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, 1997
------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------------- --------------------
Commission file number: 333-34983
---------
CAPTEC NET LEASE REALTY, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-3368333
-------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
24 Frank Lloyd Wright Drive, Ann Arbor, Michigan 48106
- - ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(313) 994-5505
--------------
(Registrant's telephone number)
Not Applicable
--------------
(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 No X
------- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of each of the registrant's classes of common
equity, as of December 19, 1997 (the latest practicable date).
Common Stock, $.01 par value 9,508,108
- - ---------------------------- ---------
(Class) (Number of shares)
Total number of pages: 19
2
CAPTEC NET LEASE REALTY, INC.
CONTENTS
ITEM NO. PAGE
PART I FINANCIAL INFORMATION
1 Financial Statements:
Balance Sheet 3
Statement of Operations 4
Statement of Changes in Stockholders' Equity 5
Statement of Cash Flows 6
Notes to Financial Statements 7 - 12
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 17
PART II OTHER INFORMATION
Other Information 18
2
3
CAPTEC NET LEASE REALTY, INC.
(A DELAWARE CORPORATION)
BALANCE SHEET
September 30, December 31,
1997 1996
---- ----
(unaudited)
ASSETS
Cash and cash equivalents $ 753,937 $ 3,862,159
Investments:
Properties subject to operating leases, net 109,373,946 70,175,031
Loans to Affiliates, collateralized by mortgage loans 12,143,038 9,101,714
Impaired mortgage loans 788,479 4,066,168
Other loans 725,223 788,512
Other loans, related party 421,920 421,920
Financing leases, net 1,240,991 1,181,900
General partner interests - -
-------------- -------------
Total investments 124,693,597 85,735,245
Short-term loans to Affiliates 5,636,901 6,637,537
Unbilled rent 1,815,720 622,354
Accounts receivable 466,581 135,451
Due from Affiliates - 269,780
Other assets 1,057,453 1,351,954
-------------- -------------
Total assets $ 134,424,189 $ 98,614,480
-------------- -------------
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 78,439,040 $ 48,160,231
Accounts payable 752,794 375,544
Due to Affiliates 381,272 -
Federal income tax payable 435,000 268,000
Deferred income tax 284,000 284,000
Security deposits held on leases 141,892 126,769
-------------- -------------
Total liabilities 80,433,998 49,214,544
-------------- -------------
Redeemable preferred stock (mandatory redemption amount
of $59,885,984 and $56,651,395) 48,828,191 49,398,936
-------------- -------------
Stockholders' Equity:
Common stock; authorized: 40,000,000 shares; issued
and outstanding: 980,330 9,803 1,000
Paid in capital 5,152,197 -
-------------- -------------
Total stockholders' equity 5,162,000 1,000
-------------- -------------
Total liabilities & stockholders' equity $ 134,424,189 $ 98,614,480
-------------- -------------
3
4
CAPTEC NET LEASE REALTY, INC.
(A DELAWARE CORPORATION)
STATEMENT OF OPERATIONS
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
Revenue:
Rental income $ 2,978,121 $ 1,391,826 $ 7,974,798 $ 3,003,920
Interest income on loans to Affiliates 179,130 392,949 522,745 1,297,506
Interest income on investments 97,424 - 339,079 -
Interest income on short-term loans to Affiliates 113,615 72,138 360,587 228,110
Other 84,617 7,018 81,170 14,176
------------- ----------- ------------ ------------
Total revenue 3,452,907 1,863,931 9,278,379 4,543,712
------------- ----------- ------------ ------------
Expenses:
Interest 1,712,025 583,423 4,419,226 1,006,539
Management fees, Affiliates 523,288 273,852 1,347,086 672,577
General and administrative 213,841 130,411 464,769 242,904
Depreciation and amortization 398,394 148,444 1,076,043 411,185
------------- ----------- ------------ ------------
Total expenses 2,847,548 1,136,130 7,307,124 2,333,205
------------- ----------- ------------ ------------
Income before income tax 605,359 727,801 1,971,255 2,210,507
Provision for income tax 206,000 (188,000) 167,000 184,000
------------- ----------- ------------ ------------
Net income 399,359 915,801 1,804,255 2,026,507
Redeemable Preferred Stock dividend requirements:
Paid dividends - 1,050,000 2,375,000 2,675,000
Accrued dividends 1,875,000 825,000 3,250,000 2,950,000
------------- ----------- ------------ ------------
Loss attributable to Common Stock $ (1,475,641) $ (959,199) $ (3,820,745) $ (3,598,493)
============= =========== ============ ============
Loss per common share $ (1.51) $ (0.98) $ (3.90) $ (3.67)
============= =========== ============ ============
Weighted average number of common shares
outstanding 980,330 980,330 980,330 980,330
============= =========== ============ ============
4
5
CAPTEC NET LEASE REALTY, INC.
