1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 1045281
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CAPTEC NET LEASE REALTY, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
38-3368333
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(IRS Employer Identification Number)
24 Frank Lloyd Wright Drive, Ann Arbor, Michigan 48106
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(Address of principal executive offices, including zip code)
(734) 994-5505
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(Registrant's telephone number)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
year)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the registrant's classes of common equity, as of the
latest practicable date.
9,508,108 shares of Common Stock, $.01 par value, outstanding as of
November 14, 2000.
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CAPTEC NET LEASE REALTY, INC.
AND SUBSIDIARIES
CONTENTS
ITEM NO. PAGE
-------- ----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Report on Form 8-K 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
ASSETS (unaudited)
Cash and cash equivalents $ 2,148,006 $ 1,035,607
Investments:
Properties subject to operating leases, net 202,494,435 217,615,654
Properties subject to financing leases, net 4,506,670 4,407,195
Loans to affiliates, collateralized by mortgage loans 9,335,946 10,979,804
Investment in joint venture 7,032,284 7,305,894
Investment in affiliated limited partnerships, net 4,181,812 4,251,568
Other loans, related party 378,124 390,520
------------ ------------
Total investments 227,929,271 244,950,635
Short-term loans to affiliates 1,969,695 398,471
Unbilled rent, net 7,145,084 6,027,221
Accounts receivable 693,131 491,052
Due from affiliates 1,505,604 1,326,307
Other assets 2,250,154 1,292,399
------------ ------------
Total assets $243,640,945 $255,521,692
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $104,378,412 $116,921,555
Accounts payable and accrued expenses 1,668,039 2,672,529
Federal income tax payable - 719,000
Security deposits held on leases 244,861 272,943
------------ ------------
Total liabilities 106,291,312 120,586,027
------------ ------------
Stockholders' Equity:
Common stock, ($.01 par value) authorized: 40,000,000
shares; issued and outstanding: 9,508,108 95,081 95,081
Paid in capital 134,711,056 134,711,056
Retained earnings 2,543,496 129,528
------------ ------------
Total stockholders' equity 137,349,633 134,935,665
------------ ------------
Total liabilities and stockholders' equity $243,640,945 $255,521,692
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
Revenue:
Rental income from operating leases $ 5,940,528 $ 6,165,542 $18,145,776 $18,332,955
Earned income from financing leases 152,467 161,231 463,974 476,777
Interest income on loans to affiliates 316,642 320,634 947,736 951,005
Other income, principally affiliated ventures 522,362 724,277 2,049,566 1,695,106
----------- ----------- ----------- -----------
Total revenue 6,931,999 7,371,684 21,607,052 21,455,843
----------- ----------- ----------- -----------
Expenses:
Interest 2,427,414 2,347,837 7,540,858 6,831,505
Management fees, affiliates, net - 52,426 - (23,102)
General and administrative 344,607 421,734 1,075,471 1,146,769
Depreciation and amortization 859,414 850,527 2,591,927 2,532,602
Non-recurring merger costs - - 1,143,000 -
----------- ----------- ----------- -----------
Total expenses 3,631,435 3,672,524 12,351,256 10,487,774
----------- ----------- ----------- -----------
Income before equity in joint venture,
gain on sale of properties, other
non-recurring and accounting change 3,300,564 3,699,160 9,255,796 10,968,069
Equity in net income of joint venture 131,524 95,636 426,601 95,636
Gain on sale of properties, net 1,253,172 127,665 2,864,393 66,246
Other non-recurring - - 706,421 -
----------- ----------- ----------- -----------
Income before accounting change 4,685,260 3,922,461 13,253,211 11,129,951
Cummulative effect of accounting change - - - (336,875)
----------- ----------- ----------- -----------
Net Income $ 4,685,260 $ 3,922,461 $13,253,211 10,793,076
=========== =========== =========== ===========
Basic and Diluted EPS:
Income before accounting change $ 0.49 $ 0.41 $ 1.39 $ 1.17
=========== =========== =========== ===========
Accounting change $ - $ - $ - $ (0.04)
=========== =========== =========== ===========
Net Income $ 0.49 $ 0.41 $ 1.39 $ 1.14
=========== =========== =========== ===========
Weighted average number of common shares
outstanding - basic and diluted 9,508,108 9,508,108 9,508,108 9,508,108
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(unaudited)
Common Stock Total
----------------------------- Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
------ ------ ------- -------- ------
BALANCE, JANUARY 1, 2000 9,508,108 $ 95,081 $ 134,711,056 $ 129,528 $ 134,935,665
Net Income - - - 13,253,211 13,253,211
Common stock dividends ($0.38 per share) - - - (10,839,243) (10,839,243)
------------- ------------- ------------- ------------- -------------
BALANCE, September 30, 2000 9,508,108 $ 95,081 $ 134,711,056 $ 2,543,496 $ 137,349,633
============= ============= ============= ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
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CAPTEC NET LEASE REALTY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
------------------------------
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,253,211 $ 10,793,076
Adjustments to net income:
Depreciation and amortization 2,591,927 2,532,602
Accounting change - 336,875
Amortization of debt issuance costs 819,396 474,628
Equity in net income of joint venture (426,601) (95,636)
Gain on sale of property (2,864,393) (66,246)
Increase in unbilled rent (1,117,863) (1,881,298)
(Increase) decrease in accounts receivable and other assets (2,189,788) 177,600
Decrease in accounts payable and accrued expenses (1,723,490) (1,018,062)
------------ ------------
Net cash provided by operating activities 8,342,399 11,253,539
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties subject to operating leases (12,468,080) (14,712,463)
Acquisition of properties subject to financing leases - (1,153,037)
(Advances) collections on short-term loans to affiliates, net (1,571,224) 696,268
Proceeds from the transfer of properties to
joint venture 3,385,972
Proceeds from the disposition of properties 27,962,782 9,062,193
Collections (advances) on loans to affiliates, collateralized by
mortgage loans 1,643,858 (683,229)
Collection of principal on other loans 12,396 11,309
Investment in joint venture (7,113,000)
Proceeds from joint venture distribution 700,211 63,828
Collection of principal on financing leases (99,475) -
Lease security deposits (28,082) 86,500
------------ ------------
Net cash provided by (used in) investing activities 16,152,386 (10,355,659)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on common stock (10,839,243) (10,791,702)
Borrowings of notes payable 11,945,000 11,000,000
Repayments of notes payable (24,488,143) (4,012,289)
------------ ------------
Net cash used in financing activities (23,382,386) (3,803,991)
------------ ------------
NET CASH FLOWS 1,112,399 (2,906,111)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,035,607 4,488,565
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,148,006 $ 1,582,454
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 8,147,036 $ 7,022,623
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION: The Company, which has operated as a REIT since November
1997, acquires, develops and owns freestanding properties which are
leased on a long-term triple-net basis to operators of national and
regional chain restaurants and national retailers. Triple-net leases
generally impose on the lessee responsibility for all operating costs
and expense of the property, including the costs of repairs,
maintenance, real property taxes, assessments, utilities and insurance.
The Company's leases typically provide for minimum rent plus specified
fixed periodic rent increases.
OTHER INFORMATION: On December 20, 1999 the Company executed an Omnibus
Agreement and Plan of Merger by and among the Company, Captec
Acquisition, Inc., a wholly-owned subsidiary of the Company, Captec
Financial Group, Inc., and Captec Advisors. The merger agreement
provided for the merger of Captec Acquisition with and into Financial
Group and of Captec Advisors with and into the Company. On May 1, 2000
the merger agreement was terminated by the mutual agreement of the
parties thereto.
UNAUDITED INTERIM FINANCIAL INFORMATION: The consolidated balance sheet
as of September 30, 2000 and the consolidated statements of operations,
stockholders' equity and cash flows for the three and nine months ended
September 30, 2000 and 1999 have not been audited. In the opinion of
management, all adjustments (including normal recurring adjustments)
considered necessary for a fair presentation have been reflected
therein. Results of operations for the interim periods are not
necessarily indicative of results for the full year. These unaudited
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 filed with the United
States Securities and Exchange Commission on March 30, 2000.
NEW PRONOUNCEMENTS: In June 1998 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
is effective for the first quarter of the first fiscal year beginning
after June 15, 2000 (January 1, 2001 for the Company). The statement
requires that all derivative instruments be recorded at fair value on
the balance sheet with changes in fair value recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction.
Pursuant to the provisions of SFAS 133, all hedging designations and
the methodology for determining hedge effectiveness must be documented
at the inception of the hedge, and upon the initial adoption of the
standard, hedging relationships must be designated anew. The
documentation must also indicate the risk management intent for
entering into the hedging arrangement. The Company is currently
assessing and implementing the documentation and methodologies as
required by the standard. The Company currently has two derivative
instruments that have been identified to be accounted for under the
provisions of the standard; an interest rate swap contract and an
interest rate cap contract. Both contracts have been designated as cash
flow hedges used to hedge interest rate risk. The fair value of the two
instruments at September 30, 2000 was $428,488. Under the provisions of
the standard the Company would be required to record an asset with the
offset to the other comprehensive income component of stockholders'
equity for the effective portion of the hedge and current earnings for
the ineffective portion of the hedge. The Company is in the process of
completing its review to determine the impact of the new standard on
income and equity. Also, since the impact is dependent on future
market rates and future derivative actions prior to year-end, it is not
fully determinable at this time.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." This statement requires start-up activities and
organization costs to be expensed as incurred. In accordance with the
provisions of the statement, the Company has recorded a $336,875
non-cash charge during the three months ended March 31, 1999
representing the balance of unamortized organization costs.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." The Company has examined its revenue recognition
practices in light of interpretive guidance and does not expect a
material impact when SAB 101 is adopted in the fourth quarter of 2000.
RECLASSIFICATIONS: Certain prior period financial statement amounts
have been reclassified to conform to the 2000 presentations.
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTIES SUBJECT TO OPERATING LEASES:
Properties subject to operating leases represent various properties
leased to tenants under long-term net operating leases. The lease
agreements generally provide for monthly rents based upon a percentage
of the property's cost. The initial term of the leases typically ranges
from 15 to 20 years, although the Company in certain cases will enter
into leases with terms that are shorter or longer. Most leases also
provide for one or more five year renewal options. In addition, certain
leases provide the tenant one or more options to purchase the
properties at a predetermined price, generally only during stated
periods during the fifth to seventh lease years.
The Company's investment in properties subject to operating leases
includes capitalized acquisition and interest costs which have been
allocated between land and buildings and improvements on a pro rata
basis. The net investment in properties subject to operating leases is
comprised of the following as of:
September 30, December 31,
2000 1999
---- ----
Land
Buildings and improvements $ 80,926,592 $ 83,344,971
Construction draws on properties 126,675,051 131,211,643
4,108,286 10,653,762
------------- -------------
Less accumulated depreciation 211,709,929 225,210,376
(9,215,494) (7,594,722)
Total ------------- -------------
$ 202,494,435 $ 217,615,654
============= =============
The Company periodically invests in properties under construction. All
construction draws are subject to the terms of a standard lease
agreement with the Company which fully obligates the tenant to the
long-term lease to all construction related costs advanced through
construction draws, including interest during the construction period.
Upon completion of construction and when the tenant lease payments
begin, the construction draws are then capitalized as land and
building. At September 30, 2000 the Company had approximately $1.0
million of unfunded commitments on properties under construction.
The Company sold eight properties during the three months ended
September 30, 2000, collecting total net proceeds of $11.5 million
and reflected a gain totaling approximately $1.3 million on the sale
of these properties.
3. FINANCING LEASES:
Properties subject to financing leases is comprised of four properties
whereby the Company owns only the building and the land is subject to a
ground lease between the tenant and an unrelated third party. The net
investment in financing leases is comprised of the following as of:
September 30, December 31,
2000 1999
---- ----
Minimum lease payments to be received $ 9,784,037 $ 10,189,037
Estimated residual value - -
------------ ------------
Gross investment in financing leases 9,784,037 10,189,037
Unearned income (5,277,367) (5,781,842)
------------ ------------
Net investment in financing leases $ 4,506,670 $ 4,407,195
============ ============
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENT IN JOINT VENTURE:
In 1999 the Company invested $7.1 million for a 22.6% membership
interest in FC Venture I, LLC. The investment is accounted for under
the equity method. Summarized financial information of the Company's
joint venture investment as of and for the nine months ended September
30, 2000 is set forth below:
Investment in properties subject to leases, net $48,389,457
Total assets 51,238,984
Notes payable 20,233,425
Total liabilities 21,071,372
Members' equity 30,167,612
Revenues 3,537,521
Net income 1,887,614
5. NOTES PAYABLE:
The Company's credit facility expires in February 2001 and provides up
to $125 million for the acquisition and development of properties and
working capital. The credit facility is subject to certain borrowing
base restrictions. The Company had approximately $102.4 million of
aggregate outstanding borrowings under the credit facility at September
30, 2000. At September 30, 2000 the Company is in compliance with all
debt covenants.
During the three months ended September 30, 2000 the Company entered
into three promissory notes for an aggregate amount of $1,945,000 with
a lending institution. The notes are collateralized by certain
properties in the Company's property portfolio. The notes have terms of
20 years and bear interest at 9.0% per annum.
6. EARNINGS PER SHARE:
Stock options currently outstanding were excluded from the computation
of diluted earnings per share because their exercise price was in
excess of the average market price of the Company's common stock during
the three and nine months ended September 30, 2000 and 1999.
7. NON-RECURRING ITEMS:
As described in Note 1 above, the Company terminated a merger agreement
on May 1, 2000 that resulted in the Company recognizing expense of $1.1
million in non-recurring merger costs in the three month period ended
March 31, 2000. Merger costs of approximately $700,000 which represent
services that have near term potential benefit are included in other
assets as of September 30, 2000.
Other non-recurring income for the nine months ended September 30, 2000
of approximately $706,000 represents the reversal of a previously
provided allowance for an estimated income tax obligation which is no
longer required due to the recent completion of an IRS audit that
resulted in no additional tax payment.
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CAPTEC NET LEASE REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY TRANSACTIONS:
The Company is party to an advisory agreement, as amended, with Captec
Net Lease Realty Advisors, Inc., an affiliate, whereby the Company pays
to Captec Advisors a management fee which is subject to a reduction in
management fees paid to Captec Advisors based on the acquisition levels
of Family Realty, Inc. and Family Realty II, Inc. of each of which the
Company owns 60% of the non-voting common stock. During the nine months
ended September 30, 2000 the Company incurred approximately $1.1
million in management fees and received an equal reduction in the
management fees from Captec Advisors.
In 1999 Family Realty II, Inc. was formed and as a result the Company
received $100,000 for formation costs incurred during the nine months
ended September 30, 2000. In addition, the Company received $500,000 in
management fees from Family Realty II during the nine months ended
September 30, 2000. Both the formation cost and management fee have
been recorded in other income.
9. SUBSEQUENT EVENTS:
In October 2000, the Company declared dividends to its shareholders of
$3,613,081, or $0.38 per share of common stock, which was paid on
October 19, 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company, which operates as a REIT, acquires, develops and owns
freestanding properties which are leased on a long-term triple-net
basis to operators of national and regional chain restaurants and
retailers. The Company's triple-net leases generally impose on the
lessee responsibility for all operating costs and expense of the
property, including the costs of repairs, maintenance, real property
taxes, assessments, utilities and insurance. The Company's leases
typically provide for minimum rent plus specified fixed periodic rent
increases. Other revenues are derived primarily from fee income earned
from affiliates and interest income on loans to affiliates.
As of September 30, 2000, the Company owned 146 properties, located in
27 states, subject to long-term net leases with 62 different lessees
under major restaurant and retail concepts including Bennigan's,
Applebee's, Denny's, Athlete's Foot, Blockbuster Video, and Jared
Jewelers.
During the three months ended September 30, 2000, the board of
directors accepted a recommendation concerning strategic alternatives
for maximizing shareholder value. Based on the recommendations, the
board authorized the Company to proceed with pursuing a possible sale
of the Company and formed a committee consisting of four directors to
oversee the process.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000. During the three months ended
September 30, 2000 total revenue decreased 6.0% to $6.9 million as
compared to $7.4 million the three months ended September 30, 1999.
Rental revenue from operating leases for the three months ended
September 30, 2000 decreased 3.7% to $5.9 million as compared to $6.2
million for the three months ended September 30, 1999, due to the
reduction of the Company's property portfolio as a result of property
sales. Earned income from financing leases for the three months ended
September 30, 2000 decreased 5.4% to approximately $152,000 for the
three months ended September 30, 2000 as compared to approximately
$161,000 for the three months ended September 30, 1999. The decrease is
the result of the amortization of principal balances. Other income
decreased 27.9% to approximately $522,000 for the three months ended
September 30, 2000 as compared to $724,000 for the three months ended
September 30, 1999 due to fees earned for the acquisition, development
and management of properties on behalf of its affiliated ventures. The
amount of fees earned for the acquisition, development and management
of properties on behalf of its affiliated ventures are subject to
variations, principally by the amount of new properties identified and
acquired by the affiliated ventures.
Total expenses decreased 1.1% to $3.6 million for the three months
ended September 30, 2000 as compared to $3.7 million for the three
months ended September 30, 1999. Interest expense increased 3.4% to
$2.4 million for the three months ended September 30, 2000 as compared
to $2.3 million for the three months ended September 30, 1999. The
increase was due to a 62 basis point increase in the weighted average
interest rate as well an increase of approximately $132,000 in
amortization of debt financing costs partially offset by a $11.9
million reduction in the average outstanding borrowings under the
Company's credit facility during the three months ended September 30,
2000 as compared to the three months ended September 30, 1999. General
and administrative expenses, including management fees to affiliates,
decreased 27.3% to approximately $345,000 for the three months ended
September 30, 2000 as compared to approximately $474,000 for the three
months ended September 30, 1999 primarily due to a decrease in
management fees and an increase in reimbursable general and
administrative expenses as a result of the acquisition activities of
affiliated ventures. The Company's management fee was equally offset
due to acquisitions of its affiliated ventures during the three months
ended September 30, 2000. The management fee paid and reductions
received are subject to variations, principally changes in the
Company's property portfolio balance caused by property acquisitions
and dispositions, and the amount of new properties identified and
acquired by the affiliated ventures. Depreciation and amortization
increased 1.0% to approximately $859,000 for the three months ended
September 30, 2000 as compared to approximately $851,000 for the three
months ended September 30, 1999 principally due to the amortization of
goodwill in connection with the Company's investment in Captec
Franchise Capital Partners L.P. III and Captec Franchise Capital
Partners L.P. IV.
In 1999 the Company invested $7.1 million in a 22.6% membership
interest in FC Venture I, LLC, a joint venture. During the three months
ended September 30, 2000 the Company recorded approximately $132,000 as
its portion of
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FC Venture's equity earnings as compared to approximately $96,000 for
the three months ended September 30, 1999. The increase is primarily
due to growth of FC Venture's property portfolio.
The Company sold 8 properties during the three months ended September
30, 2000, collecting total net proceeds of $11.5 million and reflected
a gain totaling approximately $1.3 million on the sale of these
properties.
As a result of the foregoing, the Company's net income increased 19.5%
to $4.7 million for the three months ended September 30, 2000 as
compared to $3.9 million for the three months ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000. During the nine months ended
September 30, 2000 total revenue increased 1.0% to $21.6 million as
compared to $21.5 million for the nine months ended September 30, 1999.
Rental revenue from operating leases for the nine months ended
September 30, 2000 decreased 1.0% to $18.1 million for the nine months
ended September 30, 2000 as compared to $18.3 million for the nine
months ended September 30, 1999, due to the reduction of the Company's
property portfolio as a result of property sales. Earned income from
financing leases for the nine months ended September 30, 2000 decreased
to approximately $464,000 as compared to approximately $477,000 for the
nine months ended September 30, 1999. The decrease is the result of the
amortization of principal balances. Interest income on loans to
affiliates for the nine months ended September 30, 2000 decreased to
approximately $948,000 as compared to $951,000 for the nine months
ended September 30, 1999. The decrease is primarily the result of
collection on principal. Other income increased 21.0% to $2.0 million
for the nine months ended September 30, 2000 as compared to $1.7
million for the nine months ended September 30, 1999 primarily due to
fee income earned from affiliates. The amount of fees earned for the
acquisition, development and management of properties on behalf of its
affiliated ventures are subject to variations, principally by the
amount of new properties identified and acquired by the affiliated
ventures.
Interest expense for the nine months ended September 30, 2000 increased
10.4% to $7.5 million as compared to $6.8 million for the nine months
ended September 30, 1999. The increase was due to a 62 basis point
increase in the weighted average interest rate as well an increase of
approximately $345,000 in amortization of debt financing costs
partially offset by a $3.1 million reduction in the average outstanding
borrowings under the Company's credit facility during the nine months
ended September 30, 2000 as compared to the nine months ended September
30, 1999. General and administrative expenses, including management
fees to affiliates, remained unchanged at $1.1 million for the nine
months ended September 30, 2000 as compared to $1.1 million for the
nine months ended September 30, 1999. The management fee paid and
reductions received are subject to variations, principally changes in
the Company's property portfolio balance caused by property
acquisitions and dispositions, and the amount of new properties
identified and acquired by the affiliated ventures. Depreciation and
amortization increased 2.3% for the nine months ended September 30,
2000 as compared to the nine months ended September 30, 1999
principally due to the amortization of goodwill in connection with the
Company's investment in Captec Franchise Capital Partners L.P. III and
Captec Franchise Capital Partners L.P. IV, slightly offset by the
elimination of depreciation as a result of property sales.
Non-recurring merger costs were $1.1 million during the nine months
ended September 30, 2000 as a result of the termination of the merger
agreement.
The Company sold 22 properties during the nine months ended September
30, 2000, collecting total net proceeds of $28.0 million and reflecting
a gain of $2.8 million on the sale of these properties. In addition,
the Company recorded an impairment loss of $56,000 during the nine
months ended September 30, 2000 which is netted against the gain on
sale of properties.
In 1999 the Company invested $7.1 million in a 22.6% membership
interest in FC Venture I, LLC, a joint venture. During the nine months
ended September 30, 2000 the Company recorded approximately $427,000 as
its portion of FC Venture's equity earnings as compared to
approximately $96,000 for the three months ended September 30, 1999.
The increase is primarily due to growth of FC Venture's property
portfolio.
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During the nine months ended September 30, 2000 an IRS audit of periods
prior to the Company's initial public offering was completed resulting
in no additional tax payment. As a result of the completed audit the
Company recorded other non-recurring income of approximately $706,000
representing the reversal of a previously provided allowance for an
estimated tax obligation.
As result of the foregoing, the Company's income before accounting
change increased 19% to $13.3 million for the nine months ended
September 30, 2000 as compared to $11.1 million for the nine months
ended September 30, 1999.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". This statement requires start-up activities and
organization costs to be expensed as incurred. In accordance with the
provisions of the statement, the Company recorded a $336,875 non-cash
charge during the nine months ended September 30, 1999 representing the
balance of unamortized organization costs which resulted in net income
for the nine months ended September 30, 1999 of $10.8 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal use of funds is for property development and
acquisition, payment of interest on its outstanding indebtedness, and
payment of operating expenses and dividends. Historically, interest
expense, operating expenses and dividends have been paid out of cash
flows from operations. Property acquisition and development have been
typically funded out of proceeds from borrowings. The Company expects
to meet its liquidity requirements, which are principally property
acquisition and development and scheduled debt maturities, through a
variety of future sources of capital, including long-term
collateralized and uncollateralized indebtedness, the issuance of
additional equity or debt securities and "off-balance sheet" financing
through the formation of joint ventures.
The Company's leases generally provide for specified periodic rent
increases. In addition, most of the Company's leases require the lessee
to pay all operating costs and expenses including repairs, maintenance,
real property taxes, assessments, utilities and insurance, thereby
substantially reducing the Company's exposure to increases in costs and
operating expenses. Based upon these factors, the Company does not
anticipate significant capital demands related to the management of its
properties other than potential costs of re-leasing the four vacant
Boston Chicken properties which it anticipates not exceeding $100,000.
At September 30, 2000 the Company had cash and cash equivalents of
approximately $2.1 million. For the nine months ended September 30,
2000, the Company generated cash from operations of $8.3 million as
compared to $11.3 million for the nine months ended September 30, 1999.
Cash generated from operations provides funds for dividends. Any excess
cash from operations may also be used for investment in properties. For
the nine months ended September 30, 2000 the Company generated $16.2
million from investing activities as compared to using $10.4 million
during the nine months ended September 30, 1999. The Company used $23.4
million in financing activities during the nine months ended September
30, 2000 as compared to using $3.8 million during the nine months ended
September 30, 1999.
CREDIT FACILITY. The Company maintains a syndicated credit facility
with First Union National Bank, as agent, to provide funds for the
acquisition and development of properties and working capital, and
repaid all amounts outstanding under a prior credit facility. The
credit facility provides up to $125.0 million of debt which is
collateralized by the properties. At September 30, 2000 the Company had
$102.4 million of aggregate outstanding borrowings under the credit
facility.
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The credit facility has a three year term and the revolving credit
borrowings are subject to borrowing base restrictions. The credit
facility is subject to covenants which, among other restrictions,
require the Company to maintain a minimum net worth, a maximum leverage
ratio, and specified interest and fixed charge coverage ratios. At
September 30, 2000 the Company is in compliance with all debt
covenants. The credit facility bears interest at an annual rate of
LIBOR plus a spread ranging from 1.25% to 1.75%, set quarterly
depending on the Company's leverage ratio, or at the Company's option,
the bank's base rate. In connection with the credit facility the
Company incurred issuance costs of $1.7 million and is also required to
pay an unused commitment fee ranging from .125% to .20% per annum on
the unused amount of the commitment.
The credit facility expires in February 2001 and may be renewed subject
to the consent of the lender. Upon expiration, the entire outstanding
balance of the credit facility will mature and become immediately due
and payable. At that time, the Company expects to refinance such debt
either through additional debt financings collateralized by individual
properties or groups of properties, by uncollateralized private or
public debt offerings, by additional equity offerings, or through the
sale of the Company. No assurances can be made that the Company will be
able to refinance such debt.
PROPERTY ACQUISITIONS AND COMMITMENTS. During the three months ended
September 30, 2000 the Company invested in properties for an aggregate
acquisition cost of $6.2 million. As of September 30, 2000, the Company
had entered into commitments to acquire 64 properties totaling $102.9
million. The commitments are subject to various conditions to closing
which are described in the contracts or letters of intent relating to
these properties. In addition, in the ordinary course of business the
Company is in negotiations regarding the proposed acquisition of other
properties and related co-development opportunities. The Company may
enter into commitments to acquire some of these prospective properties
in the future. The Company expects to finance its acquisition
commitments through a variety of sources of capital, including
borrowings under the credit facility, other long-term collateralized
and uncollateralized indebtedness, "off-balance sheet" financing
through the formation of joint ventures and the issuance of additional
equity or debt securities. Property acquisition commitments are
expected to generate demand for additional capital in the future.
PROPERTY SALES. During the three months ended September 30, 2000 the
Company sold 8 properties collecting total net proceeds of $11.5
million and reflecting a gain of $1.3 million on the sale of these
properties. The Company will assess the additional need for future
property sales as a means of generating capital to meet its current
commitments of future property acquisitions and developments.
DIVIDENDS. During the nine months ended September 30, 2000 the Company
paid dividends of $10,839,243. In October 2000, the Company declared a
third quarter dividend on its common stock in the amount of $0.38 per
share or $3,613,081. The dividend was payable to shareholders of record
on October 12, 2000 and was paid on October 19, 2000. The Company
expects to pay future dividends from cash available for distribution.
The Company believes that cash from operations will be sufficient to
allow the Company to make distributions necessary to enable the Company
to continue to qualify as a REIT.
YEAR 2000
As a result of the Company's Year 2000 efforts and the timely
completion of all related projects, the Company did not experience any
disruption in its business operations in January 2000. In addition, the
Company was not adversely affected by any of its key business vendors,
lessees or other partners not being Year 2000 ready.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents a risk of loss arising from adverse changes in
market prices and interest rates. The Company's market risk arises from
interest rate risk inherent in its financial instruments. The Company
is not subject to foreign currency exchange rate risk or commodity
price risk.
The Company monitors and manages interest rate exposure as an integral
part of its overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the
potentially adverse effect on its results. At September 30, 2000
substantially all of the Company's debt bears interest at variable
rates of LIBOR rate plus 1.25% to 1.75%.
The following table presents certain information on the Company's
assets and liabilities which are sensitive to interest rate changes at
September 30, 2000:
MATURITY
------------------------------------------
0 TO 3 1 TO 5
MONTHS YEARS TOTAL
----------- ------------- -------------
Assets:
Cash and cash equivalents............................................ $ 2,148,006 $ - $ 2,148,006
Properties subject to operating leases, net(1)....................... - 4,108,286 4,108,286
----------- ------------- -------------
Total assets..................................................... $ 2,148,006 $ 4,108,286 $ 6,256,292
=========== ============= =============
Liabilities
Notes payable........................................................ $ - $ 102,433,412 $ 102,433,412
=========== ============= =============
Reprice difference................................................... $ 2,148,006 $ (98,325,126)
Cumulative gap....................................................... $ 2,148,006 $ (96,177,120)
(1) Represents leases that are under construction and sensitive to
interest rate fluctuations.
A 1% increase in the variable interest rate for the nine months ended
September 30, 2000 would have resulted in additional interest expense of
approximately $515,000.
The Company uses derivative financial instruments in the normal course
of business to manage its exposure to fluctuations in interest rates.
Those instruments involve, to varying degrees, market risk, as the
instruments are subject to rate and price fluctuations, and elements of
credit risk in the event the counterparty should default. The Company
does not enter into derivative transactions for trading purposes. At
September 30, 2000 the Company had an interest rate swap contract
outstanding with a total notional amount of $50 million, and an interest
rate cap contract outstanding with a total notional amount of $31.5
million. The notional amounts serve solely as a basis for the
calculation of payments to be exchanged and are not a measure of the
exposure of the Company through the use of derivatives. Under the
interest rate swap contract, the Company agrees to pay a fixed rate of
5.8% and the counterparty agrees to make payments based on 3-month
LIBOR. Under the interest rate cap agreement the counterparty agrees to
make payments to the Company if LIBOR exceeds 6.5% through July 1, 1999
or 7.5% thereafter. The interest rate swap contract terminates July 2001
and the interest rate cap contract terminates January 2001.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months
ended September 30, 2000.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain "forward-looking statements" which
represent the Company's expectations or beliefs, including, but not
limited to, statements concerning industry performance and the
Company's operations, performance, financial condition, plans, growth
and strategies. Any statements contained in this Form 10-Q which are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words
such as "may," "will," "expect," "anticipate," intend," "could,"
estimate" or continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks
and uncertainties, certain of which are beyond the Company's control,
and actual results may differ materially depending on a variety of
important factors many of which are beyond the control of the Company.
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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 thereunto duly authorized.
CAPTEC NET LEASE REALTY, INC.
November 14, 2000 By: /s/ Patrick L. Beach
------------------------
Patrick L. Beach
Chief Executive Officer and President
November 14, 2000 By: /s/ W. Ross Martin
--------------------------------
W. Ross Martin
Chief Financial Officer and
Executive Vice President
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Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule