Fitch Places U.S. Restaurant Properties on Rating Watch Evolving.

NEW YORK -- Fitch Ratings places U.S. Restaurant Properties (USV) on Rating Watch Evolving following the company's announcement that it is acquiring CNL Restaurant Properties (CNL) for approximately $1.3 billion. Approximately $111 million of 'BB' unsecured notes and $122 million of 'B+' preferred stock are affected by Fitch's action. USV's Rating Outlook had previously been Negative. Rating Watch Evolving indicates that a rating could be raised, lowered or maintained over a three-to-six month period following the resolution of uncertain circumstances.

The new company, which will continue to trade on the NYSE, will operate under the CNL Restaurant Properties name, with ownership of 1,900 properties, financial interests in an additional 1,100 properties and total assets of approximately $2.5 billion. In adherence to the merger agreement, CNL Restaurant Properties will merge with and into U.S. Restaurant Properties. Moreover, each of the eighteen CNL Income Funds will merge with a separate wholly owned subsidiary of U.S. Restaurant Properties' operating partnership. The total transaction consists of approximately $715 million in common and preferred stock and $540 million for the eighteen CNL Income Funds. The specifics of the transition call for CNL Restaurant Properties shareholders to receive 0.7742 shares of U.S. Restaurant Properties common stock and 0.16 shares of newly issued U.S. Restaurant Properties 7.5% series C redeemable convertible preferred stock for each share of CNL Restaurant Properties common stock held. The 7.5% series C redeemable convertible preferred stock has a conversion price of $19.50 per share and a liquidation value of $25 per share.

Fitch acknowledges the increased operational efficiencies for the new entity with regard to size and synergies and further recognizes the augmented diversification of brand, tenant and geography of the combined portfolio. The transaction will also provide the company with added flexibility with respect to a broader array of available business lines; however, such increased accessibility will heighten the complexity involved in analyzing the company. In addition, Fitch anticipates the deal to be highly leveraged as well as structurally complicated and as such presents concerns about resultant leverage and coverage metrics and strategic organizational issues. This uncertainty pertaining to the formation of the company's capital structure and operations elicits our Ratings Watch Evolving stance. Fitch will continue to monitor the progress of the transaction as more details regarding the structure of the newly formed company develop.

US Restaurant Properties Inc. (USV), through its subsidiaries, is a fully-integrated, self-administered real estate investment trust (REIT) that acquires, owns, leases, and in some cases, operates restaurant, service station and other retail properties. Most of the properties are leased by USV on a triple net lease basis to quick and full service dining chain restaurants affiliated with national and regional brands. As of June 30, 2004, USV owned 778 properties located in 48 states, which were leased to 270 tenants. Additionally, USV conducts its retail operations through a taxable REIT subsidiary (TRS) called Fuel Supply Inc. (FSI), which operates twelve service stations and three restaurants and also sells fuel through fourteen operators and on a wholesale basis to two other operators. USV currently has total assets of $542 million, total debt of $325 million and an undepreciated total book capital of $639 million.