COMMERCIAL NET LEASE REALTY INC - 10-Q Quarterly Report

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This information contains 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 management of Commercial Net Lease Realty, Inc. and its wholly-owned subsidiaries (the “Company”) believe 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. Certain factors that might cause a difference include the following: the loss of any member of the Company’s management team; changes in general economic conditions; changes in real estate market conditions; continued availability of proceeds from the Company’s debt or equity capital; the availability of other debt and equity financing alternatives; market conditions affecting the Company’s equity capital; 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 be in compliance with certain debt covenants; the ability of the Company to qualify as a real estate investment trust for federal income tax purposes; the ability of the Company to integrate acquired properties and operations into existing operations; 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 Properties; the ability of tenants to make payments under their respective leases and the ability of the Company to re-lease properties that are currently vacant or that become vacant. Given these uncertainties, readers are cautioned not to place undue reliance on such statements.

Introduction

Commercial Net Lease Realty, Inc., a Maryland corporation, is a fully integrated, self-administrated real estate investment trust (“REIT”), formed in 1984 that acquires, owns, manages and indirectly, through investment interests, develops high-quality, freestanding properties that are generally leased to major retail businesses under long-term commercial net leases. As of September 30, 2002, the Company owned 343 properties (the “Properties”) that are leased to major retail businesses, including Academy, Barnes & Noble, Bed, Bath & Beyond, Bennigan’s, Best Buy, Borders, Eckerd, Good Guys, OfficeMax and The Sports Authority. Approximately 93 percent of the gross leasable area of the Company’s Property portfolio was leased at September 30, 2002.

Liquidity and Capital Resources

General. Historically, the Company's only demand for funds has been for the payment of operating expenses and dividends, for property acquisitions and development, either directly or through investment interests, for the payment of interest on its outstanding indebtedness and for other investments. Generally, cash needs for items other than property acquisitions and development have been met from operations, and property acquisitions and development have been funded by equity and debt offerings, bank borrowings, the sale of Properties and, to a lesser extent, from internally generated funds. Potential future sources of capital include proceeds from the public or private offering of the Company's debt or equity securities, secured or unsecured borrowings from banks or other lenders, proceeds from the sale of Properties, as well as undistributed funds from operations. For the nine months ended September 30, 2002 and 2001, the Company generated $45,992,000 and $36,484,000 respectively, in net cash provided by operating activities. The increase in cash from operations for the nine months ended September 30, 2002, as compared to the nine months ended September 30, 2001, is primarily the result of changes in revenues and expenses as discussed below in "Results of Operations." Cash generated from operations could be expected to fluctuate in the future.

The Company’s leases typically provide that the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation including utilities, property taxes and insurance. In addition, the Company’s leases generally provide that the tenant is responsible for roof and structural repairs. Certain of the Company’s Properties are subject to leases under which the Company retains responsibility for certain costs and expenses associated with the Property. Because many of these certain Properties are recently constructed, management anticipates that capital demands to meet obligations with

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to __________. Commission File Number 0-12989 COMMERCIAL NET LEASE REALTY, INC. (exact name of registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization)	56-1431377 (I.R.S. Employment Identification No.)
450 South Orange Avenue, Orlando, Florida 32801 (Address of principal executive offices, including zip code) (407) 265-7348 (Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 such filing requirements for the past 90 days Yes X No . Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 40,389,509 shares of Common Stock, $0.01 par value, outstanding as of November 1, 2002.


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONTENTS
Part I

	Item 1.	Financial Statements:	Page

		Condensed Consolidated Balance Sheets	1

		Condensed Consolidated Statements of Earnings	2

		Condensed Consolidated Statements of Cash Flows	3

		Notes to Condensed Consolidated Financial Statements	5

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20

	Item 4.	Controls and Procedures	21

Part II

	Other Information		22

Signatures			28

Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002			29


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)

	September 30, 2002			December 31, 2001

ASSETS
Real estate:
Accounted for using the operating method, net of accumulated depreciation and amortization of $36,401 and $31,678, respectively	$	706,400		$	706,280
Accounted for using the direct financing method		108,871			107,272
Investments in, mortgages and other receivables from unconsolidated affiliates		122,115			144,236
Mortgages, notes and accrued interest receivable		16,024			18,374
Cash and cash equivalents		3,566			6,974
Receivables, net of allowance		963			2,067
Accrued rental income, net of allowance		18,316			16,184
Debt costs, net of accumulated amortization of $5,089 and $4,393, respectively		3,347			3,057
Other assets		2,965			2,184

Total assets	$	982,567		$	1,006,628


LIABILITIES AND STOCKHOLDERS' EQUITY

Line of credit payable	$	66,500		$	107,400
Mortgages payable		56,160			37,011
Notes payable, net of unamortized discount of $711 and $517, respectively, and unamoritzed interest rate hedge gain of $1,026 and $1,439, respectively		290,315			290,922
Accrued interest payable		4,295			3,133
Other liabilities		15,988			3,522

Total liabilities		433,258			441,988


Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 15,000,000 shares; 1,782,024 and 1,999,974 shares issued and outstanding, respectively; stated liquidation value of $25 per share		44,551			50,000
Common stock, $0.01 par value. Authorized 90,000,000 shares; 40,377,342 and 40,599,158 shares issued or outstanding, respectively		404			406
Excess stock, $0.01 par value. Authorized 105,000,000 shares; none issued or outstanding		-			-
Capital in excess of par value		528,527			531,677
Accumulated dividends in excess of net earnings		(20,951	)		(14,527	)
Deferred compensation		(3,222	)		(2,916	)

Total stockholders' equity		549,309			564,640

	$	982,567		$	1,006,628


See accompanying notes to condensed consolidated financial statements. 1


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands, except per share data)

		Quarter Ended September 30,						Nine Months Ended September 30,

		2002			2001			2002			2001

	Revenues:
	Rental income from operating leases	$	19,246		$	13,443		$	55,344		$	41,043
	Earned income from direct financing leases		2,859			2,692			8,597			8,728
	Contingent rental income		66			94			455			860
	Interest from unconsolidated affiliates and other mortgages receivable		1,564			1,984			5,445			6,255
	Other		362			588			1,159			1,343

			24,097			18,801			71,000			58,229

	Expenses:
	General operating and administrative		2,136			1,528			7,126			5,100
	Real estate		255			189			1,099			368
	Interest		6,860			6,106			19,833			18,452
	Depreciation and amortization		2,916			2,374			8,522			6,673
	Provision for loss on impairment of real estate		1,882			-			1,882			-
	Expenses incurred in acquiring advisor from related party		-			1,462			-			2,153

			14,049			11,659			38,462			32,746

	Earnings from continuing operations before equity in earnings of unconsolidated affiliates and gain on disposition of real estate		10,048			7,142			32,538			25,483

	Equity in earnings of unconsolidated affiliates		257			(224	)		2,034			(2,433	)

	Gain on disposition of real estate		-			315			-			4,765


	Earnings from continuing operations		10,305			7,233			34,572			27,815

	Earnings from discontinued operations		(1,730	)		240			264			1,637


	Net earnings		8,575			7,473			34,836			29,452

	Preferred stock dividends		(1,002	)		-			(3,007	)		-


	Net earnings available to common stockholders	$	7,573		$	7,473		$	31,829		$	29,452


	Earnings per share available to common stockholders:
	Basic:
	Continuing operations	$	0.23		$	0.23		$	0.78		$	0.91
	Discontinued operations		(0.04	)		0.01			0.01			0.05

	Net earnings	$	0.19		$	0.24		$	0.79		$	0.96

	Diluted:
	Continuing operations	$	0.23		$	0.23		$	0.78		$	0.91
	Discontinued operations		(0.04	)		0.01			-			0.05

	Net earnings	$	0.19		$	0.24		$	0.78		$	0.96


	Weighted average number of common shares outstanding:
	Basic	40,304,531			30,619,548				40,400,577			30,572,843

	Diluted	40,592,453			30,906,277				40,582,695			30,703,532



See accompanying notes to condensed consolidated financial statements. 2


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)

	Nine Months Ended September 30,

	2002			2001

Cash flows from operating activities:
Net earnings	$	34,836		$	29,452
Adjustments to reconcile net earnings to net cash provided by operating activities:
Stock compensation expense		677			116
Depreciation and amortization		8,802			6,876
Provision for loss on impairment of real estate		3,285			-
Amortization of notes payable discount		93			80
Amortization of deferred interest rate hedge gain		(413	)		(384	)
Expenses incurred in acquiring advisor from related party		-			2,153
Equity in earnings of unconsolidated affiliates, net of deferred intercompany profits		(844	)		2,977
Gain on disposition of real estate		(40	)		(4,765	)
Decrease in real estate leased to others using the direct financing method		1,602			1,501
Increase in mortgages, notes and accrued interest receivable		(809	)		(274	)
Decrease (increase) in receivables		1,104			(106	)
Increase in accrued rental income		(2,276	)		(1,602	)
Decrease (increase) in other assets		(420	)		35
Increase (decrease) in accrued interest payable		1,162			(49	)
Increase (decrease) in other liabilities		(767	)		474

Net cash provided by operating activities		45,992			36,484


Cash flows from investing activities:
Proceeds from the disposition of real estate		25,986			36,438
Additions to real estate accounted for using the operating method		(36,692	)		(14,666	)
Additions to real estate accounted for using the direct financing method		(3,201	)		-
Contributions to unconsolidated affiliates		(7,000	)		(5,000	)
Payments received on mortgages and notes receivable		2,319			3,206
Increase in mortgages and other receivable from unconsolidated affiliates		(89,528	)		(73,837	)
Payments received from unconsolidated affiliates		120,344			31,145
Other		406			(567	)

Net cash provided by (used in) investing activities		12,634			(23,281	)



See accompanying notes to condensed consolidated financial statements. 3


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (dollars in thousands)


	Nine Months Ended September 30,

	2002			2001

Cash flows from financing activities:
Proceeds from line of credit payable		83,800			75,600
Repayment of line of credit payable		(124,700	)		(51,500	)
Proceeds from mortgages payable		21,000			-
Repayment of mortgages payable		(1,851	)		(1,588	)
Proceeds from notes payable		49,713			-
Repayment of notes payable		(50,000	)		-
Payment of debt costs		(1,131	)		(42	)
Proceeds from issuance of common stock		2,384			515
Payment of preferred stock dividends		(3,005	)		-
Payment of common stock dividends		(38,249	)		(28,900	)
Other		5			(134	)

Net cash used in financing activities		(62,034	)		(6,049	)


Net increase (decrease) in cash and cash equivalents		(3,408	)		7,154

Cash and cash equivalents at beginning of period		6,974			2,190


Cash and cash equivalents at end of period	$	3,566		$	9,344


Supplemental disclosure of cash flow information - interest paid, net of amount capitalized	$	18,747		$	19,590


Supplemental disclosure of non-cash investing and financing activities:
Issued 174,793 shares of common stock for the nine months ended September 30, 2001 in connection with the acquisition of the Company's advisor	$	-		$	2,153

Preferred stock dividends for non-dissenting, unexchanged shares held by the Company in connection with the merger of Captec Net Lease Realty, Inc. ("Captec") in December 2001	$	2		$	-

Common stock dividends for non-dissenting, unexchanged shares held by the Company in connection with the merger of Captec in December 2001	$	4		$	-

Liability for the consideration due to the dissenting stockholders in connection with the merger of Captec in December 2001 (see Note 9)	$	13,278		$	-

Issued 64,000 and 239,000 shares of common stock in 2002 and 2001, respectively, in connection with the Company's 2000 Performance Incentive Plan	$	982		$	3,191


See accompanying notes to condensed consolidated financial statements. 4


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended September 30, 2002 and 2001


1.	Basis of Presentation:

	The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. The financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Operating results for the quarter and nine months ended September 30, 2002, may not be indicative of the results that may be expected for the year ending December 31, 2002. Amounts as of December 31, 2001, included in the financial statements, have been derived from the audited financial statements as of that date. These unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Form 10-K of Commercial Net Lease Realty, Inc. for the year ended December 31, 2001. The condensed consolidated financial statements include the accounts of Commercial Net Lease Realty, Inc. and its wholly-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation. Basic earnings per share are calculated based upon the weighted average number of common shares outstanding during each period and diluted earnings per share are calculated based upon weighted average number of common shares outstanding plus dilutive potential common shares. Certain items in the prior year’s financial statements and notes to consolidated financial statements have been reclassified to conform with the 2002 presentation. These reclassifications had no effect on stockholders’ equity or net earnings. In August 2001, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards (“FAS”) Statement No. 143, “Accounting for Asset Retirement Obligations.” This statement is effective for fiscal years beginning after June 15, 2002. This statement addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and for the associated asset retirement costs. It requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and (or) normal use of the assets. This statement also addresses when to record a corresponding increase to the carrying amount of the related long-lived asset and to depreciate that cost over the life of the asset. Adoption of this statement is not expected to have a significant impact on the financial position or results of operations of the Company. In October 2001, the FASB issued FAS Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and broadens the presentation of discontinued operations in the income statement to include a component of an entity (rather than a segment of a business). A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. In a period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement of a business enterprise for current and prior periods shall report the results of operations of the component, including any gain or loss recognized, in discontinued operations. This statement is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The adoption of this statement

5


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Nine Months Ended September 30, 2002 and 2001


1.	Basis of Presentation - continued:

	did not have a significant impact on the financial position or results of operations of the Company. However, the Company did reclassify the results of operations related to the four properties classified as held for sale at September 30, 2002 and 16 properties sold during the nine months ended September 30, 2002 from earnings from continuing operations to earnings from discontinued operations in accordance with the statement. In April 2002, the FASB issued FAS Statement No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This statement also rescinds FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers.” This statement amends FASB Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this statement related to the rescission of Statement 4 are applicable in fiscal years beginning after May 15, 2002. The provisions of this statement related to Statement 13 are effective for transactions occurring after May 15, 2002. All other provisions of this statement are effective for financial statements issued on or after May 15, 2002. The provisions of this statement, excluding those related to the rescission of Statement 4, did not have a significant impact on the financial position or results of operations of the Company. The provisions of this statement related to the rescission of Statement 4 are not expected to have a significant impact on the financial position or results of operations of the Company. In July 2002, the FASB issued FAS Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the statement include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. The statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of this statement is not expected to have a significant impact on the financial position or results of operations of the Company.

2.	Leases:

	The Company generally leases its real estate to operators of major retail businesses. As of September 30, 2002, 252 of the leases have been classified as operating leases and 69 leases have been classified as direct financing leases. For the leases classified as direct financing leases, the building portions of the property leases are accounted for as direct financing leases while the land portions of 44 of these leases are accounted for as operating leases. Substantially all leases have initial terms of 10 to 20 years (expiring between 2003 and 2025) and provide for minimum rentals. In addition, the majority of the leases provide for contingent rentals and/or scheduled rent increases over the terms of the leases. The tenant is also generally required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building and carry insurance coverage for public liability, property damage, fire and extended coverage. The lease options generally allow tenants to renew the leases for two to four successive five-year periods subject to substantially the same terms and conditions as the initial lease.

6


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Nine Months Ended September 30, 2002 and 2001


3.	Mortgages Payable:

	In June 2002, the Company entered into a long-term, fixed rate mortgage and security agreement for $21,000,000. The loan provides for a 10-year mortgage with principal and interest of $138,000 payable monthly, based on a 30-year amortization, with the balance due in July 2012 and bears interest at a rate of 6.9% per annum. The mortgage is collateralized by a first lien on and assignments of rents and leases of certain of the Company’s properties. As of September 30, 2002, the aggregate carrying value of these properties totaled $28,057,000.

4.	Notes Payable:

	In June 2002, the Company filed a prospectus supplement to its $200,000,000 shelf registration statement and issued $50,000,000 of 7.75% notes due 2012 (the “Notes”). The Notes are senior, unsecured obligations of the Company and are subordinated to all secured indebtedness of the Company. The Notes were sold at a discount for an aggregate purchase price of $49,713,000 with interest payable semi-annually commencing on December 1, 2002. The discount of $287,000 is being amortized as interest expense over the term of the debt obligation using the effective interest method. The Notes are redeemable at the option of the Company, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the Notes being redeemed plus accrued interest thereon through the redemption date and (ii) the Make-Whole Amount, as defined in the Supplemental Indenture No. 4 dated May 30, 2002, for the Notes and filed as Exhibit 4.9 to this report. In connection with the debt offering, the Company incurred debt issuance costs totaling $410,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees and rating agency fees. Debt issuance costs have been deferred and are being amortized over the term of the Notes using the effective interest method.

7


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Nine Months Ended September 30, 2002 and 2001


5.	Earnings from Discontinued Operations:

	In accordance with FAS Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has classified its four properties held for sale at September 30, 2002 and 16 properties sold during 2002 as discontinued operations. Accordingly, the results of operations related to these 20 properties for 2001, have been reclassified to earnings from discontinued operations. The following is a summary of earnings from discontinued operations (dollars in thousands):


		Quarter Ended September 30,					Nine Months Ended September 30,

		2002			2001		2002		2001

	Revenues:
	Rental income from operating leases	$	574		$	373	$	2,085	$	1,627
	Earned income from direct financing leases		-			11		-		310
	Other		1			6		3		6

			575			390		2,088		1,943

	Expenses:
	General operating and administrative		8			8		9		13
	Real estate		38			54		171		90
	Depreciation and amortization		37			88		281		203
	Provision for loss on impairment of real estate		1,403			-		1,403		-

			1,486			150		1,864		306


	Earnings before gain (loss) on disposition of real estate		(911	)		240		224		1,637

	Gain (loss) on disposition of real estate		(819	)		-		40		-


	Earnings from discontinued operations	$	(1,730	)	$	240	$	264	$	1,637



8


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Nine Months Ended September 30, 2002 and 2001


6.	Earnings Per Share of Common Stock:

	The following represents the calculations of earnings per share of common stock and the weighted average number of shares of dilutive potential common stock for:


		Quarter Ended September 30,					Nine Months Ended September 30,

		2002			2001		2002			2001


	Earnings from continuing operations	$	10,305,000		$	7,233,000	$	34,572,000		$	27,815,000
	Preferred stock dividends		(1,002,000	)		-		(3,007,000	)		-

	Earnings available to common stockholders from continuing operations		9,303,000			7,233,000		31,565,000			27,815,000

	Earnings from discontinued operations		(1,730,000	)		240,000		264,000			1,637,000


	Net earnings available to common stockholders	$	7,573,000		$	7,473,000	$	31,829,000		$	29,452,000


	Weighted average number of common shares outstanding		40,304,531			30,491,444		40,400,577			30,477,544
	Merger contingent common shares		-			128,104		-			95,299

	Weighted average number of common shares outstanding used in basic earnings per common share		40,304,531			30,619,548		40,400,577			30,572,843


	Basic earnings per share available to common stockholders:
	Continuing operations	$	0.23		$	0.23	$	0.78		$	0.91
	Discontinued operations		(0.04	)		0.01		0.01			0.05

	Net earnings	$	0.19		$	0.24	$	0.79		$	0.96


	Weighted average number of common shares outstanding		40,304,531			30,491,444		40,400,577			30,477,544
	Effect of dilutive securities:
	Common stock options and restricted stock		287,922			190,285		182,118			90,365
	Merger contingent common shares		-			224,548		-			135,623


	Weighted average number of common shares outstanding used in diluted earnings per common share		40,592,453			30,906,277		40,582,695			30,703,532


	Diluted earnings per share available to common stockholders:
	Continuing operations	$	0.23		$	0.23	$	0.78		$	0.91
	Discontinued operations		(0.04	)		0.01		-			0.05

	Net earnings	$	0.19		$	0.24	$	0.78		$	0.96


9


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Nine Months Ended September 30, 2002 and 2001


6.	Earnings Per Share of Common Stock - continued:

	The following represents the number of options of common stock which were not included in computing diluted earnings per common share because their effects were antidulutive:


	Quarter Ended September 30,		Nine Months Ended September 30,

	2002	2001	2002	2001


Antidilutive potential common stock	454,500	1,048,892	715,708	1,336,892


7.	Related Party Transactions:

	In connection with the mortgages and other receivables from the Company’s unconsolidated subsidiary, Commercial Net Lease Realty Services, Inc. (“Services”) and its wholly-owned subsidiaries, the Company received $3,768,000 and $5,340,000 in interest and fees during the nine months ended September 30, 2002 and 2001, respectively, $1,054,000 and $1,150,000 of which was earned during the quarters ended September 30, 2002 and 2001, respectively. In addition, Services paid the Company $508,000 in expense reimbursements for accounting services provided by the Company during each of the nine months ended September 30, 2002 and 2001, $169,000 of which was earned during each of the quarters ended September 30, 2002 and 2001. In February and May 2002, the Company modified an existing secured revolving line of credit and security agreement with a wholly-owned subsidiary of Services to increase the borrowing capacity from $32,000,000 to $40,000,000 and from $40,000,000 to $45,000,000, respectively. The combined secured revolving lines of credit and security agreements with Services and its wholly-owned subsidiaries provide an aggregate borrowing capacity of $153,500,000 and each agreement has an expiration date of October 31, 2003. In February 2002, the Company acquired four properties from Services at fair market value for an aggregate cost of $15,918,000. In addition, in June 2002, the Company acquired one property from a wholly-owned subsidiary of Services at fair market value for a cost of $12,648,000. No gain was recognized by Services or its wholly-owned subsidiary on these sales. A wholly-owned subsidiary of Services holds a 33 1/3 percent equity interest in WXI/SMC Real Estate LLC (“WXI”). The Company provides certain management services for WXI on behalf of Services pursuant to WXI’s Limited Liability Company Agreement and Property Management and Development Agreement. WXI paid the Company $56,000 and $125,000 in fees during the nine months ended September 30, 2002 and 2001, respectively, $15,000 and $36,000 of which was earned during the quarters ended September 30, 2002 and 2001, respectively. The Company manages Net Lease Institutional Realty, L.P. (the “Partnership”), in which the Company holds a 20 percent equity interest. Pursuant to a management agreement, the Partnership paid the Company $145,000 and $154,000 in asset management fees during the nine months ended September 30, 2002 and 2001, respectively, $51,000 and $47,000 of which was earned during the quarters ended September 30, 2002 and 2001, respectively. In September 2000, a wholly-owned subsidiary of Services entered into a $6,000,000 promissory note with an affiliate in which certain officers and directors own a majority equity interest. The note accrues


10


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Nine Months Ended September 30, 2002 and 2001


7.	Related Party Transactions - continued:

	interest at a rate of 10%, and all principal and interest is due upon maturity at December 15, 2002. The note is secured by the affiliate’s common stock in CNL Commercial Finance, Inc. (“CCF”), a wholly-owned subsidiary of the affiliate in which a majority equity interest is owned by James M. Seneff, Jr., Gary M. Ralston and Kevin B. Habicht, each of which are officers and directors of the Company. The outstanding principal and accrued interest balance as of September 30, 2002 was $7,303,000. In September 2000, a wholly-owned subsidiary of Services entered into a $15,000,000 line of credit agreement with CCF. Interest is payable monthly and the principal balance is due in full upon termination of the line of credit on December 31, 2002. In 2001 and 2002, the line of credit was amended to increase the borrowing capacity to $25,000,000 and $37,750,000, respectively. As of September 30, 2002, $27,500,000 was outstanding and $10,250,000 was available for future borrowings on the line of credit. The line of credit is collateralized by substantially all of the assets of the affiliate. The Company has entered into three limited liability company (“LLC”) agreements, CNL Commercial Mortgage Holdings I, LLC (“CCMH I”), CNL Commercial Mortgage Holdings II, LLC (“CCMH II”) and CNL Commercial Mortgage Holdings III, LLC (“CCMH III”) with CCF. The Company invested a total of $18,000,000 in the three LLCs which hold an interest in mortgage loans. Each of the LLCs is 100 percent equity financed with no third party debt. The Company holds a non-voting and non-controlling interest in CCMH I, CCMH II and CCMH III of 42.7, 44.0 and 35.2 percent respectively, in these investments and accounts for its interests under the equity method of accounting. During the nine months ended September 30, 2002, the Company has received a total of $1,446,000 in distributions. An affiliate of James M. Seneff, Jr., an officer and director of the Company, provided certain administrative, tax and technology services to the Company. In connection therewith, the Company paid $524,000 and $307,000 in fees relating to these services during the nine months ended September 30, 2002 and 2001, respectively, $170,000 and $97,000 of which was earned during the quarters ended September 30, 2002 and 2001, respectively. In April 2002, the Company extended the maturity dates to December 31, 2002 on four mortgages totaling $8,339,000 that are held with affiliates of James M. Seneff, Jr., an officer and director of the Company, and Robert A. Bourne, a member of the Company’s board of directors. The mortgages bear interest at a weighted average of 8.8%, with interest payable quarterly. In September 2002, the Company extended the maturity date for one mortgage totaling $2,355,000 to September 30, 2007. As of September 30, 2002, the aggregate principal balance of the four mortgages was $7,837,000. As of October 2002, the aggregate principal balance of the four mortgages was $6,081,000. In May 2002, the Company purchased a combined 25 percent partnership interest in CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”) for $750,000. Affiliates of James M. Seneff, Jr., an officer and director of the Company, own the remaining partnership interests. Since November 1999, the Company has leased its office space from Plaza. The Company’s lease expires in October 2014. During the nine months ended September 30, 2002 and 2001, the Company incurred rental expenses in connection with the lease of $653,000 and $176,000, respectively. For the quarters ended September 30, 2002 and 2001, rental expenses in connection with the lease totaled $185,000 and $70,000, respectively. In addition, the Company has guaranteed 41.67% or $6,458,300, of a $15,500,000 unsecured promissory note of Plaza.


11


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Nine Months Ended September 30, 2002 and 2001


8.	Segment Information:

	Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. While the Company does not have more than one reportable segment, the Company has identified two primary sources of revenue: (i) rental and earned income from the triple net leases and (ii) fee income from development, property management and asset management services. The following tables represent the revenues, expenses and asset allocation for the two segments and the Company’s consolidated totals at (dollars in thousands):


		Rental and Earned Income			Interest and Fee Income			Corporate			Consolidated Totals


	September 30, 2002 and for the quarter then ended
	Revenues	$	22,604		$	1,493		$	-		$	24,097
	General operating and administrative expenses		1,350			307			479			2,136
	Real estate expenses		255			-			-			255
	Interest expense		6,860			-			-			6,860
	Depreciation and amortization		2,910			4			2			2,916
	Provision for loss on impairment of real estate		1,882			-			-			1,882
	Equity in earnings of unconsolidated affiliates		666			(409	)		-			257

	Earnings from continuing operations		10,013			773			(481	)		10,305
	Earnings from discontinued operations		(1,730	)		-			-			(1,730	)

	Net earnings	$	8,283		$	773		$	(481	)	$	8,575


	Assets	$	883,652		$	98,848		$	67		$	982,567

	Additions to long-lived assets:
	Real estate	$	6,055		$	-		$	-		$	6,055

	Other	$	16		$	10		$	2		$	28



	September 30, 2001 and for the quarter then ended
	Revenues	$	16,860		$	1,941		$	-		$	18,801
	General operating and administrative expenses		1,063			254			211			1,528
	Real estate expenses		189			-			-			189
	Interest expense		6,084			22			-			6,106
	Depreciation and amortization		2,347			25			2			2,374
	Expenses incurred in acquiring advisor from related party		-			-			1,462			1,462
	Equity in earnings of unconsolidated affiliates		239			(463	)		-			(224	)
	Gain on disposition of real estate		315			-			-			315

	Earnings from continuing operations		7,731			1,177			(1,675	)		7,233
	Earnings from discontinued operations		240			-			-			240

	Net earnings	$	7,971		$	1,177		$	(1,675	)	$	7,473



12


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Nine Months Ended September 30, 2002 and 2001


8.	Segment Information - continued:


		Rental and Earned Income		Interest and Fee Income			Corporate			Consolidated Totals

	Assets	$	669,940	$	117,389		$	85		$	787,414

	Additions to long-lived assets:
	Real estate	$	1,404	$	-		$	-		$	1,404

	Other	$	2	$	4		$	22		$	28


	September 30, 2002 and for the nine months then ended
	Revenues	$	65,851	$	5,149		$	-		$	71,000
	General operating and administrative expenses		4,584		1,350			1,192			7,126
	Real estate expenses		1,099		-			-			1,099
	Interest expense		19,833		-			-			19,833
	Depreciation and amortization		8,502		13			7			8,522
	Provision for loss on impairment of real estate		1,882		-			-			1,882
	Equity in earnings of unconsolidated affiliates		1,610		424			-			2,034

	Earnings from continuing operations		31,561		4,210			(1,199	)		34,572
	Earnings from discontinued operations		264		-			-			264

	Net earnings	$	31,825	$	4,210		$	(1,199	)	$	34,836


	Assets	$	883,652	$	98,848		$	67		$	982,567

	Additions to long-lived assets:
	Real estate	$	39,893	$	-		$	-		$	39,893

	Other	$	50	$	19		$	5		$	74


	September 30, 2001 and for the nine months then ended
	Revenues	$	52,194	$	6,035		$	-		$	58,229
	General operating and administrative expenses		3,455		721			924			5,100
	Real estate expenses		368		-			-			368
	Interest expense		18,398		54			-			18,452
	Depreciation and amortization		6,602		64			7			6,673
	Expenses incurred in acquiring advisor from related party		-		-			2,153			2,153
	Equity in earnings of unconsolidated affiliates		418		(2,851	)		-			(2,433	)
	Gain on disposition of real estate		4,765		-			-			4,765

	Earnings from continuing operations		28,554		2,345			(3,084	)		27,815
	Earnings from discontinued operations		1,637		-			-			1,637

	Net earnings	$	30,191	$	2,345		$	(3,084	)	$	29,452


	Assets	$	669,940	$	117,389		$	85		$	787,414

	Additions to long-lived assets:
	Real estate	$	14,666	$	-		$	-		$	14,666

	Other	$	98	$	17		$	12		$	127


13


COMMERCIAL NET LEASE REALTY, INC. and SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Nine Months Ended September 30, 2002 and 2001


9.	Commitments and Contingencies:
	On January 24, 2002, Phillip Goldstein and Judy Kauffman Goldstein, beneficial owners of shares of Captec stock held of record by Cede & Co. who allege that they did not vote for the merger of Captec into the Company, filed in the Chancery Court of the State of Delaware in and for New Castle County, a Petition for Appraisal of Stock, PHILLIP GOLDSTEIN, JUDY KAUFFMAN GOLDSTEIN and CEDE & CO. v. COMMERCIAL NET LEASE REALTY, INC., C.A. No. 19368NC (the “Appraisal Action”). The Appraisal Action alleges that a certain number of Captec shares dissented from the merger and seeks to require the Company to pay all Captec stockholders who have demanded appraisal of their shares the fair value of those shares, with interest from the date of the merger. The Appraisal Action also seeks to require the Company to pay all costs of the proceeding, including fees and expenses for plaintiff’s attorneys and experts. As a result of this action, the plaintiffs are not entitled to receive the Company’s common and preferred shares as offered in the original merger consideration. Accordingly, the Company has reduced the number of common and preferred shares issued and outstanding by 474,037 and 217,950, respectively, which represents the number of shares that would have been issued to the plaintiffs had they accepted the original merger consideration. The Company has recorded the value of these shares at the original consideration share price in addition to the cash portion of the original merger consideration as other liabilities totaling $13,278,000.


14

Liquidity and Capital Resources - continued:

Castle County, a Petition for Appraisal of Stock, PHILLIP GOLDSTEIN, JUDY KAUFFMAN GOLDSTEIN and CEDE & CO. v. COMMERCIAL NET LEASE REALTY, INC., C.A. No. 19368NC (the “Appraisal Action”). The Appraisal Action alleges that a certain number of Captec shares dissented from the merger and seeks to require the Company to pay all Captec stockholders who have demanded appraisal of their shares the fair value of those shares, with interest from the date of the merger. The Appraisal Action also seeks to require the Company to pay all costs of the proceeding, including fees and expenses for plaintiff’s attorneys and experts. As a result of this action, the plaintiffs are not entitled to receive the Company’s common and preferred shares as offered in the original merger consideration. Accordingly, the Company has reduced the number of common and preferred shares issued and outstanding by 474,037 and 217,950, respectively, which represents the number of shares that would have been issued to the plaintiffs had they accepted the original merger consideration. The Company has recorded the value of these shares at the original consideration share price in addition to the cash portion of the original merger consideration as other liabilities totaling $13,278,000.

Dividends. One of the Company's primary objectives, consistent with its policy of retaining sufficient cash for reserves and working capital purposes and maintaining its status as a real estate investment trust, is to distribute a substantial portion of its funds available from operations to its common stockholders in the form of dividends. For the nine months ended September 30, 2002 and 2001, the Company declared and paid dividends to its common stockholders of $38,253,000 and $28,900,000, respectively, or $0.950 and $0.945 per share of common stock, respectively. In October 2002, the Company declared dividends to its common stockholders of $12,925,000 or $0.320 per share of common stock, payable in November 2002.

Holders of the 9% Non-Voting Series A Preferred Stock are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions at the rate of nine percent of the $25 liquidation preference per annum (equivalent to a fixed annual amount of $2.25 per share). For the nine months ended September 30, 2002, the Company declared and paid dividends to its preferred stockholders of $3,007,000 or $1.6875 per share of preferred stock.

Contractual Obligations and Commercial Commitments. The information in the table summarizes the Company’s contractual obligations and commercial commitments outstanding as of September 30, 2002. The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of September 30, 2002. As the table incorporates only those exposures that exist as of September 30, 2002, it does not consider those exposures or positions, which arise after that date.


	Maturity Date (dollars in thousands)

	Total		2002		2003		2004		2005		2006		Thereafter


Line of credit	$	66,500	$	-	$	66,500	$	-	$	-	$	-	$	-
Mortgages		56,160		680		2,904		3,163		3,420		22,937		23,056
Long term debt⁽¹⁾		290,000		-		-		120,000		-		-		170,000


Total contractual cash obligations	$	412,660	$	680	$	69,404	$	123,163	$	3,420	$	22,937	$	193,056

⁽¹⁾ Excludes unamortizied note discounts and unamortized interest rate hedge gain.

Management believes that the Company’s current capital resources (including cash on hand), coupled with the Company’s borrowing capacity, are sufficient to meet its liquidity needs for the foreseeable future.

Results of Operations

As of September 30, 2002 and 2001, the Company owned 343 and 230 Properties, respectively, 319 and 207, respectively, of which were leased to operators of major retail businesses. In addition, during the nine months ended September 30, 2002, the Company sold seven properties which were leased during 2002. During the nine months ended September 30, 2002 and 2001, the Company earned $64,396,000 and $50,631,000, respectively, in rental income from operating leases, earned income from direct financing leases and

Results of Operations - continued:

contingent rental income from continuing operations (“Rental Income”). The increase in Rental Income during the nine months ended September 30, 2002, is primarily a result of (i) the additional rental income from the properties acquired in the Captec merger on December 1, 2001 and (ii) an increase in receipts by the Company of non-recurring additional Rental Income related to the termination of leases during the nine months ended September 30, 2002 of $3,367,000, as compared to $2,015,000 for the nine months ended September 30, 2001. The increase in Rental Income was partially offset by a decrease in Rental Income related to (i) the 37 properties sold in 2001 that were leased or partially leased during the nine months ended September 30, 2001 and (ii) the 12 vacant, unleased Properties owned by the Company during the nine months ended September 30, 2002 that were leased or partially leased during the nine months ended September 30, 2001. These 12 Properties account for 5.4 percent of the total gross leasable area of the Company’s portfolio. The Company is actively marketing these Properties (as discussed below in “Investment Considerations”).

During the quarters ended September 30, 2002 and 2001, the Company earned $22,171,000 and $16,229,000, respectively, in Rental Income. The increase in Rental Income during the quarter ended September 30, 2002, is primarily a result of the additional rental income from the properties acquired in the Captec merger. The increase in Rental Income was partially offset by a decrease in Rental Income related to (i) the 9 properties sold in 2001 that were leased during the quarter ended September 30, 2001 and (ii) the 12 vacant, unleased Properties owned by the Company during the quarter ended September 30, 2002 that were leased or partially leased during the quarter ended September 30, 2001.

During the nine months ended September 30, 2002, the Company sold 16 properties for a total of $27,079,000 and received net sales proceeds of $25,986,000. The Company recognized a net gain on the sale of these 16 properties of $37,000 for financial reporting purposes. This gain is included in earnings from discontinued operations. The Company reinvested the proceeds from three of these properties to acquire additional properties and structured the transactions to qualify as tax-free like-kind exchange transactions for federal income tax purposes. The Company used the remaining proceeds to pay down outstanding indebtedness of the Company’s credit facility.

During the nine months ended September 30, 2001, the Company sold 31 properties for a total of $36,947,000 and received net sales proceeds of $36,438,000. The Company recognized a net gain on the sale of these 31 properties of $4,765,000 for financial reporting purposes. The Company used the proceeds from 21 of these properties to acquire additional properties and structured the transactions to qualify as a tax-free like-kind exchange transactions for federal income tax purposes. The Company used the proceeds from the sale of ten properties to pay down the outstanding indebtedness of the Company’s credit facility.

During the quarter ended September 30, 2002, the Company sold four properties for a total of $4,741,000 and received net sales proceeds of $4,556,000. The Company recognized a net loss on the sale of these four properties of $819,000 for financial reporting purposes. This loss is included in earnings from discontinued operations. The Company used the proceeds to pay down outstanding indebtedness of the Company’s credit facility.

During the quarter ended September 30, 2001, the Company sold three properties for a total of $1,225,000 and received net sales proceeds of $1,153,000. The Company recognized a net gain on the sale of these three properties of $315,000 for financial reporting purposes. The Company used the proceeds to pay down outstanding indebtedness of the Company’s credit facility.

During the nine months ended September 30, 2002 and 2001, the Company earned $5,445,000 and $6,255,000, respectively, in interest income from unconsolidated affiliates and other mortgages receivable, of which $1,564,000 and $1,984,000 was earned during the quarters ended September 30, 2002 and 2001, respectively. The decrease in interest earned from unconsolidated affiliates and other mortgages receivable during 2002 was primarily attributable to (i) a decrease in the average borrowing levels on the lines of credit with Services and its wholly-owned subsidiaries and (ii) a decline in the average interest rate on the lines of credit.

Results of Operations - continued:

During the nine months ended September 30, 2002 and 2001, operating expenses from continuing operations, excluding interest, the provision for loss on impairment of real estate and expenses incurred in acquiring advisor from related party and including depreciation and amortization, were $16,747,000 and $12,141,000, respectively, (23.6% and 20.9%, respectively, of total revenues). For the quarters ended September 30, 2002 and 2001, operating expenses totaled $5,307,000 and $4,091,000, respectively, (22.0% and 21.8%, respectively, of total revenues). The increase in operating expenses for the quarter and nine months ended September 30, 2002, as compared to the quarter and nine months ended September 30, 2001, is primarily attributable to (i) the increase in depreciation and amortization expense related to the additional Properties acquired in connection with the Captec merger in December 2001, (ii) an increase in real estate expenses as a result of the increase in vacant properties and (iii) increases in expenses related to personnel. In addition, expenses related to professional services provided to the Company increased for the quarter ended September 30, 2002 as compared to the quarter ended September 30, 2001.

The Company recognized $19,833,000 and $18,452,000 in interest expense for the nine months ended September 30, 2002 and 2001, respectively, of which $6,860,000 and $6,106,000 was incurred during the quarters ended September 30, 2002 and 2001, respectively. Interest expense increased during the quarter and nine months ended September 30, 2002, as a result of the interest incurred on (i) the term note the Company entered into in November 2001 and (ii) the $50,000,000 of 7.75% notes payable issued in June 2002. However, the increase in interest expense was partially offset by a decrease in the average interest rates and borrowing levels on the Company’s credit facility.

The Company recorded a provision for loss on impairment of real estate of $1,882,000 and $1,403,000 in continuing operations and discontinued operations, respectively, in the quarter ended September 30, 2002. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Generally, the Company makes a provision for impairment loss if estimated future operating cash flows plus estimated disposition proceeds are less than the current book value. Impairment losses are measured as the amount by which the current book value of the asset exceeds the fair value of the asset.

The Company recorded $1,462,000 and $2,153,000 in expenses incurred in acquiring advisor from related party for the quarter and nine months ended September 30, 2002. The Company did not incur any expenses during the quarter and nine months ended September 30, 2002 related to acquiring the Company’s advisor from a related party on January 1, 1998. As of December 2001, the Company had issued the entire balance of shares required in connection with the acquisition of the Company’s former advisor.

During the nine months ended September 30, 2002 and 2001, the Company recognized equity in earnings of unconsolidated affiliates of $2,034,000 and $(2,433,000), respectively, of which $257,000 and $(224,000) was recognized during the quarters ended September 30, 2002 and 2001, respectively. The increase in equity in earnings of unconsolidated affiliates during the quarter and nine months ended September 30, 2002 was primarily attributable (i) to the income generated by Services and its wholly-owned subsidiaries, which was attributable to the increase in the number of real estate dispositions by Services and its subsidiaries and (ii) the income generated from the investments in mortgage loans.

Investment Considerations. As of October 2002, the Company owns 24 vacant, unleased Properties, which account for 6.9 percent of the total gross leasable area of the Company’s portfolio. The Company is actively marketing these Properties for sale or re-lease. Additionally, 2.9 percent of the total gross leasable area of the Company’s portfolio is leased to four tenants that have each filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, each of the tenants has the right to reject or affirm its leases with the Company. The lost revenues and increased property expenses resulting from the rejection by any bankrupt tenant of any of their respective leases with the Company could have a material adverse effect on the liquidity and results of operations of the Company if the Company is unable to re-lease the Properties at comparable rental rates and in a timely manner.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to interest changes primarily as a result of its variable rate credit facility and its long-term, fixed rate debt used to finance the Company’s development and acquisition activities and for general corporate purposes. The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows at both fixed and variable rates on its long-term debt.

The Company has no outstanding derivatives as of September 30, 2002 and December 31, 2001. The Company does not use derivatives for speculative or trading purposes.

The information in the table summarizes the Company’s market risks associated with its debt obligations outstanding as of September 30, 2002 and December 31, 2001. The table presents principal cash flows and related interest rates by year of expected maturity for debt obligations outstanding as of September 30, 2002. The variable interest rates shown represent the weighted average rates for the credit facility at the end of the periods.

As the table incorporates only those exposures that exist as of September 30, 2002 and December 31, 2001, it does not consider those exposures or positions, which could arise after those dates. Moreover, because firm commitments are not presented in the table below, the information presented therein has limited predictive value. As a result, the Company’s ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the Company’s hedging strategies at that time and interest rates.


	Maturity Date (dollars in thousands)

	2002		2003		2004		2005		2006		Thereafter

Variable rate credit facility	$	-	$	66,500	$	-	$	-	$	-	$	-
Average interest rate		-		(1)		-		-		-		-

Variable rate term note	$	-	$	-	$	20,000	$	-	$	-	$	-
Average interest rate		-		-		(2)		-		-		-

Fixed rate mortgages	$	680	$	2,904	$	3,163	$	3,420	$	22,937	$	23,056
Average interest rate		7.41%		7.41%		7.40%		7.37%		7.26%		8.15%

Fixed rate notes	$	-	$	-	$	100,000	$	-	$	-	$	170,000
Average interest rate		-		-		7.58%		-		-		7.79%


(1)	Interest rate varies based upon a tiered rate structure ranging from 80 basis points above LIBOR to 150 basis points above LIBOR based upon the debt rating of the Company.

(2)	Interest rate varies based upon a tiered rate structure ranging from 155 basis points above LIBOR to 225 basis points above LIBOR based upon the debt rating of the Company.


	September 30, 2002 (dollars in thousands)					December 31, 2001 (dollars in thousands)

	Total		Weighted Average Interest Rate	Fair Value		Total		Weighted Average Interest Rate	Fair Value


Variable rate credit facility	$	66,500	3.11%	$	66,500	$	107,400	5.23%	$	107,400

Variable rate term note	$	20,000	3.67%	$	20,000	$	70,000	3.66%	$	70,000

Fixed rate mortgages	$	56,160	7.56%	$	56,160	$	37,011	7.62%	$	37,011

Fixed rate notes⁽¹⁾	$	270,000	7.70%	$	291,444	$	220,000	7.70%	$	222,322

(1) Excludes unamortized note discount and unamortized interest rate hedge gain.

20

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The principal executive and financial officers of the Company have evaluated the Company’s disclosure controls and procedures within 90 days prior to the filing of this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures are effective.

Subsequent to the above evaluation, there have been no significant changes in internal controls or other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

No material developments in legal proceedings as previously reported on the Form 10-K for the year ended December 31, 2001 except as indicated below.

Beginning July 9, 2001, following the public announcement of the Company’s proposed merger with Captec, various Captec stockholders filed three lawsuits against Captec and its directors in the Chancery Court of the State of Delaware for New Castle County and an additional lawsuit in the United States District Court for the Eastern District of Michigan (the “Michigan Lawsuit”) alleging breaches of fiduciary duty in connection with the merger and in connection with the sale of certain assets of Captec to CRC Asset Acquisition LLC, a Michigan limited liability company controlled by a Captec officer. The Michigan Lawsuit also named the Company, but the Company has since been dismissed as a party to that lawsuit. On October 11, 2001, the Chancery Court of the State of Delaware for New Castle County issued an order consolidating the three Delaware Lawsuits into one action, IN RE CAPTEC NET LEASE REALTY, INC. STOCKHOLDERS LITIGATION, CONSOLIDATED C.A. No. 19008-NC. The plaintiffs sought a declaration that the action is properly maintainable as a class action, equitable relief that would enjoin the proposed merger and unspecified damages. The plaintiffs also sought a preliminary injunction barring the Company’s proposed acquisition of Captec. Captec and the other defendants entered into a Memorandum of Understanding with the plaintiffs pursuant to which the parties agreed to withdraw their preliminary injunction request, to negotiate and execute a Stipulation of Settlement and to submit the Stipulation of Settlement to the court for approval. In addition, Captec agreed to make additional disclosures to its stockholders concerning the proposed merger and to pay plaintiffs’ attorneys’ fees in an amount to be determined by the court but not to exceed $350,000. On July 26, 2002 the court approved a Stipulation of Settlement negotiated and executed by the parties and awarded the plaintiffs attorney’s fees in the amount of $350,000.

On January 24, 2002, Phillip Goldstein and Judy Kauffman Goldstein, beneficial owners of shares of Captec stock held of record by Cede & Co. who alleged that they did not vote for the merger (and who alleged that they caused a written demand for appraisal of their Captec shares to be served on Captec), filed in the Chancery Court of the State of Delaware in and for New Castle County a Petition for Appraisal of Stock, PHILLIP GOLDSTEIN, JUDY KAUFFMAN GOLDSTEIN and CEDE & CO. v. COMMERCIAL NET LEASE REALTY, INC., C.A. No. 19368NC (“Appraisal Action”). The Appraisal Action alleges that 1,072,146 shares of Captec dissented from the merger and seeks to require the Company to pay to all Captec stockholders who have demanded appraisal of their shares the fair value of those shares, with interest from the date of the merger. The Appraisal Action also seeks to require the Company to pay all costs of the proceeding, including fees and expenses for plaintiff’s attorneys and experts. On February 26, 2002 the Company filed a response to the petition for appraisal and a verified list of stockholders. The parties have commenced discovery in this action. At this early stage in the Appraisal Action, management is not in a position to assess the likelihood, or amount, of any potential award to the dissenting stockholders.

On January 4, 2002, Calapasas Investment Partnership No. 1 Limited Partnership (“Calapasas”), a Captec stockholder, filed a class action complaint against Captec, certain former Captec directors, and the Company (as successor in interest to Captec) in the United States District Court for the Northern District of California, CALAPASAS INVESTMENT PARTNERSHIP NO. 1 LIMITED PARTNERSHIP v. CAPTEC NET LEASE REALTY, INC, a Delaware Corporation; COMMERCIAL NET LEASE REALTY, INC. (as successor in interest to CAPTEC); PATRICK L. BEACH; W. ROSS MARTIN; H. REID SHERARD; RICHARD J. PETERS; LEE C. HOWLEY; and WILLIAM H. KRUL III, Case No. C 02 00071 PJH. In its complaint Calapasas alleged that Captec and certain of its directors violated provisions of the Securities and Exchange Act of 1934 by misrepresenting the value of certain Captec assets on certain of its financial

statements in 2000 and 2001 (the “Calapasas Action”). The Calapasas Action asserts that it is brought on behalf of a class consisting of all persons and entities (except insiders) that purchased Captec common stock between August 9, 2000 and prior to July 2, 2001. The Calapasas Action seeks to be certified as a class action and seeks compensatory and punitive damages for the plaintiff and other members of the class, as well as costs and expenses, including fees for plaintiff’s attorneys, accountants and experts. The Calapasas Action could result in damage awards against Captec and/or its directors, damages for which the Company, as successor in interest to Captec, could be responsible. On May 24, 2002, the Company filed a motion to dismiss the suit, and on July 17, 2002 Calapasas filed a motion in opposition to the Company’s motion to dismiss. On October 4, 2002, the court granted the Company’s motion to dismiss with leave to amend. The court required that any amended complaint shall be filed and served no later than November 8, 2002. At this early stage in the Calapasas Action management is not in a position to assess the likelihood, or amount, of any potential damage award to the plaintiff class.

Item 2.

Changes in Securities and Use of Proceeds. Not applicable.

Item 3.

Defaults Upon Senior Securities. Not applicable.

Item 4.

Submission of Matters to a Vote of Security Holders. Not applicable

Item 5.

Other Information. Not applicable.

Item 6.

Exhibits and Reports on Form 8-K.

(a)

The following exhibits are filed as a part of this report.

Articles of Incorporation and By-laws

3.1

Articles of Incorporation of the Registrant (filed as Exhibit 3.3(i) to the Registrant's Registration Statement No. 1-11290 on Form 8-B and incorporated herein by reference).

3.2

Bylaws of the Registrant, (filed as Exhibit 3(ii) to Amendment No. 2 to the Registrant's Registration No. 33-83110 on Form S-3 and incorporated herein by reference).

3.3

Articles of Amendment to the Articles of Incorporation of the Registrant (filed as Exhibit 3.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference).

3.4

Articles of Amendment to the Articles of Incorporation of the Registrant (filed as Exhibit 3.4 to the Registrant’s Current Report on Form 8-K dated February 18, 1998, and filed with the Securities and Exchange Commission on February 19, 1998 and incorporated herein by reference).

3.5

First Amended and Restated Articles of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's Registration Statement No. 333-64511 on Form S-3 and incorporated herein by reference).

3.6

Articles of Amendment to the First Amended and Restated Articles of Incorporation of the Registrant (filed as Exhibit 3.6 to the Registrant's Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference).


	4.	Instruments defining the rights of security holders, including indentures

		4.1	Specimen Certificate of Common Stock, par value $0.01 per share, of the Registrant (filed as Exhibit 3.4 to the Registrant’s Registration Statement No. 1-11290 on Form 8-B and incorporated herein by reference).

		4.2	Form of Indenture dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,00 of 7.125% Notes due 2008 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated March 20, 1998 and incorporated herein by reference).

		4.3	Form of Supplement Indenture No. 1 dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated March 20, 1998 and incorporated herein by reference).

		4.4	Form of 7.125% Note due 2008 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated March 20, 1998 and incorporated herein by reference).

		4.5	Form of Supplemental Indenture No. 2 dated June 21, 1999, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 8.125% Notes due 2004 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 17, 1999 and incorporated herein by reference).

		4.6	Form of 8.125% Notes due 2004 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated June 17, 1999 and incorporated herein by reference).

		4.7	Form of Supplemental Indenture No. 3 dated September 20, 2000, by and among Registrant and First Union National Bank, Trustee, relating to $20,000,000 of 8.5% Notes due 2010 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 20, 2000 and incorporated herein by reference).

		4.8	Form of 8.5% Notes due 2010 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated September 20, 2000 and incorporated herein by reference).

		4.9	Form of Supplemental Indenture No. 4 dated May 30, 2002, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $50,000,000 of 7.75% Notes due 2012 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 4, 2002 and incorporated herein by reference).

		4.10	Form of 7.75% Notes due 2012 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated June 4, 2002 and incorporated herein by reference).
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	10.	Material Contracts

		10.1	Letter Agreement dated July 10, 1992, amending Stock Purchase Agreement dated January 23, 1992 (filed as Exhibit 10.34 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 and incorporated herein by reference).

		10.2	Advisory Agreement between Registrant and CNL Realty Advisors, Inc. effective as of April 1, 1993 and renewed January 1, 1997 (filed as Exhibit 10.04 to Amendment No. 1 to the Registrant's Registration Statement No. 33-61214 on Form S-2 and incorporated herein by reference).

		10.3	1992 Commercial Net Lease Realty, Inc. Stock Option Plan (filed as Exhibit No. 10(x) to the Registrant's Registration Statement No. 33-83110 on Form S-3 and incorporated herein by reference).

		10.4	Secured Promissory Note, dated December 14, 1995, among Registrant and Principal Mutual Life Insurance Company relating to a $13,150,000 loan (filed as Exhibit 10.15 to the Registrant’s Current Report on Form 8-K dated January 18, 1996 and incorporated herein by reference).

		10.5	Mortgage and Security Agreement, dated December 14, 1995, among Registrant and Principal Mutual Life Insurance Company relating to a $13,150,000 loan (filed as Exhibit 10.16 to the Registrant’s Current Report on Form 8-K dated January 18, 1996 and incorporated herein by reference).

		10.6	Loan Agreement, dated January 19, 1996, among Registrant and Principal Mutual Life Insurance Company relating to a $39,450,000 loan (filed as Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference).

		10.7	Secured Promissory Note, dated January 19, 1996, among Registrant and Principal Mutual Life Insurance Company relating to a $39,450,000 loan (filed as Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference).

		10.8	Agreement and Plan of Merger dated May 15, 1997, by and among Commercial Net Lease Realty, Inc., Net Lease Realty II, Inc., CNL Realty Advisors, Inc. and the Stockholders of CNL Realty Advisors, Inc. (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated May 16, 1997 and incorporated herein by reference).

		10.9	Fourth Amended and Restated Line of Credit and Security Agreement, dated August 6, 1997, by and among Registrant, certain lenders and First Union National Bank, as the Agent, relating to a $200,000,000 loan (filed as Exhibit 10 to the Registrant’s Current Report on Form 8-K dated September 12, 1997 and incorporated herein by reference).

		10.10	Fifth Amended and Restated Line of Credit and Security Agreement, dated September 23, 1999, by and among Registrant, certain lenders and First Union National Bank, as the Agent, relating to a $200,000,000 loan (filed as Exhibit 10.13 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference).

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			10.11	Sixth Amended and Restated Line of Credit and Security Agreement, dated October 26, 2000, by and among Registrant, certain lenders and First Union National Bank, as the Agent, relating to a $200,000,000 loan (filed as Exhibit 10.11 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference).

			10.12	2000 Performande Incentive Plan (filed as Exhibit 99 to the Registrant’s Registration Statement No. 333-64794 on Form S-8 and incorporated herein by reference).

			10.13	Third Renewal Promissory Note dated as of April 1, 2001, by Commercial Net Lease Realty Services, Inc. in favor of Registrant relating to an $85,000,000 line of credit (filed as Exhibit 10.13 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference).

			10.14	Third Modification of Amended and Reatated Secured Revolving Line of Credit and Security Agreement and Other Loan Documents effective as of April 1, 2001, by and between Registrant as lender and Commercial Net Lease Realty Services, Inc. as borrower, relating to an $85,000,000 line of credit (filed as Exhibit 10.14 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference).

			10.15	Fourth Modification of Amended and Restated Secured Revolving Line of Credit and Security Agreement and Other Loan Documents effective as of July 1, 2001, by and between Registrant as lender and Commercial Net Lease Realty Services, Inc. as borrower, relating to an $85,000,000 line of credit (filed as Exhibit 10.15 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference).

			10.16	Agreement and Plan of Merger, dated as of July 1, 2001, among Commercial Net Lease Realty, Inc. and Captec Net Lease Realty, Inc. (filed as Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated July 3, 2001 and incorporated herein by reference).

		99.	Additional Exhibits

			99.1	Certification of Chief Executive Officer pursuant to 18 Section U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

			99.2	Certification of Chief Financial Officer pursuant to 18 Section U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

	(b)	No reports on Form 8-K were filed during the quarter ended September 30, 2002.


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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. DATED this 8^th day of November, 2002. COMMERCIAL NET LEASE REALTY, INC. By: /s/ Gary M. Ralston Gary M. Ralston President and Director By: /s/ Kevin B. Habicht Kevin B. Habicht Chief Financial Officer and Director




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CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James M. Seneff, Jr., certify that:

	1.	I have reviewed this quarterly report on Form 10-Q of Commercial Net Lease Realty, Inc.,

	2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14, for the registrant and we have:

		a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

		b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

		c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	5.	The registrant's other certifying officers and I have disclosed, base on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

		a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

		b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

	6.	The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


		/s/ James M. Seneff, Jr.

	Date: November 8, 2002	Name: James M. Seneff, Jr. Title: Chief Executive Officer and Director

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CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kevin B. Habicht, certify that:

	1.	I have reviewed this quarterly report on Form 10-Q of Commercial Net Lease Realty, Inc.,

	2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14, for the registrant and we have:

		a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

		b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

		c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	5.	The registrant's other certifying officers and I have disclosed, base on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

		a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

		b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

	6.	The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


		/s/ Kevin B. Habicht

	Date: November 8, 2002	Name: Kevin B. Habicht Title: Chief Financial Officer and Director

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