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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, 2001
Business Overview: A fully integrated, self-administered REIT formed in 1984. The Company acquires, owns, and manages a diversified portfolio of high-quality, freestanding retail properties leased to major tenants under full-credit, long-term commercial net leases. As of December 31, 2001, the portfolio consisted of 351 properties in 40 states, with an 89% occupancy rate.

Key Financial Metrics

Real Estate Portfolio:

• Total Properties: 351 (including 135 acquired via Captec merger).
• Occupancy Rate: 89% of gross leasable area.
• Weighted Average Remaining Lease Term: Approximately 13 years.
• Property Cost Basis: $735,509,495 (carrying value at year-end).
• Acquisitions in 2001: $250,666,699 (primarily driven by the Captec merger).
• Dispositions in 2001: $57,557,741.

Debt and Financing:

• Public Debt: 7.125% Notes due 2008 ($100M), 8.125% Notes due 2004 ($100M), and 8.5% Notes due 2010 ($20M).
• Bank Credit Facilities: $200,000,000 revolving line of credit (Sixth Amended and Restated agreement).
• Mortgage Loans Held: $88,111,817 carrying amount (investments in mortgage loans on real estate).
• Related Party Lending: $85,000,000 line of credit extended to unconsolidated affiliate Commercial Net Lease Realty Services, Inc.

Revenue and Profit:

• Revenue Data: 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, 2001.
• Depreciation Expense: $7,502,780 for the year ended December 31, 2001.

Material Changes vs. Prior Period

Merger with Captec Net Lease Realty, Inc.:
On December 1, 2001, the Company acquired 100% of Captec, a publicly traded REIT owning 135 properties. This transaction significantly expanded the portfolio.

• Consideration: $11,839,000 cash, 4,349,918 new common shares, and 1,999,974 shares of 9% Class A Perpetual Preferred Stock.
• Accounting: Purchase method of accounting; acquisition price of $124,722,000 allocated to assets/liabilities at fair value with no goodwill recorded.

Investment in Unconsolidated Affiliates:

• Commercial Net Lease Realty Services, Inc.: The Company increased its non-controlling interest from 95% to 98.7% following an additional contribution of $20,042,000 in real estate on December 31, 2001.
• Credit Facilities: Aggregate borrowing capacity for Services and its subsidiaries stands at $140,500,000.

Advisor Transaction Completion:
The Company completed the issuance of the entire "Share Balance" (up to 1,980,000 shares) to the former external advisor, CNL Realty Advisors, Inc., as of December 31, 2001.

Guidance, Risks, and Contingencies

Tenant Concentration Risk:
Eckerd Corporation (a subsidiary of J.C. Penney) accounted for more than 10% of total rental income in 2001 and is expected to do so in 2002. Eckerd leases 49 properties (8.6% of total assets). Failure of Eckerd to make payments could materially affect income.

Legal Proceedings:

• Ysiem Corporation Lawsuit: Plaintiff seeks $7.5 million in damages regarding a ground lease breach. A Magistrate Judge recommended dismissal; management believes a judgment would not materially affect operations.
• Captec Merger Litigation: Shareholder lawsuits regarding fiduciary duty breaches were consolidated. A settlement in principle was reached, with Captec agreeing to pay attorney fees up to $350,000. The Company was dismissed from the Michigan lawsuit.
• Appraisal Action: Dissenting Captec shareholders (1,072,146 shares) filed for appraisal of fair value. Management cannot currently assess the likelihood or amount of potential awards.
• Calapasas Class Action: Allegations of misrepresenting Captec asset values in 2000-2001. Management cannot assess potential damages at this early stage.

Environmental Liabilities:
The Company has 12 properties currently under environmental remediation. Sellers or tenants are contractually responsible for remediation costs.

Investor Verification Checklist

• Financial Statements: Verify specific revenue, net income, and funds from operations (FFO) figures in the Annual Report to Shareholders (incorporated by reference), as they are not explicitly detailed in the 10-K text provided.
• Eckerd Exposure: Monitor the financial health of Eckerd Corporation/J.C. Penney given the >10% revenue concentration.
• Merger Integration: Assess the performance of the 135 properties acquired from Captec in the post-merger period.
• Legal Settlements: Track the final court approval of the Captec shareholder litigation settlement and the outcome of the appraisal action.
• Debt Maturities: Review the schedule for the $100M 8.125% Notes due 2004 and the $200M revolving credit facility.