,376 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 76,286 53,109 28,572 2001 2001 1995 12/01 12/01 12/01 40 years 40 years 40 years 827,002 305,209 17,814 — 844,816 305,209 1,150,025 34,945 1974 12/01 40 years 584,237 598,556 920,143 1,019,164 — — — — 584,237 598,556 920,143 1,019,164 1,504,380 1,617,720 92,973 102,978 1997 1998 12/01 12/01 40 years 40 years See accompanying report of independent registered public accounting firm. 1997 1992 1994 1971 1985 1992 12/01 09/04 09/04 02/97 02/97 02/97 40 years 40 years 40 years 40 years 40 years (c) COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed F - 2 2 TGI Friday’s: Corpus Christi, TX . . . . . . . . . . . . Thomasville: Buford, GA . . . . . . . . . . . . . . . . . . Top’s: Lacey, WA . . . . . . . . . . . . . . . . . . Uni-Mart: Avis, PA . . . . . . . . . . . . . . . . . . . . Bear Creek, PA . . . . . . . . . . . . . . . Bloomsburg, PA . . . . . . . . . . . . . . Bloomsburg, PA . . . . . . . . . . . . . . Bloomsburg, PA . . . . . . . . . . . . . . Chambersburg, PA . . . . . . . . . . . . Coraopolis, PA . . . . . . . . . . . . . . . Dallas, PA . . . . . . . . . . . . . . . . . . . East Brady, PA . . . . . . . . . . . . . . . Emporium, PA . . . . . . . . . . . . . . . Hazleton, PA . . . . . . . . . . . . . . . . . Hazleton, PA . . . . . . . . . . . . . . . . . Johnsonburg, PA . . . . . . . . . . . . . . Larksville, PA . . . . . . . . . . . . . . . . Luzerne, PA . . . . . . . . . . . . . . . . . Moosic, PA . . . . . . . . . . . . . . . . . . Pleasant Gap, PA . . . . . . . . . . . . . Port Vue, PA . . . . . . . . . . . . . . . . . Punxsutawney, PA . . . . . . . . . . . . Ridgway, PA . . . . . . . . . . . . . . . . . Shamokin, PA . . . . . . . . . . . . . . . . Shippensburg, PA . . . . . . . . . . . . . St. Clair, PA . . . . . . . . . . . . . . . . . St. Mary’s, PA . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — 1,209,702 1,532,125 1,266,527 2,405,629 2,777,449 7,082,150 391,801 190,558 206,402 540,561 515,108 75,678 475,572 890,855 269,433 380,032 670,271 2,529,165 780,536 245,870 170,866 323,126 331,885 824,158 252,648 382,341 323,994 203,610 212,150 274,323 326,046 230,193 501,424 146,127 888,074 197,035 347,360 1,435,745 583,204 568,625 377,355 727,550 503,662 333,875 415,295 308,844 592,844 117,629 541,842 258,740 506,335 330,098 475,086 260,942 — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1,209,702 1,532,125 2,741,827 154,809 1995 12/01 40 years — 1,266,527 2,405,629 3,672,156 87,705 2004 07/04 40 years — 2,777,449 7,082,150 9,859,599 1,571,352 1992 02/97 40 years — — — — — — — — — — — — — — — — — — — — — — — — 391,801 190,558 206,402 540,561 515,108 75,678 475,572 890,855 269,433 380,032 670,271 2,529,165 780,536 245,870 170,866 323,126 331,885 824,158 252,648 382,341 323,994 203,610 212,150 274,323 326,046 230,193 501,424 146,127 888,074 197,035 347,360 1,435,745 583,204 568,625 377,355 727,550 503,662 333,875 415,295 308,844 592,844 117,629 541,842 258,740 506,335 330,098 475,086 260,942 717,847 420,751 707,826 686,688 1,403,182 272,713 822,932 2,326,600 852,637 948,657 1,047,626 3,256,715 1,284,198 579,745 586,161 631,970 924,729 941,787 794,490 641,081 830,329 533,708 687,236 535,265 6,113 4,316 16,651 9,402 2,740 3,694 6,513 26,920 10,935 10,662 7,075 13,642 9,444 6,260 7,787 5,791 11,116 2,206 10,160 4,851 9,494 6,189 8,908 4,893 1976 1980 1967 1981 1998 1990 1983 1995 1987 1996 2001 1974 1978 1990 1989 1980 1996 1953 1983 1975 1956 1989 1984 1979 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Encumbrances (k) F - 2 3 Taylor, PA . . . . . . . . . . . . . White Haven, PA . . . . . . . Wilkes-Barre, PA . . . . . . . Wilkes-Barre, PA . . . . . . . Wilkes-Barre, PA . . . . . . . Williamsport, PA . . . . . . . Yeagertown, PA . . . . . . . . Ashland, PA . . . . . . . . . . . Bear Creek, PA . . . . . . . . . Mountaintop, PA . . . . . . . . United Rentals: Carrollton, TX . . . . . . . . . . Cedar Park, TX . . . . . . . . . Clearwater, FL . . . . . . . . . Fort Collins, CO . . . . . . . . Irving, TX . . . . . . . . . . . . . La Porte, TX . . . . . . . . . . . Littleton, CO . . . . . . . . . . . Oklahoma City, OK . . . . . Perrysberg, OH . . . . . . . . . Plano, TX . . . . . . . . . . . . . Temple, TX . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . Fairfax, VA . . . . . . . . . . . . Melbourne, FL . . . . . . . . . United States of America: — — — — — — — — — — — — — — — — — — — — — — — — — Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Building, Improvements and Leasehold Interests Improve- ments Carrying Costs 526,884 866,602 471,437 422,438 1,956,613 122,164 180,073 545,140 274,920 616,488 534,807 829,241 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 1,127,796 — 64,222 607,128 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Land 180,533 485,984 178,104 171,040 875,774 908,758 142,061 355,322 689,374 422,770 477,893 535,091 1,173,292 2,057,322 708,389 1,114,553 1,743,092 744,145 641,867 1,030,426 1,159,775 510,490 1,427,764 2,950,886 746,558 Building, Improvements and Leasehold Interests 526,884 866,602 471,437 422,438 1,956,613 122,164 180,073 545,140 274,920 616,488 534,807 829,241 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 1,127,796 — 64,222 607,128 Land 180,533 485,984 178,104 171,040 875,774 908,758 142,061 355,322 689,374 422,770 477,893 535,091 1,173,292 2,057,322 708,389 1,114,553 1,743,092 744,145 641,867 1,030,426 1,159,775 510,490 1,427,764 2,950,886 746,558 Total 707,417 1,352,586 649,541 593,478 2,832,387 1,030,922 322,134 900,462 964,294 1,039,258 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 1,638,286 1,427,764 3,015,108 1,353,686 Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed 9,879 16,249 8,839 7,921 36,686 2,291 3,376 7,950 4,009 8,990 13,927 21,595 47,153 25,468 23,718 55,350 50,616 32,940 29,143 29,898 35,427 27,020 — 1,137 9,486 1973 1990 1998 1999 1989 1950 1977 1977 1980 1987 1981 1990 2001 1975 1984 2000 2002 1997 1979 1996 1998 1997 (i) 1972 1970 08/05 08/05 08/05 08/05 08/05 08/05 08/05 09/05 09/05 09/05 12/04 12/04 12/04 12/04 12/04 12/04 12/04 12/04 12/04 12/04 12/04 01/05 01/05 04/05 05/05 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 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 (i) 40 years 40 years Arlington, VA . . . . . . . . . . 