National Retail Properties
Annual Report 2006

Plain-text annual report

T H E DI V I DE N D S YOU ’ V E C OM E T O E X PEC T. Season After Season. 2006 Annual Report Season after season, year after year, our shareholders have enjoyed steady, reliable dividends. With a current yield over 5% and annual total returns higher than 12% for the past 1, 3, 5 and 10-year periods, longtime NNN shareholders appreciate the income and wealth-building attributes of our dividend both before and after retirement. While our stock price will fluctuate according to market conditions throughout the course of the year, we carefully manage our risk, enabling us to continue growing the company while simultaneously increasing and protecting our dividend. Our philosophy is simple: remain true to specific real estate fundamentals and control what we can control. The rest will take care of itself. T A B L E O F C O N T E N T S 2. Company Profile 3. Letter to Shareholders 12. Dividend Reinvestment & Direct Stock Purchase 15. Historical Financial Highlights 16. Directors & Officers Inside Back Cover: Shareholder Information A B O U T T H A T T I C K E R S Y M B O L When looking at our name, there is no question about what we do: we focus on retail properties throughout the United States. However, we sometimes get questions about the meaning of our ticker symbol, NNN. NNN is a common industry abbreviation for ‘triple net lease’ – which is the primary type of lease we have with our tenants. A triple net lease shifts property operating expenses (i.e., maintenance, taxes, insurance and utilities) to the tenant, so that the rental revenue we receive is not subject to any variable costs, resulting in fewer expenses and providing a more stable cash flow. The benefit for the tenant is that this gives them operational control over the property. For example, they are able to negotiate their own rates on insurance and maintenance items because they pay those costs directly. Our leases typically provide for attractive initial yields as well as potential growth in cash flow through base rent increases and/or percentage rents based upon tenant sales. T H E N N N R E I T National Retail Properties, Inc., is a real estate investment trust (REIT) listed on the New York Stock Exchange (ticker symbol: NNN) that invests in single tenant net-leased retail properties nationwide. NNN has generated consistent returns for more than a decade supported by its strong dividend yield and 17 consecutive years of increased annual dividends. In 2006, NNN acquired more than $300 million in properties, maintained its strong balance sheet, improved per share operating results and received a 96.2 ISS corporate governance rating (based on a scale of 0 to 100). NNN maintains a conservatively managed, fully diversified retail real estate portfolio with properties subject to long-term, net leases with established tenants such as Barnes & Noble, Best Buy, CVS, Circle K and OfficeMax. As of December 31, 2006, its 710 properties are located in 44 states with a total gross leasable area of approximately 9.3 million square feet. Current occupancy is 98% and these properties are leased to 187 tenants in 33 industry classifications. NNN is one of only 181 of the more than 10,000 publicly traded companies in America to have increased annual dividends for 17 or more consecutive years. 2 THE DIVIDENDS YOU’VE COME TO EXPECT T O O U R S H A R E H O L D E R S : Louis Rukeyser, the noted broadcaster and economic is not universally adhered to in our industry, however it prognosticator, once said: “Always be on the level is important to NNN. This approach is integral to our with people. Not everyone is going to agree with success and our efforts to build value for shareholders you, but they’ll have confidence in you.” This quote by growing Funds From Operations (FFO) per share. speaks to the way we approach our business at National Retail Properties (NYSE: NNN). I am pleased to report that NNN had another record year in 2006, generating total revenue of $150.8 million In our interaction with shareholders, customers, partners and FFO of $97.1 million. On a diluted per share basis, and employees we work hard to communicate with our FFO grew by 11.3 percent to $1.67 per share, an them “on the level”. Although we might not always all-time high. Also in 2006, we increased our dividend agree, it is pivotal that we can be relied upon to do what for the seventeenth consecutive year to $1.32 per share. we say we are going to do. This fundamental principle SEASON AFTER SEASON 3 PORTFOLIO SUMMARY Our high quality portfolio of 710 primarily net-leased In the last two years our concentration of convenience retail properties continues to be in excellent shape with stores has increased and I expect this to continue in 2007. an occupancy rate of 98.2 percent as of December 31, The convenience store industry is highly fragmented 2006. The average lease maturity of our properties with more than 140,000 locations nationwide. We are is 12 years and we have few leases expiring in working with a variety of different operators in this sector 2007. As of year-end, our properties were leased to and our tenants include the largest and most successful 187 tenants operating in 32 different retail industry consolidators in the industry. The convenience stores classifications. At the end of 2006, our properties that we are purchasing are generally located at high- were located in 44 states with a concentration in the traffic intersections with land value approximating Sunbelt where retail growth has dramatically increased. 50% of the total cost. Potential alternative tenants for this In the last 24 months our portfolio has nearly doubled from 362 to 710 properties. We now own a fully diversified portfolio of net lease retail properties located throughout the country leased to many of the premier retailers. The retail industry remains healthy and the credit statistics of our portfolio are sound. We congratulate our largest tenant, Susser Holdings, on their successful initial public offering in October. We are gratified that the confidence that we placed in Susser and their management team when we completed a large sale-leaseback transaction with them in late 2005 has been validated by their reception in the public equity markets. We have an excellent relationship and their stronger credit profile has enabled us to acquire additional Susser properties in December. type of location include bank branches, drugstores and restaurants. Given the caliber of our tenants and the quality of the real estate, we continue to like the risk- reward characteristics of the convenience store industry. Property Growth 800 700 600 500 400 300 200 100 0 12/04 03/05 06/05 09/05 12/05 03/06 06/06 09/06 12/06 4 THE DIVIDENDS YOU’VE COME TO EXPECT Annual Total Return Comparison (For periods ending December 31, 2006) 1 Year 3 Years 5 Years 10 Years National Retail Properties (NNN) 19.7% 16.1% 20.2% 12.7% S&P 500 Index 15.8% 10.4% 6.2% 8.4% Nasdaq 10.4% 7.2% 5.0% 7.0% S&P 600 Index 15.2% 15.0% 12.5% 11.6% Geographic Diversification December 31, 2006 Midwest 18.0% West 6.1% South 25.6% Rocky Mountain 6.2% Northeast 17.4% Southeast 26.7% FRANCHISE REAL ESTATE FUNDING NNN helps franchisors and franchisees fund new store expansion, pay off existing debt, fund acquisitions and extract dormant cash out of their companies. SEASON AFTER SEASON 5 ACQUISITIONS & THE COMPETITIVE ENVIRONMENT In 2006, we acquired 213 different retail properties for In our underwriting we focus on factors such as market $372 million at an average yield of approximately 8.5%. rents, the demographics of that specific market, property These new properties strengthened and diversified access and visibility, land value as a percentage of our tenant base as we added several new high-quality the total property value and a variety of other factors. operators. We expanded our geographic footprint We believe that the land value of our properties makes by acquiring our first properties in Idaho, Utah up approximately 45% of the value of our real estate and Massachusetts, and returning to Mississippi. portfolio, adding enduring significance to our locations. Increasingly, it appears that many retailers are coming to the conclusion that owning their real estate is not the optimal use of their capital, which has led to a robust acquisition market. In addition, financial investors have been actively acquiring retailers and they tend to view sale-leaseback financing as an attractive component of their capital structure. We anticipate both of these trends continuing. Cap rates (the initial yield) on net lease transactions stopped declining in early 2006 and appear to have stabilized. With large amounts of capital continuing to seek the stable and predictable returns of investment-quality real estate, we expect to see yields remain at current levels. In such an environment, our team has to work harder to find opportunities where the yield is higher than the aggressive pricing that one-off transactions can command. Each property that we acquire is individually underwritten by our experienced team and then reviewed by our real estate investment committee prior to acquisition. This is obviously a time-consuming process given our activity level. However it is important to remember that we are in the real estate business and, while we pay a great deal of attention to the ability of the current tenant to pay us our contractual rent, we ultimately may need to rely solely on the real A key element of our strategy in the last two years has been to develop relationships with a select group of growing retailers with whom we can execute repeat sale-leaseback transactions. Our acquisition officers, augmented by the efforts of senior management, have made excellent progress on this objective and as we look into 2007, we currently have a pipeline of opportunities with 11 different retailers from whom we have previously acquired properties. We hope to close sale-leaseback transactions with several of these retailers in the first six months of the year. Seventeen Consecutive Years of Increased Dividends (One of 181 companies) Dividend Yield = 5.8%* $ 1.40 $ 1.30 $ 1.20 $ 1.10 estate characteristics of the site and find another tenant. $ 1.00 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 *Based on the closing price of $22.95 on December 31, 2006 6 THE DIVIDENDS YOU’VE COME TO EXPECT CAPITAL RECYCLING An important component of our strategy in 2006 was to finance a large number of our acquisitions through the sale of real estate from our existing investment portfolio and reinvest the proceeds at higher yields. Our team executed this objective flawlessly as we sold $319 million of properties in 2006 at an average yield of 6.6% leading to realized gains of $91 million. The largest transaction in this program was the sale of our office building complex in the Washington, D.C. area leased to the U.S. government where we realized net proceeds of $228 million and a gain of $59 million. In future years, we will continue to selectively sell real estate and reinvest the proceeds into higher yielding properties; however the amount will be more modest in size. Currently we are budgeting to sell $80 million of properties from our investment portfolio in 2007. ACQUISITIONS Our acquisitions department focuses on purchasing and financing single-tenant, net-leased retail properties nationwide through sale-leaseback transactions. From 2004-2006, our portfolio has nearly doubled from 362 to 710 properties. SEASON AFTER SEASON 7 BALANCE SHEET MANAGEMENT Line of Trade (As a percentage of the annual base rent – December 31, 2006) During the last 12 months we made excellent progress at reducing our cost of capital which continues to be a key objective of NNN. In the second half of 2006, we completed two well-received financings in the public markets, Travel Plaza 3.7% Sporting Goods 7.3% Furniture 4.2% issuing $92 million of 7 3/8% Preferred Stock Other 22.3% and $172.5 million of Convertible Notes with a coupon of 3.95%. Also, through our dividend reinvestment and stock purchase plan, we issued 3.0 million shares of common stock at an average Consumer Electronics 5.6% price of $21.58, raising $65.8 million in 2006. Balance Sheet (Gross Book Basis – December 31, 2006) On January 2, 2007, we redeemed $45 million of our 9% Series A Preferred Stock which was Common Equity 52.8% originally issued in 2001. In essence, we used part of the proceeds from the 7 3/8% Preferred issued in October to redeem the 9% Preferred, further lowering our weighted average cost of capital. Preferred Equity 6.6% As of year-end, our total debt comprised approximately 35% of our total market capitalization and approximately 94% of our debt was at a fixed-rate. Our conservative FFO vs. Dividends Paid Convenience Stores 16.3% Drug Stores 8.3% Office Supply 4.1% Grocers 5.7% Book Stores 5.7% Limited-Service Restaurants 4.7% Full-Service Restaurants 12.1% Secured Debt 3.0% Unsecured Debt 37.6% fiscal policy and strong balance sheet provides us with significant financial flexibility. $ 1.80 $ 1.60 $ 1.40 $ 1.20 $ 1.00 8 THE DIVIDENDS YOU’VE COME TO EXPECT 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 HUMAN CAPITAL Our excellent FFO per share growth in 2006 is due to the efforts of our hard working associates. Our talented employees are our greatest asset and they make an impact on building the value of NNN every day. I appreciate their hard work and the significant contribution that they make to building value for shareholders. A personal goal of mine over the last 24 months has been for NNN to accomplish ‘more with less.’ Through their hard work, our associates have more than accomplished that objective: with 16% less people than we employed at the end of the first quarter in 2004, we now own 462 additional individual properties and our funds from operations in 2006 were 33% higher than they were in 2004. I know that our shareholders will want me to congratulate our team on their exemplary efforts. We have recently made organizational changes to manage our growth and two of the stars on our team have been promoted to Executive Vice President. Paul Bayer and his group are responsible for our portfolio, leasing, collecting the rent and underwriting acquisitions. Chris Tessitore and our in-house legal group have streamlined the process whereby we acquire and sell real estate in addition to handling a variety of other legal matters. DEVELOPMENT Our development group provides complete turn-key build-to- suit services ranging from market analysis, site selection and acquisition to entitlements, permitting and construction management for a variety of retailers. SEASON AFTER SEASON 9 2007 AND BEYOND Matching the 11% FFO per share growth of 2006 will be challenging. However, in 2007 we will receive a full year of rent from the properties that we acquired using the proceeds of our capital recycling, our weighted average cost of capital is lower than last year and we have a healthy pipeline of accretive property acquisitions. As a result, we are well-positioned to accomplish our multi-year objective of building value for our shareholders by growing FFO per share. This growth will allow us to continue our long history of increasing our annual dividends. Thank you for your continued support and investment in NNN. Sincerely, Craig Macnab Chief Executive Officer 10 THE DIVIDENDS YOU’VE COME TO EXPECT SEASON AFTER SEASON 11 D I V I D E N D R E I N V E S T M E N T & D I R E C T S T O C K P U R C H A S E We offer a dividend reinvestment and direct stock • Additionally, shares in the amount of purchase plan designed to make purchasing our $100 - $10,000 may be purchased on a stock economical and convenient. The plan is open one-time basis. to current shareholders as well as new investors. PLAN HIGHLIGHTS: • You can become a shareholder with a minimum initial investment of only $100. This investment • Unlike other direct stock purchase plans, we do not charge an enrollment fee, fees for investment, or plan maintenance fees, except in the event you decide to sell your common shares. can be made by check or money order. • Fees for the sale of shares: $15 transaction fee • Dividends can be reinvested to purchase additional plus a $.10 per share brokerage commission fee. shares on some or all of your common stock. To learn more about our Dividend Reinvestment and • Reinvested dividends are currently offered at a 1% discount (subject to change). • Shares in the amount of $100 to $10,000 may be purchased on an optional monthly basis which may be set up as an automatic deduction from your banking account. Stock Purchase plan, please review the prospectus posted on our website at www.nnnreit.com or request one by filling out and mailing the enclosed comment card. 12 THE DIVIDENDS YOU’VE COME TO EXPECT SEASON AFTER SEASON 13 GREEN CONVENIENCE Located in Gainesville, FL and operated by The Pantry Inc., this Kangaroo store is the first convenience store in America to be recognized by the United States Green Building Council for achieving the Leadership in Energy and Environmental Design (LEED) certification. The store, which opened in October, features energy efficient low-voltage fluorescent light fixtures and was built utilizing only low-toxin materials in the construction process. 14 THE DIVIDENDS YOU’VE COME TO EXPECT U S H I S T O R I C A L F I N A N C I A L H I G H L I G H T S (dollars in thousands, except per share data) Gross revenues(1) $ 180,876 $ 151,831 $ 133,875 $ 112,073 $ 102,067 2006 2005 2004 2003 2002 Earnings from continuing operations Net earnings Total assets Total debt Total equity 73,538 182,505 44,083 89,400 38,216 64,934 30,653 53,473 1,916,785 1,733,416 1,300,048 1,213,778 776,737 1,096,505 861,045 828,087 524,241 756,998 66,272 4,008 69,018 4,008 1,675 1,675 - - 467,419 730,754 55,473 4,008 502 - 28,098 48,058 958,300 386,912 549,141 51,178 4,010 - - US POSTA Cash dividends declared to: Common stockholders Series A Preferred Stock stockholders Series B Convertible Preferred Stock stockholders Series C Redeemable Preferred Stock stockholders Weighted average common shares: 76,035 4,376 419 923 Basic Diluted 57,428,063 52,984,821 51,312,434 43,108,213 40,383,405 58,079,875 54,640,143 51,742,518 43,896,800 40,588,957 Per share information: Earnings from continuing operations: Basic Diluted Net earnings: Basic Diluted Dividends declared to: Common stockholders 1.18 1.17 3.08 3.05 1.32 Series A Preferred Stock stockholders 2.45625 0.72 0.73 1.58 1.56 1.30 2.25 0.63 0.63 1.15 1.15 1.29 2.25 0.61 0.61 1.14 1.13 1.28 2.25 Series B Convertible Preferred Stock stockholders Series C Redeemable Preferred 41.875 167.50 167.50 50.25 Stock depositary stockholders 0.250955 - - - 0.60 0.59 1.09 1.09 1.27 2.25 - - Other data: Cash flows provided by (used in): Operating activities Investing activities Financing activities Funds from operations – diluted(2) 18,561 30,930 (106,984) (242,487) 81,864 97,121 217,844 81,803 85,800 (69,963) (19,225) 73,065 54,215 (256,870) 205,965 61,749 111,589 (15,142) (101,654) 54,595 (1) Gross revenues include revenues from the Company’s continuing and discontinued operations. The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and broadens the presentation of discontinued operations in the income statement to include a component of an entity. Accordingly, the results of operations related to these certain properties that have been classified as held for sale or have been disposed of subsequent to December 31, 2001, the effective date of SFAS No. 144, have been reclassified as earnings from discontinued operations. (2) The National Association of Real Estate Investment Trusts (“NAREIT”) developed FFO as a relative non-GAAP financial measure of performance of a REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO is defined by NAREIT and is used by the Company as follows: net earnings (computed in accordance with GAAP) plus depreciation and amortization of assets unique to the real estate industry, excluding gains (or including losses) on the disposition of real estate held for investment, and the Company’s share of these items from the Company’s unconsolidated partnerships. U S P O S T A L US POSTA L EXECUTIVE OFFICERS Craig Macnab Chief Executive Officer Julian E. Whitehurst President & Chief Operating Officer Kevin B. Habicht Chief Financial Officer & Executive Vice President Paul E. Bayer Executive Vice President Christopher P. Tessitore Executive Vice President & General Counsel † Member audit committee (Committees as of February 6, 2007) D I R E C T O R S & O F F I C E R S DIRECTORS Clifford R. Hinkle Chairman G. Nicholas Beckwith III CEO & Chairman Arch Street Management, LLC Kevin B. Habicht Chief Financial Officer & Executive Vice President National Retail Properties, Inc. Richard B. Jennings† President Realty Capital International LLC Ted B. Lanier† Retired Chairman & Chief Executive Officer Triangle Bank and Trust Company Robert C. Legler Retired Chairman First Marketing Corporation Craig Macnab Chief Executive Officer National Retail Properties, Inc. Robert Martinez† Fortieth Governor of Florida & Senior Policy Advisor Holland & Knight Pictured above left to right: Robert Martinez, Kevin B. Habicht, Clifford R. Hinkle, Robert C. Legler, Ted B. Lanier, Richard B. Jennings, G. Nicholas Beckwith III, Craig Macnab 16 THE DIVIDENDS YOU’VE COME TO EXPECT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) È 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 001-11290 NATIONAL RETAIL PROPERTIES, INC. (Exact name of registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 56-1431377 (I.R.S. Employer Identification No.) 450 South Orange Avenue, Suite 900 Orlando, Florida 32801 (Address of principal executive offices, including zip code) Registrant’s telephone number, including area code: (407) 265-7348 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Common Stock, $0.01 par value 7.375% Non-Voting Series C Preferred Stock Name of exchange on which registered: New York Stock Exchange New York Stock Exchange 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 È No ‘ 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 ‘ No È 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 È No ‘ 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 check mark whether 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 È Accelerated filer ‘ Non-accelerated filer ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2006 was $1,144,188,520. The number of shares of common stock outstanding as of February 14, 2007 was 60,272,926. DOCUMENTS INCORPORATED BY REFERENCE: Registrant incorporates by reference portions of the National Retail Properties, Inc. Proxy Statement for the 2007 Annual Meeting of Stockholders (Items 10, 11, 12, 13 and 14 of Part III). TABLE OF CONTENTS PAGE REFERENCE Part I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . Item 4. Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part III Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions, and Director Independence . . . Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 8 14 15 18 18 19 21 23 46 47 92 92 94 95 95 95 95 95 Part IV Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 PART I Statements contained in this annual report on Form 10-K, including the documents that are incorporated by reference, that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Also, when the Company uses any of the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” or similar expressions, the Company is making forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements. Certain factors that could cause actual results or events to differ materially from those the Company anticipates or projects are described in Item 1A. “Risk Factors” of this Annual Report on Form 10-K. Given these uncertainties, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Annual Report on Form 10-K or any document incorporated herein by reference. The Company undertakes no obligation to publicly release any revisions to these forward- looking statements that may be made to reflect events or circumstances after the date of this Annual Report on Form 10-K. Item 1. Business The Company National Retail Properties, Inc. (formerly known as Commercial Net Lease Realty, Inc.), a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. The terms “Registrant” or “Company” refer to National Retail Properties, Inc. and its majority owned and controlled subsidiaries. These subsidiaries include the wholly owned qualified REIT subsidiaries of National Retail Properties, Inc., as well as the taxable REIT subsidiaries and their majority owned and controlled subsidiaries (the “NNN TRS”). Effective May 1, 2006, Commercial Net Lease Realty, Inc. changed its name to National Retail Properties, Inc. The Company’s operations are divided into two primary business segments: (i) investment assets, including real estate assets, structured finance investments (included in mortgages and notes receivable on the consolidated balance sheets) and mortgage residual interests (collectively, “Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). The Investment Assets are operated through National Retail Properties, Inc. and its wholly owned qualified REIT subsidiaries. The Inventory Assets are operated through the NNN TRS. Real Estate Assets The Company acquires, owns, invests in, manages and develops properties that are leased primarily to retail tenants under long-term net leases (“Investment Properties” or “Investment Portfolio”). As of December 31, 2006, the Company owned 710 Investment Properties, with an aggregate leasable area of 9,341,000 square feet, located in 44 states. Approximately 98 percent of the Company’s Investment Portfolio was leased at December 31, 2006. The NNN TRS, directly and indirectly, through investment interests, owns real estate primarily for the purpose of selling the real estate (“Inventory Properties” or “Inventory Portfolio”). As of December 31, 2006, the NNN TRS owned 97 Inventory Properties. 4 Structured Finance Investments Structured finance agreements (included in mortgages, notes and accrued interest receivable on the consolidated balance sheets) are typically loans secured by a borrower’s pledge of ownership interests in the entity that owns the real estate. These agreements are typically subordinated to senior loans secured by first mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. As of December 31, 2006, the structured finance agreements had an outstanding principal balance of $13,917,000. Mortgage Residual Interests Orange Avenue Mortgage Investments, Inc. (“OAMI”), a majority owned and consolidated subsidiary of the Company, holds the mortgage residual interests (“Residuals”) from seven commercial real estate loan securitizations. Each of the Residuals is reported at its market value based upon a third party valuation, with unrealized gains and losses reported as other comprehensive income in stockholders’ equity. Losses that are considered other than temporary are reported through earnings. The Residuals had an estimated fair value of $31,512,000 at December 31, 2006. NNN TRS Prior to January 1, 2005, the Company held a 98.7 percent, non-controlling and non-voting interest in Commercial Net Lease Realty Services, Inc. and its majority owned and controlled subsidiaries (collectively, “Services”). Kevin B. Habicht, an officer and director of the Company, James M. Seneff, Jr. and Gary M. Ralston, each a former officer and director of the Company, (collectively, the “Services Investors”), owned the remaining 1.3 percent interest, which represented 100 percent of the voting interest in Services. Effective January 1, 2005, the Company acquired the remaining 1.3 percent interest in Services, increasing the Company’s ownership in Services to 100 percent. Effective November 1, 2005, Commercial Net Lease Realty Services, Inc. merged into National Retail Properties, Inc. CNLRS Exchange I, Inc., a taxable REIT subsidiary (“TRS”), became the TRS holding company for the Company’s development and exchange activities. Effective October 2, 2006, CNLRS Exchange I, Inc. changed its name to NNN TRS, Inc. Competition The Company generally competes with numerous other REITs, commercial developers, real estate limited partnerships and other investors, including but not limited to, insurance companies, pension funds and financial institutions, that own, manage, finance or develop retail and net leased properties. Employees As of December 31, 2006, the Company employed 68 full-time associates including executive and administrative personnel. The Company’s executive offices are located at 450 S. Orange Avenue, Suite 900, Orlando, Florida 32801, and its telephone number is (407) 265-7348. The Company has an Internet website at www.nnnreit.com where the Company’s filings with the Securities and Exchange Commission can be downloaded free of charge. 5 Business Strategies and Policies The following is a discussion of the Company’s operating strategy and certain of its investment, financing and other policies. These strategies and policies have been set by management and/or the Board of Directors and, in general, may be amended or revised from time to time by management and/ or the Board of Directors without a vote of the Company’s stockholders. Operating Strategies The Company’s strategy is to invest primarily in retail real estate that is typically located along high- traffic commercial corridors near areas of commercial and residential density. Management believes that these types of properties, when leased to national or regional retailers generally pursuant to triple-net leases, provide attractive opportunities for a stable current return and the potential for capital appreciation. Triple-net leases typically require the tenant to pay property operating expenses such as real estate taxes, assessments and other government charges, insurance, utilities, and repairs and maintenance. In some cases, the Company’s investment in real estate is in the form of structured finance investments, which are typically loans secured by a borrower’s pledge of ownership interests in the entity that owns the real estate. These agreements are typically subordinated to senior loans secured by first mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. Additionally, the Company may provide mortgage loans which are typically secured by a specific real estate asset owned by the borrower. The Company holds investment real estate assets until it determines that the sale of such a property is advantageous in view of the Company’s investment objectives. In deciding whether to sell a real estate investment asset, the Company may consider factors such as potential capital appreciation, net cash flow, potential use of sale proceeds and federal income tax considerations. The Company acquires and develops inventory real estate assets primarily for the purpose of resale. The Company’s management team considers certain key indicators to evaluate the financial condition and operating performance of the Company. The key indicators for the Company may include items such as: the composition of the Company’s Investment Portfolio (such as tenant, geographic and industry classification diversification), the occupancy rate of the Company’s Investment Portfolio, certain financial performance ratios, profitability measures and industry trends compared to that of the Company. Investment in Real Estate or Interests in Real Estate The Company’s management believes that attractive acquisition opportunities for retail properties will continue to be available and that the Company is suited to take advantage of these opportunities because of its access to capital markets, ability to underwrite and acquire properties, either for cash or securities, and because of management’s experience in seeking out, identifying and evaluating potential acquisitions. In evaluating a particular acquisition, management may consider a variety of factors, including: • • the location and accessibility of the property; the geographic area and demographic characteristics of the community, as well as the local real estate market, including potential for growth; 6 • • • • • • • • • • • the size of the property; the purchase price; the non-financial terms of the proposed acquisition; the availability of funds or other consideration for the proposed acquisition and the cost thereof; the “fit” of the property with the Company’s existing portfolio; the potential for, and current extent of, any environmental problems; the quality of construction and design and the current physical condition of the property; the financial and other characteristics of the existing tenant; the tenant’s business plan, operating history and management team; the tenant’s industry; and the terms of any existing leases. The Company intends to engage in future investment activities in a manner that is consistent with the maintenance of its status as a REIT for federal income tax purposes and that will not make the Company an investment company under the Investment Company Act of 1940, as amended. Equity investments in acquired properties may be subject to existing mortgage financings and other indebtedness or to new indebtedness which may be incurred in connection with acquiring or refinancing these investments. Investments in Real Estate Mortgages, Mortgage Residual Interests, and Securities of or Interests in Persons Engaged in Real Estate Activities While the Company’s current portfolio of, and its business objectives primarily emphasize, equity investments in retail properties, the Company may invest in (i) a wide variety of retail properties or other property and tenant types, (ii) mortgages, participating or convertible mortgages, deeds of trust, mortgage residual interests and other types of real estate interests, or (iii) securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. For example, the Company from time to time has made investments in mortgage loans or held mortgages on properties the Company sold and has made structured finance investments (as discussed above), which are typically loans secured by a pledge of ownership interests in the borrowers (or their subsidiaries) that own the underlying real estate. Financing Strategy The Company’s financing objective is to manage its capital structure effectively in order to provide sufficient capital to execute its operating strategies while servicing its debt requirements and providing value to its stockholders. The Company generally utilizes debt and equity security offerings, bank borrowings, the sale of properties, and to a lesser extent, internally generated funds to meet its capital needs. The Company typically funds its short-term liquidity requirements including investments in additional retail properties with cash from its $300,000,000 unsecured revolving credit facility (“Credit Facility”). As of December 31, 2006, $28,000,000 was outstanding and approximately $272,000,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $5,159,000. 7 For the year ended December 31, 2006, the Company’s ratio of total indebtedness to total gross assets (before accumulated depreciation) was approximately 41 percent and the secured indebtedness to total gross assets was approximately three percent. The total debt to total market capitalization was approximately 35 percent. Certain financial agreements to which the Company is a party contain covenants that limit the Company’s ability to incur debt under certain circumstances. The Company anticipates it will be able to obtain additional financing for short-term and long-term liquidity requirements as further described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity.” However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to the Company. The organizational documents of the Company do not limit the absolute amount or percentage of indebtedness that the Company may incur. Additionally, the Company may change its financing strategy at any time. The Company has not engaged in trading, underwriting or agency distribution or sale of securities of other issues and does not intend to do so. Strategies and Policy Changes Any of the Company’s strategies or policies described above may be changed at any time by the Company without notice to or a vote of the Company’s stockholders. Item 1A. Risk Factors. 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 adversely affected. Loss of revenues from tenants would reduce the Company’s cash flow. The Company’s five largest tenants accounted for an aggregate of approximately 23 percent of the Company’s annual base rent as of December 31, 2006. The default, financial distress or bankruptcy of one or more of the Company’s tenants could cause substantial vacancies among the Company’s Investment Portfolio. Vacancies reduce the Company’s revenues until the Company is able to re-lease the affected properties and could decrease the ultimate sale value of each such vacant property. Upon the expiration of the leases that are currently in place, the Company may not be able to re-lease a vacant property at a comparable lease rate or without incurring additional expenditures in connection with such re-leasing. A significant portion of the source of the Company’s annual base rent is heavily concentrated in a specific industry classification and in specific geographic locations. As of December 31, 2006, an aggregate of approximately 33 percent of the Company’s annual base rent is generated from two retail lines of trade, convenience stores and restaurants, each representing more than 10 percent. In addition, as of December 31, 2006, an aggregate of approximately 36 percent of the Company’s annual base rent is generated from properties in Texas and Florida, each representing more than 10 percent. Any financial hardship and/or changes in these industries or states could have an adverse effect on the Company’s financial results. 8 There are a number of risks inherent in owning real estate and indirect interests in real estate. Factors beyond the Company’s control affect the Company’s performance and value. Changes in national, regional and local economic and market conditions may affect the Company’s economic performance and the value of the Company’s real estate assets. Local real estate market conditions may include excess supply and intense competition for tenants, including competition based on rental rates and attractiveness and location of the property. In addition, other factors may adversely affect the performance and value of the Company’s properties, including (i) changes in laws and governmental regulations, including those governing usage, zoning and taxes; (ii) changes in interest rates; and (iii) the availability of financing. The Company’s real estate investments are illiquid. Because real estate investments are relatively illiquid, the Company’s ability to adjust the portfolio promptly in response to economic or other conditions is limited. Certain significant expenditures generally do not change in response to economic or other conditions, including: (i) debt service (if any), (ii) real estate taxes, and (iii) operating and maintenance costs. This combination of variable revenue and relatively fixed expenditures may result, under certain market conditions, in reduced income from investment. Such reduction in investment income could have an adverse effect on the Company’s financial condition. The Company may be subject to unknown environmental liabilities. The Company may acquire a property that contains some level of contamination or potential contamination exists, subject to a determination of the level of risk and potential cost of remediation. Investments in real property create a potential for substantial environmental liability on the part of the owner of such property from the presence or discharge of hazardous substances on the property, regardless of fault. It is the Company’s policy, as a part of its acquisition due diligence process, generally to obtain an environmental site assessment for each property. In such cases that the Company intends to acquire real estate where contamination or potential contamination exists, the Company generally requires the seller or tenant to (i) remediate the problem, (ii) indemnify the Company for environmental liabilities, or (iii) agree to other arrangements deemed appropriate by the Company to address environmental conditions at the property. The Company has 25 Investment Properties currently under some level of environmental remediation. In general, the seller, the tenant or an adjacent land owner is responsible for the cost of the environmental remediation for each of these Investment Properties. In the event of a bankruptcy or other inability on the part of these parties to cover these costs, the Company may have to cover the costs of remediation, fines or other environmental liabilities at these and other properties. The Company may also own properties where required remediation has not begun or adverse environmental conditions have not yet been detected. This may require remediation or otherwise subject the Company to liability. The Company cannot assure that (i) it will not be required to undertake or pay for removal or remediation of any contamination of the properties currently or previously owned by the Company, (ii) the Company will not be subject to fines by governmental authorities or litigation, or (iii) the costs of such removal, remediation fines or litigation would not be material. The Company may not be able to successfully execute its acquisition or development strategies. The Company cannot assure that it will be able to implement its investment strategies successfully. Additionally, the Company cannot assure that its property portfolio will expand at all, or if it will 9 expand at any specified rate or to any specified size. In addition, investment in additional real estate assets is subject to a number of risks. Because the Company expects to invest in markets other than the ones in which its current properties are located or which may be leased to tenants other than those to which the Company has historically leased properties, the Company will also be subject to the risks associated with investment in new markets or with new tenants that may be relatively unfamiliar to the Company’s management team. The Company’s development activities are subject to without limitation, risks relating to the availability and timely receipt of zoning and other regulatory approvals, the cost and timely completion of construction (including risks from factors beyond the Company’s control, such as weather or labor conditions or material shortages), the risk of finding tenants for the properties and the ability to obtain both construction and permanent financing on favorable terms. These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent completion of development activities once undertaken or provide a tenant the opportunity to terminate a lease. Any of these situations delay or eliminate proceeds or cash flows the Company expects from these projects, which could have an adverse effect on the Company’s financial condition. The Company may not be able to dispose of properties consistent with its operating strategy. The Company may be unable to sell properties targeted for disposition (including its Inventory Properties) at a profit if interest rates increase, or adverse market conditions exist, thereby, rendering the Company unable to sell these properties. A change in the assumptions used to determine the value of mortgage residual interests could adversely affect the Company’s financial position. As of December 31, 2006, the Residuals had a carrying value of $31,512,000. The value of these Residuals is based on delinquency, loan loss, prepayment and interest rate assumptions made by the Company to determine their value. If actual experience differs materially from these assumptions, the actual future cash flow could be less than expected and the value of the Residuals, as well as the Company’s earnings, could decline. The Company may suffer a loss in the event of a default or bankruptcy of a structured finance loan borrower. If a borrower defaults on a structured finance loan and does not have sufficient assets to satisfy the loan, the Company may suffer a loss of principal and interest. In the event of the bankruptcy of a borrower, the Company may not be able to recover against all of the assets of the borrower, or the assets of the borrower may not be sufficient to satisfy the balance due on the loan. In addition, certain of the Company’s loans may be subordinate to other debt of a borrower. The structured finance agreements are typically loans secured by a borrower’s pledge of its ownership interests in the entity that owns the real estate. These agreements are typically subordinated to senior loans secured by first mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. As of December 31, 2006, the structured finance investments had an outstanding principal balance of $13,917,000. If a borrower defaults on the debt senior to the Company’s loan, or in the event of the bankruptcy of a borrower, the Company’s loan will be satisfied only after the borrower’s senior creditors’ claims are satisfied. Where debt senior to the Company’s loans exists, the presence of intercreditor arrangements may limit the Company’s ability to amend loan documents, assign the loans, accept prepayments, exercise remedies and control decisions made in bankruptcy proceedings relating to borrowers. 10 Bankruptcy proceedings and litigation can significantly increase the time needed for the Company to acquire underlying collateral in the event of a default, during which time the collateral may decline in value. In addition, there are significant costs and delays associated with the foreclosure process. Certain provisions of the leases or structured finance loan agreements may be unenforceable. The Company’s rights and obligations with respect to its leases or structured finance loans are governed by written agreements. A court could determine that one or more provisions of an agreement are unenforceable, such as a particular remedy, a loan prepayment provision or a provision governing the Company’s security interest in the underlying collateral of a borrower. The Company could be adversely impacted if this were to happen with respect to an asset or group of assets. Property ownership through joint ventures and partnerships could limit the Company’s control of those investments. Joint ventures or partnerships involve risks not otherwise present for direct investments by the Company. It is possible that the Company’s co-venturers or partners may have different interests or goals than the Company at any time and they may take actions contrary to the Company’s requests, policies or objectives, including the Company’s policy with respect to maintaining its qualification as a REIT. Other risks of joint venture investments include impasses on decisions, because no single co-venturer or partner has full control over the joint venture or partnership. Competition with numerous other REITs, commercial developers, real estate limited partnerships and other investors may impede the Company’s ability to grow. The Company may not be in a position or have the opportunity in the future to make suitable property acquisitions on advantageous terms due to competition for such properties with others engaged in real estate investment activities. The Company’s inability to successfully acquire new properties may affect the Company’s ability to achieve anticipated return on investment, which could have an adverse effect on its results of operations. Uninsured losses may adversely affect the Company’s ability to pay outstanding indebtedness. The Company’s properties are generally covered by comprehensive liability, fire, flood, extended coverage and business interruption insurance. The Company believes that the insurance carried on its properties is adequate in accordance with industry standards. There are, however, types of losses (such as from hurricanes, wars or earthquakes) which may be uninsurable, or the cost of insuring against these losses may not be economically justifiable. If an uninsured loss occurs, the Company could lose both the invested capital in and anticipated revenues from the property. In that event, the Company’s cash flow could be reduced. Terrorist attacks, such as the attacks that occurred in New York City and Washington, D.C., on September 11, 2001, and other acts of violence or war may affect the markets in which the Company operates and the Company’s results of operations. Terrorist attacks may negatively affect the Company’s operations. There can be no assurance that there will not be further terrorist attacks against the United States or United States businesses. These attacks may directly impact the Company’s physical facilities or the businesses of the Company’s tenants. 11 Also, the United States has been engaged in armed conflict, which could have an impact on the Company’s tenants. The consequences of armed conflict are unpredictable, and the Company may not be able to foresee events that could have an adverse effect on its business. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economies. They also could result in, or cause a deepening of, economic recession in the United States or abroad. Any of these occurrences could have a significant adverse impact on the Company’s financial condition or results of operations. Vacant properties or bankrupt tenants could adversely affect the Company. As of December 31, 2006, the Company owned nine vacant, unleased Investment Properties, which accounted for approximately two percent of the total gross leasable area of the Company’s Investment Portfolio and four unleased land parcels. The Company is actively marketing these properties for sale or lease but may not be able to sell or lease these properties on favorable terms or at all. The lost revenues and increased property expenses resulting from the rejection by any bankrupt tenant of any of their respective leases with the Company could have a material adverse effect on the liquidity and results of operations of the Company if the Company is unable to re-lease the Investment Properties at comparable rental rates and in a timely manner. Less than one percent of the total gross leasable area of the Company’s Investment Portfolio is leased to one tenant that has filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, the tenant has the right to reject or affirm its lease with the Company. The amount of debt the Company has and the restrictions imposed by that debt could adversely affect the Company’s business and financial condition. As of December 31, 2006, the Company had total mortgage debt and secured notes payable outstanding of approximately $60,392,000, total unsecured notes payable of $662,304,000 and $28,000,000 outstanding on the Credit Facility. The Company’s organizational documents do not limit the level or amount of debt that it may incur. If the Company incurs additional indebtedness and permits a higher degree of leverage, debt service requirements would increase and could adversely affect the Company’s financial condition and results of operations, as well as the Company’s ability to pay principal and interest on the outstanding indebtedness or dividends to its stockholders. In addition, increased leverage could increase the risk that the Company may default on its debt obligations. The Credit Facility contains financial covenants that could limit the amount of distributions to the Company’s common and preferred stockholders. The amount of debt outstanding at any time could have important consequences to the Company’s stockholders. For example, it could: • • require the Company to dedicate a substantial portion of its cash flow from operations to payments on Company debt, thereby reducing funds available for operations, real estate investments and other appropriate business opportunities that may arise in the future; limit the Company’s ability to obtain any additional financing it may need in the future for working capital, debt refinancing, capital expenditures, real estate investments, development or other general corporate purposes; • make it difficult to satisfy the Company’s debt service requirements; 12 • • • • limit the Company’s ability to pay dividends on its outstanding common and preferred stock; require the Company to dedicate increased amounts of cash flow from operations to payments on its variable rate, unhedged debt if interest rates rise; limit the Company’s flexibility in planning for, or reacting to, changes in its business and the factors that affect the profitability of its business; and limit the Company’s flexibility in conducting its business, which may place the Company at a disadvantage compared to competitors with less debt or debt with less restrictive terms. The Company’s ability to make scheduled payments of principal or interest on its debt, or to refinance such debt will depend primarily on its future performance, which to a certain extent is subject to the creditworthiness of its tenants, competition, as well as economic, financial, and other factors beyond its control. There can be no assurance that the Company’s business will continue to generate sufficient cash flow from operations in the future to service its debt or meet its other cash needs. If the Company is unable to generate this cash flow from its business, it may be required to refinance all or a portion of its existing debt, sell assets or obtain additional financing to meet its debt obligations and other cash needs. The Company cannot assure you that any such refinancing, sale of assets or additional financing would be possible on terms and conditions, including but not limited to the interest rate, which the Company would find acceptable. The Company is obligated to comply with financial and other covenants in its debt that could restrict its operating activities, and the failure to comply with such covenants could result in defaults that accelerate the payment under its debt. The Company’s unsecured debt contains various restrictive covenants which include, among others, provisions restricting the Company’s ability to: • incur or guarantee additional debt; • make certain distributions, investments and other restricted payments, including dividend payments on its outstanding common and preferred stock; • limit the ability of restricted subsidiaries to make payments to the Company; • enter into transactions with certain affiliates; • create certain liens; and • consolidate, merge or sell the Company’s assets. The Company’s secured debt generally contains customary covenants, including, among others, provisions: • • • • • relating to the maintenance of the property securing the debt; restricting its ability to sell, assign or further encumber the properties securing the debt; restricting its ability to incur additional debt; restricting its ability to amend or modify existing leases; and relating to certain prepayment restrictions. 13 The Company’s ability to meet some of the covenants in its debt, including covenants related to the condition of the property or payment of real estate taxes, may be dependent on the performance by the Company’s tenants under their leases. In addition, certain covenants in the Company’s debt, including its Credit Facility, require the Company and its subsidiaries, among other things, to: • maintain certain maximum leverage ratios; • maintain certain minimum interest and debt service coverage ratios; • • limit dividends declared and paid to the Company’s common and preferred stockholders; and limit investments in certain types of assets. The Company’s failure to qualify as a real estate investment trust for federal income tax purposes could result in significant tax liability. The Company intends to operate in a manner that will allow the Company to continue to qualify as a real estate investment trust (“REIT”). The Company believes it has been organized as, and its past and present operations qualify the Company as a REIT. However, the IRS could successfully assert that the Company is not qualified as such. In addition, the Company may not remain qualified as a REIT in the future. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within the Company’s control. If the Company fails to qualify as a REIT, it would not be allowed a deduction for dividends paid to stockholders in computing taxable income and would become subject to federal income tax at regular corporate rates. In this event, the Company could be subject to potentially significant tax liabilities. Unless entitled to relief under certain statutory provisions, the Company would also be disqualified from treatment as a REIT for the four taxable years following the year during which the qualification was lost. Even if the Company maintains its REIT status, the Company may be subject to certain federal, state and local taxes on its income and property. Compliance with REIT requirements, including distribution requirements, may limit the Company’s flexibility and negatively affect the Company’s operating decisions. To maintain its status as a REIT for U.S. federal income tax purposes, the Company must meet certain requirements, on an on-going basis, including requirements regarding its sources of income, the nature and diversification of its assets, the amounts the Company distributes to its stockholders and the ownership of its shares. The Company may also be required to make distributions to its stockholders when it does not have funds readily available for distribution or at times when the Company’s funds are otherwise needed to fund capital expenditures or to fund debt service requirements. The Company generally will not be subject to federal income taxes on amounts distributed to stockholders, providing it distributes 100 percent of its REIT taxable income and meets certain other requirements for qualifying as a REIT. For each of the years in the three-year period ended December 31, 2006, the Company believes it has qualified as a REIT. Notwithstanding the Company’s qualification for taxation as a REIT, the Company is subject to certain state taxes on its income and real estate. Item 1B. Unresolved Staff Comments. None. 14 Item 2. