UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-K

             (Mark One)

            [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

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 1-13089

FF-TSY HOLDING COMPANY II, LLC
(Exact name of registrant as specified in its charter)

Delaware
 
74-3205842
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
   

8377 East Hartford Drive, Suite 200
Scottsdale, Arizona 85255
(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (480) 585-4500
 
Securities registered pursuant to Section 12 (b) of the Act:
 
Title of each class:
Name of exchange on which registered:
None
None
Securities registered pursuant to section 12(g) of the Act:
None
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No ¨

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 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 ¨ No x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by checkmark if the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated Filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨  No x

The Registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Annual Report on Form 10-K with the reduced disclosure format.







The aggregate market value of Trustreet Properties, Inc.’s (the predecessor to the registrant) common stock held by non-affiliates as of June 30, 2006, was $822.5 million based on the closing sale price of $13.19 per share on June 30, 2006 on the New York Stock Exchange. Trustreet Properties, Inc. common stock ceased to be outstanding as of February 26, 2007 and was accordingly de-listed under Section 12 of the Securities Exchange Act of 1934, and the rest of the outstanding common equity held by non-affiliates of the registrant is none.

DOCUMENTS INCORPORATED BY REFERENCE:
None


TABLE OF CONTENTS


 
 
PAGE
REFERENCE
Part I
   
Item 1.
Business
2
Item 1A.
Risk Factors
8
Item 1B.
Unresolved Staff Comments
14
Item 2.
Properties
14
Item 3.
Legal Proceedings
19
Item 4.
Submission of Matters to a Vote of Security Holders
19
Part II
   
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
20
Item 6.
Selected Financial Data
21
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
21
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
41
Item 8.
Financial Statements and Supplementary Data
43
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
 
Item 9A.
Controls and Procedures
92
Item 9B.
Other Information
92
Part III
   
Item 10.
Directors and Executive Officers of the Registrant
92
Item 11.
Executive Compensation
92
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
92
Item 13.
Certain Relationships and Related Transactions
92
Item 14.
Principal Accounting Fees and Services
93
Part IV
   
Item 15.
Exhibits, Financial Statement Schedules
94
 
Signatures
 
     
PEO
Certification Pursuant to Section 302(a)
 
CFO
Certification Pursuant to Section 302(a)
 



PART I


The following information, including, without limitation, the Quantitative and Qualitative Disclosures About Market Risk that are not historical facts, may be forward-looking statements. These statements generally are characterized by terms such as “believe,” “expect,” “may,” “intend,” “might,” “plan,” “estimate,” “project,” and “should”. Although we believe expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements. Factors that might cause such a difference include those discussed in the risk factors included in Item 1A to this Annual Report on Form 10-K.

Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all risk factors, nor can it assess the impact of all risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. We expressly disclaim any responsibility to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events, or otherwise, and you should not rely upon these forward-looking statements after the date of this report.

References to “we” or “us” in this annual report on Form 10-K relate to CNL Restaurant Properties, Inc. for the periods prior to February 25, 2005, Trustreet Properties, Inc for periods between February 25, 2005 and February 26, 2007, and FF-TSY Holding Company II, LLC for subsequent periods.

Item 1. Business.

General

Trustreet Properties, Inc. (“Trustreet”) was the name adopted upon the merger of CNL Restaurant Properties, Inc. (“CNLRP”) and eighteen CNL Income Fund partnerships (“the Income Funds”) with and into U.S. Restaurant Properties, Inc. (“USRP”) on February 25, 2005 (“the 2005 Merger”). Trustreet was a Maryland corporation originally incorporated in 1997.

On October 30, 2006, Trustreet entered into an Agreement and Plan of Merger (the “GE Capital Merger Agreement”) to be acquired by a subsidiary of General Electric Capital Corporation (the “GE Capital Merger”), which, in turn, is a subsidiary of General Electric Company. On February 22, 2007, Trustreet’s stockholders approved the acquisition. On February 26, 2007, GE Capital’s acquisition of Trustreet was completed, as further described below under GE Capital Merger and the surviving entity ceased to be a separate publicly traded company. Immediately prior to the completion of the acquisition on February 26, 2007, Trustreet assigned all of its assets and liabilities to its direct wholly owned subsidiary, FF-TSY Holdings Company II, LLC, a Delaware limited liability company (the “Company”), and the Company became Trustreet’s successor. See GE Capital Merger below.

Up through the date of the GE Capital Merger, through its subsidiaries, the Company operated as a fully-integrated, self-administered real estate investment trust (a “REIT”) and had elected to be taxed as a REIT. Certain of the Company’s wholly owned subsidiaries had elected to be treated as taxable REIT subsidiaries which were subject to federal income taxation at regular corporate rates. As a result of the GE Capital Merger on February 26, 2007, the Company ceased to exist and the surviving entity in the GE Capital Merger and all of its corporate subsidiaries became subject to federal and state income taxation at regular corporate tax rates.

At December 31, 2006, the Company owned approximately 2,185 properties diversified among more than 190 restaurant concepts in 49 states. The Company’s business was operated through two segments: real estate and specialty finance. The real estate segment focused on ownership and portfolio management of restaurant properties leased to restaurant operators generally under long term triple-net leases, which generally provide that the tenant is responsible for most property-related expenses, such as property taxes, maintenance and insurance. The specialty finance segment operated in the Company’s taxable REIT subsidiary (“TRS”) and included the Company’s Investment Property Sales program (“IPS”), in which the Company purchased properties and resold them to third party investors. Effective with the GE Capital Merger, the Company will no longer make substantial new investments in real estate properties. The Company will continue managing, re-leasing and selling properties to manage the portfolio that existed as of the GE Capital Merger date. On February 26, 2007, effective with the GE Capital Merger, the Company changed its strategy of both segments to generally hold all assets for long-term investment with any sales more selective in the upcoming years.

The Company’s offices are located at 8377 East Hartford Drive, Suite 200, Scottsdale, Arizona and the Company’s telephone number is (480) 585-4500. Prior to the GE Capital Merger, Trustreet’s common stock, Series A Cumulative Convertible Preferred Stock and 7.5 percent Series C Redeemable Convertible Preferred Stock were traded on the New York Stock Exchange, under the symbols “TSY”, “TSYPrA” and “TSYPrC”, respectively. The surviving entity in the GE Capital Merger ceased to be a separate publicly traded company and all shares were de-listed from the New York Stock Exchange.

The 2005 Merger

On February 25, 2005, CNLRP merged with and into USRP and the combined company changed USRP’s name to Trustreet Properties, Inc. and acquired 18 Income Funds. In the 2005 Merger, CNLRP stockholders received 0.7742 shares of USRP common stock and 0.16 shares of USRP 7.5 percent Series C Redeemable Convertible Preferred Stock (liquidation value $25.00 per share) for each share of CNLRP common stock. The aggregate dollar value of the 2005 Merger consideration received by CNLRP stockholders was approximately $788 million based on the closing stock price of USRP common on February 24, 2005 and the liquidation value of the Series C Preferred Stock. As described in Note 2 to the financial statements included in Item 8, because CNLRP was considered the acquirer for accounting purposes, the purchase price used to account for the exchange of interests between USRP and CNLRP was $473 million before transaction costs. Income Fund limited partners received approximately 84 percent of their consideration in cash and the remainder in existing USRP Series A Cumulative Convertible Stock (liquidation preference $25.00 per share). Total consideration received by the Income Fund partners was approximately $545 million based on the February 24, 2005 trading price of the Series A Preferred Stock. As described in Note 2 to the financial statements included in Item 8, the Income Fund acquisitions were accounted for as a purchase with a price of $538 million.

USRP’s predecessors included U.S. Restaurant Properties Master L. P. and U.S. Restaurant Operating L.P., which were formed in 1985 by Burger King Corporation and QSV Properties, Inc., both of which were at the time wholly owned subsidiaries of The Pillsbury Company. On October 15, 1997, U.S. Restaurant Properties Master L.P. was converted into a self-administered REIT and, on October 16, 1997, USRP’s common stock commenced trading on the New York Stock Exchange.

GE Capital Merger

On February 26, 2007, Trustreet engaged in two distinct but related transactions:

 
·
The assignment by Trustreet to the Company (which immediately prior to such assignment was a newly-formed direct wholly owned subsidiary of Trustreet) of all of its assets and liabilities (the “Assignment and Assumption”); and
 
·
Immediately following the Assignment and Assumption, the GE Capital Merger of Trustreet with and into TSY-FF Acquisition Company, Inc., a Maryland corporation and an indirect wholly owned subsidiary of GE Capital (“Merger Sub”), pursuant to that certain Agreement and Plan of GE Capital Merger, dated as of October 30, 2006, as amended (the “GE Capital Merger Agreement”) by and among Trustreet, CNL APF Partners, LP, a Delaware limited partnership and indirect subsidiary of Trustreet (“CNL Partnership”), GE Capital, FF-TSY Holding Company, Inc., a Delaware corporation and direct parent of Merger Sub (“Holdco”), Merger Sub, and Franchise-TSY Acquisition LLC, a Delaware limited liability company and wholly owned subsidiary of Merger Sub (“Partnership Merger Sub”).

Assignment and Assumption

Concurrently with the Assignment and Assumption on February 26, 2007, Trustreet, the Company, FF-TSY Holding Company II, Inc., a Delaware corporation at the time of the Assignment and Assumption a direct wholly owned subsidiary of Trustreet, and Wells Fargo Bank, National Association as Trustee under the indenture (the “Trustee”) entered into a supplemental indenture (the “Supplemental Indenture”) which amended the indenture governing Trustreet’s outstanding 7.5 percent Senior Notes due in 2015 (the “Notes”) and provided for the express assumption by the Company of all obligations of Trustreet on the Notes and under the Indenture.

GE Capital Merger Transactions

Following the effectiveness of the Assignment and Assumption, Trustreet caused Partnership Merger Sub to merge with and into CNL Partnership (the “Partnership Merger”), with CNL Partnership being the surviving entity and becoming a wholly owned subsidiary of the Company. Pursuant to the Partnership Merger, each holder of units of limited partnership interest in CNL Partnership other than Trustreet and its subsidiaries became entitled to receive $17.05 in cash, without interest and less any applicable withholding taxes, for each unit of limited partnership they owned in CNL Partnership immediately prior to the effective time of the Partnership Merger.

Following the Partnership Merger, Trustreet was merged with and into Merger Sub, with Merger Sub being the surviving entity and a direct wholly owned subsidiary of Holdco. Pursuant to the GE Capital Merger, holders of Trustreet common stock (other than Trustreet and its subsidiaries) became entitled to receive $17.05 in cash, without interest and less any applicable withholding taxes, for each share of common stock issued and outstanding and held by such holders immediately prior to the effective time of the GE Capital Merger. Also pursuant to the GE Capital Merger, each share of Series A Preferred Stock that was outstanding immediately prior to the effective time of the GE Capital Merger, other than shares owned by Trustreet, its subsidiaries, or Merger Sub, was converted into, and cancelled in exchange for, the right to receive, without interest and less any applicable withholding taxes, cash in the amount of $25.00, plus any accrued and unpaid dividends through and including February 26, 2007. Finally, each share of Series C Preferred Stock outstanding immediately prior to the effective time of the GE Capital Merger was converted into, and cancelled in exchange for, the right to receive one share of 7.5 percent Series C Redeemable Convertible Preferred Stock of Merger Sub (the “Merger Sub Series C Preferred Stock”). Upon completion of the GE Capital Merger, the Company was a direct wholly owned subsidiary of Merger Sub, which was in turn a direct wholly owned subsidiary of Holdco, which is in turn an indirect wholly owned subsidiary of GE Capital.

Liquidation of Merger Sub

Following the GE Capital Merger, Merger Sub assigned all of its assets and liabilities to Holdco (other than cash deposited by Merger Sub with the paying agent for the GE Capital Merger in an amount sufficient to discharge its obligations with respect to holders of the Merger Sub Series C Preferred Stock) and Merger Sub and Holdco filed Articles of Transfer with the State Department of Assessments and Taxation of the State of Maryland (“SDAT”) in accordance with Maryland law. On March 20, 2007, Merger Sub caused Articles of Dissolution to be filed with SDAT and the legal existence of Merger Sub was terminated. Pursuant to the dissolution and liquidation of Merger Sub, holders of Merger Sub Series C Preferred Stock received $25.00 plus accrued and unpaid dividends through the date of payment for each share of Merger Sub Series C Preferred Stock they received in the GE Capital Merger. Following the dissolution of Merger Sub, the Company is a direct wholly owned subsidiary of Holdco, which, in turn, is an indirect wholly owned subsidiary of GE Capital, which, in turn, is a subsidiary of General Electric Company.

On March 1, 2007 and March 23, 2007, Moody’s Investors Service, Inc. and Standard & Poor’s Rating Service, respectively, upgraded the credit rating on the Notes to Investment Grade Status (as defined in the Indenture governing the Notes). On March 28, 2007, the Company delivered an officers’ certificate to the Trustee under the Indenture certifying that the conditions relating to a Suspension Period (as defined in the Indenture) had been satisfied and thereby causing a Suspension Period to commence on such date. During the Suspension Period, certain restrictive covenants contained in the Indenture will not be applicable and, as such, will not restrict the Company’s activities that would otherwise have been limited or restricted absent the Suspension Period.

Segments

Up through the GE Capital Merger, the Company’s business operations were divided into two business segments, a real estate segment and a specialty finance segment.

 
·
The real estate segment oversaw and managed a portfolio of primarily long-term triple-net lease properties, as well as mortgage and equipment loans. Its responsibilities included portfolio management, property management and dispositions.
 
 
·
The specialty finance segment included the IPS program and delivered financial products principally in the forms of financing, servicing and other services, to national and larger regional restaurant operators.

Please see note 17 of the Company’s Consolidated Financial Statements appearing in Item 8 of this report for certain financial information about these two business segments. While the Company’s historical business has operated under two segments, the GE Capital Merger is expected to have a significant impact on the allocation of how assets and other resources are utilized. On February 26, 2007, effective with the GE Capital Merger, the Company changed its strategy of both segments to generally hold all assets for long-term investment with any sales more selective in the upcoming years.

Real Estate Segment

As part of the Company’s ownership and management of its real estate portfolio, the Company’s real estate segment offers customers an integrated set of financial services. The lease financing provided by the Company’s real estate segment, often through sale/leaseback transactions, enables restaurant operators to monetize their on-balance sheet real estate, allowing them to devote a greater portion of their assets to their core business of restaurant operations.

From December 31, 2005 to December 31, 2006, we encountered 28 new vacancies and resolved 34 vacancies. Of the 28 new vacancies, eight were a result of an expiring lease, eleven were terminations by the tenant as permitted by its lease agreement, and the remainder resulted from defaults. Of the 34 resolutions, properties were sold at an average of 114 percent recovery of net carrying value, or leased at an average of 92 percent of the previous cash rent. In addition, over the past 12 months, ending December 31, 2006 we renewed 71 leases scheduled to expire in 2006 or 2007. As of December 31, 2006, we had 58 properties with a net carrying value of $35.8 million with leases expiring in the next 12 months, and had 68 properties with a net carrying value of $48.7 million that are vacant with no lease. We will continue to manage these properties, and expect to reduce the number of vacant properties in the next 15 months either by locating suitable tenants to lease the properties or selling the vacant properties and reinvesting the sales proceeds in replacement properties.

Following the GE Capital Merger, the Company has undertaken the following initiatives with respect to its real estate segment:

 
·
Disposal or Re-Lease of Vacant Properties. As of December 31, 2006, the Company had 68 properties with a net carrying value of $48.7 million that were vacant with no lease. The Company intends to reduce the number of vacant properties by either locating suitable tenants to lease the properties from the Company or selling the vacant sites.

 
·
Sale of Service Station Properties. In February 2007, the Company entered into an agreement to sell approximately 70 service station properties, some of which are owned by the specialty finance segment. The sale is expected to occur by March 31, 2007, but there can be no assurance that such sale will occur when expected, or at all.

Specialty Finance Segment

The Company’s specialty finance segment offered a diverse array of highly specialized services for customers. The IPS program purchased restaurant properties and resold them to investors who generally were seeking to defer taxes on commercial properties they sold through the reinvestment of proceeds as permitted under the Internal Revenue Code. This segment also offered investment banking and development services.
 
The specialty finance segment engaged in the following significant lines of business in 2006:
 
 
·
IPS Program. The IPS program generated $208 million in property sales proceeds in 2006 through the sale of 138 properties. At December 31, 2006, the Company held 138 properties for sale through the IPS program, with an investment of $218 million, including 132 properties with an investment of $213 million that were recently purchased by the specialty finance segment. The success of our IPS program depended on the continued vibrancy of the 1031 exchange marketplace and successfully originating new triple-net leases. For the years ended December 31, 2006, 2005, and 2004, we purchased $372 million, $542 million, and $247 million in net lease properties, respectively. Origination volume in the year ended December 31, 2006 was impacted by competition in the net lease sector, specifically on smaller transactions. This increased competition resulted in a gradual decrease of the acquisition capitalization rates in the marketplace which, in turn, compressed net margins on properties sold through our IPS program. Since 2001, we have sold over $1.3 billion in properties through our IPS program within our specialty finance segment, of which $207.6 million, $242.1 million, and $256.2 million were sold during the years ended December 31, 2006, 2005, and 2004, respectively, was purchased by our specialty finance segment and funded by approximately $201 million in mortgage warehouse debt.

 
·
Development. The Company’s Development and Redevelopment Group actively sought to identify properties that were suitable for development as restaurants. Once a parcel was identified, the Development Group actively explored development opportunities including build to suit and leasing activities. Once developed, the properties were typically sold through the IPS program. At December 31, 2006, the Company had 61 properties with an investment of $63 million under development. Of the $63 million in properties held at December 31, 2006, $35 million represented undeveloped land, $2 million in projects were under construction and $15 million comprised of completed projects. The remaining $11 million were acquired with an existing structure with the intent to redevelop at a future date.

On February 26, 2007, effective with the GE Capital Merger, the Company changed its strategy of both segments to generally hold all assets for long-term investment with any sales more selective in the upcoming years.

Leases

Although there are variations in the specific terms of the Company’s leases, the following summarizes the general structure of the leases. The leases of the properties provide for initial terms typically of 15 to 20 years and expire between 2007 and 2041. Approximately 54 percent of the Company’s leases have terms that expire in 2016 or later and the average remaining lease term of the Company’s portfolio is approximately ten years. The leases are generally on a long-term triple-net basis which generally provided that the tenant is responsible for all repairs and maintenance, property taxes, insurance and utilities. The leases provide for minimum base annual rental payments (payable in monthly installments) ranging from approximately $0.005 million to $0.6 million. The majority of the leases also provide that, commencing in specified lease years (generally the sixth lease year), the annual base rent required under the terms of the lease will increase. In addition, certain leases provide for percentage rent based on sales in excess of a specified amount.

Generally, the leases provide for two to five, five-year or ten-year renewal options. The leases also generally provide that, in the event the Company wishes to sell the property subject to that lease, the Company first must offer the lessee the right to purchase the property on the same terms and conditions, and for the same price, as any offer which the Company has received for the sale of the property.

Major Tenants

At December 31, 2006, no single lessee, borrower (or affiliated groups of lessees or borrowers) or restaurant chain contributed more than ten percent of the Company’s total annualized base rent relating to its properties. In the event that certain lessees, borrowers or restaurant chains contribute more than ten percent of the Company’s rental, earned and interest income in future years, any failure of such lessees, borrowers or restaurant chains could materially affect the Company’s income. Additionally, as of December 31, 2006, no single lessee or borrower, or group of affiliated lessees or borrowers, leased properties or was the borrower under loans with an aggregate carrying value in excess of 20 percent of the total assets of the Company.

Real Estate Held for Sale

Through the date of the GE Capital Merger, the Company sold certain real estate properties to private investors as an alternative to either retaining the properties as a long-term investment or offering to sell net lease cash flows in the securitization marketplace. The accounting for these properties differed from that of similar properties without this designation as the Company did not record depreciation. In addition, the Company did not record accrued rent which is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis. The properties held for sale were contemplated being sold within a year. The Company classified its real estate held for sale as discontinued operations. As described above, effective with the GE Capital merger, the Company changed its strategy of both segments to generally hold all assets for long-term investment with any sales more selective in the upcoming years.

Mortgage, Equipment and Other Notes Receivable

Mortgage, equipment and other notes receivable are wholly or partially collateralized by first mortgages on the land and/or buildings, the equipment or other assets of franchised restaurant businesses. The loans are due in monthly installments with maturity dates ranging from 2007 to 2025.

Regulations

The Company, through its ownership interests in and management of real estate, is subject to various environmental, health, land-use and other regulations by federal, state and local governments that affect the development and regulation of restaurant and service station properties. The Company’s leases impose the primary obligation for regulatory compliance on the tenants.

Environmental Regulation

Although as a general rule the Company performs pre-purchase environmental assessments and/or investigations, some of the properties acquired by the Company are or may be contaminated by releases of hazardous substances or petroleum or may contain underground storage tanks.  To the extent such environmental concerns are identified and are subject to reporting or other regulatory requirements under state or federal environmental laws or regulations, the Company engages in any necessary activities to comply with such environmental regulatory requirements.  Management neither is aware of any environmental concerns or liabilities that are not being addressed in accordance with requirements of environmental laws, nor has it been notified by any governmental authority of any potential environmental requirement or liability not being addressed in accordance with environmental laws.

Americans With Disabilities Act (“ADA”). Under the Americans with Disabilities Act of 1990 (the “ADA”), all public accommodations, including restaurants, are required to meet federal requirements relating to physical access and use by disabled persons. If it were determined that the Company was not in compliance with the ADA, the Company could be subject to fines, injunctive relief, damages or attorneys’ fees. The Company’s leases generally contemplate that compliance with the ADA is the responsibility of the tenants. The Company is not currently a party to any litigation or administrative proceeding with respect to a claim of violation of the ADA.

Land-use, Fire and Safety Regulations. The Company and its tenants are required to operate the Properties in compliance with various laws, land-use regulations, fire and safety regulations and building codes which may either be currently applicable or which may be adopted later by the governmental body or agency having jurisdiction over the location of the Property or the matter being regulated. The Company’s leases typically contemplate that compliance with land-use and fire and safety regulations is the responsibility of the tenants.

Health Regulations. The restaurant industry is regulated by a variety of state and local departments and agencies concerned with the health and safety of restaurant customers. These regulations vary by restaurant location and type. The Company’s leases require the tenants to comply with all health regulations and inspections and require that the restaurant operators obtain insurance to cover liability for violation of such regulations or the interruption of business due to closure caused by failure to comply with such regulations. The Company is not currently a party to any litigation or administrative proceeding with respect to the compliance with health regulations of any property it finances.

Insurance. The Company generally requires its tenants to maintain adequate comprehensive liability, fire, flood and extended loss insurance provided by reputable companies with commercially reasonable and customary deductibles. The Company also generally requires that it be named as an additional insured under such policies. Tenants are required to carry certain types and amounts of insurance under the leases with the Company and the Company actively monitors tenant compliance with this requirement. There are, however, certain types of losses (generally of a catastrophic nature such as earthquakes and floods), that may be either uninsurable or not economically insurable, as to which the properties may be at risk depending on whether such events occur with any frequency in a property’s location. An uninsured loss could result in a loss to the Company of both its capital investment and anticipated profits from the affected property. In addition, because of coverage limits and deductibles, insurance coverage in the event of a substantial loss may not be sufficient to pay the full current market value or current replacement cost of the Company’s investment. Changes in building codes and ordinances, environmental considerations and other factors also might make using insurance proceeds to replace a facility after it has been damaged or destroyed unfeasible. Under such circumstances, the insurance proceeds received by the Company might be inadequate to restore its economic position with respect to the property. The Company’s policy with respect to vacant properties is to carry general liability insurance and, to the extent required by certain creditors, property coverage.

Competition

The fast-food, family-style and casual dining restaurant business is characterized by intense competition. The operators of the restaurants located on the Company's properties compete with independently owned restaurants, restaurants which are part of local or regional chains and restaurants in other well-known national chains, including those offering different types of food and service.

Local competition may enhance a restaurant’s success rather than detract from it. Many successful fast-food, family-style and casual dining restaurants are located in "eating islands", areas within which a variety of restaurants operate. This variety allows diners an opportunity to diversify their eating habits, giving them an incentive to return in the future. As a result, fast food, family style and casual dining restaurants frequently experience better operating results when there are other restaurants in the area.

Through the date of the GE Capital Merger, the Company competed with other persons and entities in locating suitable properties to acquire and in locating purchasers for properties held for sale. The Company also competed with other financing sources such as banks, mortgage lenders, real estate brokers and sale/leaseback companies for suitable tenants for its properties and borrowers for its mortgage loans.

Employees

As of December 31, 2006, the Company had 137 associates.


Item 1A. Risk Factors.
 
You should carefully consider the following risks and all of the other information set forth in this Annual Report on Form 10-K, including the consolidated financial statements and the notes thereto. If any of the events or developments described below were actually to occur, the Company’s business, financial condition or results of operations could be materially adversely affected.

Risks Relating to Our Business

Our debt could adversely affect our cash flow, our business and financial condition.
 
As of December 31, 2006, we had total consolidated debt of approximately $1.6 billion and stockholders’ equity of approximately $1.1 billion. Effective with the GE Capital Merger, we received an equity inflow of approximately $760 million which we used to repay all amounts outstanding under the revolver, term, and the warehouse facilities.
 
Our remaining substantial level of debt could have important consequences for us. For example, it could:
 
 require us to dedicate a substantial portion of our cash flow from operations to make payments on our debt, reducing the availability of our cash flow;
 
 increase our vulnerability to general adverse economic and industry conditions and adverse changes in governmental regulations;
 
 limit our flexibility in planning for, or reacting to, changes in our business, which may place us at a competitive disadvantage compared with our competitors; and
 
 limit our ability to borrow additional funds, even when necessary to maintain adequate liquidity or working capital.

The terms of our indebtedness, including the indenture governing our 7½% Senior Notes due in 2015 (the “Notes”) allow us to incur substantial amounts of additional indebtedness, subject to certain limitations. Additional indebtedness would increase the risks associated with our leverage.
 
Our cash flow from operations may not be sufficient to satisfy our debt service obligations or to fund our other liquidity needs.
 
Our ability to make payments on or refinance our debt will depend largely upon our future operating performance, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
 
If we do not have sufficient cash flow or cash available to meet our debt service obligations, we would have to consider the sales of certain assets to meet our debt service obligations. However, this option may not be adequate or feasible. Our financing arrangements and the indenture governing our Notes may restrict, or market or business conditions may limit, our ability to do this.
 
The financing agreements governing our debt contain various covenants that limit our discretion in the operation of our business and could lead to acceleration of debt repayment.
 
Our existing and future financing agreements impose and will impose operating and financial restrictions on our activities. These restrictions require us to comply with or maintain certain financial tests and ratios, including a maximum consolidated leverage ratio, a maximum ratio of secured indebtedness to adjusted total tangible assets, a minimum consolidated tangible net worth test and minimum consolidated fixed charge and interest coverage ratios, and limit or prohibit our ability to, among other things:
 
 borrow money and guarantee debt;
    • create liens;
    • make investments or acquisitions;
    • enter into sale/leaseback transactions;
    • enter into transactions with affiliates; and
    • sell assets.
 
These restrictions on our ability to operate our business could seriously harm our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities.
 
Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants and maintain the financial tests and ratios required by some of the instruments governing our financing arrangements. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity of the debt under these agreements and to foreclose upon any collateral securing that debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing. We may not be able to obtain future waivers or enter into future amendments or supplements, if necessary.
 
Our operations and financial condition could be adversely affected by a number of factors affecting the value of real estate.
 
Our investments will be subject to the risks generally associated with the ownership of real property, including:
 
 adverse changes in certain economic conditions;
    • changes in the investment climate for real estate;
    • increases in real estate tax rates and other operating expenses;
    • adverse changes in governmental laws, regulations, ordinances, and fiscal policies, including zoning and land use;
    • the relative illiquidity of real estate; and
    • compliance with environmental and other ordinances, regulations and laws.
 
Any adverse changes in, or increased costs resulting from, these or other factors could adversely affect our results of operations.
 
We rely on a small number of tenants for a significant portion of our revenue, and rental payment defaults by these significant tenants could adversely affect our results of operations.
 
As of December 31, 2006, our largest tenant represented 7.0 percent of our total annualized base rent and our ten largest tenants represented 36.7 percent of our total annualized base rent. As a result of the concentration of revenue generated from these few tenants, if any one of them were to cease paying rent or fulfilling their other monetary obligations, we could have significantly reduced rental revenues or higher expenses until the defaults were cured or the properties were leased to a new tenant or tenants. This could adversely affect our results of operations.
 
Changes in trends in the restaurant industry could adversely affect the sales, profitability and success of the chain restaurants that our tenants operate.
 
The chain restaurants operated by our tenants are generally within the quick service or casual dining segments of the restaurant industry, each of which is highly competitive. The success of these restaurants depends largely on the restaurant operators’ ability to adapt to trends and other factors affecting the restaurant industry including increased competition among restaurants (including competition for concept name recognition, products, price, value, quality, healthiness, service and convenience), the consolidation of restaurant chains, industry overbuilding, changing consumer habits, the introduction of new concepts and menu items, the increased costs of food products, the availability of labor and general economic conditions. We believe that restaurant services are consumed with disposable income subject to, for example, gasoline and other fuel prices. Losses incurred by a particular chain restaurant as a result of these or other factors could adversely affect the income that is derived from our restaurant properties, which may impact our tenants’ ability to make payments to us, which would have an adverse affect on our revenues.
 
Tenant bankruptcy proceedings could negatively affect our income.
 
As the owner of the bankrupt tenants’ underlying real estate, we face no risk of loss of ownership of the property itself if the bankrupt tenant rejects any of our leases. However, tenant bankruptcies could adversely affect our income in the following ways:
 
 reduction, interruption or termination of lease payments related to tenants’ leases;
    • reduction of revenue resulting from restructuring leases;
    • increase in costs associated with the maintenance and financing of vacant properties;
    • increase in costs associated with litigation and the protection of the properties; and
    • increase in costs associated with improving and re-leasing the properties.
 
In connection with any tenant bankruptcy, we establish reserves relating to rent payments and other accounts receivable and take impairments to the book value of the underlying real estate, as appropriate, to reflect the difference between the net book value and the market value of the asset in cases where we do not believe the net book value will be recoverable through future operations and disposal of the asset. It may be necessary to take additional asset impairments and write-offs and/or establish additional reserves in the event of future tenant bankruptcies or if the current reserves and impairment charges prove to be inadequate. These factors may have a material adverse effect on our results of operations.
 
We may not be able to re-lease properties upon the termination, expiration or rejection of leases at comparable lease rates or at all.
 
The leases of the properties that comprise our portfolio expire on dates ranging from 2007 to 2041. As of December 31, 2006, leases due to expire through 2011 represented approximately 22 percent of our total properties and approximately 17 percent of our total annualized base rent. Also, as of December 31, 2006, approximately four percent of our total properties representing three percent of the portfolio’s net carrying value were vacant (excluding unoccupied properties for which rent is currently being paid). Upon the termination or expiration of a lease, we might not be able to re-lease the related property. If we are able to re-lease, the lease rate or other lease terms might not be comparable to the expiring lease or additional expenses may be incurred because of, among other things, a downturn in the commercial leasing markets where we operate and the general performance of the restaurant industry or a specific property.
 
Our investment property sales program may be adversely affected by a significant reduction in or elimination of capital gains taxes or changes in interest rates.
 
The market for our investment property sales program is driven, in part, by demand created by property buyers seeking continued capital gains and/or tax deferrals. Any new proposal to significantly reduce or eliminate the capital gains tax or tax deferral opportunities could negatively impact demand for our properties. An increase in general levels of interest rates could result in buyers requiring a higher yield, which may not be matched with higher yields from tenants. This could cause us to experience lower average gains or even losses on the future sales of investment property sales program.
 
We may be unable to sell properties when appropriate because real estate investments are illiquid.
 
Real estate investments generally cannot be sold quickly. Consequently, we may not be able to alter our portfolio promptly in response to changes in economic or other conditions. Our inability to respond quickly to adverse changes in the performance of our investments could have an adverse effect on our ability to meet our obligations.
 
We may not be able to sell properties on terms that are acceptable, or at all.
 
We routinely make strategic dispositions of our properties. We may not be able to sell properties for a gain, and may sustain a loss, on such sales relative to current net book value. In addition, if our cash flows were to significantly decrease for any reason, we may have to sell one or more properties to support our operations. In such event, we may incur losses on the disposition of such properties.
 
Our assets may decline in value and, as a result, may be subject to impairment charges.
 
We periodically, but no less frequently than annually, evaluate our real estate investments and other assets for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions, operator performance and legal structure. If we determine that a significant impairment has occurred, we would be required to make an adjustment to the net carrying value of the asset, which could have a material adverse affect on our results of operations in the period in which the write-off occurs. To the extent we are unable to sell properties for book value, we may be required to take a non-cash impairment charge or loss on the sale, either of which would reduce our net income.
 
We will not acquire substantial new properties, so we will not have the ability to grow or diversify our existing portfolio.
 
Effective with the GE Capital Merger on February 26, 2007, we will no longer originate substantial new property acquisitions. As we continue to sell properties, we expect to experience a decline in our asset base. If this decline occurs, our property portfolio may become less diversified in terms of property type and geographic region, which could leave us more vulnerable to adverse changes affecting restaurant chains, tenants, concepts or economic conditions in geographic regions.
 
Our securitizations could require replacement property contributions or accelerated principal paydowns and could be adversely affected by changes in rating agencies’ perceptions of the securitizations and the leases and loans underlying them.
 
As of December 31, 2006, we had $456 million of rated securities structured in private placement franchise loan and net lease securitization transactions. In the event of tenant defaults relating to pledged properties in our net lease securitizations, we may elect to contribute additional properties or substitute properties into these securitized pools from properties we own and that are not otherwise pledged as collateral. In addition, if certain ratios are exceeded or not maintained within the net lease securitizations, then principal paydown on the outstanding bonds is accelerated. For the years ended December 31, 2006, 2005, and 2004 we were required to make additional debt reductions of $2.5 million, $1.8 million, and $0.8 million, respectively, as a result of exceeding certain ratios in the triple-net lease pools. There is no guaranty that we will not be required to make additional debt reductions in the future. Upon the occurrence of a significant amount of delinquencies and/or defaults, one or more of the rating agencies may choose to place a specific transaction on ratings watch or even downgrade one or more classes of securities to a lower rating. Should the loans or leases underlying the securities default, and the securities undergo a negative ratings action, we could experience material adverse consequences impacting our ability to continue earning income as servicer and our ability to engage in future desirable securitization transactions.
 
Severe weather conditions and other catastrophes may result in an increase in the number of defaults by our tenants.
 
Our business is exposed to the risk of severe weather conditions and other catastrophes. Catastrophes can be caused by various events, including natural events such as hurricanes, severe winter weather, tornadoes, windstorms, earthquakes, hailstorms, severe thunderstorms and fires, and other events such as explosions, terrorist attacks and riots. The incidence and severity of catastrophic and severe weather conditions are inherently unpredictable. Our properties are generally leased to tenants subject to triple net leases, meaning that the tenant is responsible for repairs and maintenance on the properties, and is required to pay the real estate taxes and maintain full property insurance coverage on the properties. In many cases, we also require the tenant to carry business interruption insurance which would provide for payment of rent while the property is closed. We anticipate that the tenant’s insurance would cover the damages from any such catastrophes. In the event the tenant’s insurance does not cover damage incurred, and the tenant does not have resources to cover the difference, we carry contingent property coverage that would pay for certain items but not cover all amounts of such damages.
 
The development and redevelopment of properties presents risks not present in existing operating properties.
 
In connection with the redevelopment of existing properties, we will be subject to risks, including:
 
 cost overruns;
    • delays because of a number of factors, including unforeseen circumstances, strikes, labor disputes or supply disruptions, zoning, permitting and approval issues, and bad weather and other acts of God;
    • design and construction defects;
    • contractor and subcontractor disputes and mechanics’ liens; and
    • lack of income-generating capacity until leasing payments can begin.
 
Any of these factors could have a material adverse effect on our financial condition and results of operations.
 
Environmental laws and regulations could reduce the value of our properties or our tenants’ profitability.
 
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to hazardous materials, environmental protection and human health and safety. Under various federal, state and local laws, ordinances and regulations, we or our tenants may be required to investigate and clean up certain hazardous or toxic substances released on or in restaurant or service station properties we own, and also may be required to pay other costs relating to hazardous or toxic substances. This liability may be imposed without regard to whether we or our tenants knew about the release of these types of substances or were responsible for their release. The presence of contamination or the failure to remediate properly, the migration of contaminants to or from our properties, or from or to adjacent third-party locations, may adversely affect our ability to sell or lease those properties or to borrow using those properties as collateral.
 
The costs or liabilities could exceed the value of the affected real estate. The uses of any property prior to our acquisition and the building materials and products used at the property are among the property-specific factors that will affect how the environmental laws are applied to the properties. By the nature of their businesses, our tenants utilize cleaning agents and other potentially hazardous materials and, with regard to service station properties, maintain underground storage tanks. If we are subject to any material environmental liabilities, the liabilities could adversely affect our results of operations and ability to meet our obligations. We cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist on the properties in the future. Compliance with existing and new laws and regulations may require us or the tenants to spend funds to remedy environmental problems. Our tenants, like many of our competitors, have incurred, and will continue to incur, capital and operating expenditures and other costs associated with complying with these laws and regulations, which will adversely affect their potential profitability, which could in turn impact their ability to make lease payments.
 
Generally, tenants must comply with environmental laws and meet remediation requirements. Our leases typically impose obligations on tenants to indemnify us from any compliance costs we may experience as a result of the environmental conditions on the property. If a lease does not require compliance by the tenant, however, or if a tenant fails to or cannot comply, we could be forced to pay these costs. In addition, in some cases we are responsible for adverse environmental conditions not caused by a tenant. If not addressed, environmental conditions could impair our ability to sell or re-lease the affected properties in the future or result in lower sales prices or rent payments.
 
The revenues generated by our tenants could be negatively affected by various federal, state and local laws and regulations to which they are subject.
 
We and our tenants are subject to a wide range of federal, state and local laws and regulations, such as local licensing requirements, land use ordinances, consumer protection laws, and fire, life-safety and similar requirements which regulate the use of the properties. The leases typically require that each tenant comply with all laws and regulations. Failure to comply could result in fines by governmental authorities, awards of damages to private litigants, or restrictions on the ability to conduct business on such properties. This in turn could impair the ability of a tenant to pay rent, could require us to pay penalties or fines relating to any non-compliance, and could adversely affect our ability to sell or re-lease a property.

Tax Risks

Certain of our leases may be recharacterized as financings, which would eliminate our depreciation deductions on our properties and potentially increase our tax liability.
 
If any of our leases do not constitute a lease for federal income tax purposes, it will be treated as a financing arrangement. The recharacterization of a lease in this fashion may have adverse tax consequences for us. In particular, we would not be entitled to claim depreciation deductions with respect to any improvements on the property (although we should be entitled to treat part of the payments we would receive under the arrangement as the repayment of principal).

We are subject to federal, state and local tax.

We are subject to taxation at regular corporate rates. In addition, we are subject to some federal, state and local taxes on our income and property, such as franchise, sales and property taxes. These tax obligations may adversely affect our cash flow available for debt service and our overall results of operations.

We may become subject to significant tax liability if a determination were made that our predecessor did not qualify as a REIT.

Trustreet, our predecessor, elected to be treated as a REIT for U.S. federal income tax purposes. As a REIT, Trustreet was not subject to U.S. federal income tax on income or gains that it distributed on a current basis to its stockholders. If Trustreet had failed to qualify as a REIT, it would have been subject to U.S. federal and state tax on its income and gains at regular corporate rates. If a determination were made that Trustreet had failed to qualify as a REIT, the IRS could assert that we are liable for some or all of Trustreet’s resulting tax liabilities, which could be substantial. These tax obligations may adversely affect our cash flow available for debt service and our overall results of operations.
 
We may be subject to other tax liabilities.
 
We may be subject to some federal, state and local taxes on our income and property, such as franchise, sales and property taxes, that could reduce operating cash flow. We are subject to taxation at regular corporation rates. These tax obligations may adversely affect our results of operations. In particular, as a result of the GE Capital Merger, we no longer operate as a REIT and will begin paying a significant amount of taxes that previously were not applicable to us.
 
 
Item 1B. Unresolved Staff Comments.
 
 
None.
 

Item 2. Properties.

As of December 31, 2006, the Company’s real estate segment owned 1,990 properties, either directly or indirectly through joint venture arrangements, located in all states except Alaska, and including the District of Columbia.

As of December 31, 2006, 1,959 of the 1,990 properties represented fee simple ownership and 14 properties were owned through joint venture arrangements. As of December 31, 2006, 118 properties consisted of land only.

As of December 31, 2006, 82 properties consisted of building only. The Company does not own the underlying land. In connection with the acquisition of each of these properties, the Company entered into either a tri-party agreement with the tenant and the owner of the land or an assignment of interest in the ground lease with the landlord, as described in Item 1. Business-Leases.

As of December 31, 2006, the Company had pledged 546 properties as collateral related to bonds payable.

Description of Properties

Land. The Company's property lot sizes range from approximately 800 to 329,100 square feet depending upon building size, local demographic factors and other factors. Land owned is zoned for commercial use which, prior to acquisition, was reviewed for traffic patterns and volume.




The following table lists the properties owned as of December 31, 2006 by state.

 
State
 
Total Number of
Properties
Alabama
 
53
Arizona
 
44
Arkansas
 
39
California
 
52
Colorado
 
29
Connecticut
 
6
Delaware
 
3
Florida
 
183
Georgia
 
126
Hawaii
 
9
Idaho
 
7
Illinois
 
64
Indiana
 
33
Iowa
 
27
Kansas
 
15
Kentucky
 
35
Louisiana
 
36
Maine
 
3
Maryland
 
24
Massachusetts
 
6
Michigan
 
59
Minnesota
 
26
Mississippi
 
21
Missouri
 
52
Montana
 
6
Nebraska
 
8
Nevada
 
4
New Hampshire
 
6
New Jersey
 
11
New Mexico
 
20
New York
 
49
North Carolina
 
91
North Dakota
 
6
Ohio
 
88
Oklahoma
 
23
Oregon
 
11
Pennsylvania
 
44
Rhode Island
 
2
South Carolina
 
56
South Dakota
 
6
Tennessee
 
95
Texas
 
387
Utah
 
10
Vermont
 
1
Virginia
 
34
Washington
 
19
Washington, DC
 
2
West Virginia
 
24
Wisconsin
 
34
Wyoming
 
1
     
TOTAL PROPERTIES
 
1,990

Buildings. The buildings generally are rectangular and are constructed from various combinations of stucco, steel, wood, brick and tile. Building sizes range from approximately 700 to 29,300 square feet. Generally, buildings owned on properties are freestanding and are surrounded by paved parking areas. Buildings are suitable for conversion to various uses, although modifications may be required prior to use for other than restaurant operations. Depreciation expense is computed for buildings and improvements using the straight-line method using a depreciable life of 39 to 40 years for federal income tax purposes. As of December 31, 2006 the aggregate depreciated cost basis of the properties owned (including properties owned through consolidated joint ventures) for federal income tax purposes was $1.8 billion.

The following table lists the properties owned as of December 31, 2006 by restaurant chain.

Restaurant Chain
Number of Properties
 
Wendy’s
185
Burger King
175
Pizza Hut
151
Arby’s
146
Jack in the Box
112
Captain D’s Seafood
100
Golden Corral
81
Hardees
64
International House of Pancakes
62
Denny’s
46
Checkers
39
Taco Cabana
33
KFC
33
Shoney’s
30
Applebee’s
30
Perkins
28
Grandy’s
26
Dairy Queen
26
Taco Bell
25
Bennigan’s
24
Other
574
 
TOTAL:
1,990

Management considers the properties to be well maintained and sufficient for the Company's operations and believes they are adequately covered by insurance. In addition, the Company has obtained contingent liability and property coverage. This insurance is intended to reduce the Company's exposure in the unlikely event a tenant's insurance policy lapses or is insufficient to cover claims relating to the property.

Leases. The Company leases the properties to operators of selected national and regional fast-food restaurant chains. The leases are generally on a long-term triple-net basis, which generally provide that the tenant is responsible for repairs, maintenance, property taxes, utilities and insurance. Generally, a lessee is required, under the terms of its lease agreement, to make capital expenditures to refurbish restaurant buildings, premises, signs and equipment so as to comply with the lessee's obligations, if applicable, under the franchise agreement to reflect the current commercial image of its restaurant chain. These capital expenditures are required to be paid by the lessee during the term of the lease. The terms of the leases of the properties owned by the Company are described in Item 1. Business - Leases.




The following table lists properties as of December 31, 2006 by tenant and includes average age of buildings, annualized base rent and percent of total annualized base rent. Each lease has a monthly fixed lease payment (“base rent”) due each month. Base rent represents the monthly cash rent for December 2006 on an annualized basis. It does not represent a rent number in accordance with generally accepted accounting principles as it does not include the straight-line impact of any rent escalators or any contingent rent based on tenant sales exceeding a certain threshold. In 2006, those amounts collectively were $24.4 million.

Tenant
Total Number of Properties
 
Average Age of Buildings (years)
 
Annualized Base Rent
(in thousands)
 
Percent of Total Annualized Base Rent
Jack In The Box, Inc. (1)
116
 
11.5
 
$ 13,262
 
7.0%
Captain D’s, LLC
91
 
21.8
 
7,210
 
3.8%
Sybra, Inc.
79
 
16.8
 
6,207
 
3.3%
Golden Corral Corporation
70
 
10.8
 
11,475
 
6.1%
Carrols Corporation (2)
66
 
17.0
 
6,968
 
3.7%
IHOP Properties, Inc.
60
 
10.1
 
7,728
 
4.1%
CKE Restaurants
52
 
16.3
 
4,147
 
2.2%
Checkers Drive-In Restaurants, Inc.
40
 
12.3
 
1,915
 
1.0%
NPC International, Inc.
39
 
25.5
 
1,211
 
0.6%
Fourjay, LLC
32
 
19.3
 
2,625
 
1.4%
S&A Properties Corp.
29
 
21.1
 
5,480
 
2.9%
Grandy’s, Inc.
27
 
23.0
 
1,538
 
0.8%
Dennys, Inc.
26
 
18.2
 
2,347
 
1.2%
Other
1,263
 
17.2
 
117,164
 
61.9%
Total
1,990
     
$ 189,277
 
100.0%

 
(1)
Includes Jack in the Box Inc. and Jack in the Box Eastern Division, LP affiliated under common control of Jack in the Box Inc.
    (2)    Includes Carrols Corporation and Texas Taco Cabana, LP affiliated under common control of Carrols Corporation.




The following table shows the aggregate number of leases which expire each calendar year through the year 2021, as well as the number of leases which expire after December 31, 2021. The table does not reflect the exercise of any of the renewal options provided to the tenant under the terms of such leases.

Year
Total Number of Properties
(1)
 
Annualized Base Rent
(in thousands)
 
Percent of Total Annualized Base Rent
2007
58
 
3,720
 
2.0%
2008
82
 
5,070
 
2.7%
2009
100
 
7,411
 
3.9%
2010
104
 
9,122
 
4.8%
2011
80
 
7,424
 
3.9%
2012
96
 
10,079
 
5.3%
2013
74
 
7,871
 
4.2%
2014
145
 
16,231
 
8.6%
2015
93
 
10,819
 
5.7%
2016
179
 
15,322
 
8.1%
2017
169
 
16,975
 
9.0%
2018
171
 
21,197
 
11.2%
2019
140
 
14,866
 
7.9%
2020
53
 
4,929
 
2.6%
2021
51
 
5,347
 
2.8%
Thereafter
318
 
32,763
 
17.3%
Total
1,913
 
$ 189,146
 
100.0%

(1)
Excludes properties that were not leased at December 31, 2006 and properties that were leased on a month to month basis.


Item 3. Legal Proceedings.

On January 18, 2005, Robert Lewis and Sutter Acquisition Fund, LLC, two limited partners in the Income Funds, filed a class action lawsuit on behalf of the limited partners of the Income Funds against Trustreet, CNLRP, the Income Funds, the general partners of the Income Funds, CNL Restaurant Investments, Inc. and CNL Restaurant Capital Corp. in the District Court of Dallas County, Texas (Cause No. 05-00083). The complaint alleged that the general partners of the Income Funds breached their fiduciary duties in connection with the proposed 2005 Merger between the Income Funds and subsidiaries of the operating partnership of Trustreet, and that Trustreet, and CNLRP aided and abetted such alleged breaches of fiduciary duties. The complaint further alleged that the Income Funds’ general partners violated provisions of the Income Funds’ partnership agreements and demanded an accounting as to the affairs of the Income Funds. The plaintiffs are seeking unspecified compensatory and exemplary damages and equitable relief, including an injunction of the 2005 Merger. On April 26, 2005, a supplemental plea to jurisdiction hearing was held with a ruling expected May 13, 2005. On May 2, 2005, the plaintiffs amended their lawsuit to add allegations that the general partners of the Income Funds, with CNLRP and USRP, prepared and distributed a false and misleading final proxy statement filing to the limited partners of the Income Funds and the stockholders of CNLRP and USRP. On May 26, 2005, the Court entered a Final Order Dismissing Action for lack of subject matter jurisdiction. On June 22, 2005, the plaintiffs filed a Notice of Appeal of the Order of Dismissal. On September 7, 2005, the plaintiffs filed an appellants’ brief. On November 7, 2005, the Company and the other defendants filed their Brief of Appellees’. On December 12, 2005, the plaintiffs filed a brief in reply. On September 21, 2006, the plaintiffs submitted a letter brief to the Court of Appeals setting forth additional arguments; the defendants filed a responsive letter brief on September 25, 2006. The Court of Appeals heard oral argument on September 27, 2006. As of March 29, 2007, the Court of Appeals has not yet issued its decision. Management of the Company believes the lawsuit, including the request for certification is, without merit and intends to defend vigorously against such claims. Notwithstanding a potential success in this action, we could be required to indemnify the former general partners of the Income Funds under the terms of the partnership agreements that previously governed the Income Funds.

In connection with the GE Capital Merger announcement, on October 31, 2006, a purported shareholder class action lawsuit related to the GE Capital Merger Agreement was filed in the Circuit Court for Baltimore County, Maryland naming Trustreet, each of Trustreet’s former directors and GE Capital Solutions as defendants.  The lawsuit, Dr. Hila Louise-Chashin-Simon Foundation, Inc. v. Trustreet Properties, Inc., et al (Case No. C-06-11890), alleges, among other things, that the $17.05 per share in cash paid to the holders of Trustreet’s common stock in connection with the GE Capital Merger is inadequate, that the individual director defendants breached their fiduciary duties to Trustreet’s stockholders in negotiating and approving the GE Capital Merger Agreement, that GE Capital Solutions aided and abetted the director defendants in such alleged breach and that all defendants conspired in such breach.  The complaint seeks the following relief: (i) a declaration that the lawsuit is properly maintainable as a class action and a certification of the plaintiff as a class representative; (ii) a declaration that the director defendants have breached their fiduciary duties owed to the plaintiff and other members of the class, that GE Capital Solutions aided and abetted such breaches and that all defendants conspired in such breaches; (iii) equitable relief enjoining the GE Capital Merger and, if such transaction is consummated, rescinding the transaction; (iv) appropriate damages; and (v) an award of attorneys’ and experts’ fees to the plaintiff.  Management of the Company believes that this lawsuit is without merit and intends to vigorously defend the action.

In the ordinary course of business, the Company is a defendant in legal proceedings, suits and claims common to companies engaged in the business of ownership, management and leasing of real estate. The Company believes that it is not currently involved in any litigation, claims or proceedings in which an adverse outcome would have a material adverse effect on the Company’s operating results and financial condition.

Item 4. Submission of Matters to a Vote of Security Holders.

Not required by this form.


PART II


Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

As of March 29, 2007, all of the common equity interests in the Company were owned by Holdco. There is currently no established trading market for the Company’s equity securities.
 

During the year ended December 31, 2005 and through September 2006, dividends on common stock were declared monthly. Beginning after September 2006, dividends per share of common stock were declared quarterly. For each calendar quarter indicated, the following table reflects dividends per share of common stock declared by Trustreet and CNLRP (predecessors to the Company):

 
Quarter Ended
 
2006
 
2005
 
           
March 31
 
$
0.33
 
$
0.33
 
June 30
   
0.33
   
0.33
 
September 30
   
0.33
   
0.33
 
December 31
   
0.33
   
0.33
 

The Company did not declare any distributions on its common shares outstanding from January 1, 2007 through February 26, 2007, the date of the GE Capital Merger. Effective with the GE Capital Merger, the Company ceased to be a separate publicly traded Company as described in Item 1 - Business - GE Capital Merger. Effective with the GE Capital Merger, we no longer have any common shares outstanding. All of our equity interests are held by Holdco.




Equity Compensation Plan Information

At December 31, 2006, the only equity compensation plan that Trustreet had was its Flexible Incentive Plan (the “Plan”), which was approved by Trustreet’s stockholders. Set forth below is certain information with respect to the Plan as of December 31, 2006.

Plan Category
Number of securities to be issued upon exercise of outstanding options (2)
 
Weighted average exercise price of outstanding options
 
Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in first column (1)
           
Equity compensation plans approved
by security holders
4,000
 
$ 12.23
 
30,910
Equity compensation plans not
approved by security holders
 
 
           
Total
4,000
 
$ 12.23
 
30,910

(1)
Pursuant to the terms of the Plan, the maximum number of shares potentially available for issuance under the Plan equals 4.9 percent of Trustreet’s issued and outstanding shares of common stock. As of December 31, 2006, Trustreet had reserved for issuance under the Flexible Incentive Plan only the shares reported in the above table. Trustreet terminated the Plan on February 26, 2007 in connection with the GE Capital Merger. As a result, no awards remain outstanding.

(2)
On February 26, 2007, effective with the GE Capital Merger, each outstanding option to purchase shares of Trustreet common stock received the GE Capital Merger consideration as described in Note 20 to the consolidated financial statements. In addition, restricted share awards granted under Trustreet’s compensation plans became fully vested and free of any forfeiture restrictions immediately prior to the effective time of the GE Capital Merger and received GE Capital Merger consideration, as described in Note 20 to the consolidated financial statements.



Item 6. Selected Financial Data.

Not required by this form.





Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information, including, without limitation, the Quantitative and Qualitative Disclosures About Market Risk that are not historical facts, may be forward-looking statements. These statements generally are characterized by terms such as “believe,” “expect,” “may,” “intend,” “might,” “plan,” “estimate,” “project,” and “should”. Although we believe expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Factors that might cause such a difference include:

 
·
changes in general economic conditions;
 
·
general risks affecting the real estate industry (including the inability to enter into or renew leases on favorable terms, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate);
 
·
general risks affecting the restaurant industry (including any disruption in the supply or quality of ingredients, the availability of labor, and the continued demand for restaurant dining);
 
·
our cash flow from operations may be insufficient to fund existing operations;
 
·
changes in interest rates;
 
·
our ability to refinance existing financial obligations;
 
·
our ability to locate suitable tenants for our properties;
 
·
our ability to resolve any tenant defaults that could lead to a decline in value and as a result, subject us to impairment charges;
 
·
the ability of tenants and borrowers to make payments under their agreements with us;
 
·
possible adverse changes in tax and environmental laws, as well as the impact of newly adopted accounting principles on our accounting policies and on period-to-period comparisons of financial results;
 
·
our ability to re-lease or sell properties that are currently vacant or that may become vacant;
 
·
our ability to sell properties through our investment property sales program as a result of any possible changes in tax legislation such as elimination or change of capital gains rates or change to the like-kind exchange (Section 1031) provisions; and
 
·
our ability to manage our debt levels, which could adversely affect our cash flow.

Overview of Management’s Discussion and Analysis

Trustreet was the name adopted upon the merger of CNL Restaurant Properties, Inc. (“CNLRP”) and eighteen CNL Income Fund partnerships (“the Income Funds”) with and into U.S. Restaurant Properties, Inc. (“USRP”) on February 25, 2005 (the “2005 Merger”). Trustreet was a Maryland corporation originally incorporated in 1997.

On October 30, 2006, Trustreet entered into an Agreement and Plan of Merger to be acquired by a subsidiary of General Electric Capital Corporation (“GE Capital”), which, in turn, is a subsidiary of the General Electric Company. On February 22, 2007, Trustreet’s stockholders approved the acquisition. On February 26, 2007, GE Capital’s acquisition of Trustreet was completed as further described below under GE Capital Merger, and the surviving entity ceased to be a separate publicly traded company. Immediately prior to the completion of the acquisition on February 26, 2007, Trustreet assigned all of its assets and liabilities to its direct wholly owned subsidiary, FF-TSY Holdings Company II, LLC, a Delaware limited liability company (“the “Company”) and the Company became Trustreet’s successor, as also described below under GE Capital Merger.

GE Capital Merger

On February 26, 2007, Trustreet engaged in two distinct but related transactions:

 
·
The assignment by Trustreet to the Company (which immediately prior to such assignment was a newly-formed direct wholly owned subsidiary of Trustreet) of all of its assets and liabilities (the “Assignment and Assumption”); and

 
·
Immediately following the Assignment and Assumption, the GE Capital Merger of Trustreet with and into TSY-FF Acquisition Company, Inc., a Maryland corporation and an indirect wholly owned subsidiary of GE Capital (“Merger Sub”), pursuant to that certain Agreement and Plan of GE Capital Merger, dated as of October 30, 2006, as amended (the “GE Capital Merger Agreement”) by and among Trustreet, CNL APF Partners, LP, a Delaware limited partnership and indirect subsidiary of Trustreet (“CNL Partnership”), GE Capital, FF-TSY Holding Company, Inc., a Delaware corporation and direct parent of Merger Sub (“Holdco”), Merger Sub, and Franchise-TSY Acquisition LLC, a Delaware limited liability company and wholly owned subsidiary of Merger Sub (“Partnership Merger Sub”).

Assignment and Assumption

Concurrently with the Assignment and Assumption on February 26, 2007, Trustreet, the Company, FF-TSY Holding Company II, Inc., a Delaware corporation at the time of the Assignment and Assumption a direct wholly owned subsidiary of Trustreet, and Wells Fargo Bank, National Association as Trustee under the indenture (the “Trustee”) entered into a supplemental indenture (the “Supplemental Indenture”) which amended the indenture governing Trustreet’s outstanding 7.5 percent Senior Notes due in 2015 (the “Notes”) and provided for the express assumption by the Company of all obligations of Trustreet on the Notes and under the Indenture.

GE Capital Merger Transactions

Following the effectiveness of the Assignment and Assumption, Trustreet caused Partnership Merger Sub to merge with and into CNL Partnership (the “Partnership Merger”), with CNL Partnership being the surviving entity and becoming a wholly owned subsidiary of the Company. Pursuant to the Partnership Merger, each holder of units of limited partnership interest in CNL Partnership other than Trustreet and its subsidiaries became entitled to receive $17.05 in cash, without interest and less any applicable withholding taxes, for each unit of limited partnership they owned in CNL Partnership immediately prior to the effective time of the Partnership Merger.

Immediately following the Partnership Merger, Trustreet was merged with and into Merger Sub, with Merger Sub being the surviving entity and a direct wholly owned subsidiary of Holdco. Pursuant to the GE Capital Merger, holders of Trustreet common stock (other than Trustreet and its subsidiaries) became entitled to receive $17.05 in cash, without interest and less any applicable withholding taxes, for each share of common stock issued and outstanding and held by such holders immediately prior to the effective time of the GE Capital Merger. Also pursuant to the GE Capital Merger, each share of Series A Preferred Stock that was outstanding immediately prior to the effective time of the GE Capital Merger, other than shares owned by Trustreet, its subsidiaries, or Merger Sub, was converted into, and cancelled in exchange for, the right to receive, without interest and less any applicable withholding taxes, cash in the amount of $25.00, plus any accrued and unpaid dividends through and including February 26, 2007. Finally, each share of Series C Preferred Stock outstanding immediately prior to the effective time of the GE Capital Merger was converted into, and cancelled in exchange for, the right to receive one share of 7.5 percent Series C Redeemable Convertible Preferred Stock of Merger Sub (the “Merger Sub Series C Preferred Stock”). Upon completion of the GE Capital Merger, the Company was a direct wholly owned subsidiary of Merger Sub, which was in turn a direct wholly owned subsidiary of Holdco, which is in turn an indirect wholly owned subsidiary of GE Capital.

Liquidation of Merger Sub

Following the GE Capital Merger, Merger Sub assigned all of its assets and liabilities to Holdco (other than cash deposited by Merger Sub with the paying agent for the GE Capital Merger in an amount sufficient to discharge its obligations with respect to holders of the Merger Sub Series C Preferred Stock) and Merger Sub and Holdco filed Articles of Transfer with the State Department of Assessments and Taxation of the State of Maryland (“SDAT”) in accordance with Maryland law. On March 20, 2007, Merger Sub caused Articles of Dissolution to be filed with SDAT and the legal existence of Merger Sub was terminated. Pursuant to the dissolution and liquidation of Merger Sub, holders of Merger Sub Series C Preferred Stock received $25.00 plus accrued and unpaid dividends through the date of payment for each share of Merger Sub Series C Preferred Stock they received in the GE Capital Merger. Following the dissolution of Merger Sub, the Company is a direct wholly owned subsidiary of Holdco, which, in turn, is an indirect wholly owned subsidiary of GE Capital, which, in turn, is a subsidiary of General Electric Company.

On March 1, 2007 and March 23, 2007, Moody’s Investors Service, Inc. and Standard & Poor’s Rating Service, respectively, upgraded the credit rating on the Notes to Investment Grade Status (as defined in the Indenture governing the Notes). On March 28, 2007, the Company delivered an officers’ certificate to the Trustee under the Indenture certifying that the conditions relating to a Suspension Period (as defined in the Indenture) had been satisfied and thereby causing a Suspension Period to commence on such date. During the Suspension Period, certain restrictive covenants contained in the Indenture will not be applicable and, as such, will not restrict the Company’s activities that would otherwise have been limited or restricted absent the Suspension Period.

The financial statements of FF-TSY Holding Company II, LLC reflect the 2005 Merger of CNLRP, USRP and the Income Funds on February 25, 2005. The financial statements present CNLRP as the acquiror for financial reporting purposes. Therefore, the financial results included in this Form 10-K include the historical financial results of only CNLRP from January 1, 2004 through February 24, 2005 and the financial results of all the merged entities effective February 25, 2005. Accordingly, references to “we” or “us” in this Management’s Discussion and Analysis relate to CNLRP for periods prior to February 25, 2005, Trustreet for the periods of February 26, 2005 through February 26, 2007 and FF-TSY Holding Company II, LLC for subsequent periods. Up through the date of the GE Capital Merger, we conducted our operations through two segments, a real estate segment and a specialty finance segment, as further described below in “Results of Operations”. On February 26, 2007, effective with the GE Capital merger, the Company changed its strategy of both segments to generally hold all assets for long-term investment with any sales more selective in the upcoming years.

Prior to the GE Capital Merger, we financed real estate subject to triple-net leases to national and regional restaurant operators like Wendy’s, Golden Corral, Burger King, Jack in the Box and Arby’s. Our key customers were:

 
1.
restaurant operators of major national and regional chains;
 
2.
restaurant property investors; and
 
3.
retail real estate developers.

We owned approximately 2,185 properties at December 31, 2006 with an investment of $2.2 billion, substantially all of which are leased to restaurant operators. Our real estate segment owned 1,990 of these properties as long term investments in the core REIT portfolio. The remaining properties were held in our taxable REIT subsidiary through which our specialty finance segment operated. Since January 1995, we have provided net-lease financing to the restaurant industry. As a result of the GE Capital Merger, we do not expect to originate or acquire a large number of properties going forward.

Liquidity and Capital Resources

Through February 26, 2007 we intended to meet our short-term liquidity requirements through cash flows provided by operations, our line of credit, our warehouse lines, and other short-term borrowings. Our short-term liquidity needs include:

· operating expenses; and
· current debt service requirements.

2005 Merger Financing

On February 25, 2005, we completed the 2005 Merger and CNLRP stockholders received 0.7742 shares of USRP common stock and 0.16 shares of newly issued USRP 7.5% Series C Redeemable Convertible Preferred Stock (“Preferred-C”) for each share of CNLRP stock. The Preferred-C had a liquidation preference of $25.00 per share. The aggregate dollar value of the 2005 Merger consideration received by CNLRP stockholders was approximately $788 million based on the closing stock price of USRP common stock on February 24, 2005 and the liquidation value of Preferred-C. CNLRP was considered the acquiror for accounting purposes. The purchase price used to account for the exchange of interests between USRP and CNLRP was $473 million before transaction costs. Income Fund limited partners received approximately 84 percent of their consideration in cash and the remainder in existing USRP Series A Cumulative Convertible Stock (“Preferred-A”). The Preferred-A had a liquidation preference of $25.00 per share. Total consideration received by the Income Fund partners was approximately $545 million based on the February 24, 2005 trading price of the Preferred-A. The Income Fund acquisitions were accounted for as a purchase with a price of $538 million. Prior to the GE Capital Merger, the USRP then Trustreet common, Preferred-A, and Preferred-C shares were all traded on the New York Stock Exchange using our ticker symbol, TSY.

We restructured our debt following the 2005 Merger. We initially entered into bridge facilities with an aggregate capacity of $775.0 million to fund the cash portion of the 2005 Merger and address impending debt maturities. During 2005, we obtained long-term financings to pay down the bridge facilities, repay the subordinated note payable outstanding during 2004, purchase properties, and improve capacity on our revolver. Those included a $275.0 million net lease securitization due in 2012, $300.0 million in Notes, a $275.0 million five-year term loan and a revolving credit facility with a maximum capacity of $175 million.

In 2005, we also issued 1.4 million shares of common stock through a controlled equity program and issued 8.05 million shares through a public offering totaling $129 million in proceeds, net of stock issuance costs to pay down debt and acquire properties held for investment.

Our debt structure at December 31, 2006 was as follows:

Debt
Balance
(in millions)
 
Approximate
Interest Rates
 
Expected Maturity Date
 
Type
 
                 
Mortgage Warehouse Facility (c)
$ 115.5
 
LIBOR + 1.25%
 
Mar-07 (d)
 
Collateralized
 
Mortgage Warehouse Facility (c)
281.8
 
LIBOR + 1.15%
 
Mar - May-07 (d)
 
Collateralized
 
Revolver (a)
159.0
 
LIBOR + 1.50%
 
April-08 (d)
 
Uncollateralized
 
Term Loan (a)
275.0
 
LIBOR + 2.00%
 
April-10 (d)
 
Uncollateralized
 
Series 2001-4 Bonds
21.4
 
8.89%
 
2009-2013
 
Collateralized
 
Series 2005 Bonds
241.0
 
4.72%
 
2012
 
Collateralized
 
Senior Unsecured Notes (b)
301.0
 
7.50%
 
April-15
 
Uncollateralized
 
Series 2000-A Bonds
191.5
 
8.02%
 
2009-2017
 
Collateralized
 
                 
Total Debt
$1,586.2
             

 
(a)
We have entered into hedging transactions to reduce our sensitivity to floating rate debt in the form of swaps and caps. This agreement was terminated in connection with the GE Capital Merger.
 
(b)
Balance includes a premium of $1.0 million at December 31, 2006.
 
(c)
We also paid exit fees to the lenders upon the sale of properties financed by the warehouse facilities which we recorded as interest expense. We paid exit fees of $0.3 million, $1.2 million, and $1.3 million during the years ended December 31, 2006, 2005, and 2004, respectively. Effective March 31, 2006 and May 31, 2006, we eliminated the exit fees under the mortgage warehouse facilities that expire in March and May 2007, respectively, as part of the renewals of the agreements.
 
(d)
We paid off these facilities with a capital contribution from Holdco effective with the GE Capital Merger.

Our weighted average expected contractual maturity of debt, excluding our revolving line of credit and the short-term mortgage warehouse facilities, was approximately 6.55 years, 5.36 years, and 5.20 years at December 31, 2006, 2005, and 2004, respectively. Two secured financings matured in 2006 that we paid off using our mortgage warehouse facility, as described further below under Mortgage Warehouse Facilities and Bonds Payable.

Mortgage Warehouse Facilities. Through the date of the GE Capital Merger, we financed a significant portion of our activities through our mortgage warehouse facilities. We repaid all amounts outstanding under both warehouse facilities with capital contributions received from Holdco and terminated the agreements as part of the GE Capital Merger. We expect to replace this source of capital.

Bonds Payable. We have medium-term note and long-term bond financings, referred to collectively as bonds payable. We use rental income received on properties and interest income received on mortgage loans and equipment leases pledged as collateral on medium and long-term financing to make scheduled reductions in bond principal and interest. We had $204.5 million in bonds mature in 2006 that were collateralized by real estate, which we repaid by obtaining bridge financings under one of our mortgage warehouse facilities, as described above. Through February 26, 2007, we examined a structure to facilitate the repayment of the 2006 bridge financings through a secured financing collateralized by a portion of the current collateral as well as other restaurant properties already owned or purchased in 2006. Through December 31, 2006, we incurred $3.3 million in costs relating to putting the secured financing in place. As a result of the GE Capital Merger, plans to proceed with the secured financing were abandoned and we incurred a $1 million breakage fee as a result of abandoning such plans. We wrote-off the $3.3 million in costs as of December 31, 2006.

Revolving and Term Loan. Our short-term debt included a $175 million revolving line of credit (the “Revolver”). We utilized the Revolver from time to time to manage the timing of inflows and outflows of cash from operating activities. The initial maturity date of the Revolver was April 2008, with an optional one year extension. We amended the Revolver and Term Loan facilities in September 2006 to decrease the interest rate, add $200 million in optional additional expansion capacity and refine certain terms and definitions. In December 2006, we exercised our option and borrowed $25 million against the $200 million additional expansion capacity. During 2005, we entered into a Term Loan of $275 million. We repaid all amounts outstanding under the Revolver and Term Loan with capital contributions received from Holdco as part of the GE Capital Merger.

Notes Payable. During 2005, we also issued $300 million Notes at a premium of $1.1 million. The Notes accrue interest at a rate of 7.5 percent per annum and pay interest semi-annually in arrears. We can redeem the Notes in whole or in part, at any time on or after April 1, 2010 at specified redemption prices.

Currently with the assignment and assumption of all of Trustreet’s assets and liabilities to the Company on February 26, 2007, Trustreet, the Company, FF-TSY Holding Company II, Inc., a Delaware corporation and direct wholly owned subsidiary of Holdco and Wells Fargo Bank, National Association, as Trustee, entered into a Supplemental Indenture which amended the original indenture under which the notes were issued and provided for the express assumption by the Company of all obligations of Trustreet on the Notes and under the original indenture.

Contractual Obligations, Contingent Liabilities and Commitments.

The following table presents contractual cash obligations and related payment periods as of December 31, 2006:

   
Payments due by period (in millions)
 
 
 
Contractual cash obligations:
 
2007
 
2008 to 2009
 
2010 to 2011
 
 
Thereafter
 
Total
 
                       
Borrowings (1) (5)
 
$
422.1
 
$
217.0
 
$
344.6
 
$
601.4
 
$
1,585.1
 
Interest expense payments (4) (5)
   
86.8
   
145.2
   
90.8
   
110.3
   
433.1
 
Ground leases
   
2.7
   
4.4
   
3.4
   
14.8
   
25.3
 
Leased office space (2)
   
1.5
   
3.1
   
3.3
   
5.0
   
12.9
 
Total contractual cash obligations (5)
 
$
513.1
 
$
369.7
 
$
442.1
 
$
731.5
 
$
2,056.4
 

The following table presents commitments, contingencies and guarantees and related expiration periods as of December 31, 2006:

Estimated payments due by period (in millions)
   
 
Commitments, contingencies and guarantees
   
2007
   
2008 to 2009
   
2010 to 2011
   
Thereafter
   
Total
 
                                 
Property purchase commitments (3)
 
$
28.3
 
$
 
$
 
$
 
$
28.3
 
Total commitments, contingencies and guarantees
 
$
28.3
 
$
 
$
 
$
 
$
28.3
 




(1)
The maturities on outstanding indebtedness assume loan repayments are made on the Mortgage Warehouse Facilities in accordance with the contractual obligation even though these facilities are typically renewed each year. The maturities on outstanding indebtedness also assume that bonds payable amortize in accordance with estimated payment amounts.

(2)
We lease our office space from two limited partnerships, affiliates of two or our former directors own the partnership interests, for approximately $1.5 million per year, with scheduled rent increases. Our lease expires in 2014.

(3)
Represents opportunities for net lease property purchases approved for funding and accepted by sellers as of December 31, 2006. Through the end of February 2007, we purchased $3.0 million in properties and as of February 27, 2007 had total commitments worth $55.1 million subject to a leaseback.

(4)
Excludes amortization of deferred financing costs and uses the December 31, 2006 interest rate for all variable rate debt.

(5) In connection with the GE Capital Merger, we received capital contributions from Holdco to repay approximately $760 million in debt and accrued interest relating to the Revolver, Term Loan and Mortgage Warehouse Facilities.

Cash Flows

   
Year ended December 31,
 
   
(millions)
 
   
2006
 
2005
 
2004
 
Cash flows provided by operating activities
 
$
28.4
 
$
48.4
 
$
39.0
 
Cash flows provided by/(used in) investing activities
   
18.6
   
(453.7
)
 
50.9
 
Cash flows provided by/(used in) financing activities
   
(30.5
)
 
403.1
   
(104.2
)
                     
Net increase (decrease) in cash and cash equivalents
   
16.5
   
(2.2
)
 
(14.3
)
Cash and cash equivalents at beginning of year
   
20.5
   
22.7
   
37.0
 
                     
Cash and cash equivalents at end of period
 
$
37.0
 
$
20.5
 
$
22.7
 

Cash Flows Provided by/(Used in) Operating Activities

Our sources of cash from operating activities related to rental payments from our tenants, collections of interest on our portfolio of loans and investments in retained interests on previous securitizations, and net proceeds from the sales of property inventory from our IPS program. Our uses of cash from operations included payments of operating expenses, interest on our outstanding indebtedness and the acquisition of inventory for our IPS program. Our cash from operations for the year ended December 31, 2006, was $28.4 million.

Cash from operating activities was also impacted by the acquisition and sales activity in our IPS program. During 2006, we received net sales proceeds of $262 million from the sales of properties from our IPS program. We had a net use of cash during as a result of acquiring properties at a faster rate than we sold them. For the year ended December 31, 2006, we originated $372 million in net leases.

Investing Activities

Sources of cash from investing activities during 2006 included sales of some vacant and some performing properties within our real estate segment and included the collection of principal under our mortgage and notes receivables. Uses of cash included the acquisition of properties for long-term investment in our real estate segment.




Financing Activities

Proceeds from financing activities during 2006 came from borrowings under our Revolver and from bridge financings under one of our mortgage warehouse facilities. During 2006, we used the proceeds from financing activities to pay the Revolver, distributions and costs related to the proposed secured financing that was abandoned as a result of the GE Capital Merger. During 2006, we used proceeds from the bridge financing to repay the Series 2001-A bonds and the Series 2001 bonds that matured in 2006. During 2006, we used proceeds from our mortgage warehouse facilities to acquire properties to be held as inventory under our IPS program and repaid the mortgage warehouse facilities from the sales proceeds of these inventory properties. We also repaid a portion of our bonds payable in accordance with their scheduled maturities and any required prepayments.

Through the date of the GE Capital Merger, our ability to internally fund capital needs was limited since we had to distribute at least 90 percent of our net taxable income (excluding net capital gains) to stockholders to qualify as a REIT. We made distributions to stockholders in excess of the amount necessary to comply with REIT qualification requirements under the federal tax code. Effective with the GE Capital Merger, Trustreet ceased to exist and we are subject to corporate income taxes. During the year ended December 31, 2006, we distributed $89.1 million to our common shareholders, or an annualized rate of $1.32. Effective with the GE Capital Merger, we no longer have any common shares outstanding. All of our equity interests are held by Holdco.

During 2006, we declared and paid dividends to holders of preferred stock. Preferred-A paid a quarterly dividend at an annualized rate of $1.93 per share and Preferred-C paid a quarterly dividend at an annualized rate of $1.875 per share. Common stock dividends were declared and paid monthly through September 30, 2006, at $0.11 per share, annualized at $1.32 per share. Beginning after September 2006, we decided to pay dividends on common stock quarterly, and a $0.33 per share amount was paid in December 2006. During 2006, we declared dividends to preferred stockholders of $28.7 million. As described above under the GE Capital Merger, we no longer have any preferred shares outstanding.

In 2006, the distributions to common stockholders were considered to be 67.50 percent taxable income and 32.50 percent return of capital. The 2006 distributions to all classes of preferred stockholders were 100 percent taxable income.

Net cash from operating activities was $28.4 million for the year ended December 31, 2006.  The deficiency of $89.4 million between net cash from operating activities and dividends paid for 2006 was funded though a combination of proceeds from sales of assets, collections on mortgage, equipment and other notes receivable and borrowings from the Company’s Revolver.

Liquidity Risks

In addition to the liquidity risks discussed above in connection with our IPS program, tenants or borrowers that are experiencing financial difficulties could impact our cash flow. In the event that financial difficulties persist, our collection of rental payments, and interest and principal payments on our small portfolio of mortgage loans could be interrupted. At present, most of these tenants and borrowers continue to pay rent, principal and interest substantially in accordance with lease and loan terms. However, we continue to monitor each tenant’s and borrower’s situation carefully and will take appropriate action to maximize the value of our investment.

Generally, we have used a triple-net lease to lease our properties to our tenants that requires the tenant to pay expenses on the property. The lease somewhat insulates us from significant cash outflows for maintenance, repair, real estate taxes or insurance. However, if the tenant experiences financial problems, rental payments could be interrupted and we may incur expenses of maintaining the property until the property can be sold or re-leased to another tenant. In the event of tenant bankruptcy, we may be required to fund certain expenses in order to retain control or take possession of the property. This could expose us to successor liabilities and further affect liquidity.

Additional liquidity risks include the possible occurrence of economic events that could have a negative impact on the franchise securitization market and affect the quality or perception of the loans or leases underlying our previous securitization transactions. We conducted our previous securitizations using bankruptcy remote entities. These entities exist independently from the rest of our Company and their assets are not available to satisfy the claims of our creditors, any subsidiary or its affiliates. Certain net lease properties are pledged as collateral for the triple-net lease bonds payable. In the event of a tenant default relating to pledged properties, we may elect to contribute additional properties or substitute properties into these securitized pools from properties we own not otherwise pledged as collateral. If we fail to comply with certain financial ratio covenants, then principal payments on the outstanding bonds will be accelerated. During 2006, 2005 and 2004, certain required performance cash flow ratios were below the required threshold primarily due to tenant defaults and bankruptcies in prior years. As a result, cash flow remaining in excess of the scheduled principal and interest payments was required to be used for additional debt reduction. For the years ended December 31, 2006, 2005, and 2004, we were required to make additional debt reductions of approximately $2.5 million, $1.8 million and $0.8 million, respectively, as a result of not complying with certain ratios in the net lease pools.

To date, the ratings on the loans and leases underlying the securities issued in these transactions and recorded in our borrowings, have been affirmed. Upon the occurrence of a significant amount of delinquencies and/or defaults, one or more of the three rating agencies may choose to place a securitized pool on ratings watch or even downgrade one or more classes of securities to a lower rating. Should we experience a significant number of defaults in a securitization, and the securities undergo a negative ratings action, we could experience material adverse consequences impacting our ability to continue earning income as servicer and have difficulty refinancing maturing debt.

Avian Flu

We conduct business with restaurant companies that have both domestic and international operations. While previous episodes of Avian Flu have affected the business of these companies’ international operations, it did not materially affect the financial results of their global business. However, should there be an outbreak of Avian Flu on a worldwide basis (a pandemic) including the United States, the negative impact could have material adverse consequences on the financial performance of our existing customers.

Off-Balance Sheet Transactions

We currently hold residual interests in two securitizations, the assets and liabilities of which are not consolidated into our financial statements. The carrying value of our investment in the bond certificates was $15.1 million at December 31, 2006 and is included in “other assets” in the consolidated financial statements. The following table shows the assets and the related bonds outstanding in each securitization pool at December 31, 2006:

   
 (in millions)
 
   
 Mortgage loans
 
Bonds outstanding
 
   
 in pool at par
 
At face value
 
        
Loans and debt supporting 1998-1 Certificates
 
 $ 105.8
 
$ 105.8
 
Loans and debt supporting 1999-1 Certificates
   
174.3
   
174.3
 
   
$
280.1
 
$
280.1
 
               

On March 15, 2007, a rating agency downgraded certificates in these off-balance sheet pools, including certain of the 98-1 certificates held by us. They also placed on watch certain others we hold, as well as certain of those held by third parties. Also on March 15, 2007, they downgraded certain of the 99-1 certificates held by third parties. The action does not change our view of the valuation or carrying value of the certificates we own, and we do not expect a significant impact on our ability to obtain future financings.

Quantitative and Qualitative Disclosures About Market Risk

We used fixed and floating rate debt to finance acquisitions, development and maturing debt. These transactions exposed us to market risk related to changes in interest rates. We reviewed our borrowings and attempted to mitigate interest rate exposure through the use of long-term debt maturities and derivative instruments, where appropriate. We do not use derivatives for trading or speculative purposes. In May 2005, the Company entered into an interest rate swap agreement, for notional borrowings of $175 million which applies to the variable rate debt described above, to protect the Company against fluctuation in the LIBOR rate. Under the interest rate swap agreement, the Company paid a fixed rate of 4.20 percent and receives a floating rate. The floating rate was based on LIBOR. This agreement was to mature April 1, 2010. The net payments or receipts were recognized as an adjustment to interest expense. As of December 31, 2006, the estimated value of this outstanding derivative instrument was $4.1 million. This agreement was terminated in connection with the GE Capital Merger.

At December 31, 2006, we had fixed rate debt of $754.9 million and floating rate debt of $831.3 million. Approximately 21 percent of the floating rate debt was subject to an interest rate hedge. At December 31, 2006, the weighted average rate on the floating rate debt was 6.6 percent. The impact on net income available to common stockholders and on cash flows over the next twelve months that would result from a one percentage point variance in interest rates on $831.3 million in floating rate debt would be approximately $6.6 million (pre-tax), holding all other variables constant.

Management believes that the net carrying value of the debt approximates fair value, with the exception of the Series 2000-A Bonds and Series 2005 Bonds which have an estimated fair value of approximately $202.3 million and $235.8 million. A one percentage point increase in interest rates would decrease the fair value to $194.4 million and $226.5 million. A one percentage point decrease in interest rates would increase the fair value to $210.3 million and $245.1 million.

New Accounting Pronouncements

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets”. This statement amends FASB statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement requires companies to initially record servicing assets and servicing liabilities at fair value and permits subsequent measurement to follow either an amortization method or a fair value measurement method. This statement requires prospective application to all transactions occurring after September 2006. We do not expect the adoption of this statement to have a significant impact on our financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation Number 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. The Company must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, Accounting for Income Taxes. The interpretation provides clarity and uniformity as it relates to income tax positions and the application of FASB Statement No. 5, Accounting for Contingencies. We have adopted the provisions of this statement beginning in the first quarter of 2007. The cumulative effect of applying the provisions of FIN 48 is reported as an adjustment to the opening balance of retained earnings on January 1, 2007. We do not expect the adoption of FIN 48 to have a material effect on our financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not expect the adoption of this statement to have a significant impact on our financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159,Establishing the Fair Value Option for Financial Assets and Liabilities”. The Financial Accounting Standards Board has issued SFAS 159 to permit all entities to choose to elect, at specified election dates, to measure eligible financial instruments at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157, Fair Value Measurements. An entity is prohibited from retrospectively applying SFAS No. 159, unless it chooses early adoption. SFAS No. 159 also applies to eligible items existing at November 15, 2007 (or early adoption date). The Company does not expect the adoption of SFAS No. 159 to have a material effect on the Company's financial condition.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on the consideration of effects of the prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The SEC staff believes registrants must quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for the first annual period ending after November 15, 2006 with early application encouraged. The adoption of this provision did not have any material impact on our results of operations or financial position.

Results of Operations

Financial Reporting

Historically we have managed, operated and reported our business in two distinct segments. The GE Capital Merger will have a significant impact on the way our assets and other resources are focused.  Listed below are some reasons for this change. 
 
 
·
REIT tax rules played a central role in differentiating our portfolio held long term versus our assets purchased with an intent to resell.  A REIT is encouraged to hold its assets purchased as a long term investment through the application of potentially significant excise tax provisions.   Assets held in the REIT generally earn rents federal income tax free increasing the return to an investor in the form of a dividend.  Also, REITs are measured based on funds from operations (FFO).  FFO differentiates gains on sales of assets held for investment versus resale.  To understand our business among REIT peers we used segment reporting to describe our IPS and development activities.  After the GE Capital Merger, Trustreet ceased to exist and all of our net income including gains are subject to income tax.
 
 
·
Our historic capital structure included mortgage warehouse facilities that could be used to finance substantially all of the purchase price of an asset, but the financing was generally available only for about a year.  As a result, we purchased our IPS portfolio using short term mortgage warehouse facility funds, and these were held exclusively in the taxable REIT subsidiary through structured subsidiaries.  We would more typically use our Credit facility, Senior Unsecured or equity capital to finance our longer term investments in the REIT. 
 
 
·
We measured the diversity of our portfolio as to tenant, concept or geographic location focusing solely on longer term assets, generally held in the REIT.  As the IPS program was very successful in selling newly acquired assets within six to nine months from their purchase, we preferred to look at concentrations without the distortion of IPS assets.  Going forward, we will more likely measure diversity in the aggregate.
 
 
·
Conceptually, without the limitations associated with a REIT and with greater access to capital, each of our assets could be considered for a potential sale if it optimizes overall returns.  In fact, holding an asset for a "seasoning" period during which the first few years of a lease pass, establishes some history that can produce a more desirable asset to an investor.  Also, when market conditions are favorable, forgoing an opportunity to sell an asset simply because of REIT rules does not maximize the value of certain of the portfolio assets. This view is expected to be applied to all assets following the GE Capital Merger.
 
For the years ended December 31, 2006, 2005 and 2004, the results of each segment are discussed on a stand-alone basis below. Our consolidated financial statements reflect both segments, less amounts eliminated relating to transactions between segments.

Real estate segment: Generally, the majority of our earnings have been derived from this segment, the assets of which include our properties subject to triple-net leases and a small portfolio of mortgage loans to third parties. The segment’s earnings were from rental income, interest income on loans and proceeds from dispositions of properties sold to manage portfolio risk.

Specialty finance segment: This segment includes our Investment Property Sales Program (“IPS Program”) and our real estate redevelopment activities. Many buyers of our properties were those motivated to defer taxes on commercial properties they had sold through the reinvestment of the proceeds as permitted under Section 1031 of the Internal Revenue Code. This segment’s earnings were from lease income prior to sale, net gains from investment property sales, gains from the development and sale of restaurant/retail real estate and to a lesser extent, servicing revenues. This segment historically had earnings from interest income on mortgage loans as well. The majority of these loans were transferred to the real estate segment on March 31, 2005 and then subsequently sold to an unrelated third party in July 2005.

The following table presents components of net income, including income from continuing and discontinued operations, by segment. It also reflects the elimination of transactions between segments used to prepare the consolidated financial statements.
   
Year ended December 31,
(in millions)
 
   
2006
 
2005
 
2004
 
Revenues:
             
Real estate
 
$
207.2
 
$
168.9
 
$
72.6
 
Specialty finance
   
13.9
   
18.4
   
29.3
 
Other*
   
(5.1
)
 
(4.9
)
 
(3.0
)
Total revenues
   
216.0
   
182.4
   
98.9
 
                     
Expenses:
                   
Operating expenses excluding interest, depreciation, and amortization:**
                   
Real estate
   
36.2
   
22.0
   
12.2
 
Specialty finance
   
24.0
   
30.6
   
25.6
 
Other*
   
(4.5
)
 
(4.0
)
 
(2.0
)
Total operating expenses excluding interest, depreciation, and
amortization**
   
55.7
   
48.6
   
35.8
 
                     
Depreciation and amortization expense:
                   
Real estate
   
35.8
   
28.3
   
10.1
 
Specialty finance
   
2.7
   
1.5
   
0.9
 
Total depreciation and amortization expense
   
38.5
   
29.8
   
11.0
 
                     
Interest expense:
                   
Real estate
   
93.8
   
80.5
   
29.3
 
Specialty finance
   
8.5
   
10.6
   
18.3
 
Other*
   
(0.3
)
 
(1.0
)
 
0.4
 
Total interest expense
   
102.0
   
90.1
   
48.0
 
                     
Loss on termination of cash flow hedge:
                   
Real estate
   
   
8.6
   
 
Specialty finance
   
   
   
0.9
 
Total loss on termination of cash flow hedge
   
   
8.6
   
0.9
 
                     
Total expenses
   
196.2
   
177.1
   
95.7
 
                     
Income from continuing operations
   
19.8
   
5.3
   
3.2
 
                     
Income from discontinued operations, after income taxes:
                   
Real estate
   
20.4
   
18.0
   
9.5
 
Specialty finance
   
28.9
   
31.3
   
29.2
 
Total income from discontinued operations, after income taxes
   
49.3
   
49.3
   
38.7
 
                     
Gain on sale of assets - Real estate segment
   
0.7
   
9.6
   
0.1
 
                     
Net income
 
$
69.8
 
$
64.2
 
$
42.0
 

*      relates primarily to eliminations of transactions between segments
**
also includes the minority interest in earnings of consolidated joint ventures net of the equity in earnings of unconsolidated joint ventures



Revenues:

Revenues in the real estate segment were comprised of the following:

   
Year ended December 31,
(in millions)
 
   
2006
 
% of total
 
2005
 
% of total
 
2004
 
% of total
 
Rental income
 
$
191.9
   
93
%
$
151.8
   
90
%
$
61.6
   
85
%
Interest income
   
6.1
   
3
%
 
12.2
   
7
%
 
9.2
   
13
%
Other
   
9.2
   
4
%
 
4.9
   
3
%
 
1.8
   
2
%
Total Revenues
 
$
207.2
   
100
%
$
168.9
   
100
%
$
72.6
   
100
%


Revenues from the real estate segment are primarily rental revenues from real estate properties we own and lease to our tenants. Our long-term leases generally provide for payments of base rents with scheduled increases and/or contingent rent based on a percentage of the lessee’s gross sales. Rental income increased 26 percent for the year ended December 31, 2006, as compared to the year ended December 31, 2005. The increase in rental income for the year was primarily due to the acquisition of three property portfolios during the second half of 2005 of approximately $272 million and the acquisition of $70 million in properties during 2006 as well as a full year of rental revenue in 2006 on properties acquired in the 2005 Merger. Rental income increased 146 percent for the year ended December 31, 2005, as compared to the year ended December 31, 2004 due to the 2005 Merger which added approximately $1 billion in properties to our portfolio. The portfolio from USRP included certain ground leases that were subleased to tenants but for which the lessor remained legally responsible in the event the tenant did not pay. Effective with the 2005 Merger, the sublease rents received are recorded as rental revenues and the corresponding payments are recorded in property expenses, as further described below.

Interest income in the real estate segment of $6.1 million, $12.2 million and $9.2 million in 2006, 2005 and 2004, respectively, is generated by our amortizing portfolio of mortgage, equipment and other notes receivable as well as investment income earned on bonds held in mortgage loan securitizations. Interest income decreased 50 percent for the year ended December 31, 2006, as compared to the year ended December 31, 2005 due to the sale of approximately $198.2 million in notes receivable in July 2005 to an unrelated third party. Interest income increased 33 percent for the year ended December 31, 2005, as compared to the year ended December 31, 2004. The increase was a result of adding $15 million in former USRP loans in February 2005 and $198.2 million in loans that were moved from the specialty finance segment in March 2005 that were subsequently sold in July 2005.

Other income increased 88 percent for the year ended December 31, 2006, as compared to the year ended December 31, 2005. Other income during the year ended December 31, 2006 includes approximately $1 million in recoveries relating to a loan previously reserved as uncollectible. We collected our loan in full from the borrower during 2006 and in accordance with our policy, recorded the collection of amounts deemed uncollectible in prior periods as income in the period the collection was received. Other income during the year ended December 31, 2006 also includes $1.8 million in bankruptcy proceeds collected from the bankruptcy court from a tenant who declared bankruptcy in a prior year, and $2.3 million in real estate tax and other tenant reimburseables for certain properties acquired through the 2005 Merger. The leases on certain properties assumed in the 2005 Merger require us to pay real estate taxes on behalf of the tenant. In these situations, we record the payment of the real estate taxes as an expense and then record the reimbursement from the tenant as tenant reimbursable within other income. Prior to the 2005 Merger, we did not have any leases that required us to pay taxes on behalf of the tenant. Other income increased 172 percent for the year ended December 31, 2005, as compared to the year ended December 31, 2004. Other income during 2005 included the recognition of approximately $1.1 million in deferred origination fees upon the sale of the mortgage loans noted above, the collection of $0.9 million in due diligence and advisory service fees and $0.2 million in tenant reimburseables related to properties acquired through the 2005 Merger.




Revenues in the specialty finance segment were comprised of the following:

   
Year ended December 31,
(in millions)
 
   
2006
 
% of total
 
2005
 
% of total
 
2004
 
% of total
 
Rental income
 
$
3.5
   
25
%
$
2.0
   
11
%
$
   
%
Interest income
   
3.9
   
28
%
 
9.2
   
50
%
 
22.0
   
75
%
Other
   
6.5
   
47
%
 
7.2
   
39
%
 
7.3
   
25
%
Total Revenues
 
$
13.9
   
100
%
$
18.4
   
100
%
$
29.3
   
100
%

Specialty finance segment revenues decreased by 25 percent in 2006 as compared to 2005. Revenues associated with properties acquired with the intent to sell are recorded as revenue within discontinued operations and are not included here. Rental income increased in 2006 due to amending certain leases on properties held for investment in October 2005 increasing the annual rental payments under those leases. Rental income has also increased during 2006 due to a cumulative adjustment recorded in June 2006 for the reclassification of certain properties from real estate held for sale to real estate investment properties as a result of no longer meeting the “held for sale” criteria under generally accepted accounting principles. As a result of the reclassification, the related revenues were reclassified as revenues from continuing operations for all periods presented.

Interest income decreased 58 percent in 2006 as compared to 2005. The decrease is primarily due to the transfer of $198.2 million in mortgage loans to the real estate segment in March 2005. The real estate segment sold these mortgage loans to an unrelated third party in July 2005. The transfer of these loans in March 2005 resulted in a decrease in interest income in 2005 as compared to 2004.

Other income decreased 10 percent in 2006 as compared to 2005. The decrease is due to recoveries in 2005 of $1.5 million in receivables that had been previously written off. Recoveries in 2006 were $0.5 million. The decrease is partially offset by increased servicing fees earned from the real estate segment due to growth in the portfolio of assets being serviced by the specialty finance segment.


Operating expenses, excluding depreciation, amortization and interest:

Operating expenses, excluding interest, depreciation and amortization are presented in the following charts that detail the results by segment. The real estate segment portion of these costs consisted of the following:

   
Year ended December 31,
(in millions)
 
   
2006
 
% of total
 
2005
 
% of total
 
2004
 
% of total
 
General operating
and administrative
 
$ 20.1
 
55%
 
$ 12.8
 
58%
 
$ 8.9
 
73%
 
Property expenses,
state and other taxes
 
10.7
 
30%
 
7.1
 
32%
 
0.6
 
5%
 
Other
 
5.4
 
15%
 
2.1
 
10%
 
2.7
 
22%
 
   
$ 36.2
 
100%
 
$ 22.0
 
100%
 
$ 12.2
 
100%
 

General operating and administrative expenses include employee related expenses, professional fees, portfolio servicing costs and office and other expenses. General and administrative expenses increased 57 percent for the year ended December 31, 2006, as compared to 2005. General operating and administrative expenses during 2006 included approximately $3.0 million in due diligence, internal and external costs (legal, tax, accounting fees and other costs) related to the GE Capital Merger. In addition, due to the GE Capital Merger, we abandoned plans for a secured financing in 2006 and wrote-off approximately $3.3 million in debt issuance costs incurred as of December 31, 2006. General operating and administrative expenses also increased approximately $1.0 million in 2006 as compared to 2005 due to an increase in servicing fees to the specialty finance segment as a result of the acquisition of three property portfolios during the second half of 2005 of $272 million and the acquisition of $70 million in properties during 2006.

General operating and administrative expenses in the real estate segment increased 44 percent in 2005 as compared to 2004 as a result of having increased the rental portfolio to $1.9 billion with the 2005 Merger in February 2005 and the portfolio acquisitions during 2005. During 2005, general operating and administrative expenses included $0.7 million allocated to this segment as a result of the grant of stock and related cash compensation to members of the Board of Directors and employees during 2005. In addition, reflected in the specialty finance segment discussion of general operating and administrative below, various issues increased our overall costs that were, in turn, allocated between segments. This increase was offset by a decrease in expenses resulting from the shift in the internal reporting of certain property development and redevelopment activities which, until 2005, reported through the real estate segment, as we viewed those activities as more appropriately aligned with the specialty finance segment. Direct and indirect payroll relating to these property development and redevelopment activities approximated $3.3 million during 2005.

Property expenses typically occur when tenants default on their obligations under their lease. Property expenses, state and other taxes increased 51 percent for the year ended December 31, 2006 as compared to 2005. Property expenses include legal fees, real estate taxes, insurance, repairs and maintenance and other expenses relating to properties that are vacant or properties whose tenants are experiencing financial difficulties. Property expenses during 2006 reflect twelve months of such expenses for vacant properties acquired as part of the 2005 Merger on February 25, 2005, as opposed to only incurring ten months of such expenses during 2005. Though we have reduced some of the initial vacancies, we have had additional properties become vacant subsequent to December 31, 2005. Property expenses during 2006 also reflect twelve months of rental expense versus ten months in 2005 for leasing arrangements where we are the tenant under certain leases assumed with the 2005 Merger where we are required to make rental payments of approximately $0.3 million per month and record these payments as rental expense. To the extent we have subleased these premises to another tenant, we have included the sublease rental income in rental revenues. Property expenses also increased beginning in 2005 because effective with the 2005 Merger, we acquired leasing arrangements whereby we are required to pay real estate taxes directly on behalf of the tenants under the terms of the lease. To the extent we then bill the tenants for the real estate taxes, we have included the reimbursements from the tenants in other income, as described above. Property expenses, state and other taxes increased for the year ended December 31, 2005 over 2004 due to the 2005 Merger transaction in February 2005 that increased our portfolio of properties to over $1 billion.

Other expenses in the real estate segment increased 157 percent during the year ended December 31, 2006 as compared to 2005, due to an increase in asset impairments related to properties held for investment, loans, and other investments. Other expenses decreased 22 percent during the year ended December 31, 2005 as compared to 2004 due to a decrease in asset impairments related to properties held for investment and mortgage loans. Some expenses formerly presented in this category associated with properties treated as discontinued operations are incorporated in the earnings or losses from discontinued operations for all periods presented.

Operating expenses, excluding interest, depreciation, and amortization in the specialty finance segment consisted of the following:
   
Year ended December 31,
(in millions)
 
   
2006
 
% of total
 
2005
 
% of total
 
2004
 
% of total
 
General operating
and administrative
 
$ 23.8
 
99%
 
$ 28.6
 
93%
 
$ 21.5
 
84%
 
Property expenses,
state and other taxes
 
0.2
 
1%
 
0.5
 
2%
 
 
—%
 
Other
 
 
—%
 
1.5
 
5%
 
4.1
 
16%
 
   
$ 24.0
 
100%
 
$ 30.6
 
100%
 
$ 25.6
 
100%
 

General operating and administrative expenses in the specialty finance segment decreased 17 percent during 2006 as compared to 2005 and increased 33 percent during 2005 as compared to 2004. There are a number of items that have impacted the comparability between the three years that are summarized as follows:

·
Our expenses in this segment include a $2 million charge during 2005 resulting from a grant of stock and related cash compensation to members of our Board of Directors and employees.

·
During 2005, we incurred certain costs related to the upgrade of our property management software to account for leasing transactions and to capture other tenant and lease information. We also incurred certain costs to in-source the information technology, human resources and other functions previously outsourced to related parties.

·
Due to the 2005 Merger, we incurred additional expenses with the integration of the merged portfolios. While our servicing fee income in this segment for the management of the larger portfolio increased after the 2005 Merger, we incurred various one-time setup expenses during 2005 to add new properties creating an excess of new expenses over new revenues that have stabilized in 2006. The Income Fund portfolio had been previously serviced by the specialty finance segment and did not create significant additional integration costs.

·
In 2005 we shifted the internal reporting of certain property development and redevelopment activities previously reported through the real estate segment. Direct and indirect payroll relating to the property development and redevelopment activities approximated $2.4 million and $3.3 million during 2006 and 2005, respectively.

The decrease in the line item for other expenses relates to impairments and a decrease in the minority interest in income of consolidated joint ventures. The specialty finance segment recorded provisions for loan losses of $0.1 million in 2005, associated with non-performing loans, and a recovery of $0.5 million due to improved performance on its loan portfolio during 2004. The segment also recorded write-offs of $1.0 million during 2004 relating to its 1998-1 and 1999-1 residual interests. The specialty finance segment recorded these amounts based on its determination that a permanent impairment in value had occurred as a result of certain borrower delinquencies within these securitized pools. The decrease in minority interest in income of consolidated joint ventures during 2005, as compared to 2004, was due to a decrease in activities of the consolidated joint venture. We sold the last remaining properties in 2005 and dissolved the joint venture in July 2005.

Interest Expense

Interest expense for each segment is illustrated in the following table:

   
Year ended December 31,
(in millions)
 
   
2006
 
% of total
 
2005
 
% of total
 
2004
 
% of total
 
Real estate
 
$ 93.8
 
92%
 
$ 80.5
 
89%
 
$ 29.3
 
61%
 
Specialty finance
 
8.5
 
8%
 
10.6
 
12%
 
18.3
 
38%
 
Other
 
(0.3
)
—%
 
(1.0
)
(1)%
 
0.4
 
1%
 
   
$ 102.0
 
100%
 
$ 90.1
 
100%
 
$ 48.0
 
100%
 

Interest expense in the real estate segment increased approximately $13.3 million or 17 percent for the year ended December 31, 2006 as compared to 2005 due to (i) a full twelve months of interest expense on debt assumed with the 2005 Merger on February 25, 2005 and a $275 million net lease securitization completed in March of 2005, (ii) interest on $50 million additional borrowings completed in September 2005, (iii) interest on $100 million additional borrowings completed in December 2005, and (iv) borrowings to fund the acquisition of $70 million in properties during 2006. The increase is also due to rising interest rates on our variable rate debt. The average debt balance at the real estate segment was $1.4 billion, $1.2 billion, and $0.4 billion at December 31, 2006, 2005 and 2004, respectively. The weighted average interest rate on all borrowings was 6.69 percent, 5.99 percent, and 5.92 percent at December 31, 2006, 2005 and 2004, respectively. Included in interest expense within the real estate segment is amortization of deferred financing costs of $8.4 million, $8.4 million, and $4.3 million for the years ended December 31, 2006, 2005 and 2004, respectively. The increase in deferred financing costs in 2005 over 2004 was due to incurring costs to complete the 2005 Merger financing.

Interest expense in the specialty finance segment decreased 20 percent in 2006 as compared to 2005 and decreased 42 percent in 2005 as compared to 2004. The decrease in interest expense is primarily due to the transfer of the pool of mortgage loans and related $161 million of debt outstanding at March 31, 2005 to the real estate segment on March 31, 2005. The decrease in interest expense in 2005, as compared to 2004, was also due to the early extinguishment of the $22 million Subordinated Note Payable in April 2005.

Loss on Termination of Cash Flow Hedge

During the year ended December 31, 2005, the real estate segment recorded a loss on termination of cash flow hedge of $8.6 million. In July 2005, the real estate segment sold a portfolio of mortgage loans, repaid the related debt and recorded a $10.6 million loss on termination of cash flow hedge that was previously recorded in other comprehensive income (loss). This amount was partially offset by approximately $2 million which represented the decrease during the year ended December 31, 2005 in the fair value of the hedge liability prior to the sale of the loans. The sale of these loans is discussed below in Gain on Sale of Assets. 

The specialty finance segment recorded a loss on termination of cash flow hedge of $0.9 million during 2004. In conjunction with our Note Payable pay down of approximately $5.8 million during 2004, we unwound a portion of our cash flow hedge to comply with our hedge agreement.

Depreciation and Amortization

Depreciation and amortization expense for each segment is illustrated in the following table:

   
Year ended December 31,
(in millions)
 
   
2006
 
% of total
 
2005
 
% of total
 
2004
 
% of total
 
Real estate
 
$ 35.8
 
93%
 
$ 28.3
 
95%
 
$ 10.1
 
92%
 
Specialty finance
 
2.7
 
7%
 
1.5
 
5%
 
0.9
 
8%
 
   
$ 38.5
 
100%
 
$ 29.8
 
100%
 
$ 11.0
 
100%
 

Depreciation and amortization in the real estate segment increased $7.5 million or 26 percent in the year ended December 31, 2006, when compared to the same period in 2005. The increase is due to the acquisition of three property portfolios during the second half of 2005 in an aggregate amount of approximately $272 million and the acquisition of $70 million in properties during 2006 as well as a full year of depreciation and amortization during 2006 on properties acquired in the 2005 Merger.

Depreciation and amortization in the real estate segment increased $18.2 million or 180 percent in the year ended December 31, 2005, when compared to the same period in 2004 as a result of the 2005 Merger and portfolio acquisitions that increased the rental portfolio to $1.9 billion.

Depreciation and amortization in the specialty finance segment increased $1.2 million or 80 percent during 2006 as compared to 2005. The increase is due to a cumulative adjustment in 2006 to record depreciation and amortization for certain properties reclassified in June 2006, from real estate held for sale to real estate investment properties, as described above. As a result of the reclassification, the related depreciation and amortization were recorded as part of income from continuing operations for all periods presented. Depreciation and amortization in the specialty finance segment increased $0.6 million or 67 percent during 2005 as compared to 2004. This increase is due to the acquisition of properties into this segment during the 2005 Merger that are held as investment properties rather than held for sale. The expenses for any properties held for sale are reported as discontinued operations.

Discontinued Operations

We record discontinued operations in two categories, real estate and retail. In the real estate category, under generally accepted accounting principles (“GAAP”), when a property is designated as held for sale, such as all of the properties purchased under our IPS program, all income and certain expenses relating to the property and the ultimate gain or loss realized upon its disposition are treated as discontinued operations for all periods presented. Revenues associated with these properties are not reflected in the “Revenues” line item in our income statement, but instead, along with expenses and any gain or loss from its sale, are presented separately under the “Income from discontinued operations” line item. In addition, only operating and administrative expenses that are directly attributable to acquiring or selling these properties are allocated to “Income from discontinued operations” and all other general and operating and administrative expenses are allocated to “Income (loss) from continuing operations”.

The following table shows our results from discontinued operations:

   
Year ended December 31,
(in millions)
 
   
2006
 
2005
 
2004
 
   
Real Estate
Segment
 
Specialty
Finance
Segment
 
Real Estate
Segment
 
Specialty Finance
Segment
 
Real Estate
Segment
 
Specialty Finance
Segment
 
                           
Sale of real estate
 
$
90.1
 
$
267.4
 
$
61.1
 
$
257.0
 
$
34.8
 
$
256.2
 
Cost of real estate sold
   
79.7
   
237.6
   
52.1
   
218.1
   
27.1
   
220.9
 
Gain on sale of real estate
   
10.4
   
29.8
   
9.0
   
38.9
   
7.7
   
35.3
 
Net other income
   
10.0
   
3.4
   
9.0
   
1.5
   
2.6
   
4.8
 
Earnings from real
estate discontinued
operations before tax
   
20.4
   
33.2
   
18.0
   
40.4
   
10.3
   
40.1
 
                                       
Retail operations revenue
   
   
   
   
34.8
   
13.5
   
 
Retail cost of sales
   
   
   
   
33.9
   
14.3
   
 
Earnings (loss) from
retail discontinued
operations before tax
   
   
   
   
0.9
   
(0.8
)
 
 
                                       
Income tax provision
   
   
(4.4
)
 
   
(10.0
)
 
   
(10.9
)
                                       
Income from discontinued
operations, after income
taxes
 
$
20.4
 
$
28.8
 
$
18.0
 
$
31.3
 
$
9.5
 
$
29.2
 


Our real estate segment periodically sells properties in the portfolio. We may have a performing property and believe it to be an opportune time to sell the asset and realize value. Also, we believe the best strategy to resolve certain vacant properties is to sell them. We received net sales proceeds of $90.1 million, $61.1 million and $34.8 million during the years ended December 31, 2006, 2005 and 2004, respectively, generating pre-tax gains of $10.4 million, $9.0 million and $7.7 million, during the years ended December 31, 2006, 2005 and 2004, respectively. In addition, during the year ended December 31, 2006, we recognized and included as net other income, $5 million in lease amendment fees collected from a tenant.

While GAAP requires us to disclose our investment property sales program as a discontinued operation, we do not manage it in that manner. It is a vital business operation that was developed over the last five years that allows us to compete on large transactions and appropriately mitigate risk and manage concentrations. Since 2001, in our specialty finance segment, we have sold approximately $1.3 billion in restaurant properties generating net pre-tax gains of $162.7 million. During the years ended December 31, 2006, 2005, and 2004, sales volume included 138 units, 116 units, and 124 units, respectively, sold on the IPS platform. While the volume of units sold increased 27 percent during 2006 versus 2005, our net margin percentage, which we define as the gain on the sale of the property divided by the original cost, declined on a year to date basis from 17 percent in 2005 to 10 percent in 2006. This was due to narrowing of the spread between acquisition cap rates and sell-side cap rates in 2006 versus 2005. Although we expected some compression, the decline in our net margin percentage was greater than we anticipated. This was a result of an increase in the 1031 exchange buyer’s mortgage interest rates which led to a slight upward trend in our sell side cap rates. In addition, the mix of IPS inventory contributed to lower aggregate net gains during 2006 versus 2005. During the year ended December 31, 2006, the average cost per property sold in IPS was $1.4 million, compared to $1.8 million in the same period in 2005.
 
Our specialty finance segment operated 18 convenience and gas stores in Hawaii. This business was previously operated by USRP and was acquired as part of the 2005 Merger. On February 24, 2005, the day before the 2005 Merger, USRP entered into a definitive agreement to sell the business to Aloha Petroleum, Ltd. ("Aloha"). The terms of that agreement resulted in us maintaining ownership of the real estate on eleven convenience and gas properties, which would be leased to Aloha. In accordance with purchase accounting rules, the values assigned to these assets at the 2005 Merger date were the expected net sales proceeds per the contract. As a result, we did not record any gain or loss on the sale of these assets. During 2005, the Hawaiian operations produced pre-tax income of approximately $0.4 million before consideration of indirect corporate overhead.

During 2004, our real estate segment operated twelve restaurants in a subsidiary that was sold in the fourth quarter of 2004. While not our core expertise, we acquired the operations of the franchisee to preserve the value of our real estate investment because the franchisee was experiencing financial difficulties.

Until the GE Capital Merger, we were treated as a REIT and generally recorded no income tax expense. However, we had a taxable REIT subsidiary ("TRS”), where various business operations took place including the IPS program. The TRS recorded an income tax provision of approximately $4.4 million, $10.0 million and $10.9 million for the years ended December 31, 2006, 2005 and 2004, respectively. All operations of the TRS, including the IPS program are reflected in discontinued operations.

On March 31, 2005, other subsidiaries within the REIT purchased from the TRS a 100 percent interest in a partnership that held a pool of mortgage loans collateralizing a $160.8 million note payable carrying a variable interest rate (the “Loan Transfer”). A portion of this variable interest rate was fixed through the initiation of a hedge transaction. This hedge met the definition of a cash flow hedge, and as a result, changes in its value were reported in other comprehensive income (“OCI”), net of applicable income taxes at the then applicable effective tax rate.

As a result of the Loan Transfer, the items of income and expense associated with the mortgage loans and related note payable are no longer reflected in the TRS income tax returns. Accordingly, any deferred tax asset or liability, and any tax effect of the hedge will not be realized. The $10 million income tax provision for the year ended December 31, 2005, includes a $3.2 million non-cash charge related to the Loan Transfer.

Gain on Sale of Assets

During the year ended December 31, 2005, pre-tax gain on sale of assets of $9.6 million was recorded by the real estate segment. This gain resulted from the July 2005 sale of mortgage loans to a third party as described above in Loss on Termination of Cash Flow Hedge.


Item 7a. Quantitative and Qualitative Disclosures About Market Risk

This information is provided above in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.










Report of Independent Registered Certified Public Accounting Firm


To the Board of Managers of FF- TSY Holding Company II, LLC


In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of FF-TSY Holding Company II, LLC (successor to Trustreet Properties, Inc. and subsidiaries) at December 31, 2006 and 2005 , and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index  appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 20 of the consolidated financial statements, the Company was acquired by General Electric Capital Corporation on February 26, 2007.


/s/PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
Orlando, Florida
March 27, 2007



Item 8. Financial Statements and Supplementary Data.

FF-TSY HOLDING COMPANY II, LLC
CONSOLIDATED BALANCE SHEETS
(In thousands)


   
December 31,
 
   
2006
 
 2005
 
ASSETS
          
            
Real estate investment properties
 
$
1,713,039
 
$
1,680,579
 
Net investment in capital leases
   
130,940
   
135,118
 
Real estate held for sale
   
307,727
   
308,494
 
Mortgage, equipment and other notes receivable, net of allowance
of $5,439 and $5,706, respectively
   
82,720
   
88,239
 
Cash and cash equivalents
   
36,991
   
20,459
 
Restricted cash
   
34,948
   
32,465
 
Receivables, less allowance for doubtful accounts
of $2,960 and $2,394, respectively
   
9,077
   
7,665
 
Accrued rental income, net
   
42,409
   
32,658
 
Intangible lease costs, net of accumulated amortization of $19,327
and $9,185, respectively
   
65,699
   
72,420
 
Goodwill
   
235,895
   
235,895
 
Other assets
   
61,720
   
69,481
 
   
$
2,721,165
 
$
2,683,473
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
               
Revolver
 
$
159,000
 
$
55,000
 
Notes payable
   
576,024
   
579,002
 
Mortgage warehouse facilities
   
397,273
   
122,722
 
Bonds payable
   
453,886
   
742,201
 
Below market lease liability, net of accumulated amortization of
$7,930 and $3,677, respectively
   
27,304
   
31,642
 
Due to related parties
   
257
   
232
 
Other payables
   
45,672
   
56,097
 
Total liabilities
 
$
1,659,416
 
$
1,586,896
 

See accompanying notes to consolidated financial statements.


FF-TSY HOLDING COMPANY II, LLC
CONSOLIDATED BALANCE SHEETS - CONTINUED
(In thousands)



   
December 31,
 
   
2006
 
 2005
 
               
Minority interests
 
$
7,169
 
$
4,077
 
               
Commitments and contingencies (Note 18)
             
               
Stockholders’ equity:
             
Preferred stock, $0.001 par value per share: 84,500 shares authorized and unissued
   
   
 
Preferred stock, $0.001 par value per share: Series A Cumulative Convertible Preferred Stock - 8,000 shares authorized, 7,834 shares issued and outstanding (aggregate liquidation value of $195,855)
   
8
   
8
 
Preferred stock, $0.001 par value per share: Series C Redeemable Convertible Preferred Stock - 7,500 shares authorized, 7,244 shares issued and outstanding (aggregate liquidation value of $181,101)
   
7
   
7
 
Excess shares, $0.001 par value per share. 400,000 shares authorized and unissued
   
   
 
Common stock, $0.001 par value per share; 300,000 shares authorized, 67,555 and 67,375 shares issued at December 31, 2006 and 2005, respectively, and 67,535 and 67,357 shares outstanding at December 31, 2006 and 2005, respectively
   
67
   
67
 
Capital in excess of par value
   
1,490,682
   
1,489,405
 
Accumulated other comprehensive income
   
5,040
   
3,547
 
Accumulated distributions in excess of net income
   
(441,224
)
 
(400,534
)
Total stockholders’ equity
   
1,054,580
   
1,092,500
 
               
   
$
2,721,165
 
$
2,683,473
 

See accompanying notes to consolidated financial statements


FF-TSY HOLDING COMPANY II, LLC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except for per share data)


   
Year ended December 31,
 
   
2006
 
2005
 
2004
 
               
Revenues:
             
               
Rental income from operating leases
 
$
184,596
 
$
142,809
 
$
53,048
 
Earned income from capital leases
   
10,872
   
10,631
   
8,560
 
Interest income from mortgage, equipment and other notes
receivables
   
7,589
   
18,070
   
26,394
 
Investment and interest income
   
2,179
   
2,259
   
3,770
 
Other income
   
10,822
   
8,607
   
7,132
 
     
216,058
   
182,376
   
98,904
 
Expenses:
                   
General operating and administrative
   
39,563
   
37,970
   
28,408
 
Interest expense
   
101,947
   
90,074
   
47,999
 
Property expenses, state and other taxes
   
10,802
   
7,138
   
543
 
Depreciation and amortization
   
38,567
   
29,816
   
11,011
 
Loss on termination of cash flow hedge
   
   
8,558
   
940
 
Impairment provisions on assets
   
4,912
   
1,907
   
3,238
 
     
195,791
   
175,463
   
92,139
 
Income from continuing operations before minority interest and equity in earnings of unconsolidated joint ventures
   
20,267
   
6,913
   
6,765
 
                     
Minority interest
   
(585
)
 
(1,756
)
 
(3,718
)
                     
Equity in earnings of unconsolidated joint ventures
   
62
   
118
   
105
 
                     
Income from continuing operations
   
19,744
   
5,275
   
3,152
 
                     
Income from discontinued operations, after income taxes
   
49,192
   
49,269
   
38,731
 
                     
Gain on sale of assets
   
747
   
9,643
   
135
 
                     
Net income
   
69,683
   
64,187
   
42,018
 
Dividends to preferred stockholders
   
(28,703
)
 
(24,448
)
 
 
Net income allocable to common stockholders
 
$
40,980
 
$
39,739
 
$
42,018
 
                     
Basic and diluted net income per share:
                   
Income/(loss) from continuing operations allocable to
common stockholders
 
$
(0.12
)
$
(0.17
)
$
0.09
 
Income from discontinued operations
   
0.73
   
0.89
   
1.11
 
                     
Basic and diluted net income per share
 
$
0.61
 
$
0.72
 
$
1.20
 
                     
Weighted average number of shares of common stock
outstanding
                   
Basic
   
67,274
   
55,053
   
35,032
 
Diluted
   
67,274
   
55,053
   
35,032
 

See accompanying notes to consoliated financial statements.


FF-TSY HOLDING COMPANY II, LLC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME/(LOSS)
Years ended December 31, 2006, 2005 and 2004
(In thousands)

<
 
Preferred Stock
Series A
 
Preferred Stock
Series C
 
Common Stock
 
Capital in
     
Accumulated distributions
in excess
 
Accumulated other
compre-
     
Compre-
hensive
 
 
Number of
shares
 
Par
value
 
Number of
shares
 
Par
value
 
Number of
Shares
 
Par
value
 
excess of
par value
 
Loans to
Stockholders
 
of net
income
 
hensive
income/(loss)
 
 
Total
 
income/
(loss)
 
                                                 
Balance at December 31, 2003
 
$ —
 
 
$ —
 
45,249
 
$ 452
 
$ 826,627
 
$ —
 
$ (332,746
)
$ (14,447
)
$479,886
     
                                                 
Stock issuance costs
 
 
 
 
 
 
(1,493
)
 
 
 
(1,493
)
   
                                                 
Net income
 
 
 
 
 
 
 
 
42,018
 
 
42,018
 
$ 42,018
 
                                                 
Other comprehensive loss, market
revaluation on available for sale
securities
 
 
 
 
 
 
 
 
 
(340
)
(340
)
(340
)