(A DELAWARE CORPORATION)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(unaudited)
Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
----- ------- -------- ------
BALANCE, JANUARY 1, 1997 $ 1,000 $ - $ - $ 1,000
Net income - - 1,804,255 1,804,255
Redeemable Preferred Stock dividends paid from
retained earnings - - (1,804,255) (1,804,255)
Common stock issued in merger and
subsequent stock split, net 3,186 5,157,814 - 5,161,000
Adjustment to reflect $.01 per share par value of
Advisors Michigan historical shares 5,617 (5,617) - -
---------- ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1997 $ 9,803 $ 5,152,197 $ - $ 5,162,000
---------- ------------ ------------ ------------
5
6
CAPTEC NET LEASE REALTY, INC.
(A DELAWARE CORPORATION)
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,804,255 $ 2,026,507
Adjustments to net income:
Depreciation and amortization 1,076,043 411,185
Amortization of debt issuance costs 393,750 306,250
Loss (gain) on sale of leased equipment 58,688 (7,018)
Increase in unbilled rent (1,193,366) (333,174)
(Decrease) increase in receivables and other assets (288,099) (2,089,952)
Increase in payables 925,522 489,734
----------- -----------
Net cash provided by operating activities 2,776,793 803,532
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties (32,157,979) (47,204,887)
Advances on loans to Affiliates, collateralized by
mortgage loans (6,959,526) (9,965,115)
Acquisition of other loans - (800,000)
Acquisition of financing leases (370,165) (405,619)
Advances on short-term loans to Affiliates (4,383,416) (2,350,861)
Collections on short-term loans to Affiliates 5,384,052 1,932,170
Proceeds from the sale of leased equipment 704,723 830,000
Collections on loans to Affiliates, collateralized by
mortgage loans 3,918,202 13,932,438
Collection of principal on other loans 63,289 2,614
Collection of principal on financing leases (3,127) -
Change in lease security deposits 15,123 38,775
----------- -----------
Net cash used in investing activities (33,788,824) (43,990,485)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Redeemable Preferred Stock - 10,000,000
Proceeds from the issuance of notes payable 30,342,875 36,137,525
Organization and offering costs - (600,000)
Debt issuance costs - (1,050,000)
Principal payments of notes payable (64,066) (25,864)
Dividends paid on Redeemable Preferred Stock (2,375,000) (2,675,000)
----------- -----------
Net cash provided by financing activities 27,903,809 41,786,661
----------- -----------
NET CASH FLOWS (3,108,222) (1,400,292)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,862,159 1,969,196
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 753,937 $ 568,904
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,837,033 $ 518,220
============ ===========
Cash paid for taxes $ - $ -
============ ===========
Non-cash transfers: From impaired mortgage loans to
properties subject to operating leases $ 3,277,689 $ -
============ ===========
6
7
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:
a. MERGER: Captec Net Lease Realty, Inc., a Michigan corporation,
("Net Lease Michigan") was formed in October 1994 for the purpose of
investing in restaurant and retail real estate and commenced operations
in February 1995. Captec Net Lease Realty Advisors, Inc., a Michigan
corporation, ("Advisors Michigan") was formed in October 1994 for the
purpose of providing certain advisory services to Net Lease Michigan and
also commenced operations in February 1995. In connection with an
initial public offering of common stock (which was completed in November
1997), Captec Net Lease Realty, Inc., a Delaware corporation, ("Captec"
or the "Company") was formed in August 1997 and Net Lease Michigan and
Advisors Michigan were merged into the Company effective September 30,
1997 in exchange for 1,315,440 shares of Common Stock and 50,000 shares
of Redeemable Preferred Stock. In October 1997, a reverse split of
.745249 shares for each share of Common Stock was effected, resulting in
980,330 shares outstanding. The accompanying balance sheet as of
September 30, 1997 accounts for the merger as a purchase of Net Lease
Michigan by Advisors Michigan in accordance with Accounting Principles
Board Opinion No. 16. Accordingly, the cost of the acquisition was
$5,161,000 (318,607 split adjusted shares issued to the shareholders of
Advisors Michigan at an assumed fair value of $16.20) and the assets
acquired and liabilities assumed of Net Lease Michigan were recorded at
their estimated fair values (resulting in an increase to historical
recorded value of properties subject to operating leases of $5,161,000).
The 661,723 split adjusted shares issued to Advisors Michigan, as
purchaser, were recorded at historical cost of $1,000. In addition, as
the principal business activities of the continuing Company consist of
the activities performed by Net Lease Michigan, Net Lease Michigan is
deemed to be the "predecessor" company for financial reporting purposes
and the accompanying balance sheet as of December 31, 1996 and the
statements of operations and cash for the periods ended September 30,
1997 and 1996 are of Net Lease Michigan. All intercompany transactions
between Net Lease Michigan and Advisors Michigan were eliminated in these
financial statements.
b. UNAUDITED INTERIM FINANCIAL INFORMATION: The balance sheet as of
September 30, 1997 and the statements of operations and cash flows for
the periods ended September 30, 1997 and 1996 have not been audited. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been reflected herein. Results of operations for the interim periods are
not necessarily indicative of results expected for the full year.
2. PROPERTIES SUBJECT TO OPERATING LEASES:
The Company's real estate portfolio is 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
7
8
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
from the Company at a predetermined price, generally only during stated
window periods during the fifth to seventh lease years.
The Company's investment in real estate includes capitalized acquisition
and interest costs, which costs have been allocated between land and
buildings and improvements on a pro rata basis. The net investment in
properties subject to operating leases as of September 30, 1997 is
comprised of the following:
Land $ 41,577,795
Buildings and improvements 64,516,288
Construction draws on properties 4,844,635
----------------
110,938,718
Less accumulated depreciation ( 1,564,772)
----------------
Total $ 109,373,946
================
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
for all amounts advanced under construction draws.
3. NOTES PAYABLE:
In February 1996, the Company entered into a $100 million revolving
credit agreement, which is used to provide funds for the acquisition of
properties. Borrowings under the credit facility are collateralized by a
first mortgage on the properties financed. The credit facility agreement
requires monthly installments of interest only at LIBOR plus 2.318
percent. The credit facility expires on February 1998, at which time the
Company may elect to extend the facility for one additional year, subject
to the payment of an extension fee equal to 0.5 percent of the loan
facility amount. In addition, the agreement provided for a commitment
fee and closing expenses totaling $1,050,000, which were paid in February
1996 and capitalized in other assets. These capitalized fees and
expenses are being amortized and treated as interest expense on a
straight-line basis over the initial term of the facility. The credit
facility agreement contains covenants which, among other restrictions,
require the Company to maintain a capitalization, as defined in the
agreement, of $40 million, liquid assets equal to the greater of $2
million or 5% of the outstanding borrowings under the credit facility,
and a loan-to-value ratio of not more than 75% on the properties financed
under the credit facility.
In June 1997, the credit facility was increased to $150 million. Amounts
borrowed under the credit facility totaled $76,207,975 as of September
30, 1997.
8
9
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Company has a note payable to a financial institution with a
principal balance of $1,524,176 as of September 30, 1997. This note
bears interest at a fixed rate of 9.85 percent per annum and is payable
in equal monthly installments of $15,813, with a balloon payments for all
remaining principal, approximately $1,350,000, due in June 2001. This
note is collateralized by a first mortgage on one property.
The Company has a note payable to a financial institution with a
principal balance of $706,889 as of September 30, 1996. This note bears
interest at a fixed rate of 10.35 percent per annum and is payable in
equal monthly installments of $10,221, with a balloon payment for all
remaining principal, approximately $603,000, due in October 1999. This
note is collateralized by a first mortgage on two properties.
4. INCOME TAX:
The components of the provision for income tax for the nine months ended
September 30, 1997 are as follows:
Current $ 167,000
Deferred -
---------------
$ 167,000
===============
The reconciliation of the federal income tax provision to the amount
computed by applying the statutory federal income tax rate to income
before federal income taxes for the nine months ended September 30, 1997
is summarized as follows:
Federal income taxes at statutory rates $ 670,227
Preferred stock dividends deducted as interest expense ( 503,227)
---------------
$ 167,000
===============
The provision for income taxes does not bear the usual relationship to
pretax income for the nine months ended September 30, 1997 principally
as a result of the treatment of dividends paid on the Redeemable
Preferred Stock as deductible for interest expense for income tax
purposes. If deduction for interest is challenged by the Internal
Revenue Service, the Company could be assessed and ultimately required to
pay income and withholding taxes aggregating up to approximately
$3,400,000 for deductions taken through September 30, 1997. The Company
has provided an allowance, consisting of currently payable taxes and a
valuation allowance on deferred taxes, of approximately $875,000 through
September 30, 1997 to reflect its estimate of the minimum settlement of
this matter, should a claim be asserted by the Internal Revenue Service.
There is no assurance that if any claim is asserted, it could be settled
for the amounts provided as of September 30, 1997 or any amount less than
the aggregate amounts.
9
10
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
5. PRO FORMA FINANCIAL STATEMENTS:
The following pro forma balance sheet as of September 30, 1997 and pro
forma statements of operations for the periods ended September 30, 1997
and 1996 have been prepared to reflect the transactions and adjustments
related to the Company's initial public offering (the "Offering"), which
transactions and adjustments are described in detail in the pro forma
financial statements contained in the Prospectus dated November 13, 1997.
The pro forma financial information is based on the historical financial
statements contained herein and should be read in conjunction with those
financial statements and the other notes thereto. The pro forma balance
sheet was prepared as if transactions related to the Offering and the
application of proceeds therefrom occurred on September 30, 1997. The
pro forma statements of operations were prepared as if transactions
related to the Offering and the application of proceeds therefrom
occurred on January 1, 1996. The pro forma financial information is not
audited and is not necessarily indicative of the results which actually
would have occurred if the transactions had been consummated on the dates
described, nor does it purport to represent the Company's future
financial position or results of operations.
10
11
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
------
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1997
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
ASSETS
Cash and cash equivalents $ 753,937 $ 3,779,976 $ 4,533,913
Investments:
Properties subject to operating leases, net 109,373,946 - 109,373,946
Loans to Affiliates, collateralized by mortgage loans 12,143,038 - 12,143,038
Impaired mortgage loans 788,479 - 788,479
Other loans 725,223 - 725,223
Other loans, related party 421,920 - 421,920
Financing leases, net 1,240,991 - 1,240,991
General partner interests - 3,315,000 3,315,000
--------------- ------------- -------------
Total investments 124,693,597 3,315,000 128,008,597
Short-term loans to Affiliates 5,636,901 (3,000,000) 2,636,901
Unbilled rent 1,815,720 - 1,815,720
Accounts receivable 466,581 - 466,581
Other assets 1,057,453 - 1,057,453
--------------- ------------- -------------
Total assets $ 134,424,189 $ 4,094,976 $ 138,519,165
-------------- ------------- -------------
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 78,439,040 $(78,439,040) $ -
Accounts payable 752,794 - 752,794
Due to Affiliates 381,272 - 381,272
Federal income tax payable 435,000 284,000 719,000
Deferred income tax 284,000 (284,000) -
Security deposits held on leases 141,892 - 141,892
--------------- ------------- -------------
Total liabilities 80,433,998 (78,439,040) 1,994,958
--------------- ------------- -------------
Redeemable preferred stock (mandatory redemption amount
of $59,885,984) 48,828,191 (48,828,191) -
--------------- ------------- -------------
Stockholders' Equity:
Common stock, $.01 par value; authorized: 40,000,000
shares; issued and outstanding: 9,508,108 9,803 85,278 95,081
Paid in capital 5,152,197 131,276,929 136,429,126
--------------- ------------- -------------
Total stockholders' equity 5,162,000 82,534,016 136,524,207
--------------- ------------- -------------
Total liabilities & stockholders' equity $ 134,424,189 $ 4,094,976 $ 138,519,165
-------------- ------------- -------------
Pro Forma information reported above is presented in accordance with the
methods utilized in the pro forma financial statements included in the
Company's Prospectus dated November 13, 1997, as discussed in the footnotes
thereto.
11
12
CAPTEC NET LEASE REALTY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
------
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
Revenue:
Rental income $ 2,978,121 $ 1,391,826 $ 7,974,798 $ 3,003,920
Interest income on loans to Affiliates 179,130 392,949 522,745 1,297,506
Interest income on investments 97,424 - 339,079 -
Interest income on short-term loans to Affiliates 113,615 72,138 360,587 228,110
Other 237,617 140,018 385,170 348,176
----------- ----------- ----------- -----------
Total revenue 3,605,907 1,996,931 9,582,379 4,877,712
----------- ----------- ----------- -----------
Expenses:
Interest - - - -
Management fees, Affiliates 172,000 82,000 450,000 202,000
General and administrative 278,841 279,811 838,444 838,904
Depreciation and amortization 430,394 180,444 1,172,043 507,185
----------- ----------- ----------- -----------
Total expenses 881,235 542,255 2,460,487 1,548,089
----------- ----------- ----------- -----------
Net income $ 2,724,672 $ 1,454,676 $ 7,121,892 $ 3,329,623
----------- ----------- ----------- -----------
Net Income per share $ 0.29 $ 0.15 $ 0.75 $ 0.35
----------- ----------- ----------- -----------
Depreciation and amortization 430,394 180,444 1,172,043 507,185
----------- ----------- ----------- -----------
FFO $ 3,155,066 $ 1,635,120 $ 8,293,935 $ 3,836,808
----------- ----------- ----------- -----------
FFO per share $ 0.33 $ 0.17 $ 0.87 $ 0.40
----------- ----------- ----------- -----------
Net effect of straight-line rents 395,765 154,645 1,193,366 333,174
----------- ----------- ----------- -----------
FAD $ 2,759,301 $ 1,480,475 $ 7,100,569 $ 3,503,634
----------- ----------- ----------- -----------
FAD per share $ 0.29 $ 0.16 $ 0.75 $ 0.37
----------- ----------- ----------- -----------
Weighted average shares outstanding 9,508,108 9,508,108 9,508,108 9,508,108
----------- ----------- ----------- -----------
Pro Forma information reported above is presented in accordance with the methods
utilized in the pro forma financial statements included in the Company's
Prospectus dated November 13, 1997, as discussed in the footnotes thereto.
12
13
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Captec Net Lease Realty, Inc. ("Captec" or the "Company") 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.
Triple-net leases generally impose on the lessee all of the obligations 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 or, in certain limited circumstances,
indexation to CPI and/or percentage rent. As of September 30, 1997, Captec
owned 83 properties, located in 26 states, subject to long-term net leases with
39 different tenants operating 26 restaurant and retail concepts. The Company
completed an initial public offering (the "Offering") of 8,000,000 shares of
its common stock in November 1997. In conjunction with the Offering, the
Company intends to qualify as a real estate investment trust ("REIT").
The following discussions should be read in conjunction with the historical and
pro forma financial statements appearing elsewhere in this report. The
historical financial data include certain interest, general and administrative
and income tax expenses which will not be incurred by the Company after the
Offering which are excluded from the pro forma financial data. Conversely, the
historical financial data does not include certain revenues from two affiliated
partnerships (the "Affiliated Partnerships") which are being purchased by the
Company in conjunction with the Offering which are included in the pro forma
financial data.
HISTORICAL RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997. During the three months ended September
30, 1997 (the "Quarter"), total revenue increased 85% to $3.4 million as
compared to $1.9 million for the comparable quarter of 1996 (the "1996
Quarter"). Rental revenue increased 114% to $3.0 million for the Quarter as
compared to $1.4 million for the 1996 Quarter. The increase in rental revenue
resulted principally from the acquisition of 25 net leased properties and the
benefit of a full period of rental revenue from properties acquired and leased
in preceding periods. Interest income on investments, including interest
income on loans to Affiliates, decreased by 16% to $390,000 for the Quarter as
compared to $465,000 for the 1996 Quarter, as the Company's other investments
and short-term loans declined.
Interest expense increased by 193% to $1.7 million for the Quarter as compared
to $583,000 for the 1996 Quarter. The increase was primarily due to interest
on $41.5 million of additional debt used to fund the acquisition of properties
which was incurred during the twelve months ended September 30, 1997, as well
as a full period of interest on debt incurred in prior periods. General and
administrative expenses, including management fees to Affiliates, increased 82%
to $737,000 for the Quarter as compared to $404,000 for the 1996 Quarter,
primarily due to an increase in management fees paid to Affiliates.
Depreciation and amortization increased 169% to $398,000 for the Quarter as
compared to $148,000 for the 1996 Quarter, primarily due to the
13
14
continued acquisition of net leased properties and the effect of a full period
of depreciation of properties acquired and leased in the preceding periods.
Since the Company has not historically been a REIT, a provision for income tax
has been recorded. The provision for income tax does not bear the usual
relationship to pretax income as a result of the treatment of dividends paid on
the redeemable preferred stock as deductible interest expense for tax purposes.
See Note 4 to the Financial Statements. The provision for income tax for the
Quarter reflects an expense of $206,000 as compared with a credit of $188,000
for the 1996 Quarter.
As a result of the foregoing, the Company's net income before income tax
declined 17% to $605,000 for the Quarter as compared to $728,000 for the 1996
Quarter. Most notably, the Company's high level of borrowings prior to the
Offering and the higher management fee structure, prior to the application of
the new advisory fee agreements which took effect after the end of the Quarter,
exceeded the increases in revenues. Similarly, the Company's net income prior
to preferred stock dividend requirements declined 56% to $399,000 for the
Quarter as compared to $916,000 for the 1996 Quarter, as further impacted by
the provision for income tax.
NINE MONTHS ENDED SEPTEMBER 30, 1997. During the nine months ended September
30, 1997 ("1997"), total revenue increased 104% to $9.3 million as compared to
$4.5 million for the comparable nine month period of 1996 ("1996"). Rental
revenue increased 166% to $8.0 million for 1997 as compared to $3.0 million for
1996. The increase in rental revenue resulted principally from the acquisition
of 25 net leased properties and the benefit of a full period of rental revenue
from properties acquired and leased in preceding periods. Interest income on
investments, including interest income on loans to Affiliates, decreased by 20%
to $1.2 million for 1997 as compared to $1.5 million for 1996, as the Company's
other investments and short-term loans declined.
Interest expense increased by 339% to $4.4 million for 1997 as compared to $1.0
million for 1996. The increase was primarily due to interest on $41.5 million
of additional debt used to fund the acquisition of properties which was
incurred during the twelve months ended September 30, 1997, as well as a full
period of interest on debt incurred in prior periods. General and
administrative expenses, including management fees to Affiliates, increased 98%
to $1.8 million for 1997 as compared to $915,000 for 1996, primarily due to an
increase in management fees paid to Affiliates. Depreciation and amortization
increased 162% to $1.1 million for 1997 as compared to $411,000 for 1996,
primarily due to the continued acquisition of net leased properties and the
effect of a full period of depreciation of properties acquired and leased in
the preceding periods. The provision for income tax decreased by 9% to
$167,000 for 1997 as compared to $184,000 for 1996, as a result in the decrease
in income before income tax.
As a result of the foregoing, the Company's net income before income tax
declined 11% to $2.0 million for 1997 as compared to $2.2 million for 1996, and
net income prior to preferred stock dividend requirements declined 11% to $1.8
million for 1997 as compared to $2.0 million for 1996.
14
15
PRO FORMA RESULTS OF OPERATIONS
Pro forma net income was $2.7 million for the Quarter, compared to $1.5 million
for the 1996 Quarter, or an increase of 87%. Pro forma net income was $7.1
million for 1997, compared to $3.3 million for 1996, or an increase of 114%.
Pro forma revenue increased by $153,000 and $304,000 for the Quarter and for
1997, respectively, as a result of the inclusion of revenues from the
Affiliated Partnerships. Pro forma expenses declined by $2.0 million and $4.8
million for the Quarter and for 1997, respectively, as a result of: (i) the
elimination of interest expense based on repayment of the entire outstanding
balance of the notes payable; (ii) a reduction in management fees to conform
with the terms of the new advisory agreement negotiated in conjunction with the
Offering; and (iii) elimination of the provision for income tax based upon the
intent of the Company to qualify as a REIT, the aggregate effects of which were
offset in part by an increase in general and administrative expenses to reflect
the commencement of salaries and benefits and other incremental costs related
to operating as a public REIT and an increase in depreciation expense to
reflect the increase in recorded values of properties subject to operating
leases. The pro forma adjustments were assumed to have occurred on January 1,
1996.
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 acquisitions have typically been funded out of proceeds from equity
offerings and its credit facility. The Company expects to meet its long-term
liquidity requirements (principally property development and acquisition and
scheduled debt maturities) through a variety of future sources of capital,
including long-term secured and unsecured indebtedness and the issuance of
additional equity or debt securities.
The Company's leases generally provide for specified periodic rent increases
including fixed increase amounts, and in limited circumstances indexation to
CPI and/or percentage rent. 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.
At September 30, 1997, the Company had cash and cash equivalents of $754,000
and $73.8 million available on its credit facility. Furthermore, on a pro
forma basis cash and cash equivalents increased to $4.5 million and the entire
$150 million was available on its credit facility. For the nine month period
ended September 30, 1997, the Company generated cash from operations of $2.8
million as compared to $804,000 in 1996. Cash generated from operations
provides funds for distributions to shareholders in the form of quarterly
dividends. Any excess cash from operations may also be used for investment in
properties.
INITIAL PUBLIC OFFERING. At September 30, 1997, the Company was in
registration for the Offering, which was subsequently completed on November 14,
1997. In the Offering the Company sold 8 million common shares at a price of
$18 per share. Net proceeds from the offering totaled $132.9 million, after
underwriting commissions and offering expenses. The Company has used the net
proceeds of the Offering to repay $80.1 million of its existing notes
15
16
payable and to redeem $40.5 million of the redeemable preferred stock and pay
$10.9 million of accrued dividends thereon. The remaining $9.5 million of
redeemable preferred stock was exchanged for 527,778 shares of common stock.
CREDIT FACILITY. At September 30, 1997, on a pro forma basis assuming
completion of the Offering, the Company had no debt outstanding. After
completion of the Offering, the Company had outstanding $17.7 million of
borrowings under its $150.0 million credit facility. The Company expects that
the credit facility will primarily be used to acquire properties, although up
to $5.0 million may be borrowed to make dividend payments. The credit facility
is secured by a first lien on properties and other assets financed thereunder.
Upon completion of the Offering, the interest rate on the credit facility was
reduced from LIBOR plus 2.32% to LIBOR plus 1.75%. Furthermore, the Company
was granted the right to extend the expiration date of the credit facility from
February 26, 1998 to November 1999. During the term of the credit facility,
the Company is required to make monthly payments of interest only, and the
credit facility may be prepaid without premium or penalty at any time provided
that certain conditions of the credit facility are met. The Company may also
be required to make principal payments in order to maintain certain ratios
between the Company's aggregate indebtedness under the credit facility and the
value of the collateral pledged as security for the credit facility. The
credit facility imposes certain limitations upon the Company's ability to incur
additional financing.
The credit facility will expire in November 1999 (assuming extension of the
expiration date as described above), at which time the entire outstanding
balance of the credit facility will mature. At that time, the Company expects
to refinance such debt either through additional debt financings secured by
individual properties or groups of properties, by unsecured private or public
debt offerings or by additional equity offerings.
PROPERTY ACQUISITIONS AND COMMITMENTS. During the Quarter, the Company
acquired $8.5 million of completed properties and the balance of investments in
properties under construction declined $2.2 million, resulting in a net
increase in investments in properties of $6.3 million. For 1997 the Company
acquired $36.3 million of completed properties and the balance of investments
in properties under construction declined $1.2 million, resulting in a net
increase in investments in properties of $35.1 million.
As of September 30, 1997 the Company had entered into commitments to acquire 68
properties totaling $100 million. The commitments are subject to various
conditions to closing which are described in the contracts or letters of intent
relating to these properties. On a pro forma basis, the Company had
availability under its credit facility to meet the entire funding obligation
under these commitments.
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. Property
acquisition commitments arising out of these negotiations are expected to
generate the primary demand for additional capital in the future.
DIVIDENDS. The Company has historically paid quarterly dividends on its
redeemable preferred stock. In anticipation of the Offering, the Company did
not make any preferred stock dividend payments during the Quarter. After
payment of the accrued preferred stock dividends and the redemption and
exchange of the Company's outstanding redeemable preferred stock out of the
proceeds of the Offering, the Company's preferred stock dividend requirement
has been eliminated.
16
17
Subsequent to the completion of the Offering, the Company intends to pay a
regular quarterly dividend on its common stock of $.375 per share (which if
annualized would be $1.50 per share). The first quarterly dividend will be
paid with respect to the quarter ended December 31, 1997, which dividend will
be paid on a pro rata basis for that portion of the quarter in which the common
shares have been outstanding. The Company expects to pay these dividends from
cash available for distributions, which the Company believes will exceed
historical cash available for distributions due to the reduction in debt
service and preferred stock dividend requirements, the decrease in advisory fee
rates and other factors indicated in the pro forma results of operations, as
well as the anticipated growth of the portfolio of net leased properties. 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.
17
18
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 27.1 Financial Data Schedule.
18
19
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.
December 26, 1997 By: /w/ Patrick L. Beach
--------------------------------------
Patrick L. Beach
Chief Executive Officer and President
December 26, 1997 By: /w/ W. Ross Martin
--------------------------------------
W. Ross Martin
Chief Financial Officer and
Executive Vice President
19