UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): _____________
_______________
CNL RESTAURANT PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 001-15581 59-3239115
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) (Commission File Number) Identification No.)
450 South Orange Avenue, Orlando, Florida 32801
(Address, including zip code, of Principal Executive Offices)
Registrant's telephone number, including area code (407) 540-2000
(Former Name or Former Address, if Changed Since Last Report.)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
___ Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
___ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
___ Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
___ Pre-commencement communications pursuant to Ruler 13e-4(c) under the
Exchange Act (17 CFR 240/13e-4(c))
Item 8.01
During the nine months ended September 30, 2004, CNL Restaurant
Properties, Inc. ("the Company") sold and identified as held for sale several
properties ("the Properties").
This Form 8-K is being filed to amend Items 6, 7 and 8 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2003 to reflect the
reclassification of the Properties as discontinued operations in accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144") and the requirements of
the U.S. Securities and Exchange Commission (the "SEC"). Under the SEC
requirements, the Company must reflect any reclassification to discontinued
operations required by FAS 144 subsequent to the sale and identification for
sale of properties on previously issued annual financial statements for each of
the years shown in the Company's last annual report on Form 10-K if those
financials are incorporated by reference in subsequent filings made with the SEC
under the Act of 1933, as amended, even though those financial statements relate
to periods prior to the date the properties were identified for sale. The
reclassifications have no effect on stockholder's equity or net income. No other
amendments are hereby made to the Company's Annual Report on Form 10-K.
The Company has reported revenues and expenses related to the
Properties as income from discontinued operations for the reporting periods
following December 31, 2003.
Readers should refer to the Company's quarterly reports on Form 10-Q
for information related to periods subsequent to December 31, 2003.
Item 6. Selected Financial Data
<s> <c>
(In Thousands, except for share and per share data)
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
2003 2002 2001 2000 1999
---------------- -------------- -------------- --------------- ----------------
Continuing Operations:
Revenues (1) $ 113,634 $ 335,163 $ 273,252 $ 113,091 $ 65,073
================ ============== ============== =============== ================
Earnings/(loss) from
continuing operations, net (1) $ 8,903 $ 26,816 $ (13,912 ) $ (5,250 ) $ (55,669 )
Discontinued Operations:
Earnings/(loss) and gains from
discontinued operations,
net (1) 33,537 8,774 (6,699 ) 8,177 5,832
---------------- -------------- -------------- --------------- ----------------
Earnings/(loss) before
cumulative effect of
accounting change 42,440 35,590 (20,611) 2,927 (49,837 )
Cumulative effect of accounting
change -- -- (3,841) -- --
---------------- -------------- -------------- --------------- ----------------
Net income/(loss) $ 42,440 $ 35,590 $ (24,452 ) $ 2,927 $ (49,837 )
================ ============== ============== =============== ================
Earnings/(loss) per share (1):
Continuing operations (1) $ 0.20 $ 0.60 $ (0.32 ) $ (0.12 ) $ (1.41 )
Discontinued operations (1) 0.74 0.20 (0.15 ) 0.19 0.15
Cumulative effect of
accounting change -- -- (0.09 ) -- --
---------------- -------------- -------------- --------------- ----------------
Net income/(loss) per share $ 0.94 $ 0.80 $ (0.56 ) $ 0.07 $ (1.26 )
================ ============== ============== =============== ================
Funds from operations (2) $ 49,504 $ 44,710 $ (6,029 ) $ 16,007 $ 35,956
================ ============== ============== =============== ================
Cash distributions declared $ 69,002 $ 67,991 $ 66,466 $ 66,329 $ 60,079
================ ============== ============== =============== ================
Cash distributions declared
per share $ 1.52 $ 1.52 $ 1.52 $ 1.52 $ 1.52
================ ============== ============== =============== ================
Weighted average shares
outstanding:
Basic 45,248,670 44,620,235 43,589,985 43,495,919 39,402,941
================ ============== ============== =============== ================
Diluted 45,248,670 44,620,235 43,589,985 43,495,919 39,402,941
================ ============== ============== =============== ================
At December 31:
Total assets $ 1,298,116 $ 1,383,450 $ 1,560,117 $ 1,605,944 $ 1,138,193
================ ============== ============== =============== ================
Long-term obligations $ 656,321 $ 671,465 $ 484,815 $ 398,100 $ 140,504
================ ============== ============== =============== ================
Total stockholders'
equity (3) $ 479,886 $ 494,151 $ 526,182 $ 607,738 $ 672,214
================ ============== ============== =============== ================
For a discussion of material events affecting the comparability of the
information reflected in the selected financial data, refer to the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7.
(1) The results of operations relating to properties that were either disposed
of or that were classified as held for sale through September 30, 2004 are
reported as discontinued operations for all periods presented.
(2) Funds from operations ("FFO"), based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") and as used herein, except for the add back
of the advisor acquisition expense of $76.3 million during 1999, means net
income/(loss) determined in accordance with Generally Accepted Accounting
Principles ("GAAP"), excluding gains (losses) from sales of depreciable
operating property, excluding extraordinary items (as defined by GAAP),
including depreciation and amortization of real estate assets and after
adjusting for unconsolidated partnerships and joint venture. As a result
of the restatement, FFO does not include add backs for impairment
provisions or capital lease principal components. These amounts for the
years ended December 31, 2003, 2002, 2001, 2000 and 1999 (in thousands)
were $11,542, $13,335, $26,018, $2,576 and $0, respectively, for the
impairment provisions and $1,725, $1,852, $2,384, $2,242 and $1,629,
respectively, for capital lease principal components. Funds from
operations are generally considered by industry analysts to be the most
appropriate measure of performance. FFO (i) does not represent cash
generated from operating activities determined in accordance with GAAP
(which, unlike FFO, generally reflects all cash effects of transactions
and other events that enter into the determination of net earnings), (ii)
is not necessarily indicative of cash flow available to fund cash needs
and (iii) should not be considered as an alternative to net earnings
determined in accordance with GAAP as an indication of the Company's
operating performance, or to cash flow from operating activities
determined in accordance with GAAP as a measure of either liquidity or the
Company's ability to make distributions. Accordingly, the Company believes
that in order to facilitate a clear understanding of the consolidated
historical operating results of the Company, FFO should be considered in
conjunction with the Company's net earnings and cash flows as reported in
the accompanying consolidated financial statements and notes thereto.
However, the Company's measure of FFO may not be comparable to similarly
titled measures of other REITS because these REITS may not apply the
definition of FFO in the same manner as the Company.
(3) Includes subscriptions received of $0.2 million during 1999 and includes
$1.5 million of stock issuance costs during each of the years ended
December 31, 2003, 2002, 2001 and 2000 and $1.7 million during the year
ended December 31, 1999. Stock issuance costs consists of selling
commissions, marketing support and due diligence expense reimbursement
fees during 1999 and organizational and offering expenses. Stock issuance
costs for 2003, 2002, 2001 and 2000 consist of soliciting dealer servicing
fees.
The following is a reconciliation of net earnings to FFO:
<s> <c>
(In Thousands)
2003 2002 2001 2000 1999
------------- ------------- -------------- ------------- --------------
Net income/(loss) $ 42,440 $ 35,590 $ (24,452 ) $ 2,927 $ (49,837 )
Depreciation
Continuing operations 9,803 10,258 11,228 10,315 7,138
Discontinued operations 859 1,947 2,186 2,032 1,532
Loss/(Gain) on sale of property
Continuing operations 5 181 1,141 721 781
Discontinued operations (3,633 ) (3,295 ) -- -- --
Amortization of joint venture
costs 30 29 27 12 9
Advisor acquisition expense -- -- -- -- 76,333
Cumulative effect of accounting
change -- -- 3,841 -- --
------------- ------------- -------------- ------------- --------------
FFO (*) $ 49,504 $ 44,710 $ (6,029 ) $ 16,007 $ 35,956
============= ============= ============== ============= ==============
(*)- The Company restated FFO for the years ended December 31, 2002, 2001, 2000
and 1999 to conform to the 2003 presentation, which conforms to the NAREIT
definition of FFO, except for the add back by the Company of the advisor
acquisition expense of $76.3 million during 1999.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information, including, without limitation, the Quantitative and
Qualitative Disclosures About Market Risk that are not historical facts, may be
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements generally are characterized by the use of terms such as "believe,"
"expect" and "may." Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Company's actual results could differ materially from those set
forth in the forward-looking statements. Factors that might cause such a
difference include changes in general economic conditions, changes in real
estate conditions, availability of capital from borrowings under the Company's
credit facilities, the availability of other debt and equity financing
alternatives, changes in interest rates under the Company's current credit
facilities and under any additional variable rate debt arrangements that the
Company may enter into in the future, the ability of the Company to refinance
amounts outstanding under its credit facilities at maturity on terms favorable
to the Company, the ability of the Company to locate suitable tenants for its
restaurant properties and borrowers for its mortgage loans, the ability of
tenants and borrowers to make payments under their respective leases, secured
equipment leases or mortgage loans, the ability of the Company to re-lease
properties that are currently vacant or that may become vacant and the ability
of the Company to securitize or sell mortgage loans or net lease properties on a
favorable and timely basis. Given these uncertainties, readers are cautioned not
to place undue reliance on such statements.
Organization and Business
CNL Restaurant Properties, Inc. ("CNL-Properties" or the "Company"), formerly
CNL American Properties Fund, Inc., is the nation's largest self-advised real
estate investment trust ("REIT") focused on the restaurant industry. The Company
has two primary subsidiary operating companies, CNL Restaurant Investments, Inc.
and CNL Restaurant Capital Corp. The Company was founded in 1994 and at December
31, 2003, has financial interests in approximately 1,000 properties diversified
among more than 120 restaurant concepts in 43 states. The Company's total real
estate holdings subject to lease include over 640 properties, of which 90
properties are classified as held for sale. At December 31, 2003, the servicing
portfolio of net lease properties and mortgages consists of approximately 2,200
units, of which over 1,200 are serviced on behalf of third parties.
The Company operates two business segments - real estate and specialty finance.
o The real estate segment, operated principally through the Company's
wholly owned subsidiary CNL Restaurant Investments, Inc.
("CNL-Investments"), formerly known as CNL Restaurant Properties, Inc.
(a name used by the Company effective June 27, 2003), and its
subsidiaries manage a portfolio of primarily long-term triple-net
lease properties. Those responsibilities include portfolio management,
property management, dispositions and the opportunistic acquisition
and profitable sale of real estate investments. In addition,
CNL-Investments services approximately $525 million in affiliate real
estate portfolios and earns management fees related thereto. Revenues
from the real estate segment represented approximately 75 percent, 26
percent and 32 percent of the Company's total revenues in 2003, 2002
and 2001, respectively. The increase in 2003 is the result of adopting
accounting rules that require a component of the specialty finance
revenues to be treated as discontinued operations, as described below.
o The specialty finance segment, operated through the Company's
wholly-owned subsidiary CNL Restaurant Capital Corp. ("CNL-Capital
Corp"), formerly known as CNL Franchise Network Corp., is partnered
with a financial institution, Bank of America ("the Bank"), in owning
CNL Restaurant Capital, LP ("CNL-Capital"). CNL-Capital, through its
subsidiaries, delivers financial solutions principally in the forms of
financing, advisory and other services to national and larger regional
restaurant operators. It does this primarily by acquiring restaurant
real estate properties, which are subject to a triple-net lease,
utilizing short-term debt and generally selling such properties at a
profit. Revenues from the specialty finance segment represented
approximately 25 percent, 74 percent and 68 percent of the Company's
total revenues in 2003, 2002 and 2001, respectively. The decrease in
2003 was due to classifying components of revenues into discontinued
operations in accordance with new accounting requirements.
When the Company was created in 1994, the intent was to provide stockholders
liquidity by December 31, 2005 through either listing on a national exchange,
merging with another public company or liquidating its assets. The Company's
officers and directors continue to actively monitor the public markets for
opportunities to satisfy the liquidity objectives of the Company. The Company's
board presently has no intention to liquidate the Company. To comply with
certain tax guidelines governing the significance of taxable REIT subsidiaries,
the Company may pursue other alternatives relative to CNL-Capital Corp that
would provide stockholder liquidity for all or a portion of the Company's
investment.
Liquidity and Capital Resources
General. Historically, the Company's demand for funds has been for payment of
operating expenses and dividends, for payment of principal and interest on its
outstanding indebtedness, and in the case of CNL-Capital, for acquisitions of
properties with the intent to sell. The Company's management expects to continue
meeting short-term and long-term liquidity requirements through distributions
from CNL-Investments, issuance of debt and sales of common or preferred stock.
To date, the Company has not received distributions from CNL-Capital because
this subsidiary has reinvested its earnings in ongoing operations. Management
expects that distributions from CNL-Capital will begin within the next two
years.
Contractual Obligations, Contingent Liabilities and Commitments. The following
table presents the Company's contractual cash obligations and related payment
periods as of December 31, 2003:
<s> <c>
Payments due by period (In millions)
Less
than one 2 to 3 4 to 5
Contractual cash obligations: year years years Thereafter Total
- ------------------------------------------- ---------- --------- ---------- ------------ ----------
Borrowings (1) $ 146.0 $ 175.5 $ 68.9 $ 361.4 $ 751.8
Leased office space (2) 1.1 2.4 2.4 8.0 13.9
---------- --------- ---------- ------------ ----------
Total contractual cash obligations $ 147.1 $ 177.9 $ 71.3 $ 369.4 $ 765.7
========== ========= ========== ============ ==========
The following table presents the Company's commitments, contingencies and
guarantees and related expiration periods as of December 31, 2003:
<s> <c>
Estimated payments due by period (In millions)
Less
Commitments, contingencies than one 2 to 3 4 to 5
and guarantees year years years Thereafter Total
- ---------------------------------------- ---------- ----------- ----------- ------------ ---------
Guaranty of unsecured promissory
note (2) $ 1.3 $ -- $ -- $ -- $ 1.3
Purchase commitments 82.0 -- -- -- 82.0
---------- ----------- ----------- ------------ ---------
Total commitments, contingencies
and guarantees $ 83.3 $ -- $ -- $ -- $83.3
========== =========== =========== ============ =========
(1) The maturities on outstanding indebtedness assumes that loan repayments are
made on the mortgage warehouse facilities in accordance with the
contractual obligation and that bonds payable amortize in accordance with
estimated payment amounts. In the event the mortgage warehouse lenders
continue to renew the facilities as expected, $146 million of the 2004
amounts would likely mature in a later year. In January 2004, the Company
renegotiated the Subordinated Debt Facility. Under the renegotiated terms,
the Company will make a mandatory repayment of $11.875 million by December
31, 2004. This repayment of $11.875 million was reflected in the
"Thereafter" column in this table as of December 31, 2003.
(2) In May 2002, the Company purchased a combined five percent partnership
interest in CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (the "Plaza") for
$0.2 million. Affiliates of James M. Seneff, Jr. and Robert A. Bourne, each
of which is a director of the Company, own the remaining partnership
interests. The Company has severally guaranteed 8.33 percent or $1.3
million of a $15.5 million unsecured promissory note on behalf of the
Plaza. The guaranty continues through the loan maturity in November 2004.
Since November 1999, the Company has leased its office space from CNL
Plaza, Ltd., an affiliate of a member of the Company's board of directors.
The Company's lease expires in 2014 and provides for scheduled rent
increases over the term of the lease. Rental and other expenses in
connection with the lease for the years ended December 31, 2003, 2002 and
2001 totaled $1.4 million, $1.5 million and $1.2 million, respectively.
Dividends. The Company's ability to internally fund capital needs is limited
since it must distribute at least 90 percent of its net taxable income
(excluding net capital gains) to stockholders to qualify as a REIT. The Company
is a self-advised real estate investment trust that reflects the earnings of its
two primary segment subsidiaries, CNL-Investments and CNL-Capital Corp. The
Company has continued to declare and pay distributions to its stockholders.
These distributions have been primarily funded by CNL-Investments' activities
because the Company has elected to reinvest the earnings of CNL-Capital, its
specialty finance business, to date as contemplated by the agreement with the
partners of CNL-Capital. The Company will continue to reinvest earnings into
this subsidiary if the subsidiary is able to generate acceptable returns. The
remainder of the distributions to date has been funded by sales of the Company's
common stock to the Company's Chairman through a private company affiliate, CNL
Financial Group, Inc. ("CFG"), and loans from CFG.
The Company has elected to distribute amounts in excess of that necessary to
qualify as a REIT. During the years ended December 31, 2003, 2002 and 2001, the
Company distributed $69.0 million, $68.0 million and $66.5 million,
respectively, or $1.52 per share each year, to its stockholders. During 2003,
2002 and 2001, approximately 39 percent, 0 percent and 21 percent, respectively,
of the distributions received by stockholders were considered to be ordinary
income and approximately 61 percent, 100 percent and 79 percent, respectively,
were considered a return of capital for federal income tax purposes. The REIT's
taxable income in 2003, 2002 and 2001 has not included any of CNL-Capital's
earnings since inception. The Company's cash from operations for the years ended
December 31, 2003, 2002 and 2001 were $108.4 million, $111.6 million and $48.7
million. Management believes that a better indicator of cash from operations
would exclude the changes in the held for sale loans and real estate portfolio
and proceeds from the sale of loans. Net cash provided by operating activities
excluding changes in mortgage loans and inventories of real estate held for sale
is $71.2 million, $50.0 million and $59.4 million in the years ended December
31, 2003, 2002 and 2001.
In order to ensure that the Company maintained its historical level of
distributions to its stockholders, the Company's Chairman, through CFG, made
advances to the Company in the amount of $18.7 million, $11.75 million and $8.7
million during the years ended December 31, 2003, 2002 and 2001, respectively,
in the form of demand balloon promissory notes. The notes are
non-collateralized, bear interest at LIBOR plus 2.5 percent or at the base rate,
as defined in the agreement, with interest payments and outstanding principal
due upon demand. The principal amount including accrued interest at December 31,
2003 was $23.5 million. In addition, during 2002 and 2001, the Chairman, through
CFG, received 1,173,354 shares and 579,722 shares, respectively, of the
Company's stock in exchange for $20.1 million and $9.7 million, respectively, in
cash, including the conversion of amounts previously treated as advances. This
provided capital that allowed the Company to reinvest the earnings generated by
the specialty finance business. The number of shares was determined using an
estimated fair value per share of $16.78 and $17.13 during 2001 and 2002,
respectively. The value per share for 2001 and 2002 was determined by a third
party firm, which based its valuation on an analysis of comparable publicly
traded real estate investment trusts and a discounted cash flow analysis. The
Company's Chairman is under no obligation to purchase additional shares or make
advances to the Company. Should the Company's Chairman determine not to purchase
additional shares or loan additional funds to the Company, and the Company does
not generate adequate cash flow from other sources, the Company may have to
reduce its distribution rate.
In connection with maintaining its historical distribution level, the Company
may sell additional shares of its common stock to CNL Financial Group or to
third party purchasers. The Company's Chairman is under no obligation to
purchase additional shares of the Company's common stock or loan additional
funds to the Company in order to guarantee that the Company maintains its
historical distribution level to stockholders. Selling additional shares of the
Company's stock may dilute a shareholder's investment and may reduce the value a
shareholder would receive in a future liquidity event. However, selling stock to
enable CNL-Capital to reinvest earnings may be accretive to the extent that the
value of the specialty finance segment increases.
The Company is currently exploring interest in an offering of the Company's
preferred stock. The proceeds of any sale of preferred stock would be used for
general corporate purposes, meeting existing payment demands and potentially, to
retire existing debt.
o Specialty Finance Segment (CNL-Capital).