93,574,724(s) 24,077,279 117,691,768 29,856,683 — 24,077,279 147,548,451 171,625,730 9,143,868 1982 08/03 40 years United Trust Bank: Bridgeview, IL . . . . . . . . . — 673,238 744,154 — — 673,238 744,154 1,417,392 75,191 1997 12/01 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed F - 2 4 Vacant Land: Midland, MI . . . . . . . . . . . . . . . . Florence, AL . . . . . . . . . . . . . . . . Ankeny, IA . . . . . . . . . . . . . . . . . Vacant Property: Gainesville, FL . . . . . . . . . . . . . . Chandler, AZ . . . . . . . . . . . . . . . Hammond, LA . . . . . . . . . . . . . . Indianapolis, IN . . . . . . . . . . . . . Mesa, AZ . . . . . . . . . . . . . . . . . . Englewood, CO . . . . . . . . . . . . . . Dallas, GA . . . . . . . . . . . . . . . . . Woodstock, GA . . . . . . . . . . . . . Bonham, TX . . . . . . . . . . . . . . . . Value City: Florissant, MO . . . . . . . . . . . . . . Value City Furniture: White Marsh, MD . . . . . . . . . . . . Walgreens: Sunrise, FL . . . . . . . . . . . . . . . . . Tulsa, OK . . . . . . . . . . . . . . . . . . Wal-Mart: Aransas Pass, TX . . . . . . . . . . . . Beeville, TX . . . . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . Sealy, TX . . . . . . . . . . . . . . . . . . Winfield, AL . . . . . . . . . . . . . . . . Waremart: Eureka, CA . . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — 230,356 1,578,577 661,958 317,386 654,765 247,600 639,584 195,652 716,608 1,287,630 1,937,017 54,999 — — — — — — — — — 230,356 1,578,577 661,958 — — — 1,248,404 765,164 813,514 1,015,173 512,566 1,458,985 1,952,791 1,284,901 202,085 — — 7,500 — — — — — — — — — — — — — — — 317,386 654,765 247,600 639,584 195,652 716,608 1,287,630 1,937,017 54,999 1,248,404 772,664 565,314 1,015,173 512,566 883,392 1,952,791 1,284,901 202,085 230,356 1,578,577 661,958 1,565,790 1,427,429 812,914 1,654,757 708,218 1,600,000 3,240,421 3,221,918 257,084 — — — (e) (e) (e) 07/03(v) 06/04(v) 06/05 (e) (e) (e) 68,922 82,653 79,922 102,575 51,791 (y) 128,152 84,322 7,368 1982 1997 1997 1996 1997 1995 1997 1997 1984 03/99 12/01 12/01 12/01 12/01 12/01(v) 05/03 05/03 07/04 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 2,490,210 2,937,449 — — 2,490,210 2,937,449 5,427,659 198,890 1996 04/03 40 years 3,762,030 — 3,006,391 — 3,762,030 3,006,391 6,768,421 585,620 1998 03/98(g) 40 years 1,957,974 1,193,187 1,400,970 3,055,724 190,505 507,231 630,043 1,344,244 419,811 2,640,175 2,315,424 3,131,407 1,483,362 1,684,505 — — — — — — — — — — — — — — 1,957,974 1,193,187 1,400,970 3,055,724 3,358,944 4,248,911 91,939 41,380 1994 2003 05/03 06/05 40 years 40 years 190,505 507,231 630,043 1,344,244 419,811 2,640,175 2,315,424 3,131,407 1,483,362 1,684,505 2,830,680 2,822,655 3,761,450 2,827,606 2,104,316 448,280 393,140 531,687 251,863 286,015 1983 1983 1983 1982 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 — — 3,135,036 5,470,606 8,605,642 1,213,791 1965 02/97 40 years See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed — 192,830 278,892 83,773 — 192,830 362,665 555,495 107,638 1995 12/95 40 years — — — — — — — — — — — 307,068 585,872 496,410 — 501,136 333,445 624,318 418,975 1,031,974 696,950 1,023,371 1,874,875 — — — — — — — — — — — — 307,068 585,872 496,410 — 803,478 585,872 203,505 — 1985 (i) 07/92 02/98 33 years (i) 501,136 333,445 834,581 33,692 1980 12/01 40 years 624,318 418,975 1,043,293 42,334 1995 12/01 40 years 1,031,974 696,950 1,728,924 70,421 1997 12/01 40 years 1,023,371 1,874,875 2,898,246 115,227 1984 07/03 40 years 366,448 643,759 38,660 — 405,108 643,759 1,048,867 73,958 1976 12/01 40 years 307,846 311,313 199,234 148,106 1,163,553 1,104,945 2,532,133 — — — — — — — — — 307,846 311,313 619,159 6,810 1990 02/05 40 years 199,234 148,106 347,340 3,394 1961 02/05 40 years 1,163,553 1,104,945 2,268,498 19,950 2000 06/05 30 years 2,532,133 — 2,532,133 1,123,865 — (n) (m) $146,994,003 $576,814,288 $713,777,608 $86,666,996 $ — $577,816,381 $796,762,887 $1,374,579,268 79,197,144 F - 2 5 Washington Bike Center: Fairfax, VA . . . . . . . . Wendy's Old Fashioned Hamburger: Fenton, MO . . . . . . . . Sacramento, CA . . . . New Kensington, PA . . . . . . . . . . . . . Whataburger: Albuquerque, NM . . . Wherehouse Music: Homewood, AL . . . . . Winn-Dixie: Columbus, GA . . . . . Zheng China Buffet: Southfield, MI . . . . . . Ziebart: Maplewood, MN . . . . Middleburg Heights, OH . . . . . . . . . . . . Zio’s Restaurant: Aurora, CO . . . . . . . . Leasehold Interests: . . . . See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Accumulated Depreciation and Amortization Total Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Real Estate Held for Investment the Company has Invested in Under Direct Financing Leases: Academy: Houston, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . N. Richland Hills, TX . . . . . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . Baton Rouge, LA . . . . . . . . . . . . . . . . . . . . . . . . San Antonio, TX . . . . . . . . . . . . . . . . . . . . . . . . . $ — — — — — — — $ — $1,924,740 1,867,519 2,253,408 2,112,335 1,910,697 2,405,466 1,961,017 — — — — — — $— — — — — — — $— $— — — — — — — — — — — — — F - 2 6 Barnes and Noble: Plantation, FL . . . . . . . . . . . . . . . . . . . . . . . . . . . Best Buy: Evanston, IL . . . . . . . . . . . . . . . . . . . . . . . . . . . . Borders Books & Music: Altamonte Springs, FL . . . . . . . . . . . . . . . . . . . . Checkers: Orlando, FL . . . . . . . . . . . . . . . . . . . . . . . . . . . . CVS: — — — — — 3,498,559 — 3,400,057 — 3,267,579 — 286,910 San Antonio, TX . . . . . . . . . . . . . . . . . . . . . . . . . Dallas, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arlington, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . Amarillo, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . Amarillo, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . Amarillo, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . Kissimmee, FL . . . . . . . . . . . . . . . . . . . . . . . . . . Tampa, FL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alice, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lafayette, LA . . . . . . . . . . . . . . . . . . . . . . . . . . . Moore, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — 303,716(j) — — 308,179(j) — — — — — — — 158,851 — — 189,187 — — 783,974 638,684 636,070 849,071 869,846 855,348 933,852 1,090,532 804,963 949,128 879,296 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (d) — — (d) — — $(c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (c) (c) (d) (c) (c) $(c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (c) (c) (d) (c) (c) $(c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (c) (c) (d) (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 1993 1994 1994 1994 1994 1994 1995 1995 1995 1995 1995 12/93 01/94 02/94 12/94 12/94 12/94 04/95 12/95 06/95 01/96 01/96 (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (c) (c) (d) (c) (c) See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Building, Improvements and Leasehold Interests Accumulated Depreciation and Amortization Total Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Ft. Worth, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . Irving, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jasper, FL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Williston, FL . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oklahoma City, OK . . . . . . . . . . . . . . . . . . . . . . Oklahoma City, OK . . . . . . . . . . . . . . . . . . . . . . Norman, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . Del City, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arlington, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . Haltom City, TX . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — — — 513,867(t) F - 2 7 Dave & Buster’s: Utica, MI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eckerd: Millville, NJ . . . . . . . . . . . . . . . . . . . . . . . . . . . . Atlanta, GA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mantua, NJ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vineland, NJ . . . . . . . . . . . . . . . . . . . . . . . . . . . . Glassboro, NJ . . . . . . . . . . . . . . . . . . . . . . . . . . . East Point, GA . . . . . . . . . . . . . . . . . . . . . . . . . . Chattanooga, TN . . . . . . . . . . . . . . . . . . . . . . . . . Kennett Square, PA . . . . . . . . . . . . . . . . . . . . . . Arlington, VA . . . . . . . . . . . . . . . . . . . . . . . . . . . Food 4 Less: Lemon Grove, CA . . . . . . . . . . . . . . . . . . . . . . . Chula Vista, CA . . . . . . . . . . . . . . . . . . . . . . . . . Food Lion: — — — — — — — — — — — — 399,592 (l) (l) 2,529,969 — 1,228,436 347,474 — 355,757 — 1,365,125 1,419,093 — 1,225,477 — 1,376,025 — — 1,135,067 — 2,074,777 78,461 — — — — — — — — — 1,416,071 — — — — — — — — — — — — — 4,888,743 — — — — — — — 336,610 828,942 668,390 951,795 — — — — — — — 1,901,335 — — — — — 1,984,435 — — — — — — 887,497 1,173,529 — 1,344,240 (l) — 3,201,489 — 4,068,179 — 4,266,181 Keystone Heights, FL . . . . . . . . . . . . . . . . . . . . . Chattanooga, TN . . . . . . . . . . . . . . . . . . . . . . . . . Lynchburg, VA . . . . . . . . . . . . . . . . . . . . . . . . . . Martinsburg, WV . . . . . . . . . . . . . . . . . . . . . . . . 599,903(j) 88,604 631,832(j) 336,488 128,216 617,773(j) 448,648 — 1,845,988 1,701,072 1,674,167 1,543,573 — — — — — — — — — — — — Land (d) — — — (l) (l) — — — — — — — — — — — (d) — (l) — — — (d) (d) (d) (d) (d) (c) (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) (c) (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) (c) (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) 1996 1996 1994 1995 1997 1997 1997 1998 1998 1996 1996 12/96 12/96 01/97 01/97 06/97 06/97 06/97 05/98 05/98 09/97 09/97 1998 06/98 1994 1994 1994 1999 1994 1996 1997 2000 2002 03/94 03/94 06/94 03/99(h) 12/94 12/96 09/97 12/00 02/02 1996 1995 07/95(f) 11/98 1993 1993 1994 1994 05/93 10/93 01/94 08/94 (d) (c) (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) See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Accumulated Depreciation and Amortization Total Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed F - 2 8 Heilig-Meyers: Marlow Heights, MD . . . . . . . . . . . . . . . . . York, PA . . . . . . . . . . . . . . . . . . . . . . . . . . . International House of Pancakes: Stafford, TX . . . . . . . . . . . . . . . . . . . . . . . . Sunset Hills, MO . . . . . . . . . . . . . . . . . . . . . Las Vegas, NV . . . . . . . . . . . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . . . . . . . . . . . . Arlington, TX . . . . . . . . . . . . . . . . . . . . . . . Matthews, NC . . . . . . . . . . . . . . . . . . . . . . . Phoenix, AZ . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — — Jared Jewelers: Glendale, AZ . . . . . . . . . . . . . . . . . . . . . . . . Lewisville, TX . . . . . . . . . . . . . . . . . . . . . . . Oviedo, FL . . . . . . . . . . . . . . . . . . . . . . . . . Phoenix, AZ . . . . . . . . . . . . . . . . . . . . . . . . Toledo, OH . . . . . . . . . . . . . . . . . . . . . . . . . — 246,172 482,411 434,915 — 415,926 279,312 1,397,178 1,109,609 — — — — — — — 571,832 736,345 613,582 623,641 608,132 655,668 559,307 (l) (l) (l) (l) (l) 1,599,105 1,502,903 1,500,145 1,241,825 1,457,625 Kash N’ Karry: Valrico, FL . . . . . . . . . . . . . . . . . . . . . . . . . — 1,234,519 3,255,257 Levitz: Tempe, AZ . . . . . . . . . . . . . . . . . . . . . . . . . Sports Authority: Dallas, TX . . . . . . . . . . . . . . . . . . . . . . . . . . SuperValu: Warwick, RI . . . . . . . . . . . . . . . . . . . . . . . . Uni-Mart: Olean, NY . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — 634,444 2,225,991 — — 2,658,975 2,978,154 41,775 267,667 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (d) (d) — — — — — — — (l) (l) (l) (l) (l) (d) (d) — — (d) (d) (d) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (d) (c) (c) (d) (d) (d) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (d) (c) (c) (d) (d) (d) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) 1968 1997 11/98 11/98 1992 1993 1993 1993 1993 1993 1993 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 (d) 1997 06/02 (d) 1994 01/95 (c) (c) 1994 03/94 1992 02/97 (d) 1992 08/05 (d) (d) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (d) (c) (c) (d) $4,138,768 $4,692,172 $101,842,977 $5,380,302 $— $— $— $— $— See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Real Estate Held for Sale the Company has Invested in: AJ Petroleum: Brandon, FL . . . . . . . . . . . . . . . . . . Hollywood, FL . . . . . . . . . . . . . . . . Hollywood, FL . . . . . . . . . . . . . . . . $— — — $ 516,188 417,487 645,533 $ 342,694 318,173 387,651 $— — — $— $ 516,188 417,487 — 645,533 — $ 342,694 318,173 387,651 $ 858,882 735,660 1,033,184 $— — — 1971 1961 1960 12/05 12/05 12/05 F - 2 9 Children’s Pediatric: Houston, TX . . . . . . . . . . . . . . . . . . Circle K: Brownsville, TX . . . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . . Edinburg, TX . . . . . . . . . . . . . . . . . Lawton, OK . . . . . . . . . . . . . . . . . . Lawton, OK . . . . . . . . . . . . . . . . . . McAllen, TX . . . . . . . . . . . . . . . . . McAllen, TX . . . . . . . . . . . . . . . . . Mission, TX . . . . . . . . . . . . . . . . . . Mission, TX . . . . . . . . . . . . . . . . . . Port Aransas, TX . . . . . . . . . . . . . . Victoria, TX . . . . . . . . . . . . . . . . . . Weslaco, TX . . . . . . . . . . . . . . . . . Wichita Falls, TX . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — 423,620 1,923,303 800,356 723,555 1,308,398 606,629 565,233 259,336 1,082,047 608,913 530,990 282,667 815,555 418,775 523,521 419,201 737,855 577,863 700,898 866,118 501,890 683,444 264,245 535,129 810,701 2,151,142 643,379 1,010,988 478,043 871,812 482,525 808,203 593,006 726,720 497,382 661,184 456,323 718,917 646,942 1,128,645 1,385,879 1,043,338 1,078,464 509,985 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 423,620 1,923,303 2,346,923 800,356 723,555 1,308,398 606,629 565,233 259,336 1,082,047 608,913 530,990 282,667 815,555 418,775 523,521 419,201 737,855 577,863 700,898 866,118 501,890 683,444 264,245 535,129 810,701 2,151,142 643,379 1,010,988 478,043 871,812 482,525 808,203 593,006 726,720 497,382 661,184 456,323 718,917 646,942 1,128,645 1,385,879 1,043,338 1,078,464 509,985 1,335,485 1,534,256 3,459,540 1,250,008 1,576,221 737,379 1,953,859 1,091,438 1,339,193 875,673 1,542,275 916,157 1,184,705 875,524 1,456,772 1,224,805 1,829,543 2,251,997 1,545,228 1,761,908 774,230 — — — — — — — — — — — — — — — — — — — — — — 1995 12/05 1980 1978 1995 1976 1984 1977 1978 1982 1983 1982 1980 1988 1985 1985 2000 1999 1996 1984 1983 1996 1984 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 — — — — — — — — — — — — — — — — — — — — — — — — — See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Total Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed F - 3 0 CompUSA: Roseville, MN . . . . . . . . . . . . . . . . . . . Hollywood Video: Lafayette, LA . . . . . . . . . . . . . . . . . . . . Montgomery, AL . . . . . . . . . . . . . . . . . Ridgeland, MS . . . . . . . . . . . . . . . . . . . Hope Rehab: Houston, TX . . . . . . . . . . . . . . . . . . . . . Kohl’s: Lapeer, MI . . . . . . . . . . . . . . . . . . . . . . La-Z Boy: Egg Harbor, NJ . . . . . . . . . . . . . . . . . . Newington, CT . . . . . . . . . . . . . . . . . . . Logan’s Roadhouse: Midland, MI . . . . . . . . . . . . . . . . . . . . . Long John Silver’s: Houston, TX . . . . . . . . . . . . . . . . . . . . . MJ Superstore: Baton Rouge, LA . . . . . . . . . . . . . . . . . Pier 1 Imports: Longmont, CO . . . . . . . . . . . . . . . . . . . Power Center: Bismarck, ND . . . . . . . . . . . . . . . . . . . Midland, MI . . . . . . . . . . . . . . . . . . . . . Myrtle Beach, SC . . . . . . . . . . . . . . . . . Plano, TX . . . . . . . . . . . . . . . . . . . . . . . Whiting, NJ . . . . . . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — 1,605,841 1,425,192 605,651 595,148 782,051 1,153,939 1,191,546 937,121 112,608 511,258 2,636,319 1,787,136 1,499,743 14,077 — — — — 420,268 754,322 483,315 630,315 812,815 983,462 7,346,029 1,094,291 4,113,058 8,651,229 3,644,249 — — — — — — — — — — — — — — — — — — — — — — — 1,605,841 1,425,192 3,031,033 — — — — 605,651 595,148 782,051 1,153,939 1,191,546 937,121 1,759,590 1,786,694 1,719,172 112,608 511,258 623,866 — 2,636,319 — 2,636,319 — — — — — — — — — — — 1,787,136 1,499,743 — 1,787,136 — 1,499,743 14,077 — 14,077 420,268 754,322 1,174,590 483,315 630,315 1,113,630 812,815 983,462 1,796,277 7,346,029 1,094,291 4,113,058 8,651,229 3,644,249 — 7,346,029 — 1,094,291 — 4,113,058 — 8,651,229 — 3,644,249 — — — — — — — — — — — — — — — — — 1994 12/05 1999 1998 1997 12/05 12/05 12/05 1995 12/05 (e) 10/05 (e) (e) 03/05 08/05 (e) 05/05 (i) 12/05 1998 12/05 1997 12/05 (e) (e) (e) (e) (e) 10/04 05/05 12/04 12/05 06/05 — — — — — (e) (e) (e) (e) (i) — — (e) (e) (e) (e) (e) See accompanying report of independent registered public accounting firm. COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encumbrances (k) Land Building, Improvements and Leasehold Interests Improve- ments Carrying Costs Land Building, Improvements and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed F - 3 1 Uni-Mart: Cuba, NY . . . . . . . . . . . . . . . . Blakeslee, PA . . . . . . . . . . . . . Bradford, PA . . . . . . . . . . . . . Bradford, PA . . . . . . . . . . . . . Dillsburg, PA . . . . . . . . . . . . . Harrisburg, PA . . . . . . . . . . . . Kane, PA . . . . . . . . . . . . . . . . Kingston, PA . . . . . . . . . . . . . Plains Twp., PA . . . . . . . . . . . Springdale, PA . . . . . . . . . . . . Tobyhanna, PA . . . . . . . . . . . Trucksville, PA . . . . . . . . . . . Wilkes-Barre, PA . . . . . . . . . . Vacant Land: Big Flats, NY . . . . . . . . . . . . . Grand Prairie, TX . . . . . . . . . . Riverview, FL . . . . . . . . . . . . Whiting, NJ . . . . . . . . . . . . . . Whiting, NJ . . . . . . . . . . . . . . Whiting, NJ . . . . . . . . . . . . . . Walgreen's: Long Beach, MS . . . . . . . . . . Wawa: Whiting, NJ . . . . . . . . . . . . . . Wherehouse Music: Independence, MO . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — $— 374,010 191,627 184,231 84,803 363,105 148,741 156,967 225,315 220,758 426,789 1,016,622 75,360 202,547 2,037,725 385,616 9,665,886 146,854 304,461 196,702 179,259 441,013 761,512 443,237 562,238 293,940 913,017 671,281 410,521 74,490 1,167,783 239,954 380,994 — — — — — — — — — — — — — — — — — — — — — — — — — 1,546,301 1,675,993 — 508,334 — — 504,673 1,214,241 — — — — — — — — — — — — — — — — — — — — — — — 374,010 191,627 184,231 84,803 363,105 148,741 156,967 225,315 220,758 426,789 1,016,622 75,360 202,547 2,037,725 385,616 9,665,886 146,854 304,461 196,702 179,259 441,013 761,512 443,237 562,238 293,940 913,017 671,281 410,521 74,490 1,167,783 239,954 380,994 — — — — — — Total 553,269 632,640 945,743 528,040 925,343 442,681 1,069,984 896,596 631,279 501,279 2,184,405 315,314 583,541 2,037,725 385,616 9,665,886 146,854 304,461 196,702 1,546,301 1,675,993 3,222,294 508,334 — 508,334 504,673 1,214,241 1,718,914 $70,451,572 $37,227,156 $— $— $70,451,572 $37,227,156 $107,678,728 See accompanying report of independent registered public accounting firm. 1961 1984 1983 1988 1992 1989 1984 2000 1986 1953 1989 1988 1994 (e) (e) (e) (e) (e) (e) 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 12/02 03/05 06/05 06/05 06/05 — — — — — — — — — — — — — (e) (e) (e) (e) (e) (e) 2005 12/04(g) — (e) 06/05 (e) 1994 12/05 — — — — — — — — — — — — — — — — — — — — — — — $— COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES NOTES TO SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2005 (a) Transactions in real estate and accumulated depreciation during 2005, 2004, and 2003 are summarized as follows: 2005 2004 2003 Land, buildings, and leasehold interests: Balance at the beginning of year . . . . . . . . . . . . . . . . . . . . . . . $1,129,126,522 $ 982,075,881 $787,893,067 Acquisitions, completed construction and tenant improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469,384,345 240,699,423 278,670,366 Disposition of land, buildings, and leasehold interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loss on impairment of real estate . . . . . . . . (87,446,918) (2,399,821) (93,648,782) (84,487,552) — — Balance at the close of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,508,664,128 $1,129,126,522 $982,075,881 Accumulated depreciation and amortization: Balance at the beginning of year . . . . . . . . . . . . . . . . . . . . . . . $ 61,801,972 $ 49,108,834 $ 39,488,104 Disposition of land, buildings, and leasehold interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization expense . . . . . . . . . . . . . (1,664,831) 19,059,987 (2,118,579) 14,811,717 (1,868,941) 11,489,671 Balance at the close of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79,197,128 $ 61,801,972 $ 49,108,834 (b) As of December 31, 2005, the leases are treated as either operating or financing leases for federal income tax purposes. As of December 31, 2005, the aggregate cost of the properties owned by the Company that under operating leases were $1,542,153,525 and financing leases were $10,710,568. (c) For financial reporting purposes, the portion of the lease relating to the building has been recorded as a direct financing lease; therefore, depreciation is not applicable. (d) For financial reporting purposes, the lease for the land and building has been recorded as a direct financing 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. (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, fixed 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 financing 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 12 years to 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, fixed 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. F-32 (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, fixed rate mortgage and security agreement. (t) Property is encumbered as a part of the Company’s $12,000,000 long-term, fixed rate mortgage and security agreement. (u) Property is encumbered as a part of the Company’s $6,952,000 long-term, fixed rate mortgage and security agreement. (v) In 2005, this property was distributed from a taxable REIT subsidiary to the Company at the property's net book value. (w) In 2005, there was a lease amendment to this property, resulting in a reclassification from a direct financing lease to an operating lease. (x) (y) In 2005, the Company amended this property’s lease to a ground lease, and thus reclassed the building's net book value to land only. Therefore, depreciation is not applicable. In 2005, this property was distributed from a taxable REIT subsidiary to the Company at the property's net book value. This property is deemed held for sale, there depreciation is not applicable. See accompanying report of independent registered public accounting firm. F-33 COMMERCIAL NET LEASE REALTY, INC. AND SUBSIDIARIES SCHEDULE IV—MORTGAGE LOANS ON REAL ESTATE December 31, 2005 Description City, OK (h) First mortgages on properties: National City, CA . . . . San Jose, CA . . . . . . . . Rockledge, FL . . . . . . . Duncanville, TX . . . . . Independence, MO . . . Lawton and Oklahoma . . . . . . Burleson, TX (h) . . . . . Bellingham, WA . . . . . Sonora, CA . . . . . . . . . Roseville, MN (i) . . . . Lake Jackson, TX . . . . Sports Authority, NJ . . Jackson, MS . . . . . . . . Topsham, ME . . . . . . . Des Moines, IA . . . . . . Interest Rate Final Maturity Date Periodic Payment Terms Prior Liens Face Amount of Mortgages Carrying Amount of Mortgages (f) Principal Amount of Loans Subject to Delinquent Principal or Interest 11.5% 11.5% 10.0% 10.0% 10.0% 8.5% 8.5% 7.2% 8.9% 6.5% 7.5% 9.0% 4.5% 4.5% 8.0% 2009 2009 2018 2007 2007 2007 2007 2013 2005 2009 2008 2022 2012 2008 2010 (b) — $ 2,765,000 $ (b) — (b) — (d) — (d) — 2,565,000 400,000 690,018 1,068,788 986,657 982,868 — — — $ — — — — — (c) — (c) — (b) — (b) — (b) — (b) — (b) — (b) — (d) — (e) — 4,399,805 2,355,279 2,605,000 150,651 1,894,000 1,875,000 6,000,000 1,000,000 5,750,000 400,000 — — 2,547,436 — — 1,814,863 6,000,000 938,525 5,750,000 397,223 — — — — — — — — — — $33,918,541 $19,417,572(a) $ — (a) The following shows the changes in the carrying amounts of mortgage loans during the years: Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . New mortgage loans . . . . . . . . . . . . . . . . . . . . . . . Deductions during the year: 2005 2004 2003 $11,527,558 13,150,000(g) $19,773,196 — $ 8,277,867 17,122,868(g) Collections of principal . . . . . . . . . . . . . . . . . (5,259,986) (8,245,638) (5,627,539) Balance at the close of year . . . . . . . . . . . . . . . . . . . . . . $19,417,572 $11,527,558 $19,773,196 (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) Principal and interest is payable at level amounts over the life of the loan with a principal balloon payment at maturity. (f) Mortgages held by the Company and its subsidiaries for federal income tax purposes for the years ended December 31, 2005, 2004 and 2003 were $19,417,572, $11,527,558 and $13,194,972, respectively. (g) Mortgages totaling $13,150,000 and $17,122,868 were accepted in connection with real estate transactions for the year ended December 31, 2005 and 2003, respectively. (h) The mortgages are affiliates of certain members of the Company's board of directors. (i) In January 2005, the mortgagee became current with all delinquent amounts. See accompanying report of independent registered public accounting firm. F-34 2. Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession. Exhibit Index 2.1 2.2 2.3 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 (filed as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated January 19, 2005, and incorporated herein by reference). Real Estate Purchase and Sale Agreement, dated November 28, 2005, between the Company and SSP Partners, as amended (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated December 21, 2005, and incorporated herein by reference). Real Estate Purchase and Sale Agreement, dated December 1, 2005, between the Company and SSP Partners, as amended (filed as Exhibit 2.2 to the Registrant’s Current Report on Form 8-K dated December 21, 2005, and incorporated herein by reference). 3. Articles of Incorporation and By-laws 3.1 3.2 3.3 3.4 First Amended and Restated Articles of Incorporation of the Registrant, as amended (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, and incorporated herein by reference). 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”) (filed as Exhibit 3 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference). Articles Supplementary Classifying and Designating 10,000 Preferred Shares as the Series B Preferred Stock (filed as Exhibit 3 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference). Third Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated August 18, 2005 and incorporated herein by reference). 4. Instruments Defining the Rights of Security Holders, Including Indentures 4.1 4.2 4.3 4.4 Specimen Certificate of Common Stock, par value $0.01 per share, of the Registrant (filed as Exhibit 3.4 to the Registrant’s Registration Statement No. 1-11290 on Form 8-B and incorporated herein by reference). 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 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference). Form of Supplemental Indenture No. 1 dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference). Form of 7.125% Note due 2008 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8- K dated March 20, 1998, and incorporated herein by reference). 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 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 (filed 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 (filed 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 (filed 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 (filed 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 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated June 15, 2004, and incorporated herein by reference). Form of 6.25% Notes due 2014 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 15, 2004, and incorporated herein by reference). Articles Supplementary Establishing and Fixing the Rights and Preferences of a Series of Preferred Stock (the Series A Preferred Stock) (filed as Exhibit 3 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference). Specimen Stock Certificate relating to the Series A Preferred Stock (filed as Exhibit 4 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference). Articles Supplementary Classifying and Designating 10,000 Preferred Shares as the Series B Preferred Stock (filed as Exhibit 3 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference). Specimen Stock Certificate relating to the Series B Preferred Stock (filed as Exhibit 4 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference). Form of Supplemental Indenture No. 6 dated as of November 17, 2005, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $150,000,000 of 6.15% Notes due 2015 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated November 14, 2005, and incorporated herein by reference). 4.16 Form of 6.15% Notes due 2015 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated November 14, 2005, and incorporated herein by reference). 10. Material Contracts 10.1 10.2 2000 Performance Incentive Plan (filed 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 (filed as Exhibit 10.2 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference). 10.3 10.4 10.5 10.6 10.7 10.8 10.9 Employment Agreement dated February 16, 2004, between the Registrant and Craig Macnab (filed as Exhibit 10.3 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference). Employment Agreement dated February 1, 2003, between the Registrant and Julian E. Whitehurst (filed as Exhibit 10.4 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference). Employment Agreement dated January 1, 2003, as amended, between the Registrant and Kevin B. Habicht (filed as Exhibit 10.5 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference). Employment Agreement dated January 1, 2003, between the Registrant and Dennis E. Tracy (filed as Exhibit 10.6 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference). 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 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated July 25, 2003, and incorporated herein by reference). Eighth Amended and Restated Line of Credit and Security Agreement, dated December 13, 2005, by and among Registrant, certain lenders and Wachovia Bank, N.A., as the Agent, relating to a $300,000,000 loan (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 15, 2005, and incorporated herein by reference). Form of Lease Agreement, between an affiliate of Commercial Net Lease Realty, Inc., as landlord and SSP Partners, as tenant (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 21, 2005, and incorporated herein by reference). 10.10 Real Estate Purchase Contract, dated February 9, 2006, among CNLR DC Acquisitions I, LLC, Brookfield Financial Properties, L.P. and the Registrant (filed herewith). 10.11 Amendment to Real Estate Purchase Contract, dated February 14, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed herewith). 10.12 Second Amendment to Real Estate Purchase Contract, dated February 15, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed herewith). 12. Statement of Computation of Ratios of Earnings to Fixed Charges (filed herewith). 21. Subsidiaries of the Registrant (filed herewith). 23. Consent of Independent Accountants dated February 24, 2006 (filed herewith). 24. Power of Attorney (included on signature page). 31. Section 302 Certifications 31.1 31.2 Certification of Chief Executive Officer 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 (filed herewith). Certification of Chief Financial Officer 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 (filed herewith). 32. Section 906 Certifications 32.1 32.2 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 99. Additional Exhibits 99.1 Certification of Chief Executive Officer pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company Manual (filed herewith). 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 fixed charges for the periods as shown. Exhibit 12 2005 2004 2003 2002 2001 Net Earnings, before Extraordinary Item . . . . . . . . . . . . $ 74,615,024 $64,933,739 $53,472,592 $48,058,349 $28,963,548 Fixed Charges: Interest on Indebtedness . . . . . . . . . . . . . . . . . . . . . Amortization of Discount Relating to Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of Treasury Lock Gain . . . . . . . . . . . Amortization of Deferred Charges . . . . . . . . . . . . . 37,034,923 33,453,678 28,356,201 27,239,152 25,522,640 104,463 (325,945) 1,507,466 122,859 (456,669) 1,260,198 146,195 (596,741) 1,334,224 127,375 (554,527) 963,438 107,201 (515,299) 817,170 38,320,907 34,380,066 29,239,879 27,775,438 25,931,712 Net Earnings Before Fixed Charges . . . . . . . . . . . . . . . . $112,935,931 $99,313,805 $82,712,471 $75,833,787 $54,895,260 Divided by Fixed Charges Fixed Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,320,907 $34,380,066 $29,239,879 $27,775,438 $25,931,712 451,624 2,563,035 Capitalized and Deferred Interest . . . . . . . . . . . . . . (599,902) 270,879 102,544 Ratio of Net Earnings to Fixed Charges . . . . . . . . . . . . . 2.76 2.87 2.82 2.79 2.08 $ 40,883,942 $34,650,945 $29,342,423 $27,175,536 $26,383,336 Preferred Stock Dividends Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . $ Series B Convertible Preferred Stock . . . . . . . . . . . 4,008,575 $ 4,008,378 $ 4,007,532 $ 4,009,554 1,675,000 1,675,000 502,500 — Total Preferred Stock Dividends . . . . . . . . . . $ 5,683,575 $ 5,683,378 $ 4,510,032 $ 4,009,554 — — — Combined Fixed Charges and Preferred Stock Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,567,517 $40,334,323 $33,852,455 $31,185,090 $26,383,336 Ratio of Net Earnings to Combined Fixed Charges and Preferred Stock Dividends . . . . . . . . . . . . . . . . . . . . . 2.43 2.46 2.44 2.43 2.08 COMMERCIAL NET LEASE REALTY, INC. SUBSIDIARIES OF THE REGISTRANT December 31, 2005 Exhibit 21 Subsidiary CCMH I, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CCMH II, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CCMH III, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CCMH IV, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CCMH V, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CCMH VI, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNL Commercial Mortgage Funding, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNL Mortgage Investors, LP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNL SBA License, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLR BJ’s Orlando FL, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLR DC Acquisitions I, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLR GP Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLR LP Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLR RAD Monticello NY, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLR Ster Florida LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLR Ster Paradise Valley Arizona LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLR Ster Texas LP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLR Texas GP Corp. CNLRS Acquisitions, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLRS Arcadian Commons, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLRS Bismarck ND, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLRS Development, Inc. CNLRS Equity Ventures, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLRS Equity Ventures II, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLRS Equity Ventures Plano, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLRS Exchange I, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLRS P&P, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLRS RGI Bloomingdale Exchange LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLRS WG Dallas TX, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLRS WG Ennis TX, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLRS WG Long Beach MS, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CNLRS Yosemite Park CO, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Net Lease Realty Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Net Lease Realty, LP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gator Pearson, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . KK-Seminole FL, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NAPE Acquisition, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NNN Acquisitions, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Lease Funding, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Lease Institutional Realty, L.P. Net Lease Realty I, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Lease Realty III, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Lease Realty VI, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NorthStar Brokerage Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Orange Avenue Mortgage Investments, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . RAD Poughkeepsie NY, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RE-Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . WG Grand Prairie TX, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jurisdiction of Formation Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Florida Delaware Delaware Delaware Delaware Florida Arizona Texas Delaware Maryland Delaware Delaware Maryland Maryland Maryland Maryland Maryland Texas Delaware Delaware Delaware Delaware Delaware Maryland Delaware Delaware Delaware Maryland Maryland Maryland Delaware Maryland Maryland Delaware Maryland Delaware Delaware Maryland Delaware Exhibit 23 Consent of Independent Registered Public Accounting Firm To the Board of Directors Commercial Net Lease Realty, Inc.: We consent to the incorporation by reference in registration statement (no. 333-126071) on Form S-3, registration statement (no. 333-105635) on Form S-3, registration statement (no. 333-111180) on Form S-3, and registration statement (no. 333-64794) on Form S-8 of Commercial Net Lease Realty, Inc. and subsidiaries of our reports dated February 17, 2006, with respect to the consolidated balance sheets of Commercial Net Lease Realty, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and all related financial statement schedules, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005, and the effectiveness of internal control over financial reporting as of December 31, 2005, which reports appear in the December 31, 2005 annual report on Form 10-K of Commercial Net Lease Realty, Inc. and subsidiaries. Our report with respect to the consolidated financial statements refers to the implementation of Financial Accounting Standards Board Interpretation No. 46, revised December 2003, Consolidation of Variable Interest Entities (FIN 46R). /s/ KPMG LLP Orlando, Florida February 24, 2006 Certified Public Accountants CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 31.1 I, Craig Macnab, Chief Executive Officer 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 financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined 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 financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness 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 financial reporting that occurred during the registrant’s most recent first fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. February 27, 2006 Date /s/ Craig Macnab Name: Title: Craig Macnab Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 31.2 I, Kevin B. Habicht, Chief Financial Officer 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 financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined 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 financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness 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 financial reporting that occurred during the registrant’s most recent first fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. February 27, 2006 Date /s/ Kevin B. Habicht Name: Title: Kevin B. Habicht Chief Financial Officer CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.1 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 Officer, certifies that (1) this Annual Report of Commercial Net Lease Realty, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2005, as filed 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 financial condition of the Company as of December 31, 2005 and 2004 and its results of operations for the years ended December 31, 2005, 2004 and 2003. February 27, 2006 Date /s/ Craig Macnab Name: Title: Craig Macnab Chief Executive Officer 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 staff upon request. CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.2 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 Officer, certifies that (1) this Annual Report of Commercial Net Lease Realty, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2005, as filed 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 financial condition of the Company as of December 31, 2005 and 2004 and its results of operations for the years ended December 31, 2005, 2004 and 2003. February 27, 2006 Date /s/ Kevin B. Habicht Name: Title: Kevin B. Habicht Chief Financial Officer 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 staff upon request. Annual CEO Certification (Section 303A.12(a)) As the Chief Executive Officer of Commercial Net Lease Realty, Inc., and as required by Section 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 notified to the Exchange pursuant to Section 303A.12(b) and disclosed as Exhibit H to the Company’s Section 303A Annual Written Affirmation. By: /s/ Craig Macnab Print Name: Craig Macnab Title: Chief Executive Officer and President Date: June 6, 2005 450 S. Orange Avenue, Suite 900 Orlando, FL 32801 (800) NNN-REIT www.nnnreit.com COMMENTS/REQUEST INFORMATION We always enjoy hearing from our shareholders. If you have a comment or question, or would like to receive additional investor information, please fill out, detach and return this card. COMMENT/QUESTION: PLEASE SEND ME: Dividend Reinvestment Plan prospectus Complete investor information kit Investor fact sheet Information on Acquisition programs Information on Development programs Information on 1031 Exchange program Name Address email City State Zip BUSINESS REPLY MAIL FIRST-CLASS MAIL PERMIT NO. 478 ORLANDO, FL POSTAGE PAID BY ADDRESSEE COMMERCIAL NET LEASE REALTY, INC C/O CRAIG MACNAB 450 S. ORANGE AVENUE, SUITE 900 ORLANDO, FL 32801 

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