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Business Context and Reporting Period

Company: Commercial Net Lease Realty, Inc. (NNN REIT, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: A fully integrated, self-administered Real Estate Investment Trust (REIT) formed in 1984. The Company acquires, owns, and manages high-quality, freestanding retail properties leased to major tenants under full-credit, long-term commercial net leases. As of December 31, 2002, the portfolio consisted of 341 properties in 39 states, with a 94% occupancy rate.

Key Financial Metrics

Real Estate Portfolio:

• Total Properties: 341 (39 states).
• Occupancy Rate: 94%.
• Weighted Average Remaining Lease Term: Approximately 12 years.
• Real Estate Carrying Cost (Operating Leases): $741,837,842 (Gross amount at close of period).
• Real Estate Carrying Cost (Direct Financing Leases): $105,140,913 (Gross amount at close of period).
• Accumulated Depreciation (Operating Leases): $38,671,148.

• Public Notes Outstanding:
  • 7.125% Notes due 2008 ($100,000,000).
  • 8.125% Notes due 2004 ($100,000,000).
  • 8.500% Notes due 2010 ($20,000,000).
  • 7.750% Notes due 2012 ($50,000,000).
• Mortgage Loans Held: Carrying amount of $21,910,551.
• Lines of Credit (Unconsolidated Affiliate): Aggregate borrowing capacity of $171,000,000 for Commercial Net Lease Realty Services, Inc. (Services), expiring October 31, 2003.

The filing text incorporates financial statements by reference and does not provide specific consolidated revenue, net income, or cash flow figures for the year ended December 31, 2002, within the provided text. Specific values for these metrics are not available in the source document.

Material Changes and Events

Merger Activity:

• Captec Merger: Completed the acquisition of Captec Net Lease Realty, Inc. on December 1, 2001. The acquisition added 135 properties. The purchase price was $124,722,000, allocated to assets and liabilities with no goodwill recorded.
• Appraisal Action Settlement: A lawsuit regarding dissenting Captec shareholders was settled in February 2003 for $15,569,000. As of December 31, 2002, a liability of $13,278,000 was recorded for this matter.

• Acquisitions: $40,106,987 in land, buildings, and leasehold interests.
• Dispositions: $32,643,283 in land, buildings, and leasehold interests.
• Impairment: Provision for loss on impairment of real estate was $3,285,493.

Eckerd Corporation accounted for more than 10% of total rental income in 2002 and is expected to do so in 2003. Eckerd leased 52 properties, representing 11.3% of total assets.

Outlook, Risks, and Contingencies

Legal Proceedings:

• Ysiem Corporation: A breach of ground lease lawsuit seeking $7.5 million. Summary judgment was granted to the Company in 2002; plaintiff appealed. Management believes a loss is unlikely and would not be material.
• Calapasas Action: A class action lawsuit alleging misrepresentation of Captec asset values. The complaint was dismissed with leave to amend in October 2002; a second amended complaint was filed in November 2002. Management cannot currently assess the likelihood or amount of damages.

The Company has 13 properties currently under environmental remediation. Sellers or tenants are contractually responsible for remediation costs.

The Company competes with other REITs and investors for property acquisitions. The filing incorporates quantitative market risk disclosures by reference; specific sensitivity analysis is not detailed in the text.

Investor Verification Checklist

• Financial Statements: Verify specific revenue, net income, and FFO (Funds From Operations) figures in the incorporated Annual Report to Shareholders, as they are not explicitly stated in the 10-K text provided.
• Eckerd Concentration: Assess the financial health of Eckerd Corporation (a subsidiary of J.C. Penney) given its 11.3% asset concentration and >10% revenue contribution.
• Legal Liabilities: Monitor the status of the Calapasas class action lawsuit and the final settlement of the Captec appraisal action ($15.6M).
• Debt Maturities: Review the schedule for the $100M 8.125% Notes due 2004 and the $171M credit facility for the unconsolidated affiliate expiring in 2003.
• Impairment Charges: Investigate the $3.3M impairment provision to understand which specific assets were affected and the rationale.