CNL-Capital current demand for funds include (i) payment of operating expenses,
(ii) funds necessary for net lease originations to be sold in its Investment
Property Sales Program (as defined below) and (iii) payment of principal and
interest on its outstanding indebtedness. Demands for funds diminished at
CNL-Capital during 2003 due to a decline in new originations of real estate
properties and a decrease in interest expense, and due to CNL-Capital not
distributing to the Company any cash resulting from the "net spread" earned and
not distributing any of the gains realized from the sale of properties under the
Investment Property Sales Program, as described below.
During the years ended December 31, 2003, 2002 and 2001, CNL-Capital Corp
derived its primary cash flows from lease and interest income earned in excess
of interest expense paid ("net spread"), net gains from the Investment Property
Sales Program, advisory services and servicing revenues. Significant cash
outflows consist of operating expenses, real property purchases and capital
enhancements in the loan portfolio (excess of investment over related
borrowings). CNL-Capital had cash and cash equivalents of $31.9 million, $10.4
million and $10.8 million at December 31, 2003, 2002 and 2001, respectively.
CNL-Capital's longer-term liquidity requirements (beyond one year) are expected
to be met through successful renewal of its warehouse credit facilities and
gains from the Company's Investment Property Sales Program. In addition,
management believes CNL-Capital's longer term liquidity requirements will be
satisfied in part by operating cash flows provided by servicing and advisory
services. CNL-Capital may also seek additional debt or equity financing. Any
decision to pursue additional debt or equity capital will depend on a number of
factors, such as compliance with the terms of existing credit agreements, the
Company's financial performance, industry or market trends and the general
availability of attractive financing transactions.
Investment Property Sales Program
As described above, the improvement in liquidity has been primarily due to
Investment Property Sales, further described below, outpacing new originations.
The Company's Investment Property Sales Program came into being as a reaction to
uncertainty in the franchise asset-backed securitization market. CNL-Capital was
formed in June of 2000 through an alliance between the Company and the Bank. The
original vision of CNL-Capital was centered on securitization. This business
model was predicated upon the origination of pools of loans or triple-net leases
and the subsequent issuance of bonds collateralized by real estate and other
restaurant assets underlying the loan or lease. The securitization market
experienced considerable volatility in late 2000 that continued through 2003
virtually shutting down that securitization financing channel for the franchise
asset class. Rising delinquencies in securitized loan pools, falling treasury
rates, macroeconomic uncertainties combined with the sluggish restaurant sales
within certain concepts all contributed to the volatility. Investors required
higher interest rates on securities issued in securitizations while ratings
agencies downgraded the quality of the loans underlying the securities. While
many of the Company's competitors experienced downgrades or ratings actions on
bonds previously issued, the Company's prior loan or lease securitizations to
date have not been subject to any such ratings action.
In 2001, CNL-Capital changed its business focus to the private market sales
channels to either refinance or sell existing mortgage loans, and halted the
origination of new loans. In October 2001, the Company renegotiated certain
terms of its alliance with the Bank. Over the course of 2001 through 2003, the
Company sold or refinanced the loans described above over a longer term.
The uncertainty in the franchise asset-backed securitization market led
management to focus the originations effort toward new long-term, triple-net
leases on real estate with the intent of selling these properties to third
parties. In 2001, CNL-Capital began selling investment properties to third
parties (the "Investment Property Sales Program") adding diversity to its
original securitization model. These leased properties may qualify the buyer for
special tax treatment under Section 1031 of the Internal Revenue Code (a
"Section 1031 Exchange"). Generally, Section 1031 Exchanges allow an investor
who realizes a gain from selling appreciated real estate to defer paying taxes
on such gain by reinvesting the sales proceeds in like-kind real estate. The
success of this program is dependent upon achieving an optimal balance of cash
flows from lease income earned in excess of holding costs versus a maximum gain
on the sale. The chart below illustrates cash flows from Investment Property
Sales proceeds and purchases of properties in the years ended December 31:
<s> <c>
(In thousands)
2003 2002 2001
------------- ------------- --------------
Proceeds from Investment Property Sales program sales $ 193,850 $ 287,622 $ 128,480
============= ============= ==============
Purchases of properties to be sold under the Investment
Property Sales program $ 168,965 $ 263,019 $ 118,372
============= ============= ==============
For properties acquired subsequent to December 31, 2001, generally accepted
accounting principles require that the sale of these investment properties be
designated as discontinued operations. A significant element of the ongoing
activities of the specialty finance segment is the Investment Property Sales
Program that consists of the origination of new triple-net lease financing on
properties and the subsequent disposition of those properties. The following
table shows the combined results of the Investment Property Sales Program and
the rest of the operations of the specialty finance segment (without treating
the Investment Property Sales Program as discontinued operations) for each of
the three years ended December 31:
<s> <c>
(In thousands)
2003 2002 2001
------------- -------------- -------------
Revenues:
Sale of real estate $ 193,850 $ 287,622 $ 128,480
Rental income 9,983 13,165 16,212
Other revenue items 32,020 35,116 46,271
----------- -------------- -------------
235,853 335,903 190,963
----------- -------------- -------------
Expenses:
Cost of real estate sold 168,965 263,019 118,372
Interest expense 25,920 29,608 32,176
Depreciation and amortization 1,216 1,243 5,519
Other expenses 31,220 29,466 30,653
----------- -------------- -------------
227,321 323,336 186,720
----------- -------------- -------------
Income tax benefit 6,346 -- --
Cumulative effect of accounting change -- -- (3,841 )
----------- -------------- -------------
Net income $ 14,878 $ 12,567 $ 402
=========== ============== =============
Management expects continued demand for Investment Property Sales Program
properties but continues to study other sales channels to market net lease
assets. The success of the Investment Property Sales business is dependent on
successfully originating new triple-net leases. For the years ended December 31,
2003, 2002 and 2001, CNL-Capital originated $137 million, $204 million and $182
million in net leases respectively. During 2002, originations included a
portfolio of $117 million in properties. CNL-Capital acquired this portfolio in
September 2002 by purchasing all of the limited and general partnership
interests of CNL Net Lease Investors, L.P., an affiliate of the Company's
Chairman of the Board and Vice Chairman of the Board, that until the
acquisition, was a client of CNL-Investment's property management group.
Management had contemplated stronger demand for its core triple-net lease
financing in 2003 and attributes the slow-down to two competitive factors:
o A number of identified leases have been lost to competitors offering
mortgage debt financing. With the low prevailing interest rates, large
national and regional banks have offered inexpensive mortgage
financing that many restaurant operators find more attractive than
leases. CNL-Capital does not currently originate debt financing due to
the volatility and high cost of capital currently associated with the
securitization market. CNL-Capital instead earns a fee for the
referral of such opportunities to the Bank, its financial institution
partner, pursuant to the terms of that alliance. While debt financing
represents a threat to the net lease finance product and, as a result,
the success of the Investment Property Sales program, management
believes that a securitized debt product is not currently in the best
interest of CNL-Capital. Management continues to monitor the potential
reemergence of a mortgage loan product, but does not expect this
market to be viable in the near term.
o CNL-Capital has lost a few transactions as new competitors have
emerged with a net lease program styled after CNL-Capital's Investment
Property Sales program. Competitors have met mixed success at offering
this product, and management believes it can recapture this piece of
the market through differentiating its Investment Property Sales
program as a highly efficient, turnkey program that brings value to
our restaurant clients.
Management has responded to this slowdown by adjusting net lease rates,
identifying larger transactions like the September 2002 portfolio acquisition of
$117 million in properties and by identifying new areas to reduce costs. These
originations provide inventory necessary to execute the Investment Property
Sales Program and CNL-Capital typically profits from the leases while holding
them. At December 31, 2003, CNL-Capital is involved in several opportunities for
net lease originations with $82 million approved for funding and accepted by the
client, and an additional $30 million approved with client acceptance pending.
CNL-Capital's warehouse facilities provide advances for up to 97 percent of the
real estate purchase value. The Company is reinvesting its operating profits to
fund the amounts not advanced by the mortgage warehouse facilities.
Indebtedness.
During 2003, CNL-Capital used the "net spread" earned to pay operating expenses
and used borrowings on its warehouse facilities to fund new real estate
originations. CNL-Capital has continued to reduce its warehouse credit capacity
to align triple-net lease financing opportunities to its financing capacity
requirements and to reduce its overall financing costs. The Company reduced its
warehouse credit capacity from $385 million at December 31, 2002 to $260 million
at December 31, 2003 thereby realizing economies from the reduced capacity.
CNL-Capital may be subject to margin calls on its warehouse credit facilities.
The Bank and the other lenders monitor delinquency assumptions and may require
one or more margin calls to reduce the level of warehouse financing. During the
years ended December 31, 2003, 2002 and 2001, CNL-Capital made $10.1 million,
$16.8 million and $21.3 million in margin calls.
CNL-Capital has the following borrowing sources at December 31, 2003, with the
stated total capacity and interest rate:
<s> <c>
In thousands
Amount used Capacity Maturity Interest rate (4)
----------------- ------------- --------------- -------------------
Note payable (medium term financing) (1) $ 181,955 $ 181,955 Jun 2007 2.53%
Mortgage warehouse facilities (1)(2) 93,513 260,000 Annual 2.53%
Subordinated note payable 43,750 43,750 June 2007 8.50%
Series 2001-4 bonds payable (3) 38,921 38,921 2009 - 2013 8.90%
----------------- -------------
$ 358,139 $ 524,626
================= =============
(1) Average rate excludes the impact of hedge transactions that bring the
total average rate to 6.13 percent on the medium term financing and
3.41 percent on the warehouse facilities.
(2) In December 2003, CNL-Capital lowered the borrowing capacity on one of
its mortgage warehouse facilities from $260 million to $160 million
because it did not require the full capacity and extended the maturity
date on this facility to March 2004 pending further negotiations with
the Bank. In March 2004, CNL-Capital renewed this facility through
March 2005. The second mortgage warehouse facility of $100 million
matures in June 2004.
(3) Includes $4,983 in bonds held by CNL-Investments eliminated upon
consolidation in Company financial statements.
(4) Excludes debt issuance and other related costs.
Note Payable. In June 2002, in order to repay warehouse financing, CNL-Capital
entered into a five-year term $207 million financing collateralized with $225
million in mortgage loans re-designated to reflect the Company's intention to
hold them to maturity. The transaction provides CNL-Capital earnings on the
excess of interest income over interest expense. This five-year term financing
carries a variable interest rate tied to the weighted average rate of commercial
paper plus 1.25 percent with a portion of such interest fixed through the
initiation of a hedge transaction.
Mortgage Warehouse Facilities. CNL-Capital management maintains regular contact
with its mortgage warehouse facility lenders and believes that the relatively
low-cost, high-advance rate financing they provide has been integral to
CNL-Capital's success. As is typical of revolving debt facilities, these
facilities carry a 364-day maturity and accordingly CNL-Capital is vulnerable to
any changes in the terms of these facilities. The warehouse facilities currently
advance an average of 92.2 percent of the original real estate value.
Company warehouse borrowings were initially designed to provide interim
financing until periodic securitizations could occur. In forming the alliance
with the Bank in 2000, the Bank provided a warehouse credit facility (the
"Warehouse Credit Facility") with an initial capacity of $500 million. The
instability of the securitization markets led to renegotiated terms of the
relationship with the Bank in October 2001, including the need to remove certain
loans held as collateral on the Warehouse Credit Facility and the requirement
that CNL-Investments guarantee a portion of the repayments. As part of the
renegotiations, the Bank agreed to finance the remaining loans held as
collateral on the Warehouse Credit Facility until December 2003.
In December 2003, CNL-Capital removed the remaining loans on the Warehouse
Credit Facility by selling them to CNL-Investments, the real estate segment of
the Company. CNL-Investments combined these loans with loans it previously owned
and issued $24.9 million of notes collateralized by approximately $46.6 million
of mortgage loans. The Company re-designated the loans previously held in the
Warehouse Credit Facility to reflect the Company's intention to hold them to
maturity and terminated the swap hedging these loans. This financing carries a
variable interest rate of LIBOR plus 4.50 percent. This transaction enabled
CNL-Capital to repay the warehouse financing and eliminated a $2 million
guaranty previously provided by CNL-Investments on the mortgage loans. The
transaction also provides the Company ongoing earnings on the excess of interest
income over interest expense under the refinancing.
In mid December 2003, CNL-Capital renewed the December 2003 maturity date on the
Warehouse Credit Facility through March 2004, pending further negotiations with
the Bank. As part of the renewal, CNL-Capital reduced the $260 million capacity
to $160 million and agreed to a 15 basis point unused fee on this facility, and
the Bank agreed to finance the remaining loans until March 2004. In March 2004,
CNL-Capital renewed this facility through March 2005. The second mortgage
warehouse facility of $100 million with another lender matures in June 2004.
Management has and may continue to decrease the mortgage warehouse facility
capacity from its present level in order to economize on its cost, provided that
there continue to be costs associated with excess capacity. At December 31,
2003, CNL-Capital had approximately $94 million in capital supporting its loan
and lease portfolio.
Subordinated Note Payable. In forming the alliance with the Bank during 2000,
the Bank provided CNL-Capital with a $43.75 million subordinated debt facility
(the "Subordinated Debt Facility"). In late December 2003, CNL-Capital removed
the remaining loans on the Warehouse Credit Facility by selling them to
CNL-Investments. In January 2004, CNL-Capital used these proceeds along with
additional funds, to repay the Bank $10 million on the Subordinated Debt
Facility. As part of the repayment, CNL-Capital and the Bank modified the terms
of the Subordinated Debt Facility. CNL-Capital extended the maturity date on the
Subordinated Debt Facility from June 2007 to December 2008 and reduced the
interest rate from 8.50 percent to 7.00 percent per annum. Under the new terms,
CNL-Capital will make a mandatory repayment of $11.875 million on this facility
by December 31, 2004. CNL-Capital will then make quarterly payments of principal
and interest to the Bank using a five-year amortization schedule beginning March
2005 with a balloon payment due on December 31, 2008. As part of the
negotiations, the Bank eliminated a previous restriction on CNL-Capital to pay
down the Subordinated Debt Facility for every dollar distributed by CNL-Capital
to the Company. In addition, the Company agreed to provide a guaranty on the
entire amount outstanding under the Subordinated Debt Facility as part of the
renegotiations. Prior to the renegotiations, only CNL-Capital had provided a
guaranty on the Subordinated Debt Facility.
Bonds Payable. In May 2001, CNL-Capital issued bonds collateralized by a pool of
mortgages (the "Series 2001-4 Bonds). The proceeds of $42.1 million were applied
to pay down short-term debt. At December 31, 2003, 60 mortgage loans served as
collateral for the bonds which had a carrying value of approximately $45.8
million as of December 31, 2003. The offering resulted in an initial weighted
average life of approximately 7.8 years and a rate of interest of approximately
8.90 percent per annum. The bond indenture requires monthly principal and
interest payments received from borrowers to be applied to the bonds. The bond
indenture also provides for an optional redemption of the bonds at their
remaining principal balance when the remaining amounts due under the loans that
serve as collateral for the bonds are less than 10 percent of the aggregate
amounts due under the loans at the time of issuance.
Some sources of debt financing require that CNL-Capital maintain certain
standards of financial performance such as a fixed-charge coverage ratio, a
tangible net worth requirement and certain levels of available cash. Any failure
to comply with the terms of these covenants would constitute a default and may
create an immediate need to find alternate borrowing sources.
Liquidity Risks.
Tenants or borrowers that are experiencing financial difficulties could impact
CNL-Capital's ability to generate adequate amounts of cash to meet its needs. In
the event the financial difficulties persist, CNL-Capital's collection of
interest and principal payments could be interrupted. At present, most of these
borrowers continue to pay principal and interest substantially in accordance
with loan terms. However, CNL-Capital continues to monitor each borrower's
situation carefully and will take appropriate action to place CNL-Capital in a
position to maximize the value of its investment.
Liquidity risk also exists from the possibility of borrower delinquencies on the
mortgage loans held for sale or held to maturity. In the event of a borrower
delinquency, the Company could suffer not only shortfalls on scheduled payments
but also margin calls by the lenders that provide the warehouse facilities and
the five-year note, subjecting the Company to unanticipated cash outflows. The
Company is obligated under the provisions of its mortgage warehouse facilities
and its five-year note to pay down certain debt associated with borrower
delinquencies or defaults within a required time frame. Most properties acquired
on the mortgage warehouse facilities are required to be sold within a certain
time frame. Any delinquency, default or delay in the resale of properties
financed through one of these facilities would generally result in an immediate
pay-down of the related debt and may restrict the Company's ability to find
alternative financing for these specific assets. The Company's debt, excluding
bonds payable, generally provides for cross-default triggers. A default of a
mortgage warehouse facility, for example from a failure to make a margin call,
could result in other Company borrowings becoming immediately due and payable.
For those borrowers who have experienced financial difficulties or who have
defaulted under their loans, management has estimated the loss or impairment on
the related investments and included such charge in earnings through December
31, 2003. However, management acknowledges that the estimation process is
challenging due to the number of possible outcomes that may result from a
default situation. While management believes it has recorded appropriate
reserves at December 31, 2003 based on an assessment of specific borrowers'
financial difficulties, facts may develop in future periods that may suggest the
need for larger reserve charges.
As of March 12, 2004, CNL-Capital is under negotiations to provide temporary
debt service relief to a borrower/tenant who is experiencing liquidity
difficulties. CNL-Capital anticipates lowering the interest rate over the next
twelve months on eight mortgage loans to provide the necessary debt service
relief to the borrower/tenant. Repayment terms would go back to the original
terms starting with the thirteenth month. This temporary debt service relief
will have a $1.5 million negative impact to cash flows of CNL-Capital over the
next twelve months. Management does not believe that this temporary decline in
cash flows will have a material adverse effect on the overall liquidity of the
Company.
Additional liquidity risks include the possible occurrence of economic events
that could have a negative impact on the franchise securitization market and
affect the quality or perception of the loans or leases underlying CNL-Capital's
previous securitization transactions. The Company conducted its previous
securitizations using bankruptcy remote entities. These entities exist
independent from the Company and their assets are not available to satisfy the
claims of creditors of the Company, any subsidiary or its affiliates. To date,
the ratings on the loans underlying the securities issued in these transactions
have been affirmed unlike the ratings of many competitors' loan pools that have
been downgraded. Upon the occurrence of a significant amount of delinquencies
and/or defaults, one or more of the three rating agencies may choose to place a
specific transaction on ratings watch or even downgrade one or more classes of
securities to a lower rating. Should the loans underlying the securities
default, and the securities undergo a negative ratings action, CNL-Capital could
experience material adverse consequences impacting its ability to continue
earning income as servicer, and its ability to engage in future profitable
securitization transactions. CNL-Capital holds an interest in the following
securitizations (referred to as the 1998-1 and 1999-1 residual interests), the
assets and liabilities of which are not consolidated in the Company financial
statements:
<s> <c>
December 31, 2003
-----------------------------------------
(In Thousands)
Mortgage loans in Bonds outstanding
pool at par at face value (1)
------------------- --------------------
Loans and debt supporting 1998-1 Certificates issued by CNL
Funding 1998-1, LP $ 192,801 $ 191,144
Loans and debt supporting 1999-1 Certificates issued by CNL
Funding 1999-1, LP $ 229,044 $ 229,044
------------------- --------------------
$ 421,845 $ 420,188
=================== ====================
(1) Certain bonds in both the 1998-1 and 1999-1 pools are owned by
CNL-Investments; the aggregate amount of these bonds of $27,563 appears
as investments in the consolidated financial statements of the Company.
Management believes that the Investment Property Sales Program will continue to
be successful, but not without risks. Management believes that the recent tax
law changes decreasing, but not eliminating capital gains taxes, are not
significant enough to dissuade demand created by property buyers seeking
continued tax deferrals. However any sweeping new proposal to eliminate the
capital gains tax could negatively impact demand. An increase in general levels
of interest rates could result in buyers requiring a higher yield. Neither the
rate of return on leased properties nor the rate of return required by a buyer
correlate directly with prevailing interest rates. Net lease properties acquired
in anticipation of sales through the Investment Property Sales program can
typically be leased to tenants at a rate that exceeds the rate a buyer is
willing to accept. CNL-Capital is at risk, however, that any interest rate
increases causing buyers to demand higher yields may not be matched with higher
yields from tenants. This risk could cause CNL-Capital to experience lower
average gains or even losses on the future sales of Investment Property Sales
properties.
o Real Estate Segment (CNL-Investments)
CNL-Investments' demand for funds are predominantly interest expense, operating
expenses, reinvestment of disposition proceeds and distributions to the Company.
CNL-Investments' cash flows primarily consist of rental income from tenants on
restaurant properties owned, interest income on mortgage loans, dispositions of
properties and income from holding interests in prior loan securitizations
including those originated by predecessor entities of CNL-Capital.
CNL-Investments had cash and cash equivalents of $4.4 million, $5.3 million and
$10.2 million at December 31, 2003, 2002 and 2001, respectively.
CNL-Investments' management believes the availability on its line of credit will
permit it to meet its short-term liquidity objectives. Long-term liquidity
requirements will be met through a combination of selectively disposing assets
and reinvesting the proceeds in high-yielding investments and cash from
operating activities.
Indebtedness
From time to time, CNL-Investments will borrow amounts available under its
Revolver to fund operating expenses. Borrowing resources at December 31, 2003
for CNL-Investments include:
<s> <c>
(In thousands)
Amount Used Capacity Maturity Interest Rate (1)
-------------- -------------- --------------- ------------------
Revolver $ 2,000 $ 30,000 Oct 2004 3.62%
Note payable (2) 605 5,000 2005 4.40%
Series 2000-A bonds payable 252,477 252,477 2009-2017 7.94%
Series 2001 bonds payable 118,690 118,690 Oct 2006 1.70%
Series 2003 bonds payable 24,906 24,906 2005-2010 5.67%
-------------- --------------
$ 398,678 $ 431,073
============== ==============
(1) Excludes debt issuance and other related costs.
(2) CNL-Investments did not renew the remaining $4.4 million available under the
note payable when it matured in January 2004.
CNL-Investments provides a guaranty of up to ten percent of CNL-Capital's five
year term financing. CNL Investments also provides a 100 percent guaranty on
CNL-Capital's Subordinated Debt Facility.
CNL-Investments' short-term debt consists of a $30 million revolving line of
credit (the "Revolver") entered into in October 2001 with the Bank.
CNL-Investments utilizes the Revolver from time to time to manage the timing of
inflows and outflows of cash from operating activities. The Revolver matured in
October 2003, and at that time CNL-Investments exercised its one-year renewal
option.
In January 2003, a subsidiary of CNL-Investments, entered into a Master Credit
Facility Agreement ("the Note Payable") with CNL Bank, an affiliate. The Note
Payable had a total borrowing capacity of $5 million and was established for the
purpose of financing the acquisition and redevelopment of real estate
properties. At December 31, 2003, the Company had $0.6 million outstanding
relating to this Note Payable. Amounts outstanding are collateralized by
mortgages on certain real property, bear interest at LIBOR plus 325 basis points
per annum and require monthly interest only payments until maturity in 2005. The
unused portion of $4.4 million on the credit facility expired in January 2004
and management of CNL-Investment elected not to extend the available capacity.
CNL-Investments also has medium-term note and long-term bond financing, referred
to collectively as bonds payable, that was used to restructure the Company's
indebtedness. Rental income received on 379 properties and interest income
received on 34 mortgage loans and four equipment leases pledged as collateral on
medium and long-term financing is used to make scheduled reductions in bond
principal and interest.
Some sources of debt financing require that CNL-Investments maintain certain
standards of financial performance such as a fixed-charge coverage ratio, and
impose a limitation on the distributions from CNL-Investments to the Company
tied to funds from operations. Any failure to comply with the terms of these
covenants could constitute a default and may create an immediate need to find
alternate borrowing sources.
Liquidity Risks
Liquidity risks within the real estate business include the potential that a
tenant's financial condition could deteriorate, rendering it unable to make
lease payments. Generally, CNL-Investments uses a triple-net lease to lease its
properties to its tenants. The triple-net lease is a long-term lease that
requires the tenant to pay expenses on the property. The lease somewhat
insulates CNL-Investments from significant cash outflows for maintenance,
repair, real estate taxes or insurance. However, if the tenant experiences
financial problems, rental payments could be interrupted and in the event of
tenant bankruptcy, CNL-Investments may be required to fund certain expenses in
order to retain control or take possession of the property and its operations.
This could expose CNL-Investments to successor liabilities and further affect
liquidity.
Management is aware of multi-unit tenants that are also experiencing financial
difficulties. In the event the financial difficulties continue, CNL-Investments'
collection of rental payments could be interrupted. At present, most of these
tenants continue to pay rent substantially in accordance with lease terms.
However, CNL-Investments continues to monitor each tenant's situation carefully
and will take appropriate action to place CNL-Investments in a position to
maximize the value of its investment. For those tenants who have experienced
financial difficulties or have defaulted under their leases, management has
estimated the loss or impairment on the related properties and included such
charge in earnings through December 31, 2003. However, management acknowledges
that the estimation process is challenging due to the number of possible
outcomes that may result from a default situation. While management believes it
has recorded an appropriate impairment charge at December 31, 2003, based on its
assessment of the tenants' financial difficulties and its knowledge of the
properties, facts may develop in future periods that may suggest the need for a
larger impairment charge.
In October 2003, a tenant of CNL-Investments, Chevy's Holding, Inc. and numerous
operating subsidiaries, ("Chevy's") filed for voluntary bankruptcy under the
provisions of Chapter 11. Chevy's operates the Chevy's, Rio Bravo and Fuzio
concepts. CNL-Investment owns 22 Chevy's units, with a total investment of $56.6
million. As of December 31, 2003, Chevy's has rejected 16 of the 22 leases.
Management has recorded impairments relating to some of these sites and expects
these rejected sites to be re-leased or sold. Chevy's has paid rent on the six
remaining sites since filing bankruptcy in October 2003.
In February 2004, The Ground Round, Inc. ("Ground Round"), a tenant of
CNL-Investments, filed for voluntary bankruptcy under the provisions of Chapter
11. Ground Round operates the Ground Round and Tin Alley Grills concepts.
CNL-Investments owns 12 units, with a total investment of $12.9 million. Ground
Round had closed eight of these sites as of the bankruptcy filing.
CNL-Investments did not collect the February rents but anticipates collecting
the March rents in accordance with bankruptcy provisions. As of March 12, 2004,
Ground Round had neither affirmed nor rejected the 12 leases and CNL-Investments
had determined that no impairment provisions were deemed necessary. Management
will continue to monitor developments surrounding the bankruptcy, including the
potential rejection of some or all of these leases.
As of March 12, 2004, CNL-Investments is under negotiations to provide temporary
rent forbearance to a tenant who is experiencing liquidity difficulties.
CNL-Investments anticipates forbearing the collection of partial rents over the
next twelve months on ten sites to provide the necessary rent relief. Under the
proposed negotiations, the tenant will pay the amounts deferred under the
forbearance agreement over five years. This temporary forbearance on the rents
will have a $1.8 million negative impact to cash flows of CNL-Investments over
the next twelve months but will be collected between months 13 through 72.
CNL-Investments has experienced tenant bankruptcies and may commit further
resources in seeking resolution to these properties including funding restaurant
businesses directly or on behalf of successor tenants. For example, where the
value of the leased real estate is linked to the financial performance of the
tenant, CNL-Investments may allocate capital to invest in turnaround
opportunities. As of December 31, 2003 the Company owned, through an investment
of $1.8 million, the business restaurant operations of twelve Denny's
restaurants that represented a strategic move to preserve the Company's real
estate investment when the franchisee of the restaurants experienced severe
financial difficulties. CNL-Investment has since successfully disposed of the
real estate and plans to sell its investment in the business by the end of 2004.
This activity is not a core operation or competency of the Company and is only
undertaken in situations where management believes the course of action best
preserves the Company's position in the real estate or loan investment.
Certain net lease properties are pledged as collateral for the Series 2000-A and
Series 2001 triple-net lease mortgage bonds payable. In the event of a tenant
default relating to pledged properties, the Company may elect to contribute
additional properties or substitute properties into these securitized pools from
properties it owns not otherwise pledged as collateral. These pools contain
properties potentially impacted by the recent bankruptcy filing of Chevy's and
the financial difficulties of other restaurant operators. Management is
evaluating the impact to the pools, including any need to identify substitute
properties. In the event that CNL-Investments has no suitable substitute
property, the adverse performance of the pool might inhibit the Company's future
capital raising efforts, including the ability to refinance the Series 2001
bonds maturing in 2006. The Series 2000-A and Series 2001 financings include
certain triggers relating to delinquency percentages or debt service coverage.
If certain ratios are exceeded or not maintained, then principal pay down on the
outstanding bonds is accelerated.
Off-Balance Sheet Transactions
The Company is not dependent on the use of any off-balance sheet financing
arrangements for liquidity. The Company holds a residual interest in
approximately $422 million in loans transferred to unconsolidated trusts that
serve as collateral for the long-term bonds discussed in "Liquidity and Capital
Resources - Specialty Finance Segment (CNL-Capital). Recent accounting
pronouncements have not required the consolidation of these trusts.
Interest Rate Risk
Floating interest rates on variable rate debt expose the Company to interest
rate risk. The Company invests in assets with a fixed return by sometimes
financing a portion of them with variable rate debt. As of December 31, 2003,
the Company's variable rate debt includes the following:
o $2 million on its Revolver;
o $94 million on its mortgage warehouse facilities;
o $182 million on the June 2002 five-year financing;
o $119 million outstanding on the Series 2001 bonds; and
o $25 million outstanding on the Series 2003 bonds.
Generally, the Company uses derivative financial instruments (primarily interest
rate swap contracts) to hedge against fluctuations in interest rates from the
time it originates fixed-rate mortgage loans and leases until the time they are
sold. The Company generally terminates certain of these contracts upon the sale
of the loans or properties, and both the gain or loss on the sale of the loans
and the additional gain or loss on the termination of the interest rate swap
contracts is recognized in the consolidated statement of operations.
Additionally, the Company uses interest rate swaps and caps to hedge against
fluctuations in variable cash flows on a portion of its floating rate debt.
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed upon notional principal
amount. Under a cap purchase, a third party agrees to assume any interest costs
above a stated rate. Changes in the values of the Company's current interest
rate swaps and caps are reflected in other comprehensive income.
The Company also invests in financial instruments that are subject to various
forms of market risk such as interest rate fluctuations, credit risk and
prepayment risk. The value of its mortgage loans held for sale and its
investments change as a result of fluctuating interest rates, credit risk,
market sentiment and other external forces, which could materially adversely
affect liquidity and capital resources.
The Company has entered into the following cash flow hedges and interest rate
caps that are outstanding as of December 31, 2003. The net value associated with
these hedges is reflected on the Company's Consolidated Balance Sheets:
<s> <c>
Estimated
Value
(Liability)
(in
thousands)
Notional Cap Strike at
Amount (In Price or Trade Maturity December
Type of Hedge Thousands) Swap Rate Date Date 31, 2003
----------------------------- -------------- ------------- ---------- ---------- -----------
Pay Fixed Rate - Receive
Floating Rate Swap $ 144,418 6.590% 6/14/02 3/15/22 $ (10,772 )
Interest Rate Cap 132,000 4.500% 9/28/01 12/25/06 730
Interest Rate Cap 30,000 3.500% 12/17/03 2/1/11 953
Management estimates that a one-percentage point increase in short-term interest
rates for the year ended December 31, 2003 would have resulted in additional
interest costs of approximately $2.7 million. This sensitivity analysis contains
certain simplifying assumptions (for example, it does not consider the impact of
changes in prepayment risk or credit spread risk). Therefore, although it gives
an indication of the Company's exposure to interest rate change, it is not
intended to predict future results and the Company's actual results will likely
vary.
Management believes inflation has not significantly affected the Company's
earnings because the inflation rate has remained low. During inflationary
periods, which generally are accompanied by rising interest rates, the Company's
ability to grow may be adversely affected because the yield on new investments
may increase at a slower rate than new borrowing costs. However, sustained low
inflation could lead to net lease pricing pressure as tenants request decreasing
rates for longer maturities.
Critical Accounting Policies
The Company accounts for many asset categories that require management to
exercise extensive judgment and make estimates. Listed below are the more
significant accounting policies that require management judgment and estimates
or are otherwise significant to the results of operations:
o The Company records the acquisition of land, buildings and equipment at
cost, including acquisition, closing and construction period interest
costs. Land and buildings are leased to restaurant operators generally
on a triple-net basis, which means that the tenant is responsible for
all operating expenses relating to the property, including property
taxes, insurance, maintenance and repairs. The property and secured
equipment leases held for investment are accounted for using either the
direct financing or the operating method unless the Company has
classified these properties pursuant to their intent to sell.
Management estimates residual values and collectable rents in
determining whether a lease is accounted for as either direct financing
or operating.
o The Company's real estate accounting differs for assets held by its two
operating segments based upon management's intention with respect to
such asset's disposition.
o Real estate held within the real estate segment is generally
acquired with an intention to hold long-term. It is depreciated over
its estimated useful life and rent is recorded giving consideration
to contractual rent increases over the life of the lease. Some real
estate held by this segment may be designated so as to reflect
management's intention to dispose of the asset. In such case all
operating income and expense, including depreciation and accrued
rent associated with future contractual increases, is reflected as a
component of discontinued operations for all periods presented, even
for periods prior to management having stated its intention to sell.
o Real estate held within the specialty finance segment is generally
acquired with an intention to sell within one year. It is therefore
not depreciated, and future contractual rent increases do not impact
earnings. Because of a transition rule, the specialty finance
properties are accounted for differently depending on acquisition
date. All such properties acquired after December 31, 2001 are
treated as discontinued operations, and operating income and expense
is reflected as a component of discontinued operations.
o "Mortgage loans held for sale" were loans originated that the Company
intended to sell or securitize. They were recorded at fair market value
which was estimated using quoted prices, the present value of the
expected cash flows and the estimated impact of any defaults, and may
have been recorded at an amount greater than cost. In December 2003,
the Company re-designated the majority of these loans to reflect the
Company's intention to hold them to maturity and terminated the related
derivative instrument hedging these loans.
o "Mortgage notes receivable" differ from "mortgage loans held for sale"
primarily because of management's intention to hold the mortgage to its
maturity. These financial assets are recorded at the lower of cost or
market. Certain assets have been reclassified from "mortgage loans held
for sale" into the "mortgage notes receivable" category when, in lieu
of selling the mortgages, the Company elects to refinance such
mortgages using longer-term debt. In the case of such reclassified
mortgages, the Company records these at the value on the refinance
date. The value at such date may differ from the par value of the loan
with any such difference being amortized to earnings over the remaining
life of the mortgage loans as a yield adjustment.
o Certain loans originated by the Company were sold to independent trusts
that, in turn, issued securities to investors backed by these assets.
The Company retains the servicing rights and participates in certain
cash flows from the trusts. The present value of expected excess of net
cash flows, after payment of principal and interest to bond or other
certificate holders, over the estimated cost of servicing is recorded
at the time of sale as a retained interest. Retained interests in
securitized assets are included in other investments. Accounting for
the retained interests requires that the Company estimate values using
market trends and historical experience, expected prepayments and
defaults. This information is considered, along with prevailing
discount rates and the terms of the bonds and certificates, to arrive
at an initial value and to periodically review the value for gains or
losses. Permanent impairments, representing the excess of carrying
value over estimated current fair value, are recorded as an expense.
o Management reviews, no less than annually, its long-lived assets for
impairment or potential loss as events or circumstances indicate that
the carrying amount of the assets may not be recoverable. Management
compares the estimated future undiscounted cash flows, including the
residual value of the property or collateral, with the carrying cost of
the individual asset. If impairment is indicated, the assets are
adjusted to the estimated fair value. In addition, management evaluates
the carrying value of goodwill on a periodic basis to determine if an
impairment is deemed necessary.
o The Company has also entered into certain derivative contracts in order
to hedge its exposure to fluctuations in interest rates on variable
rate debt qualifying for treatment as cash flow hedges. As long as this
certain criteria for hedge accounting are met the changes in fair value
of these contracts is reflected in other comprehensive income (loss)
and as a component of stockholders' equity. If the requirements are not
met, changes in the fair value of these contracts are reflected in
earnings.
o Valuation of deferred tax assets. The Company accounts for federal and
state income taxes with respect to its TRS subsidiaries using the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the consolidated financial statements carrying amounts of
existing assets and liabilities and respective tax bases and operating
losses and tax-credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. In the event that these
assumptions change the deferred taxes may change.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. The valuation
allowance is based on the Company's estimates of future taxable income
and ongoing prudent and feasible tax planning strategies. Should the
Company determine it would not be likely to realize in full the
deferred tax asset in the future, the Company would record a valuation
allowance to reduce the deferred tax asset to an amount that is more
likely than not to be realized. An adjustment to the deferred tax asset
would decrease income in the period the determination was made.
In estimating future taxable income, the Company must estimate future
income using historical data, the expected growth rate of revenues and
expenses, the effect of capital expenditures, and future market and
economic conditions. Variability of these and other assumptions could
result in an inability to recover the carrying value of the deferred
tax assets.
New Accounting Pronouncements.
The implementation of certain accounting pronouncements have not had a material
impact on the Company's results of operations. In January 2003, the Financial
Accounting Standards Board (the "FASB") issued FAS Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities." FIN 46 requires that a
variable interest entity be consolidated by a company if that company is subject
to a majority risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. Prior
to FIN 46, a company generally included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003, and to older entities no later than the
first fiscal year or interim period ending after December 15, 2003. Management
adopted this standard in 2003 which resulted in the consolidation of two of the
Company's previously unconsolidated subsidiaries. Adoption of this standard did
not change the Company's accounting for the Company's bankruptcy remote
securitization entities. The Company restated all prior periods presented to
conform with the 2003 presentation. The consolidation did not significantly
impact the Company's financial position or results of operations.
In December 2003, the FASB issued FIN 46R, "Consolidation of Variable Interest
Entities". This Interpretation requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries. The primary
beneficiary of a variable interest entity is the party that absorbs a majority
of the entity's expected losses, receives a majority of its expected residual
returns, or both, as a result of holding variable interests, which are the
ownership, contractual, or other pecuniary interests in an entity that change
with changes in the fair value of the entity's net assets excluding variable
interests. Prior to FIN 46R, a company generally included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. Application of FIN 46R is required in financial statements of
public entities that have interests in variable interest entities for periods
ending after March 15, 2004. The Company does not expect that the application of
this Interpretation will have a significant effect on its financial position or
results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("FAS 150"). FAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. FAS 150 will require issuers to
classify certain financial instruments as liabilities (or assets in some
circumstances) that previously were classified as equity. Some of the examples
of financial instruments covered by FAS 150 include shares that are mandatorily
redeemable, and other financial instruments that embody an obligation to
repurchase outstanding shares or a conditional obligation that requires
settlement by issuing a variable number of the entity's shares. FAS 150 also
requires that minority interests for majority owned finite lived entities be
classified as a liability and recorded at fair market value. FAS 150 initially
applied immediately to all financial instruments entered into or modified after
May 31, 2003, and otherwise was effective at the beginning of the first interim
period beginning after June 15, 2003. Effective October 29, 2003, the FAS
deferred implementation of FAS 150, as it applies to minority interests of
finite lived Partnerships. The deferral of these provisions is expected to
remain in effect while these interests are addressed in either Phase II of the
FASB's Liabilities and Equity project or Phase II of the FASB's Business
Combinations Project; therefore, no specific timing for the implementation of
these provisions has been stated. The implementation of the currently effective
aspects of FAS 150 did not have a material impact on the Company's results of
operations.
Results from Operations
The Company generated net income of $42.4 million and $35.6 million and
generated a loss of $24.5 million for the years ended December 31, 2003, 2002
and 2001, respectively. The 19 percent increase in net income in 2003 as
compared to 2002 was the result of a combination of factors including lower
general, operating and administrative expense and decreased losses in the
mortgage loans held for sale. The Company undertook an initiative to reduce
general operating expenses by transferring certain functions out of the Company
as described below. In addition, property expenses were lower in 2003 as
compared to 2002 due to resolutions of 2002 bankruptcies and selling vacant
properties that incurred property expenses during 2002. The Company also
benefited from a decrease in interest expense resulting from low interest rates
in the economy as well as having lower amounts outstanding under its credit
facilities than in 2002. The decrease in amounts outstanding under its credit
facilities was the result of paying down principal in accordance with loan
repayment terms, selling properties financed with debt under the Investment
Sales Program and not having to borrow as much due to low originations volume.
The loss during 2001 was primarily the result of the Company recording
provisions for loan losses and impairment provisions relating to several tenant
and borrowers who experienced financial difficulties or filed for bankruptcy.
Net earnings in 2003 and 2002 also benefited from creating the Investment
Property Sales Program that only had a partial year benefit in 2001.
The following discussion of results from operations is by segment. All segment
results are before eliminating adjustments and results of the holding company.
As a result, the sum of amounts applicable to each segment will not, in some
cases, equal the Company total amount reflected in the condensed consolidated
statement of operations. Company earnings by segment reflect restatements for
prior periods resulting from consolidating previously unconsolidated entities in
accordance with the implementation of new accounting pronouncements. Company
earnings are as follows for each of the years ended December 31:
<s> <c>
(In Millions)
% of % of % of
Net income/(loss) by segment 2003 Total 2002 Total 2001 Total
---------- -------- ----------- ---------- --------- -------
Real estate segment $ 27.7 65% $ 23.2 65% $ (22.8 ) (93% )
Specialty finance segment 14.9 35 12.6 35 0.4 2
Other holding company results,
results for periods prior to
segment reporting and
consolidating eliminations (0.2) -- (0.2 ) -- (2.1 ) (9 )
---------- -------- ----------- ---------- --------- -------
Net income/(loss) $ 42.4 100% $ 35.6 100% $ (24.5 ) (100% )
========== ======== =========== ========== ========= =======
o The real estate segment posted a 19 percent increase in earnings in 2003.
The improved operating performance was due to incurring lower general,
operating and administrative expenses, interest expense and property
expenses in 2003 as compared to 2002. The real estate segment posted
earnings in 2002 as compared to a loss in 2001 that resulted when $28.2
million in loan reserves and $26.9 million in real estate impairments were
recorded in 2001 in connection with certain borrower and tenant
delinquencies. Exclusive of these charges in each year, the improved
performance of the real estate segment during the comparative years
reflects the 2002 initiative to sell vacant and under-performing properties
and use the proceeds to reduce debt. The sales resulted in a net gain of
$3.3 million and generated sales proceeds that were applied to reduce the
business segment's overall debt by $44.7 million during 2002.
o The specialty finance segment reported an 18 percent increase in earnings
in 2003 as compared to 2002 due to a one time benefit from income taxes of
approximately $6.5 million. The benefit resulted from the reversal of the
valuation allowance on deferred tax assets, as further described below.
Absent this one time benefit, operating results would have decreased by 33
percent to $8.4 million in 2003, as compared to $12.6 million in 2002.
Despite a decrease in interest expense, overall net income was lowered by
an increase in provisions for loan losses and a decrease in the net spread
between the segment's rental and interest income and its interest expense.
The decrease in the spread was primarily due to a decrease in rental income
from lower originations volume and less inventory levels available to earn
this spread income pending the sale of the properties under the Investment
Property Sales Program. Operating results of $12.6 million were higher in
2002 as compared to operating results of $0.4 million in 2001 due to the
expansion of the Investment Property Sales Program which sold $288 million
of real estate properties during 2002 as compared to $128 million in 2001,
representing an increase of 125 percent. Gains from these sales were $24.6
during 2002 as compared to $10.1 during 2001, representing an increase of
144 percent.
Revenues
<s> <c>
For the year ended December 31,
Total revenues by segment (in % of % of % of
millions) 2003 Total 2002 Total 2001 Total
-------- ------ -------- ------- -------- ------
Real estate segment $ 84.5 75% $ 87.6 26% $ 87.5 32%
Specialty finance segment* 32.3 28 250.8 75 190.1 70
Other holding company results,
results for periods prior to
segment reporting and
consolidating eliminations (3.2) (3) (3.2) (1) (4.4) (2)
-------- ------ -------- ------- -------- ------
Total revenues* $ 113.6 100% $335.2 100% $ 273.2 100%
======== ====== ======== ======= ======== ======
* See discussion below for accounting treatment of sales of restaurant
properties as discontinued operations.
Revenues are discussed based on the individual segment results beginning with
the results of the real estate segment through CNL-Investments:
<s> <c>
For the year ended December 31,
Real estate segment revenues by % of % of % of
line item (in millions) 2003 Total 2002 Total 2001 Total
-------- ------- --------- ------- ------- ------
Rental income from operating
leases and earned income from
direct financing leases $71.4 85% $ 71.1 81% $ 72.1 82%
Interest income from mortgage
equipment and other notes
receivable 4.2 5 4.2 5 4.3 5
Investment and interest income 4.5 5 4.8 5 5.1 6
Other income 4.4 5 7.5 9 6.0 7
-------- ------- --------- ------- ------- ------
Total segment revenues $ 84.5 100% $ 87.6 100% $ 87.5 100%
======== ======= ========= ======= ======= ======
The rental revenue from vacant and other properties sold was classified as a
component of discontinued operations for all periods presented and was not
included in the segment revenues above. The combined amount of rental income
from operating leases and earned income from direct financing leases from
continuing operations for 2003, 2002 and 2001 did not change significantly for
each of the years presented.
Other income in the real estate segment decreased during 2003 as compared to
2002 as a result of decreased billings of direct costs to third parties using
CNL-Investments for property management services. During 2003, the Company
transferred certain functions to CFG, an affiliate, thereby reducing general and
operating expenses, as well as reducing the billings of these expenses collected
from third parties. Other income was higher in 2002 as compared to each of 2003
and 2001 due to the fact that during 2002, the Company earned disposition fees
and recorded as income the settlement proceeds collected from one of its tenants
who filed for bankruptcy. No such amounts were recorded during 2003 or 2001.
The revenues of the specialty finance segment through CNL-Capital are more
variable than those of the real estate segment. The following table provides
additional information relating to the revenues of this segment:
<s> <c>
For the year ended December 31,
Specialty finance segment
revenues by line item (in % of % of % of
millions) 2003 Total 2002 Total 2001 Total
-------- ------- --------- ------- ------- ------
Sale of real estate $ -- --% $ 209.5 84% $ 128.5 68%
Rental income from operating
leases and earned income from
direct financing leases -- -- 7.7 3 15.4 8
Interest income from mortgage
equipment and other notes
receivable 25.6 79 30.4 12 36.6 19
Investment and interest income 0.8 2 1.4 -- 1.5 1
Net decrease in value of mortgage
loans held for sale, net of
related hedge (1.9) (5) (5.4) (2) (5.1) (3)
Gain on sale of mortgage loans -- -- 4.1 2
Other income 7.8 24 7.2 3 9.1 5
-------- ------- --------- ------- ------- ------
$ 32.3 100% $ 250.8 100% $ 190.1 100%
======== ======= ========= ======= ======= ======
The comparability of the specialty finance segment revenues is significantly
impacted by the method of accounting for its sales of real estate that are
recorded pursuant to discontinued operations guidance. This program was not
started until 2001. The following information presents the Investment Property
Sales Program sales:
<s> <c>
Specialty finance segment Investment Property Sales For the year ended December 31,
Program sales (in millions) 2003 2002 2001
------------ ------------- -----------
Sale of real estate, as reported $ -- $ 209.5 $ 128.5
Cost of real estate sold, as reported -- (193.2) (118.4)
Gain on disposal of discontinued operations, net as
reported 24.9 8.3 --
------------ ------------- -----------
Total gains from Investment Property Sales
Program sales $ 24.9 $ 24.6 $ 10.1
============ ============= ===========
CNL-Capital sold 147, 182 and 90 properties under the Investment Property Sales
Program in 2003, 2002 and 2001, respectively. Additional information on actual
proceeds, purchases and related gains is located in "Liquidity and Capital
Resources - Specialty Finance Segment (CNL-Capital) - Investment Property Sales
Program."
Other matters impacting the comparability of the various components of revenues
during the three years ended December 31, 2003, 2002 and 2001 include:
o Rental income from operating leases reflects a decrease because in 2002 and
2001, rental revenues associated with properties acquired after December
31, 2001 were recorded as a component of income from discontinued
operations while properties acquired prior to January 1, 2002 were recorded
in rental income. Beginning January 1, 2003, however, these revenues are
recorded in discontinued operations regardless of the date of acquisition.
All properties owned by this segment are held with the intent to be sold.
o Interest income from mortgage, equipment and other notes receivable
decreased 16 percent and 17 percent during 2003 and 2002, each as compared
to the previous year, as a result of normal principal repayments as well as
foreclosure actions, the modification of terms and other impacts of
delinquent loans between years. The Company has not originated new mortgage
loans since May of 2001, focusing instead on the opportunity to refer
potential borrowers to CNL-Capital's financial institution partner.
o Despite a hedging strategy designed to address market volatility in the
value of loans held for sale, the loan valuation increases associated with
decreases in interest rates for mortgage loans held for sale, net of
related hedge, were more than offset by estimated potential default losses
and valuation decreases (liability increases) in hedge contracts. The
results improved in 2003 as compared to 2002 due to improvements in the
hedge valuations partially offset by increased potential default related
loan reserves. In addition, the decrease in 2003 resulted from
CNL-Capital's sale of its remaining loans to CNL-Investments in conjunction
with CNL-Investments issuing bonds on the new 2003 pool.
o Investment and interest income associated with retained interests in the
off balance sheet loan pools decreased by 43 percent in 2003 as a result of
certain pool defaults and prepayments in 2002 and 2003.
o During 2001, CNL-Capital sold a portfolio of approximately $127 million in
loans through private market sales channels resulting in a gain on sale of
mortgage loans of $4.1 million. No such sales occurred during 2002 and
2003.
o Other income reflects, among other items, fees from advisory services,
servicing income and referral fees for loans and other products from the
Bank. Other income was 21 percent lower during 2002 as compared to 2001 due
to a decrease of approximately $0.8 million in referral fees from the Bank
in 2002 as compared to 2001. Other income was higher in 2001 as compared to
each of 2003 and 2002 by approximately $1 million due to the Company
selling approximately $127 million in loans during 2001 using private
market sales channels. The sale of these loans triggered the recognition of
the remaining $1 million in deferred origination fees collected on these
loans when they were originated.
Expenses
Excluding costs of sales, expenses decreased during 2003 and 2002, each as
compared to the previous year. General operating and administrative expenses and
interest expense were lower during 2003 and 2002, each as compared to the
previous year, due to the Company's initiative of outsourcing some functions to
reduce expenses. Interest expense was lower for each period presented due to
declining interest rates and having lower amounts outstanding under its
borrowings.
Cost of real estate sold is associated with the Investment Property Sales
Program of the specialty finance segment and relates to properties held for sale
at the end of 2001 that were sold by December 31, 2002. In 2002, costs
associated with properties acquired after 2001 were required to be included as a
component of the gain on disposal of discontinued operations, while in 2003 this
treatment is required regardless of acquisition date. A table and related
discussion of the comparative results is reported above under the discussion of
related revenues.
General operating and administrative expenses consist primarily of
payroll-related and legal and other professional expenses. The following table
illustrates the comparative period expenses by segment:
<s> <c>
For the year ended December 31,
General operating and admini-
strative expenses by segment (in % of % of % of
millions) 2003 Total 2002 Total 2001 Total
-------- ------ -------- ------- ------ --------
Real estate segment $ 9.0 36% $ 11.8 42% $ 8.8 30%
Specialty finance segment 18.6 74 19.0 67 22.6 76
Other holding company results,
results for periods prior to
segment reporting and
consolidating eliminations (2.4) (10) (2.4) (9) (1.8) (6)
-------- ------ -------- ------- -------- ------
Total general operating and
administrative expenses $ 25.2 100% $ 28.4 100% $ 29.6 100%
======== ====== ======== ======= ======== ======
o CNL-Investments' general operating and administrative expenses decreased by
24 percent during 2003 as compared to 2002 as a result of transferring
certain financial and strategic functions, including transferring certain
employees relating to the management of the external portfolios, to a
subsidiary of CFG, an affiliate. General and administrative functions were
34 percent higher during 2002 as compared to 2001 because during 2002,
CNL-Investments increased its workout activity to deal with several tenant
defaults and bankruptcies that it did not experience during 2001. If
CNL-Investments had not transferred certain functions to a subsidiary of
CFG during 2003, general operating and administrative expenses would have
been comparable between 2002 and 2003.
o CNL-Capital's general operating and administrative expenses were fairly
constant between 2003 and 2002. General operating and administrative
expenses decreased by 16 percent during 2002 as compared to 2001 due to
CNL-Capital undertaking cost cutting initiatives in 2001 that included a
reduction of employees. CNL-Capital has continued to control personnel and
payroll related costs in this segment. In addition, general operating and
administrative expenses in 2001 included higher legal expenses incurred due
to resolution of troubled loans and were at levels higher than those
incurred during 2003 and 2002.
Interest expense constitutes one of the most significant operating expenses,
excluding cost of real estate sold by CNL-Capital, which is a component of the
gain from the disposal of discontinued operations for properties acquired after
2001. Certain interest expense is included in operating results from
discontinued operations. Components of interest expense from continuing
operations are as follows:
<s> <c>
For the year ended December 31,
Interest expense by segment (in % of % of % of
millions) 2003 Total 2002 Total 2001 Total
-------- ------ -------- ------- ------ ------
Real estate segment $ 27.5 54% $ 30.6 52% $ 36.9 54%
Specialty finance segment 23.7 47 28.5 49 31.8 47
Other holding company results and
consolidating eliminations (0.6) (1) (0.7) (1) (0.8) (1)
-------- ------ -------- ------- -------- ------
Total interest expense $ 50.6 100% $ 58.4 100% $ 67.9 100%
======== ====== ======== ======= ======== ======
o CNL-Investments decreased its level of debt throughout most of 2003 and
2002 through the sales of real estate. The segment realized a decrease of
10 percent and 21 percent in interest expense in 2003 and 2002,
respectively, each as compared to the previous year. The decrease in 2002
resulted from the repayment of the Note Payable with proceeds of the Series
2001 Bonds issued in October 2001, which carried a lower rate of interest.
Interest expense also decreased due a decline in weighted average balances
outstanding on its borrowings during 2003 as compared to 2002.
o CNL-Capital has reduced its interest-bearing debt, partly due to holding
lower inventory levels of properties held for sale. The reduction in
available inventory occurred because CNL-Capital generated $194 and $288
million in Investment Property Sales properties throughout 2003 and 2002,
respectively, while acquiring only $169 and $263 million, respectively, in
new properties. Declining interest rates also contributed to lower interest
expense in 2003 and 2002, each as compared to the previous year. The
weighted average interest charged by the mortgage warehouse facilities to
fund property acquisitions decreased from 5.13 percent to 4.07 percent to
3.41 percent in 2001, 2002 and 2003, respectively. The decrease in the
weighted average rates charged on borrowings from the mortgage warehouse
facilities was partially offset by the 5.87 percent weighted average rate
charged by the five-year financing of over $225 million entered into in
June 2002. By removing these assets from warehouse financing, CNL-Capital
complied with the terms of the warehouse facility and was able to preserve
net spread resulting from the excess of the interest income received over
the interest expense paid, despite the increased interest expense on the
five-year financing.
Property expenses typically occur when properties are defaulted in the real
estate segment. The Company recognized $0.8 million, $3.1 million and $1.9
million in property expenses during 2003, 2002 and 2001, respectively. Property
expenses were higher in 2002 and 2001 due to three major tenants declaring
bankruptcy and rejecting numerous leases that resulted in the Company incurring
real estate taxes, insurance, repairs and maintenance and legal fees related to
dealing with resolution of the assets within bankruptcies. Phoenix Restaurant
Group, Inc. and its subsidiaries, (collectively referred to as "PRG") filed for
bankruptcy in 2001 and Roadhouse Grill, Inc. ("Roadhouse Grill") and Houlihan's
Restaurant Group ("Houlihan's") filed for bankruptcy in 2002. In 2003, fewer
vacant properties were on hand incurring these expenses as opposed to 2002 and
2001. Some expenses formerly presented in this category associated with
properties treated as discontinued operations are incorporated in the income or
loss from discontinued operations for all years presented.
Depreciation and amortization expenses reflect the level of assets invested in
leased properties held by the real estate segment. Certain of these expenses
have been reflected as a component of discontinued operations. The specialty
finance segment does not depreciate its properties held for sale, but along with
CNL-Investments, CNL-Capital has recorded depreciation on office and computer
equipment during 2003, 2002 and 2001, respectively. Depreciation and
amortization expense during 2001 included goodwill amortization of $3.1 million.
As a result of new accounting rules, no amortization of goodwill was recorded in
2002 and 2003.
CNL-Capital recorded a loss on termination of cash flow hedge of $0.5 million
and $8.1 million in 2003 and 2001, respectively. Most of the loss in 2001
resulted when CNL-Capital focused on its Investment Property Sales Program
instead of on securitizations. This change in focus was the result of changes in
market conditions. The loss during 2003 relates to the prepayment of mortgage
loans by a borrower causing CNL-Capital to pay down a portion of the related
debt collateralized by these mortgage loans and to also unwind a portion of the
related swap.
Impairments and provisions on assets consist of bad debt expense relating to
receivables that management deemed uncollectible, provisions for loan losses
associated with non-performing loans, valuation allowances associated with
investments in the 1998-1 and 1999-1 residual interests and impairment
provisions on properties (excluding impairments on properties treated as
discontinued operations as described below). The following table illustrates the
comparative period expenses by segment:
<s> <c>
For the year ended December 31,
Impairments and provisions on % of % of % of
assets (in millions) 2003 Total 2002 Total 2001 Total
-------- ------ -------- ------- -------- ------
Real estate segment $ 4.4 33% $ 4.5 47% $ 40.2 99%
Specialty finance segment 8.8 67 5.1 53 0.5 1
-------- ------ -------- ------- -------- ------
$ 13.2 100% $ 9.6 100% $ 40.7 100%
======== ====== ======== ======= ======== ======
CNL-Investments recorded provisions for loan losses of $0.8 million and $28.2
million during 2003 and 2001, respectively, associated with non-performing
loans. The provisions for loan losses during 2001 related primarily to loans
from PRG, which declared bankruptcy in 2001, based on questionable
collectibility of the loans. CNL-Investments recorded impairment provisions of
$3.6 million, $4.5 million and $12.0 million during 2003, 2002 and 2001,
respectively, excluding impairments on properties treated as discontinued
operations as described below. The impairments related to properties from
defaulted tenants, including properties previously leased to PRG, Roadhouse
Grill, Houlihan's and Chevy's, all of which declared bankruptcy during 2001 and
2002. The impairments represented the difference between the net carrying value
of the properties and the estimated fair value of the properties.
CNL-Capital recorded provisions for loan losses of $4.7 million and $3.2 million
in 2003 and 2002, respectively, associated with non-performing loans. Management
evaluates its loan portfolio and records a reserve as potential losses become
evident. CNL-Capital also recorded reserves or write-offs of $1.6 million, $1.9
million and $0.1 million during 2003, 2002 and 2001, respectively, relating to
its 1998-1 and 1999-1 residual interests. CNL-Capital recorded these amounts
based on its determination that a permanent impairment in value had occurred as
a result of certain borrower delinquencies within these securitized pools.
CNL-Capital also recorded bad debt expense of $2.5 million and $0.4 million
during 2003 and 2001, respectively, relating to receivables that management
elected to write-off.
Discontinued Operations
The Company accounts for certain of its revenues and expenses as originating
from discontinued operations pursuant to Statement of Financial Accounting
Standard No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS 144"). FAS 144 requires that sales of real estate, or the
designation of a real estate asset as held for sale, be treated as discontinued
operations. Any gain or loss from such disposition, and any income or expenses
associated with these real estate assets, are included in the income statement
as discontinued operations. CNL-Capital's Investment Property Sales program, a
vital piece of its ongoing operating strategy, falls under the new guidance.
Therefore, gains from properties sold under the Investment Property Sales
program are included as discontinued operations, unless the gain was realized in
2002 for properties acquired before January 1, 2002. Income and expenses
associated with Investment Property Sales program assets are also included in
discontinued operations, except for 2002 income and expenses associated with
properties acquired before January 1, 2002 and sold by December 31, 2002. In
addition, CNL-Investments has designated certain real estate assets since
December 31, 2001 as held for sale and has included income and expenses
associated with the assets as well as the gain or loss from any dispositions of
these assets as discontinued operations for all periods presented.
During 2002, the Company purchased the operations of certain restaurants. In
December 2003, the Company decided to dispose of these restaurant operations.
All operating results relating to these restaurant operations have been recorded
as discontinued operations. The table below illustrates the treatment of
discontinued operations by segment for each of the years ended December 31:
<s> <c>
Income from discontinued operations
by segment (in millions) 2003 2002 2001
------------- ------------ -----------
Real estate segment discontinued operations:
Operating loss $ (7.0 ) $ (6.0 ) $ (7.1 )
Gains on disposal 3.7 3.3 --
Specialty finance segment discontinued
operations:
Operating income 5.9 3.2 0.4
Gains on disposal 24.6 8.3 --
Income tax benefit 6.3 -- --
------------- ------------ -----------
Total income (loss) from discontinued
operations $ 33.5 $ 8.8 $ (6.7 )
============= ============ ===========
The operating loss of the real estate segment includes impairment provisions of
$7.9 million, $8.9 million and $14.9 million during 2003, 2002 and 2001,
respectively. These impairments related primarily to properties from defaulted
tenants that were later designated as held for sale or sold through December 31,
2003. The operating income of the specialty finance segment includes impairment
provisions of $1.4 million and $0.7 million during 2003 and 2002, respectively,
that were related to properties designated as held for sale or sold through
December 31, 2003. The restaurant operations generated revenues of $13.7 million
and $2.4 million during 2003 and 2002, respectively, and generated related
expenses of $14.2 million and $2.8 million, respectively.
Income Tax Benefit
The Company is primarily treated as a REIT and generally records no tax expense.
However, effective January 1, 2001, the activities of CNL-Capital and certain
activities of CNL-Investments are taxable pursuant to rules governing TRSs. The
Company has not reflected an income tax expense to date through December 31,
2003. This is attributed to the following:
o At the time of the election, differences existed between the tax
and the financial reporting treatment of certain items such as loan
loss reserves and reserves for impairment and depreciation. In the
aggregate, these differences served to defer deductions and
accelerate income reported for tax purposes prior to the TRS
election, with the benefit of the reversal of such differences
attributed to the TRS. This benefit gave rise to a deferred tax
asset. Management did not believe that the realization of the
deferred tax asset was more likely than not. Therefore the deferred
tax asset was completely offset by a valuation allowance, and no
benefit was recognized January 1, 2001.
o As the CNL-Capital TRS generated earnings subsequent to its initial
year, management reversed the extent of the valuation allowance,
thus recognizing some net deferred tax asset as adjusted by current
changes. This reversal created a net deferred tax asset that had
generally approximated the cumulative tax being paid. As of
December 31, 2003, CNL-Capital reversed the valuation allowance of
$6.3 million previously recorded by the CNL-Capital TRS against its
deferred tax asset. CNL-Capital determined that is was more likely
than not that this deferred tax asset will be realized based on
historical earnings and projected future income of CNL-Capital. As
of December 31, 2003, the CNL-Investments TRS had a deferred tax
asset of $0.8 million. This TRS has not yet generated any taxable
income. Therefore, CNL-Investments established a valuation
allowance to completely offset the deferred tax asset.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
This information is described above in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Certified Public Accounting Firm
To the Board of Directors and Stockholders of
CNL Restaurant Properties, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and comprehensive
income/(loss) and of cash flows present fairly, in all material respects, the
financial position of CNL Restaurant Properties, Inc. and its subsidiaries at
December 31, 2003 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Notes 1 and 8 to the consolidated financial statements, on
January 1, 2001 the Company changed its method of accounting for derivative
financial instruments and on January 1, 2002 the Company adopted Financial
Accounting Standards No. 142 "Goodwill and other Intangible Assets", and No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
March 12, 2004, except for Note 4, as to which the date is December 2, 2004
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except for share data)
<s> <c>
December 31,
2003 2002
---------------- ----------------
ASSETS
Real estate investment properties $ 542,972 $ 553,730
Net investment in direct financing leases 103,662 110,926
Real estate and restaurant assets held for sale 131,210 185,718
Mortgage loans held for sale 1,490 37,407
Mortgage, equipment and other notes receivable, net of
allowance of $13,964 and $12,062, respectively 320,900 334,499
Other investments 29,671 32,163
Cash and cash equivalents 36,955 16,579
Restricted cash 12,462 4,574
Receivables, less allowance for doubtful accounts
of $872 and $1,182, respectively 3,382 3,214
Accrued rental income 25,935 21,920
Goodwill 56,260 56,260
Other assets 33,217 26,460
------------------ ------------------
$ 1,298,116 $ 1,383,450
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolver $ 2,000 $ 14,000
Note payable 182,560 203,207
Mortgage warehouse facilities 93,513 145,758
Subordinated note payable 43,750 43,750
Bonds payable 430,011 424,508
Due to related parties 25,038 5,702
Other payables 34,096 33,512
------------------ ------------------
Total liabilities 810,968 870,437
------------------ ------------------
Minority interests, including redeemable partnership interest 7,262 18,862
Commitments and contingencies (Note 15)
Stockholders' equity:
Preferred stock, without par value. Authorized
and unissued 3,000,000 shares -- --
Excess shares, $0.01 par value per share.
Authorized and unissued 78,000,000 shares -- --
Common stock, $0.01 par value per share. Authorized
62,500,000 shares, issued 45,286,297 and 45,286,297
shares, respectively, outstanding 45,248,670 and
45,248,670 shares, respectively 452 452
Capital in excess of par value 826,627 816,745
Accumulated other comprehensive loss (14,447 ) (16,862 )
Accumulated distributions in excess of net earnings (332,746 ) (306,184 )
------------------ ------------------
Total stockholders' equity 479,886 494,151
------------------ ------------------
$ 1,298,116 $ 1,383,450
================== ==================
See accompanying notes to consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except for share data and per share data)
<s> <c>
Year Ended December 31,
2003 2002 2001
-------------- ------------- -------------
Revenues:
Sale of real estate $ -- $ 209,498 $ 128,480
Rental income from operating leases 60,590 66,936 73,401
Earned income from direct financing leases 10,890 11,892 12,387
Interest income from mortgage, equipment and other
notes receivables 29,807 34,552 40,831
Investment and interest income 4,586 5,347 5,845
Other income 9,614 12,306 13,259
Net decrease in value of mortgage loans
held for sale, net of related hedge (1,853 ) (5,368 ) (5,070 )
Gain on sale of mortgage loans -- -- 4,120
--------------- --------------- --------------
113,634 335,163 273,253
--------------- --------------- --------------
Expenses:
Cost of real estate sold -- 193,179 118,372
General operating and administrative 25,208 28,433 29,592
Interest expense 50,576 58,401 67,892
Property expenses 801 3,115 1,900
State and other taxes 209 88 931
Depreciation and amortization 12,326 12,878 17,461
Loss on termination of cash flow hedges 502 -- 8,060
Impairments and provisions on assets 13,147 9,598 40,667
--------------- -------------- ---------------
102,769 305,692 284,875
--------------- --------------- --------------
Earnings/(loss) from continuing operations before
minority interest in income of consolidated joint
ventures, equity in earings of unconsolidated
joint ventures and loss on sale of assets 10,865 29,471 (11,622 )
Minority interest in income of consolidated joint ventures (1,913 ) (2,409 ) (1,250 )
Equity in earnings of unconsolidated joint ventures 108 101 98
Loss on sale of assets (157 ) (347 ) (1,138 )
--------------- --------------- --------------
Earnings/(loss) from continuing operations, net 8,903 26,816 (13,912 )
Earnings/(loss) from discontinued operations, net of
income tax benefit 33,537 8,774 (6,699 )
--------------- --------------- --------------
Earnings/(loss) before cumulative effect of accounting
change 42,440 35,590 (20,611 )
--------------- --------------- --------------
Cumulative effect of accounting change -- -- (3,841 )
--------------- --------------- --------------
Net income/(loss) $ 42,440 $ 35,590 $ (24,452 )
=============== =============== ==============
See accompanying notes to consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except for share data and per share data)
<s> <c>
Year Ended December 31,
2003 2002 2001
--------------- --------------- --------------
Earnings/(loss) per share of common
stock (basic and diluted):
From continuing operations $ 0.20 $ 0.60 $ (0.32 )
From discontinued operations 0.74 0.20 (0.15 )
--------------- --------------- --------------
Before cumulative effect of accounting change 0.94 0.80 (0.47 )
Cumulative effect of accounting change -- -- (0.09 )
--------------- --------------- --------------
Net income/(loss) $ 0.94 $ 0.80 $ (0.56 )
=============== =============== ==============
Weighted average number of shares
of common stock outstanding 45,248,670 44,620,235 43,589,985
=============== =============== ==============
See accompanying notes to consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME/(LOSS)
Years Ended December 31, 2003, 2002 and 2001
(In thousands except for share data and per share data)
<s> <c>
Accumulated Accumulated
Common stock distributions other Compre-
----------------------- Capital in in excess compre- hensive
Number Par excess of of net hensive income/
of shares value par value earnings income/(loss) Total (loss)
----------- ---------- -------------- ------------- ------------- ------------- ----------
Balance at December 31, 2000 43,495,919 $ 435 $ 789,926 $ (182,865 ) $ 242 $ 607,738
Shares issued 579,722 6 9,722 -- -- 9,728
Stock issuance costs -- -- (1,494 ) -- -- (1,494 )
Net loss -- -- -- (24,452 ) -- (24,452 ) (24,452 )
Other comprehensive income,
market revaluation on
available for sale
securities -- -- -- -- 839 839 839
Cumulative effect adjustment
to recognize fair value
of cash flow hedges -- -- -- -- (5,172 ) (5,172 ) (5,172 )
Reclassification of cash
flow hedge losses to
statement of operations -- -- -- -- 8,060 8,060 8,060
Current period adjustment to
recognize change in fair
value of cash flow hedges,
net of tax -- -- -- -- (2,599 ) (2,599 ) (2,599 )
----------
Total comprehensive loss -- -- -- -- -- -- $ (23,324 )
==========
Distributions declared and
paid ($1.52 per share) -- -- -- (66,466 ) -- (66,466 )
----------- ---------- -------------- ------------- ------------- -----------
Balance at December 31, 2001 44,075,641 $ 441 $ 798,154 $ (273,783 ) $ 1,370 $ 526,182
Shares issued 1,173,354 11 20,088 -- -- 20,099
Retirement of common stock (325 ) -- (4 ) -- -- (4 )
Stock issuance costs -- -- (1,493 ) -- -- (1,493 )
Net income -- -- -- 35,590 -- 35,590 35,590
Other comprehensive loss,
market revaluation on
available for sale
securities -- -- -- -- (775 ) (775 ) (775 )
Current period adjustment to
recognize change in fair
value of cash flow hedges,
net of tax -- -- -- -- (17,457 ) (17,457 ) (17,457 )
-----------
Total comprehensive income -- -- -- -- -- -- $ 17,358
===========
Distributions declared and
paid ($1.52 per share) -- -- -- (67,991 ) -- (67,991 )
----------- ---------- -------------- ------------- ------------- -----------
Balance at December 31, 2002 45,248,670 $ 452 $ 816,745 $ (306,184 ) $ (16,862 ) $ 494,151
=========== ========== ============== ============= ============= ===========
See accompanying notes to consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME/(LOSS)
Years Ended December 31, 2003, 2002 and 2001
(In thousands except for share data and per share data)
<s> <c>
Accumulated Accumulated
Common stock distributions other Compre-
----------------------- Capital in in excess compre- hensive
Number Par excess of of net hensive income/
of shares value par value earnings income/(loss) Total (loss)
----------- ---------- -------------- ------------- ------------- ------------- ----------
Balance at December 31, 2002 45,248,670 $ 452 $ 816,745 $ (306,184) $ (16,862) $ 494,151
Acquisition of minority
interest -- -- 11,375 -- -- 11,375
Stock issuance costs -- -- (1,493 ) -- -- (1,493 )
Net income -- -- -- 42,440 -- 42,440 42,440
Reclassification of market
revaluation on available
for sale securities to
statement of operations -- -- -- -- (78 ) (78 ) (78)
operations
Reclassification of cash
flow hedge losses to
statement of operations -- -- -- -- 502 502 502
Current period adjustment to
recognize change in fair
value of cash flow hedges,
net of $1,750 in tax benefit -- -- -- -- 1,991 1,991 1,991
-----------
Total comprehensive income -- -- -- -- -- -- $ 44,855
===========
Distributions declared and
paid ($1.52 per share) -- -- -- (69,002 ) -- (69,002 )
----------- ---------- -------------- ------------- ------------- -----------
Balance at December 31, 2003 45,248,670 $ 452 $ 826,627 $ (332,746 ) $ (14,447 ) $ 479,886
=========== ========== ============== ============= ============= ===========
See accompanying notes to consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<s> <c>
Year Ended December 31,
2003 2002 2001
-------------- ------------- -------------
Cash flows from operating activities:
Net income/(loss) $ 42,440 $ 35,590 $ (24,452)
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation and amortization 13,466 14,826 19,646
Impairments and provisions on assets 22,405 19,165 55,595
(Gain)/loss on sales of assets (3,475 ) (2,947 ) 1,137
Gain on sale of mortgage loans -- -- (4,120 )
Income tax benefit (6,346 ) -- --
Cumulative effect of accounting change -- -- 3,841
Net decrease in value of mortgage loans held for sale,
net of related hedge 1,853 5,368 5,070
Proceeds from sale of loans -- -- 105,975
Investment in mortgage loans held for sale (112 ) (226 ) (94,520 )
Collection on mortgage loans held for sale 7,635 16,356 24,604
Changes in inventories of real estate held for sale 29,618 45,471 (46,704 )
Changes in other operating assets and liabilities 888 (22,016 ) 2,662
-------------- -------------- --------------
Net cash provided by operating activities 108,372 111,587 48,734
-------------- -------------- --------------
Cash flows from investing activities:
Additions to real estate investment properties -- (7,212 ) (26,052 )
Proceeds from sale of assets 25,312 67,085 12,659
Decrease/(increase) in restricted cash (7,888 ) 6,357 (9,055 )
Investment in joint venture -- (150 ) (10 )
Investment in mortgage, equipment and other notes receivable -- (6,607 ) (11,458 )
Collection on mortgage, equipment and other notes receivable 29,075 15,481 9,325
Proceeds from sale or maturities of securities 19 -- 982
-------------- -------------- --------------
Net cash provided by (used in) investing activities 46,518 74,954 (23,609 )
-------------- -------------- --------------
See accompanying notes to consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands)
<s> <c>
Year Ended December 31,
2003 2002 2001
--------------- --------------- ---------------
Cash flows from financing activities:
Payment of stock issuance costs $ (1,493 ) $ (1,493 ) $ (1,493 )
Proceeds from borrowings on credit facility, note
payable and subordingated note payable 34,104 249,334 63,949
Payment on credit facility, note payable and
subordinated note payable (66,751 ) (90,874 ) (159,666 )
Proceeds from borrowings on mortgage warehouse facilities 124,127 189,901 325,264
Payments on mortgage warehouse facilities (176,372 ) (474,312 ) (358,860 )
Issuance of bonds 24,906 -- 177,223
Retirement of bonds payable (19,403 ) (16,436 ) (10,066 )
Payment of loan costs and bond issuance costs (2,231 ) (27 ) (9,634 )
Proceeds from sale of shares -- 9,750 3,692
Loan from stockholder 18,710 11,750 8,708
Retirement of shares of common stock -- (4 ) --
Distributions to minority interest (1,867 ) (1,484 ) (234 )
Distributions to stockholders (68,244 ) (67,991 ) (66,466 )
--------------- -------------- --------------
Net cash used in financing activities (134,514 ) (191,886 ) (27,583 )
--------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 20,376 (5,345 ) (2,458 )
Cash and cash equivalents at beginning of year 16,579 21,924 24,382
--------------- -------------- --------------
Cash and cash equivalents at end of year $ 36,955 $ 16,579 $ 21,924
=============== ============== ==============
Supplemental disclosures of cash flow information:
Interest paid $ 48,114 $ 52,704 $ 58,417
=============== ============== ==============
Interest capitalized $ 95 $ 113 $ 568
=============== ============== ==============
Income taxes paid $ 4,019 $ 193 $ 34
=============== ============== ==============
Supplemental disclosures of non-cash investing and financing
activities:
Mortgage notes accepted in exchange for sale of
properties $ 1,394 $ -- $ --
=============== ============== ==============
Financing of computer software acquisition $ 1,788 $ -- $ --
=============== ============== ==============
Distributions declared and unpaid at December 31 $ 758 $ -- $ --
=============== ============== ==============
Conversion of related party advances into shares of
common stock $ -- $ 10,350 $ --
=============== ============== ==============
Redemption of minority interest in lieu of payment on
accounts receivable $ 317 $ -- $ --
=============== ============== ==============
Acquisition of minority interest $ 11,375 $ -- $ --
=============== ============== ==============
See accompanying notes to consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002 and 2001
1. Significant Accounting Policies:
Organization - CNL Restaurant Properties, Inc. ("the Company") formerly
CNL American Properties Fund, Inc. was organized in Maryland in May of
1994, and is a self-administered real estate investment trust ("REIT").
The term "Company" includes, unless the context otherwise requires, CNL
Restaurant Properties, Inc. and its majority owned and controlled
subsidiaries. These subsidiaries include CNL Restaurant Investments,
Inc. ("CNL-Investments") formerly CNL Restaurant Properties, Inc. and
CNL Restaurant Capital Corp. ("CNL-Capital Corp.") formerly CNL
Franchise Network Corp. The Company's operations are divided into two
business segments, real estate and specialty finance. The real estate
segment, operated principally through the Company's wholly owned
subsidiary CNL-Investments and its subsidiaries, owns and manages a
portfolio of primarily long-term triple-net lease properties. Its
activities include portfolio management, property management and
dispositions. In addition, it services approximately $525 million in
affiliate portfolios and earns management fees related thereto. The
specialty finance segment, CNL Restaurant Capital, LP ("CNL-Capital"),
and its subsidiaries, is operated through the Company's wholly-owned
subsidiary CNL-Capital Corp., a partnership with Bank of America (the
"Bank") and CNL/CAS Corp., an affiliate of the Company's Chairman.
CNL-Capital provides financing, servicing, development and advisory
services to national and regional restaurant operators.
Effective January 1, 2003, CNL-Capital modified certain terms relating
to the alliance with the Bank that resulted in the Bank reducing its
ownership interest in CNL-Capital. The Bank's ownership interest in
CNL-Capital is redeemable at their option under certain conditions
after a specified date for a cash payment of $4.3 million. In
conjunction with the ownership reduction, the Bank agreed to assume
certain costs of its portfolio operations and decreased the referral
fees paid by the Bank to CNL-Capital under the referral program between
the Bank and CNL-Capital. In addition, CNL CAS/Corp. agreed to reduce
its interest in CNL-Capital. As a result, the Company's effective
ownership interest in CNL-Capital increased from 84.39% to 96.26%. The
Company reduced the minority interest and increased stockholders'
equity by approximately $11.4 million to reflect this change in
ownership.
Principles of Consolidation - The consolidated financial statements of
the Company include its majority owned and controlled affiliates. All
significant intercompany balances and transactions among consolidated
affiliates have been eliminated. The equity method of accounting is
applied to those investments in joint ventures that are not subject to
control by the Company due to the significance of rights held by other
parties.
Use of Estimates - Preparation of the financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions relating to the reporting
of assets and liabilities and the disclosure of contingent assets and
liabilities. Significant estimates include provisions for impairment of
real estate and loans, valuation of loans held for sale, deferred tax
assets, goodwill and long lived assets. Actual results could differ
from those estimates.
Real Estate and Lease Accounting - The Company records its properties
comprised of land, buildings and equipment at cost. Management reviews
its properties for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be
recoverable through operations or sale. Management determines whether
impairment in value has occurred by comparing the estimated future
undiscounted cash flows, including the residual value of the property,
with the carrying cost of the individual property. If impairment is
indicated, the assets are adjusted to estimated fair value.
Properties leased to restaurant operators are generally on a triple-net
basis, which means 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
direct financing or the operating method.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002 and 2001
1. Significant Accounting Policies - Continued:
Direct financing method - The leases accounted for using the
direct financing method are recorded at the net investment
that, at the inception of the lease, generally represents the
cost of the asset. Unearned income is deferred and amortized
to income over the lease terms so as to produce a constant
periodic rate of return on net investment in the leases.
Operating method - Land, building and secured equipment leases
are accounted for using the operating method. Revenue is
recognized as rentals are earned and depreciation is charged
to operations on a straight-line basis over the life of the
related assets. Rental income is recognized on a straight-line
basis over the lease term. Buildings and equipment are
depreciated on the straight-line method over their estimated
useful lives of 30 and seven years, respectively.
Properties acquired that the Company intends to sell or securitize
within one year of acquisition are recorded at cost. Rental income is
recognized without regard to potential future rent increases and the
asset is not depreciated. Revenue from sale of real estate is
recognized at the time of closing when collectibility of the sales
price is reasonably assured and the earnings process is substantially
complete.
Loans - The Company has originated loans to restaurant operators that
are generally secured by real estate or equipment. The Company accounts
for loans depending on the following classification:
Mortgage loans held for sale - Loans originated that the
Company intends to sell or securitize generally within one
year of origination are recorded at cost and adjusted for
changes in market value under the Company's hedging strategy.
Quoted prices for similar loans and the present value of the
expected cash flows net of the estimated impact of any
defaults are used to determine fair value.
Mortgage, equipment and other notes receivable - Loans
originated that are expected to be held until maturity are
recorded at cost and are reduced for any estimated future
loss. Whenever it appears that future collection on specific
notes appears doubtful, a valuation allowance is established.
The allowance represents the difference between the carrying
amount and the amount management expects to receive. Increases
and decreases in the allowance due to changes in the
measurement of the impaired loans are included in the
provision for loss on loans. Loans continue to be classified
as impaired unless they are brought fully current and the
collection of scheduled interest and principal is considered
probable. When a loan or portion of a loan, including an
impaired loan, is determined to be uncollectible, the portion
deemed uncollectible is charged against the allowance and
subsequent recoveries, if any, are credited to the allowance.
Accrual of interest is discontinued when management believes,
after considering economic and business conditions and
collection efforts, that the borrowers' financial condition is
such that collection of interest is doubtful. Subsequent
interest is recorded as income.
Securitizations - Certain loans are originated and sold to entities
that, in turn, issue securities to investors backed by these assets.
The Company retains the servicing rights and participates in cash flows
from the retained equity positions and lower rated securities. The
present value of the expected cash flows for each retained security,
after payment of principal and interest to third-party bond or
certificate holders, over the estimated cost of servicing is recorded
at the time of sale as a retained interest. Retained interests in
securitized assets are included in other investments. Accounting for
the retained interests requires the Company to estimate their value
using market trends and historical experience, expected prepayments and
defaults. This information is considered, along with prevailing
discount rates and the terms of the bonds and certificates, to arrive
at current fair value amounts and determine whether a permanent
impairment in value has occurred.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002 and 2001
1. Significant Accounting Policies - Continued:
Restricted Cash - Restricted cash relates to cash received in
connection with assets held as collateral for certain debt and is
subject to restrictions until released by the trustee.
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. These amounts may exceed federally insured levels,
however, the Company has not experienced any losses in such accounts.
Derivative Financial Instruments - The Company utilizes derivative
instruments to partially offset the effect of fluctuating interest
rates on the value of its mortgage loans held for sale and the cash
flows associated with a portion of its variable-rate debt. The Company
adopted Statement of Financial Accounting Standards No. 133 ("FAS
133"), as amended, on January 1, 2001, which requires all derivative
instruments to be recorded on the balance sheet at fair value. Changes
in the value of derivatives associated with hedge transactions are
recorded either in current earnings or in other comprehensive income
depending on the type.
Fair-value hedge transactions - When the Company hedges
changes in the fair value of an asset or liability, the
effective changes in the value of the derivative instrument
are generally offset in the income statement by changes in the
value of the hedged item.
Cash-flow hedge transactions - When the Company hedges
variability of cash flows related to a variable-rate asset or
liability or a forecasted transaction, effective changes in
the value of the derivative instrument are reported in other
comprehensive income and subsequently recognized in operations
in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item or forecasted
transaction.
The ineffective portion of all hedges are reflected in earnings.
Effective January 1, 2001, the Company recorded a cumulative effect
adjustment loss of $21.2 million to recognize the value of all
derivative instruments that were designated as fair-value hedging
instruments and an offsetting cumulative effect adjustment of $17.4
million to recognize the excess of the fair values of related hedged
assets over the carrying value. In addition, effective January 1, 2001
a cumulative effect adjustment through stockholders' equity of $5.2
million was recorded to recognize at fair value all derivative
instruments that were designated as cash-flow hedging instruments.
During 2003, the Company recorded a $0.5 million charge to results of
operations upon unwinding a portion of a cash flow hedge as a result of
the collection of a note receivable and repayment of the related debt.
During 2001, the Company determined that a forecasted debt issuance
would not occur and also terminated a cash flow hedge upon repayment of
the related debt. The termination of the hedges and the hedge
accounting for the related derivative instruments resulted in an $8.1
million charge to the statement of operations.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002 and 2001
1. Significant Accounting Policies - Continued:
Loan Costs - Loan costs incurred in connection with debt have been
capitalized and are being amortized over the term of the related debt
using the effective interest method. Loan costs are included in other
assets in the financial statements. As of December 31, 2003 and 2002,
the Company had capitalized loan costs of $25.6 million and $26.0
million, respectively and recorded accumulated amortization of $6.9
million and $8.3 million, respectively.
Equity Compensation Plan - During 1999, the stockholders approved a
performance incentive plan (the "Plan"), which became effective as of
February 23, 1999. The Plan authorized the issuance of up to 4,500,000
shares of the Company's common stock upon the exercise of stock options
(both incentive and nonqualified), stock appreciation rights and the
award of restricted stock ("Stock Award") provided that the aggregate
number of shares of Common Stock that may be issued pursuant to
Options, stock appreciation rights ("SARs"), and Stock Awards granted
under the Plan would increase automatically to 9,000,000 shares and
12,000,000 shares, respectively, when the Company had issued and
outstanding 150,000,000 shares and 200,000,000 shares, respectively, of
common stock. The Plan terminates on February 23, 2009. Key employees,
officers, directors and persons performing consulting or advisory
services for the Company or its affiliates, as defined in the Plan, who
are designated by the committee administering the Plan, are eligible to
receive awards under the Plan. Awards may be made in the form of stock
options, stock awards, SARs, Phantom Stock Awards, Performance Awards
and Leveraged Stock Purchase Awards as defined further in the Plan. As
of December 31, 2003, the Company had not made any awards related to
the Plan.
Income Taxes - The Company has made an election to be taxed as a REIT
for federal income tax purposes. The Company generally will not be
subject to federal corporate income taxes on amounts distributed to
stockholders, providing it distributes at least 90 percent of its
taxable income and meets certain other requirements for qualifying as a
REIT. Earnings and profits, which determine the taxability of dividends
to stockholders, differ from reported net income as a result of
differing treatment of items for financial reporting versus tax
purposes, such as different lives and methods used to depreciate
investment properties. Notwithstanding qualification as a REIT for tax
purposes, the Company is subject to certain state taxes on its income
and property.
Effective January 1, 2001, the Company's subsidiary, CNL-Capital Corp.,
elected to be treated as a taxable REIT subsidiary ("TRS") pursuant to
the provisions of the REIT Modernization Act. As a TRS, its operating
Partnership, CNL-Capital, 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. Certain
activities reside within CNL-Capital Corp. that are therefore subject
to federal income taxes. Also, effective January 1, 2001, a subsidiary
of CNL-Investments, elected to be treated as a TRS. Operations
commenced during 2002 and are subject to federal income taxes.
Earnings Per Share - Basic earnings per share are calculated based upon
net earnings (income available to common stockholders) divided by the
weighted average number of shares of common stock outstanding during
the reporting period. The Company's subsidiary, CNL-Capital, has
entered into a subordinated note payable with a conversion feature that
allows one of the partners to convert the note into additional
ownership of the subsidiary. For the years ended December 31, 2003,
2002 and 2001 the impact of this conversion feature was not dilutive.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002 and 2001
1. Significant Accounting Policies - Continued:
Consolidated Statement of Cash Flows - Supplemental Disclosure - During
the years ended December 31, 2003 and 2001, the Company re-designated
approximately $23.7 and $60.9 million, respectively, from mortgage
loans held for sale to held for investment. The loans serve as
collateral for bonds issued by the Company. In June 2002, the Company
redesignated approximately $225 million from mortgage loans held for
sale to held for investment. The loans serve as collateral for a five
year borrowing facility.
During 2003 and 2002, the Company foreclosed on loans held for sale
from borrowers and accepted the underlying real estate collateral as
settlement for the mortgage loans. The collateral received during 2003
and 2002 had a net realizable value of $4.6 and $3.7 million,
respectively.
During the years ended December 31, 2002 and 2001, the Company
converted $10.3 million and $6.0 million, respectively, of outstanding
loans payable plus accrued interest payable under the loans into
604,177 shares and 359,722 shares, respectively, of Company stock (see
Note 12).
During the year ended December 31, 2002, a tenant and borrower of the
Company assigned loans in the amount of $7.5 million to an affiliate.
The Company agreed to the assignment in exchange for an interest in a
participating loan from the affiliate (see Note 12).
From time to time, properties classified as long-term investments may
be subsequently re-designated to held for sale classification. The
Company identified 30 and 83 such properties with a net book value of
$26.2 and $80.6 million during 2003 and 2002, respectively, as held for
sale.
New Accounting Standards - In January 2003, the FASB issued FAS
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities." FIN 46 requires that a variable interest entity be
consolidated by a company if that company is subject to a majority risk
of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. Prior to
FIN 46, a company generally included another entity in its consolidated
financial statements only if it controlled the entity through voting
interests. The consolidation requirements of FIN 46 apply immediately
to variable interest entities created after January 31, 2003, and to
older entities no later than the first fiscal year or interim period
ending after December 15, 2003. Management adopted this standard in
2003 which resulted in the consolidation of two of the Company's
previously unconsolidated subsidiaries. Adoption of this standard did
not change the Company's accounting for the Company's bankruptcy remote
securitization entities. The Company restated all prior periods
presented to conform with the 2003 presentation. The consolidation did
not significantly impact the Company's financial position or results of
operations.
In December 2003, the FASB issued FIN 46R, "Consolidation of Variable
Interest Entities". This Interpretation requires existing
unconsolidated variable interest entities to be consolidated by their
primary beneficiaries. The primary beneficiary of a variable interest
entity is the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected residual returns, or both,
as a result of holding variable interests, which are the ownership,
contractual, or other pecuniary interests in an entity that change with
changes in the fair value of the entity's net assets excluding variable
interests. Prior to FIN 46R, a company generally included another
entity in its consolidated financial statements only if it controlled
the entity through voting interests. Application of FIN 46R is required
in financial statements of public entities that have interests in
variable interest entities for periods ending after March 15, 2004. The
Company does not expect that the application of this Interpretation
will have a significant effect on its financial position or results of
operations.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002 and 2001
1. Significant Accounting Policies - Continued:
In May 2003, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("FAS 150"). FAS 150 establishes standards for
how an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. FAS 150 will
require issuers to classify certain financial instruments as
liabilities (or assets in some circumstances) that previously were
classified as equity. Some of the examples of financial instruments
covered by FAS 150 include shares that are mandatorily redeemable, and
other financial instruments that embody an obligation to repurchase
outstanding shares or a conditional obligation that requires settlement
by issuing a variable number of the entity's shares. FAS 150 also
requires that minority interests for majority owned finite lived
entities be classified as a liability and recorded at fair market
value. FAS 150 initially applied immediately to all financial
instruments entered into or modified after May 31, 2003, and otherwise
was effective at the beginning of the first interim period beginning
after June 15, 2003. Effective October 29, 2003, the FASB deferred
implementation of FAS 150, as it applies to minority interests of
finite lived Partnerships. The deferral of these provisions is expected
to remain in effect while these interests are addressed in either Phase
II of the FASB's Liabilities and Equity project or Phase II of the
FASB's Business Combinations Project; therefore, no specific timing for
the implementation of these provisions has been stated. The
implementation of the currently effective aspects of FAS 150 did not
have a material impact on the Company's results of operations.
Reclassification - Certain items in the prior years' financial
statements have been reclassified to conform to the 2003 presentation.
These reclassifications had no effect on stockholders' equity or net
income.
2. Real Estate Investment Properties:
Real estate investment properties consist of the following at December
31:
<s> <c>
(In thousands)
2003 2002
------------------ -----------------
Land $ 281,400 $ 282,222
Buildings 311,197 308,586
Equipment 1,673 2,031
------------------ -----------------
594,270 592,839
Less accumulated depreciation (52,468 ) (41,898 )
------------------ -----------------
541,802 550,941
Construction in progress 1,170 2,789
------------------ -----------------
$ 542,972 $ 553,730
================== =================
During 2002 and 2001, the Company sold several properties and equipment
that were subject to operating leases and received net proceeds of $0.9
million and $11.2 million, respectively, and recorded net losses of
$0.3 million and $1.1 million, respectively.
In 2003, 2002, and 2001 the Company recorded provisions for impairment
of $3.5 million, $3.6 million and $9.8 million, respectively. The
tenants of these properties experienced financial difficulties and/or
ceased payment of rents under the terms of their lease agreements. The
provisions represent the amount necessary to reduce the carrying value
to the estimated fair value of the properties.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002 and 2001
2. Real Estate Investment Properties - Continued:
For the years ended December 31, 2003, 2002, and 2001 tenants paid or
are expected to pay directly to real estate taxing authorities
approximately $10.3 million, $9.4 million and $10.8 million,
respectively, in real estate taxes in accordance with the terms of
their triple-net leases.
Substantially all property leases have initial terms of 10 to 25 years
(most expiring between 2004 and 2024) and provide for scheduled rent
increases, and in some cases, contingent rent. The leases generally
allow the tenant to purchase the property at the greater of the
Company's purchase price plus a specified percentage or fair market
value at specified times. Fixed and determinable lease revenues are
recognized on a straight-line basis over the terms of the leases. For
the years ended December 31, 2003, 2002 and 2001, the Company
recognized $6.2 million, $5.7 million and $6.7 million, respectively,
of such accrued rental income.
Future minimum contractual lease payments to be received under
noncancellable operating leases at December 31, 2003 are as follows:
(In thousands)
--------------------
2004 $ 54,267
2005 55,179
2006 55,187
2007 55,760
2008 56,878
Thereafter 461,535
--------------------
$ 738,806
====================
3. Net Investment in Direct Financing Leases:
The components of net investment in direct financing leases consisted
of the following at December 31:
<s> <c>
(In thousands)
2003 2002
------------ -------------
Minimum lease payments
receivable $ 194,191 $ 217,448
Estimated residual values 25,779 26,674
Interest receivable from
secured equipment leases 6 15
Less unearned income (116,314 ) (133,211 )
------------ -------------
Net investment in direct financing
leases $ 103,662 $ 110,926
============ =============
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
3. Net Investment in Direct Financing Leases - Continued:
The following is a schedule of future minimum lease payments to be
received on direct financing leases at December 31, 2003:
(In thousands)
----------------
2004 $ 12,631
2005 12,551
2006 12,548
2007 12,603
2008 12,660
Thereafter 131,198
----------------
$ 194,191
================
The Company's real estate segment recorded provisions for losses on
direct financing leases totaling $0.1 million, $0.9 million and $2.2
million during the years ended December 31, 2003, 2002 and 2001,
respectively. The tenants of these properties experienced financial
difficulties and ceased payment of rents under the terms of their lease
agreements. The provisions represent the amount necessary to reduce the
carrying values of the direct financing leases to their estimated fair
value.
4. Real Estate and Restaurant Assets Held for Sale:
Real estate and restaurant assets held for sale consist of the
following at December 31:
(In thousands)
2003 2002
-------------- ---------------
Land and buildings $ 129,597 $ 184,322
Restaurant assets 1,613 1,396
-------------- ---------------
$ 131,210 $ 185,718
============== ===============
The Company's specialty finance subsidiary CNL-Capital actively
acquires real estate assets subject to leases with the intent to sell.
Assets acquired after December 31, 2001 are subject to FAS 144, and the
operating results and gains or losses are recorded as discontinued
operations.
The Company's real estate investment subsidiary, CNL-Investments, will
divest properties from time to time when it is strategic to the
Company's longer-term goals. When CNL-Investments establishes its
intent to sell a property, all operating results relating to the
properties and the ultimate gain or loss on disposition of the
properties are treated as discontinued operations for all periods
presented. These financial statements reflect reclassifications of
rental related income, interest expense and other categories so as to
conform with the requirements of FAS 144 including all properties
identified as September 30, 2004. During 2002, the Company purchased
the operations of certain restaurants. In December 2003, the Company
decided to dispose of these restaurant operations. All operating
results relating to these restaurant operations are recorded as
discontinued operations.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
4. Real Estate and Restaurant Assets Held for Sale - Continued:
The operating results of the discontinued operations were as follows
for the years ended December 31:
<s> <c>
(In thousands)
2003 2002 2001
------------ ----------- ------------
Rental income $ 12,401 $ 13,048 $ 13,646
Food and beverage income 13,728 2,428 --
Interest expense (2,267 ) (2,348 ) (2,248 )
Other property related expense (1,887 ) (3,530 ) (3,169 )
Impairment provisions (9,258 ) (9,567 ) (14,928 )
Food and beverage expenses (13,856 ) (2,836 ) --
------------ ----------- ------------
Loss from discontinued operations (1,139 ) (2,805 ) (6,699 )
------------ ----------- ------------
Sales of real estate 226,250 148,875 --
Cost of real estate sold (197,920 ) (137,296 ) --
------------ ----------- ------------
Gain on disposal of discontinued operations 28,330 11,579 --
------------ ----------- ------------
Income tax benefit 6,346 -- --
------------ ----------- ------------
Earnings/(loss) from discontinued operations,
net $ 33,537 $ 8,774 $ (6,699 )
============ =========== ============
5. Mortgage Loans Held for Sale:
Mortgage loans held for sale are wholly or partially collateralized by
first mortgages on land and/or buildings of franchised restaurant
businesses and consist of approximately $4.5 million in fixed-rate
loans at December 31, 2003. The loans carry a weighted average interest
rate of 8.33 percent. Mortgage loans are due in monthly installments
with maturity dates ranging from 2004 to 2022 and generally prohibit
prepayment for certain periods or include prepayment penalties.
Mortgage loans held for sale consist of the following at December 31:
<s> <c>
(In thousands)
2003 2002
------------- -------------
Outstanding principal $ 4,531 $ 45,462
Accrued interest income 45 890
Deferred financing income (22 ) (90 )
Valuation adjustment (3,064 ) (8,855 )
------------- -------------
$ 1,490 $ 37,407
============= =============
The valuation adjustment at December 31, 2003 and 2002 include a
decline in value associated with borrower delinquencies.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
6. Mortgage, Equipment and Other Notes Receivable:
Mortgage, equipment and other notes receivable consist of the following
at December 31:
<s> <c>
(In thousands)
2003 2002
-------------- -------------
Outstanding principal $ 332,924 $ 343,832
Accrued interest income 3,377 3,696
Deferred financing income (1,530 ) (1,926 )
Unamortized deferred costs 93 959
Allowance for uncollectible notes (13,964 ) (12,062 )
-------------- -------------
$ 320,900 $ 334,499
============== =============
Approximately $308 million and $318 million of the outstanding
principal balance as of December 31, 2003 and 2002, respectively, is
secured by mortgages. The remaining principal is secured by franchised
restaurant equipment and other collateral. As of December 31, 2003 and
2002, approximately $8 million and $14 million in notes receivable are
considered impaired and approximately $3 million and $5 million are
non-accrual status with regard to recognition of interest. The Company
recognized $0.4 million and $0.75 million of interest income as of
December 31, 2003 and 2002, respectively, on impaired loans.
Changes in the allowance for loan losses for 2003 and 2002 are
summarized as follows:
<s> <c>
(In thousands)
2003 2002
-------------- ------------
Balance at beginning of year $ 12,062 $ 32,752
Provision for loan losses 5,463 3,099
Recoveries on loans previously charged off (944 ) --
Interest income reserves 964 600
Loans charged off (3,581 ) (24,389 )
-------------- ------------
Balance at end of year $ 13,964 $ 12,062
============== ============
Management believes the net carrying value of the notes approximates
fair value based on current rates at which similar loans would be made
to borrowers with similar credit and for similar maturities.
7. Other Investments:
The Company holds the following franchise loan investments arising from
securitization transactions which were either purchased from affiliates
(the 1998 Series) or retained in connection with a transaction executed
by the Company (the 1999 Series). The carrying amounts of these
investments, including accrued interest, consist of the following at
December 31:
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
7. Other Investments - Continued:
<s> <c>
(In Thousands)
2003 2002
------------- --------------
1998-1 Fixed Rate Certificates $ 9,605 $ 9,605
1998-1 Floating Rate Certificates 6,582 6,582
1998-1 Interest Only Certificate 249 346
1998-1 Residual Interest 1,980 4,358
1999-1 Fixed Rate Certificates 11,255 11,272
------------- --------------
$ 29,671 $ 32,163
============= ==============
The 1998-1 and 1999-1 Fixed Rate Certificates bear interest at pass
through rates of 8.40 percent and 8.5 percent, respectively. As of
December 31, 2003 and 2002 the pass through rates on the 1998 Floating
Rate Certificates were 3.37 percent and 3.67 percent, respectively.
The key assumptions used in calculating the value of these investments
at the time of securitization are based on normal market assumptions as
follows:
o five percent prepayment penalty computed after taking into
consideration the period of time covered by yield maintenance and
lockout prepayment penalties;
o a cumulative default ratio (CDR) of zero; and
o prevailing market discount rates at the time of securitization
Subsequently, the values of the held to maturity retained securities
are measured using updated prepayment and CDR assumptions with
adjustments to prevailing market discount rates based on consultations
with investment bankers. If the resulting change in fair value is
considered to be permanent in nature, the carrying value of the
investment is adjusted through earnings. Securities designated as held
for sale are recorded at fair market value, with adjustments recorded
through earnings.
During the years ended December 31, 2003, 2002 and 2001, the Company
recorded either reserves or write-offs amounting to $1.6 million, $2.0
million and $0.1 million, respectively, relating to its 1999-1 and
1998-1 residual interests. The Company recorded these amounts based on
its determination that a permanent impairment in value had occurred as
a result of certain borrower delinquencies.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
7. Other Investments - Continued:
The following table shows the effects on an individual key assumption
affecting the original fair value of the retained certificates under
two negative scenarios by altering the original assumptions at the time
of securitization. Reasonable prepayment assumptions would not have a
further material impact on these scenarios.
<s> <c>
1998-1 1999-1
Certificates Certificates
($ in millions) ($ in millions)
----------------- -----------------
Fair value of retained certificates $ 18.4 $ 11.3
Residual cash flows discount rate (annual):
Impact on fair value of 100 bp adverse change $(0.54) $(0.61)
Impact on fair value of 200 bp adverse change $(1.05) $(1.20)
Expected Credit Losses (annual rate):
Impact on fair value of 2 percent adverse change $ 0.12 $ 0.45
Impact on fair value of 3 percent adverse change $ 0.10 $(0.92)
These sensitivities are hypothetical and should be used with caution.
Changes in fair value based on a percentage variation 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, the
effect of a variation in a particular assumption on the original fair
values of the retained certificates is calculated without changing any
other assumption; in reality, changes in one factor may result in
changes in another (for example, increases in market interest rates may
result in lower prepayments and increased credit losses), which might
magnify or counteract the sensitivities.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
7. Other Investments - Continued:
The following table represents the securitized portfolio and all
managed loans as of December 31:
<s> <c>
Principal Amount > 60
Days
Total Principal Amount Past Due
(In thousands) (In thousands)
--------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Mortgage loans $ 735,517 $ 809,756 $ 16,011 $ 35,226
Equipment and other loans 23,783 29,082 199 1,713
------------ ------------ ------------ ------------
Total loans managed or securitized 759,300 838,838 16,210 36,939
Less:
Loans securitized (421,845) (449,544) (3,599 ) (11,557 )
Loans held for sale or securitization (4,531) (45,462) (1,969 ) (10,271 )
------------ ------------ ------------ ------------
Loans held in portfolio (Note 6) $ 332,924 $ 343,832 $ 10,642 $ 15,111
============ ============ ============ ============
The Company had net charge-offs during the years ended December 31,
2003, 2002 and 2001 of $11.3 million, $24.9 million and $3.4 million,
respectively.
The following table summarizes cash flows received from and paid to
securitization trusts for the years ended December 31:
<s> <c>
(In thousands)
2003 2002 2001
------------ ----------- ------------
Servicing fees received $ 1,597 $ 1,625 $ 1,730
Other cash flows received on retained interests $ 4,332 $ 5,272 $ 6,978
Servicing advances paid $ (4,128 ) $ (6,253 ) $ 5,746 )
Collection of servicing advances $ 3,603 $ 5,115 $ 3,796
8. Goodwill:
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142").
FAS 142 requires the use of a nonamortization approach to account for
purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill and certain intangibles will not be amortized into
results of operations, but instead are reviewed for impairment and
written down and charged to results of operations only in the periods
in which the recorded value is more than its fair value. The Company
adopted the provisions of this statement on January 1, 2002. The
Company's goodwill relates to its specialty finance segment. As a
result of the adoption of this standard, the Company stopped amortizing
the goodwill commencing January 1, 2002.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
8. Goodwill - Continued:
Goodwill represents the excess of the purchase price and related costs
over the fair value assigned to the net assets and liabilities of
acquired operations. On September 1, 1999, the Company acquired CNL
Restaurant Advisors, Inc., formerly CNL Fund Advisors, Inc. (the
"Advisor"), CNL Financial Corporation and CNL Financial Services, Inc.
("CNL Restaurant Financial Services Group") by issuing 6.15 million
shares. Prior to the acquisition, the Advisor and CNL Restaurant
Financial Services Group had been affiliated with the Company. The
acquisitions were accounted for under the purchase method of
accounting. The Company expensed the $76.3 million excess of the
purchase price of the Advisor over the fair value of the net acquired
assets. The Company recognized $45.7 million as goodwill, representing
the excess purchase price of CNL Restaurant Financial Services Group.
In June 2000, the Company recorded goodwill related to the Bank's
alliance and CNL Financial Group, Inc.'s ("CFG's") advisory services
operations that were acquired as part of the formation of CNL-Capital.
The Company evaluated its goodwill balance of $56.3 million and did not
record any impairments to goodwill during the years ended December 31,
2003 or 2002. An independent business valuation company determined the
fair market value using a discounted cash flow valuation approach and a
capital market valuation approach. The discounted cash flow approach
values the Company based on the present value of future forecasted cash
flows that an investor in the Company would anticipate receiving
through continued operations. The capital market approach values the
company using an analysis of the multiples of market values of
comparable publicly traded companies.
The following table summarizes the effect of adopting FAS 142 during
2002 on reported earnings before cumulative effect of accounting change
and on net earnings:
<s> <c>
(In thousands)
2003 2002 2001
----------- ----------- ------------
Reported earnings/(loss) before cumulative
effect of accounting change $42,440 $35,590 $ (20,611)
Add back: Goodwill amortization -- -- 3,142
----------- ----------- ------------
Adjusted earnings/(loss) before cumulative
effect of accounting change $42,440 $35,590 $ (17,469)
=========== =========== ============
Reported net income/(loss) $42,440 $35,590 $ (24,452)
Add back: Goodwill amortization -- -- 3,142
----------- ----------- ------------
Adjusted net income/(loss) $42,440 $35,590 $ (21,310)
=========== =========== ============
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
8. Goodwill - Continued:
The following table summarizes the effect of adopting FAS 142 during
2002 on earnings/(loss) per share of common stock (basic and diluted):
<s> <c>
2003 2002 2001
----------------- ---------- ------------
Reported earnings/(loss) before cumulative
effect of accounting change $ 0.94 $ 0.80 $ (0.47)
Add back: Goodwill amortization -- -- 0.07
----------------- ---------- ------------
Adjusted earnings/(loss) before cumulative
effect of accounting change $ 0.94 $ 0.80 $ (0.40)
================= ========== ============
Reported net income/(loss) $ 0.94 $ 0.80 $ (0.56)
Add back: Goodwill amortization -- -- 0.07
----------------- ---------- ------------
Adjusted net income/(loss) $ 0.94 $ 0.80 $ (0.49)
================= ========== ============
9. Borrowings:
Borrowings consist of the following at December 31:
<s> <c>
2003 2002
------------------------------- ----------------------------
Amount Average Amount Average
(In thousands) Rate (In thousands) Rate
------------------------------- ----------------------------
Revolver $ 2,000 3.62% $ 14,000 3.92%
Note payable 182,560 6.13% 203,207 5.99%
Mortgage warehouse facilities 93,513 3.41% 145,758 4.07%
Subordinated note payable 43,750 8.50% 43,750 8.50%
Series 2000-A bonds payable 252,477 7.94% 261,369 7.94%
Series 2001-4 bonds payable 33,938 8.90% 38,441 8.90%
Series 2001 bonds payable 118,690 1.70% 124,698 2.28%
Series 2003 bonds payable 24,906 5.67% -- --
----------------- ----------------
$ 751,834 $ 831,223
================= ================
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
9. Borrowings - Continued:
Borrowing resources at December 31, 2003 include:
<s> <c>
(In thousands)
--------------------------------- Expected
Balance Maturity
Outstanding Capacity Retirement Date
--------------- ------------- ----------------
Revolver $ 2,000 $ 30,000 October 2004
Note payable 182,560 186,955 (1)
Mortgage warehouse facilities 93,513 260,000 Annual
Subordinated note payable 43,750 43,750 June 2007
Series 2000-A bonds payable 252,477 252,477 2009-2017
Series 2001-4 bonds payable 33,938 33,938 2009-2013
Series 2001 bonds payable 118,690 118,690 October 2006
Series 2003 bonds payable 24,906 24,906 2005-2010
--------------- -------------
$ 751,834 $ 950,716
=============== =============
(1) $0.6 million matures in 2005 and $182 million matures in 2007. The
Company elected to not renew the remaining $4.4 million available
capacity that expired in January 2004.
The Revolver bears interest at a rate of LIBOR plus 225 basis points
per annum, which includes an unused fee of 25 basis points per annum,
and includes financial covenants that provide for the maintenance of
certain financial ratios. The Company was in compliance with all
covenants as of December 31, 2003.
The Company entered into a note payable (the "Note Payable") in 1999 in
the amount of $147.0 million. During 2001, the Company applied proceeds
received from the issuance of bonds to pay down the note. Borrowings
under the note bore initial interest at the rate of the lender's
commercial paper plus 56 basis points per annum. During 2002, the
Company used net sales proceeds from the sales of properties and paid
off the entire outstanding principal balance relating to the Note
Payable. In June 2002, the Company entered into a loan and security
agreement with Nieuw Amsterdam Receivables Corporation with an initial
borrowing amount of approximately $207 million that bears interest at a
rate of weighted average commercial paper plus 1.25 percent per annum
(the "Note Payable"). Collateral for the Note Payable consists of 172
mortgage loans that had a carrying value of $209.8 million at December
31, 2003. The Company used the proceeds from the new facility to
refinance a pool of franchise loans formerly held on its other mortgage
warehouse facilities. The loan has an initial term of five years with a
renewal provision based on the Company's request and the lender's
consent.
In January 2003, the Company entered into a Master Credit Facility
Agreement ("the Note Payable") with CNL Bank, an affiliate. The Note
Payable had a total borrowing capacity of $5 million and was
established to finance real estate properties. At December 31, 2003,
the Company had $0.6 million outstanding collateralized by mortgages
which bears interest at LIBOR plus 325 basis points per annum and
require monthly interest only payments until maturity in 2005. The
Company elected not to renew the remaining $4.4 million available
capacity that expired in January 2004.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
9. Borrowings - Continued:
CNL-Capital maintains mortgage warehouse facilities which have a total
borrowing capacity of $260.0 million at December 31, 2003 and bear
interest at a weighted average rate of 3.41 percent.
The $160 million warehouse credit facility has been extended until
March 2005 and the $100 million mortgage warehouse facility matures in
June 2004. Management believes the lender will grant a one-year
extension to the Company.
The Company is obligated under the provisions of its mortgage warehouse
facilities and its Note Payable to pay down certain debt associated
with borrower delinquencies or defaults within a required time frame.
Most properties acquired on the mortgage warehouse facilities are
required to be sold within a certain time frame. Any delinquency,
default or delay in the resale of properties financed through one of
these facilities would generally result in an immediate pay-down of the
related debt.
In June 2000, CNL-Capital entered into a $43.75 million senior
subordinated note payable with the Bank that bore interest at a rate of
8.50 percent per annum. In January 2004, the Company amended the
subordinated note payable agreement while at the same time making a $10
million prepayment reducing the balance to $33.75 million and reducing
the Bank's ownership from the conversion feature in CNL-Capital from
13.1 percent to 10.11 percent. As of December 31, 2003, the Bank had
not exercised its conversion option. In addition, the Company agreed to
make a mandatory prepayment of $11.875 million prior to or on December
31, 2004. The interest rate was reduced from 8.50 percent to 7.00
percent per annum. The subordinated note will amortize over five years
with a balloon payment due December 31, 2008.
Collateral for the Series 2000-A bonds consist of 258 commercial real
estate properties operated as restaurants leased to tenants, with a
carrying value of $330.0 million at December 31, 2003. The Series
2000-A bonds bear interest at a weighted average fixed rate of 7.9
percent per annum. The bond indenture provides for an optional
redemption at their remaining principal balance when remaining rents
due under the leases that serve as collateral are less than ten percent
of the aggregate initial rents due under the leases.
Collateral for the Series 2001-4 bonds consists of 60 mortgage loans
that had a carrying value of approximately $45.8 million as of December
31, 2003. The Series 2001-4 bonds bear interest at a rate of 8.90
percent per annum. The bond indenture requires monthly principal and
interest payments received from borrowers to be applied to the bonds.
The bond indenture also provides for an optional redemption of the
bonds at their remaining principal balance when the remaining amounts
due under the loans that serve as collateral for the bonds are less
than ten percent of the aggregate amounts due under the loans at the
time of issuance.
Collateral for the Series 2001 bonds consist of 121 commercial real
estate properties operated as restaurant units which have a carrying
value of approximately $183.6 million as of December 31, 2003. The
bonds are scheduled to amortize over a 15-year period, but mature in
2006. The 2001 bonds bear interest at a rate of LIBOR plus 48 basis
points per annum. The Company entered into an interest rate cap
agreement with a strike rate of 4.5 percent to protect against future
increases in LIBOR.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
9. Borrowings - Continued:
In December 2003, the Company issued notes collateralized by a pool of
mortgage loans, Series 2003. The proceeds of $25 million were applied
to pay down short-term and medium term debt. The Company applied 34
mortgage loans and 4 equipment leases as collateral for the bonds,
which had a carrying value of approximately $46.6 million as of
December 31, 2003. The offering resulted in an initial weighted average
maturity of approximately 3.8 years and rate of interest of
approximately 5.67 percent per annum. The bond indenture requires
monthly principal and interest payments received from borrowers to be
applied to the bonds. The Company entered into an interest rate cap
agreement with a strike rate of 3.5 percent to protect against future
increases in LIBOR.
The following schedule of maturities on outstanding indebtedness does
not reflect the annual extensions on the warehouse facilities but
assumes that bonds payable amortize in accordance with estimated
payment amounts:
(In thousands)
-----------------
2004 $ 145,959
2005 36,621
2006 138,886
2007 32,780
2008 36,089
Thereafter 361,499
-----------------
$ 751,834
=================
Management believes that net carrying value of the debt approximates
fair value based on current rates at which similar loans would be made
to the Company at similar credit levels and similar maturities.
10. Income Tax:
The Company elected to be taxed as a REIT under the Internal Revenue
Code. To qualify as a REIT, the Company must meet a number of
organizational and operational requirements, including a current
requirement that it distribute at least 90 percent of its taxable
income to its stockholders. As a REIT the Company generally will not be
subject to corporate level federal income tax on net income it
distributes to its stockholders, except taxes applicable to its taxable
REIT subsidiaries ("TRSs").
For income tax purposes the Company has two TRSs in which activities of
the specialty finance segment and select activities of the real estate
segment are conducted. Prior to January 1, 2001, Company subsidiaries
were not subject to federal income tax.
Loan valuation adjustments, loss reserves, loan fees, and depreciation,
among other items, are treated differently for tax than for financial
reporting purposes. In the aggregate, the Company's TRSs have an excess
of available future deductible items over future taxable items and as
such may more fully benefit from these items when the related
subsidiaries produce a greater level of taxable income. The CNL
Investments TRS does not have sufficient historical earnings on which
to expect a full potential future benefit of these future deductions.
Therefore the Company has recorded a valuation allowance of $0.8
million against the CNL-Investments TRS deferred tax asset associated
with the future deductible items.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
10. Income Tax - Continued:
The consolidated provision for federal income taxes differs from the
amount computed by applying the statutory federal income tax rate to
the income from continuing operations as follows for each of the three
years ended December 31:
<s> <c>
(In thousands)
2003 2002 2001
------------ ------------- -------------
Expected tax at U.S. statutory rate $ 2,761 $ 9,180 $ (5,351 )
REIT income not subject to U.S.
income tax (10,288 ) (9,004 ) 5,949
Goodwill amortization -- -- 902
Change in valuation allowance 7,527 (176 ) (1,500 )
------------ ------------- ------------
Provision for income taxes $ -- $ -- $ --
------------ ------------- ------------
As of December 31, 2003, the Company reversed the valuation allowance
of approximately $7 million previously recorded in the CNL-Capital TRS.
The Company determined that it is more likely than not that this
deferred tax asset will be realized based on historical earnings and
projected future income.
The components of the net deferred tax asset consists of the following
at December 31:
<s> <c>
(In thousands)
2003 2002
---------- -----------
Deferred tax asset:
Cash flow hedge related difference $ 4,039 $ 5,789
Loan valuation and related hedge differences (155) 1,899
Loan origination fees 646 619
Real estate loss reserves 1,303 300
Reserve for investment losses 1,200 736
Net operating losses 1,092 250
Other 449 (19)
---------- -----------
Total 8,574 9,574
Valuation allowance (842) (7,846)
---------- -----------
Net recorded deferred tax asset $ 7,732 $ 1,728
========== ===========
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
10. Income Tax - Continued:
The income tax provision (benefit) consists of the following components
for each of the years ended December 31:
<s> <c>
(In thousands)
2003 2002 2001
------------ ----------- -------------
Current:
Federal $ 2,678 $ 1,487 $ --
State 458 241 --
------------ ----------- -------------
3,136 1,728 --
------------ ----------- -------------
Deferred:
Federal (8,466 ) (1,487 ) --
State (1,016 ) (241 ) --
------------ ----------- -------------
(9,482 ) (1,728 ) --
------------ ----------- -------------
Total provision/(benefit) $ (6,346 ) $ -- $ --
============ =========== =============
The income tax benefit has been allocated as follows:
<s> <c>
(In thousands)
2003 2002 2001
------------ ----------- ------------
Continuing operations $ -- $ -- $ --
Discontinued operations (6,346) -- --
------------ ----------- ------------
Total income tax benefit $ (6,346) $ -- $ --
============ =========== ============
11. Distributions:
For the years ended December 31, 2003, 2002 and 2001, approximately 39
percent, 0 percent and 21 percent, respectively, of the distributions
received by stockholders were considered to be ordinary income and
approximately 61 percent, 100 percent and 79 percent, respectively,
were considered a return of capital for federal income tax purposes.
The Company has continued to declare and pay distributions to its
stockholders that are primarily funded by distributions from
CNL-Investments. The Company elected to reinvest the earnings of the
specialty finance segment since 2001. The remainder of the
distributions were funded by sales of its common stock to the Company's
Chairman through a private company affiliate, CFG, and loans from CFG.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
12. Related Party Transactions:
The following table and disclosures summarize related party
transactions with affiliated entities for the years ended December 31:
<s> <c>
(In thousands)
---------------------------------------
Amounts received (paid): 2003 2002 2001
------------ ------------ ------------
Services purchased from affiliates (1) $ (3,094) $ (3,954) $ (4,564)
Rental and other expenses to affiliates
for office space (2) $ (1,445) $ (1,479) $ (1,237)
Servicing fees from affiliates (3) $ 4,612 $ 5,938 $ 6,771
Referral fees from the Bank $ 1,109 $ 734 $ 1,580
Sale of properties to an affiliate (4) $ -- $ 25,857 $ 13,430
Sale of equipment leases to an affiliate (5) $ -- $ -- $ 1,100
(1) Services purchased from affiliates include human resources,
tax planning and compliance, computer systems support,
investor relations and other services.
(2) In May 2002, the Company purchased a combined five percent
partnership interest in CNL Plaza, Ltd. and CNL Plaza Venture,
Ltd. (the "Plaza") for $0.2 million. Affiliates of James M.
Seneff, Jr. and Robert A. Bourne, each of which is a director
of the Company, own the remaining partnership interests. The
Company has severally guaranteed 8.33 percent or $1.3 million
of a $15.5 million unsecured promissory note on behalf of the
Plaza. The guaranty continues through the loan maturity in
November 2004. The Company received distributions of $0.07
million and $0.1 million during the years ended December 31,
2003 and 2002, respectively, from the Plaza. Since November
1999, the Company has leased its office space from CNL Plaza,
Ltd., an affiliate of a member of the Company's board of
directors. The Company's lease expires in 2014 and provides
for scheduled rent increases over the term of the lease.
Rental and other expenses for the years ended December 31,
2003, 2002 and 2001 include accrued rental expense (the
additional rent expense resulting from the straight-lining of
scheduled rent increases over the term of the lease) and
executory costs. Future commitments due under the office space
operating lease are as follows:
(In thousands)
-------------------
2004 $ 1,106
2005 1,139
2006 1,173
2007 1,209
2008 1,245
Thereafter 8,042
-------------------
$ 13,914
===================
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
12. Related Party Transactions - Continued:
(3) Property management and other administrative services provided
to affiliates investing in restaurant net lease properties and
loans.
(4) Proceeds received from affiliates from the sale of 22
properties and 11 properties during 2002 and 2001,
respectively, for which the Company recorded losses of $0.9
million and gains of $0.1 million, respectively.
(5) Proceeds received from an affiliate for the purchase of
collection rights of the current and future cash flows of
three equipment leases, for which no gain or loss was
recognized.
During the year ended December 31, 2001, CFG, an affiliate, advanced
$6.0 million to the Company in the form of a demand balloon promissory
note. The loan bore interest at a rate of LIBOR plus 2.5 percent or at
the base rate as defined in the agreement. During the year ended
December 31, 2001, the Company converted the outstanding principal
balance plus accrued interest under the advances into 359,722 shares of
Company stock. During 2001, the Company also issued 220,000 shares to
CFG in exchange for $3.7 million paid to the Company in cash. As of
December 31, 2001, CFG had advanced an additional $2.7 million under
the same terms as the previous advances. During 2002, CFG advanced an
additional $7.5 million to the Company under the same terms of the
previous advances. In June 2002, the Company converted the $10.3
million of outstanding principal plus accrued interest under the
advances, into 604,177 shares of stock. During September 2002 the
Company also issued 569,177 additional shares to CFG in exchange for
$9.75 million paid to the Company in cash. During the years 2003 and
2002, CFG advanced an additional $18.7 million and $4.25 million,
respectively, to the Company under the same terms as the previous
advances. The balance outstanding as of December 31, 2003 was $23.5
million, which included accrued interest.
During the year ended December 2003, OrangeDen, LLC, a subsidiary of
the Company entered into a collateral contribution agreement (`the
Agreement") with two separate affiliates, CFG and Cherry Den, LLC, to
provide collateral for a letter of credit to an insurance company for
worker's compensation and general liability coverage relating to
employees leased to the restaurant operations within CNL-Investments.
The collateral consists of certificates of deposit with one-year terms
amounting to $353,000 and are included in real estate and restaurant
assets held for sale at December 31, 2003 relating to this Agreement.
During the year ended December 31, 2002 CNL-Capital acquired a
portfolio of 109 real estate properties, which have been classified as
held for sale, for approximately $117 million by acquiring all of the
limited partner and general partners interests in CNL Net Lease
Investors, LP, ("NLI"). Eight of the properties acquired were vacant
and the remaining 101 properties were leased to restaurant operators
under triple-net leases, which means the tenant is responsible for all
operating expenses relating to the property, including property taxes,
insurance, maintenance and repairs. The Chairman of the Board and Vice
Chairman of the Board of Directors of the Company, through an
affiliate, owned the 0.1 percent general partner interest in NLI prior
to the acquisition by CNL-Capital and agreed to waive their rights to
benefit from the transaction. Of the original 109 properties, 92 have
been sold as of December 31, 2003.
During the year ended December 31, 2002, a tenant and borrower of the
Company assigned loans in the amount of $7.5 million to Restaurants
Acquisitions I, LLC, an affiliate of the Company. The Company agreed to
the assignment and advanced an additional $3.6 million to the affiliate
in exchange for an $11.1 million participating note. The note bears
interest at a rate of ten percent per annum and matures on May 1, 2014.
The participating note entitles the Company to receive a percentage of
all cash flows generated by the borrower on a quarterly basis until the
note matures. The Company earned $1.1 million and $0.7 million in
interest income from the affiliate during 2003 and 2002, respectively.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
12. Related Party Transactions - Continued:
During the year ended December 31, 2001, an affiliate advanced
approximately $5.8 million to Phoenix Restaurant Group, Inc. and its
subsidiaries (collectively referred to as "PRG"), a tenant and borrower
of the Company. PRG used these proceeds to pay outstanding obligations,
including obligations to the Company.
13. Concentration of Credit Risk:
No individual lessee or borrower (or affiliated groups of lessees or
borrowers) or restaurant chains represented more than ten percent of
the Company's revenues relating to its properties, loans and secured
equipment leases during the years ended December 31, 2003, 2002 or
2001.
Although the Company's properties are geographically diverse throughout
the United States and lessees and borrowers operate a variety of
restaurant concepts, 15 restaurant chains constitute 72 percent of the
Company's properties. Failure of any one of these restaurant chains or
any significant lessees or borrowers could significantly impact results
of operations if the Company is not able to timely protect its
interest.
14. Segment Information:
The Company has established CNL-Investments and CNL-Capital Corp. as
separate legal entities to operate and measure the real estate and
specialty finance segments, respectively.
CNL-Investments is the parent company of CNL APF Partners LP, a real
estate company that acquires and holds real estate, mortgage and
equipment loans generally until maturity. CNL-Capital Corp. is the
parent of CNL-Capital, a specialty finance company that offers
financing, servicing, advisory and other services to restaurant
operators. CNL-Capital acquires restaurant real estate properties
subject to triple-net leases, utilizing short-term debt, and then sells
them generally within one year.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
14. Segment Information - Continued:
The following tables summarize the results for the years 2003, 2002 and
2001 for CNL-Investments and CNL-Capital Corp. Consolidating
eliminations and other results of the parent of CNL-Investments and
CNL-Capital Corp. are reflected in the "other" column.
<s> <c>
Year Ended December 31, 2003
(In thousands)
CNL- CNL-Capital Consolidated
Investments Corp. Other Totals
------------- -------------- ------------- ---------------
Revenues $ 84,560 $ 32,254 $ (3,180 ) $ 113,634
------------- -------------- ------------- ---------------
General operating and administrative 8,980 18,645 (2,417 ) 25,208
Interest expense 27,481 23,653 (558 ) 50,576
Property expenses, state and other taxes 1,013 (3 ) -- 1,010
Depreciation and amortization 11,392 934 -- 12,326
Loss on termination of cash flow hedges -- 502 -- 502
Impairments and provisions on assets 4,391 8,756 -- 13,147
Minority interest net of equity in
earnings 114 1,691 -- 1,805
Loss on sale of assets 148 9 -- 157
------------- -------------- ------------- ---------------
53,519 54,187 (2,975 ) 104,731
------------- -------------- ------------- ---------------
Discontinued operations:
Earnings/(loss) from discontinued
operations, net of income tax benefit (3,274 ) 36,811 -- 33,537
------------- -------------- ------------- ---------------
Net income $ 27,767 $ 14,878 $ (205 ) $ 42,440
============= ============== ============= ===============
Assets at December 31, 2003 $ 811,203 $ 491,923 $ (5,010 ) $ 1,298,116
============= ============== ============= ===============
Investments accounted for under the
equity method at December 31, 2003 $ 1,038 $ -- $ -- $ 1,038
============= ============== ============= ===============
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
14. Segment Information - Continued:
<s> <c>
Year Ended December 31, 2002
(In thousands)
CNL- CNL-Capital Consolidated
Investments Corp. Other Totals
-------------- -------------- ----------- ---------------
Revenues $ 87,600 $ 250,784 $ (3,221 ) $ 335,163
-------------- -------------- ----------- ---------------
Cost of real estate sold -- 193,179 -- 193,179
General operating and administrative 11,764 19,064 (2,395 ) 28,433
Interest expense 30,590 28,490 (679 ) 58,401
Property expenses, state and other taxes 2,813 390 -- 3,203
Depreciation and amortization 11,635 1,243 -- 12,878
Impairments and provisions on assets 4,448 5,150 -- 9,598
Minority interest net of equity in earnings 128 2,180 -- 2,308
Loss on sale of assets 330 17 -- 347
-------------- -------------- ----------- ---------------
61,708 249,713 (3,074 ) 308,347
-------------- -------------- ----------- ---------------
Discontinued operations:
Earnings/(loss) from discontinued
operations, net of income tax
benefit (2,722 ) 11,496 -- 8,774
-------------- -------------- ----------- ---------------
Net income $ 23,170 $ 12,567 $ (147 ) $ 35,590
============== ============== =========== ===============
Assets at December 31, 2002 $ 831,491 $ 555,971 $ (4,012 ) $ 1,383,450
============== ============== =========== ===============
Investments accounted for under the
equity method at December 31, 2002 $ 1,121 $ -- $ -- $ 1,121
============== ============== =========== ===============
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
14. Segment Information - Continued:
<s> <c>
Year Ended December 31, 2001
(In thousands)
CNL- CNL-Capital Consolidated
Investments Corp. Other Totals
------------- --------------- ----------- ---------------
Revenues $ 87,481 $ 190,123 $ (4,351 ) $ 273,253
------------- --------------- ----------- ---------------
Cost of real estate sold -- 118,372 -- 118,372
General operating and administrative 8,757 22,564 (1,729 ) 29,592
Interest expense 36,907 31,787 (802 ) 67,892
Property expenses, state and other taxes 2,474 143 214 2,831
Depreciation and amortization 11,942 5,519 -- 17,461
Loss on termination of cash flow hedges 1,643 6,417 -- 8,060
Impairments and provisions on assets 40,179 488 -- 40,667
Minority interest and equity in earnings 132 1,020 -- 1,152
Loss on sale of assets 1,116 22 -- 1,138
Cumulative effect of accounting change -- 3,841 -- 3,841
------------- --------------- ----------- ---------------
103,150 190,173 (2,317 ) 291,006
------------- --------------- ----------- ---------------
Discontinued operations:
Earnings/(loss) from discontinued
operations, net of income tax
benefit (7,151 ) 452 -- (6,699 )
------------- --------------- ----------- ---------------
Net income/(loss) $ (22,820 ) $ 402 $ (2,034 ) $ (24,452 )
============= =============== =========== ===============
Assets at December 31, 2001 $ 920,911 $ 643,154 $ (3,948 ) $ 1,560,117
============= =============== =========== ===============
Investments accounted for under the
equity method at December 31, 2001 $ 1,058 $ -- $ -- $ 1,058
============= =============== =========== ===============
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
15. Commitments and Contingencies:
In the ordinary course of business, the Company has outstanding
commitments to qualified borrowers and tenants. These commitments,
including development agreements, if accepted by the potential
borrowers, obligate the Company to provide funding. At December 31,
2003, the Company had committed to fund $88 million to qualified
tenants.
Certain operating leases provide that, in the event the Company sells
the leased property before the fifth lease year, the annual rent will
increase to the fifth year annual rent effective on the day of the
sale, and that the Company will compensate the tenant for such increase
using a portion of the proceeds from the sale of the property.
16. Selected Quarterly Financial Data:
The following table presents selected unaudited quarterly financial
data for each fiscal quarter during the years ended December 31, 2003
and 2002:
<s> <c>
(In thousands except for share data)
2003 Quarter First Second Third Fourth Year
--------------------------------- ----------- ---------- ---------- ----------- -----------
Continuing operations:
Revenues (1) $ 27,075 $ 28,230 $29,745 $28,584 $ 113,634
=========== ========== ========== =========== ===========
Earnings from
continuing operations,
net (1) $ 750 $ 1,820 $ 6,245 $ 88 $ 8,903
Discontinued operations:
Earnings and gains
from discontinued
operations, net (1) 7,269 8,770 6,803 10,695 33,537
----------- ---------- ---------- ----------- -----------
Net Income $ 8,019 $ 10,590 $13,048 $10,783 $ 42,440
=========== ========== ========== =========== ===========
Earnings per share:
Continuing operations (1) $ 0.01 $ 0.04 $ 0.14 $ 0.01 $ 0.20
=========== ========== ========== =========== ===========
Discontinued operations (1) $ 0.17 $ 0.19 $ 0.15 $ 0.23 $ 0.74
=========== ========== ========== =========== ===========
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2003, 2002 and 2001
16. Selected Quarterly Financial Data - Continued:
<s> <c>
(In thousands except for share data)
2002 Quarter First Second Third Fourth Year
--------------------------------- ---------- ----------- ---------- ---------- ------------
Continuing operations:
Revenues (1) $69,217 $ 137,257 $80,420 $48,269 $ 335,163
========== =========== ========== ========== ============
Earnings/(loss) from
continuing operations,
net (1) $ 6,034 $ 13,804 $ 7,845 $ (867) $ 26,816
Discontinued operations:
Earnings and gains
from discontinued
operations, net (1) 398 1,238 3,398 3,740 8,774
---------- ----------- ---------- ---------- ------------
Net Income $6,432 $ 15,042 $11,243 $ 2,873 $ 35,590
========== =========== ========== ========== ============
Earnings/(loss) per share:
Continuing operations (1) $ 0.14 $ 0.31 $ 0.17 $ (0.02) $ 0.60
========== =========== ========== ========== ============
Discontinued operations (1) $ 0.01 $ 0.03 $ 0.08 $ 0.08 $ 0.20
========== =========== ========== ========== ============
(1) The results of operations relating to properties that were either
disposed of or that were classified as held for sale through
September 30, 2004 are reported as discontinued operations for all
periods presented. In addition, management adopted FIN 46 in 2003
which resulted in the consolidation of two of the Company's
previously unconsolidated subsidiaries. The Company restated all
prior periods to conform with the 2003 presentation.
Item 9.01. Financial Statement and Exhibits.
(a) The following documents are filed as part of this report.
1. Consolidated Financial Statements
Report of Independent Registered Certified Public Accounting
Firm.
Consolidated Balance Sheets at December 31, 2003 and 2002.
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001.
Consolidated Statements of Stockholders' Equity and
Comprehensive Income/(Loss) for the years ended December 31,
2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001.
Notes to Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: December 2 , 2004 CNL RESTAURANT PROPERTIES, INC.
By:
/s/ CURTIS B. McWILLIAMS
--------------------------------
Curtis B. McWilliams
Chief Executive Officer
/s/ STEVEN D. SHACKELFORD
--------------------------------
Steven D. Shackelford
Chief Financial Officer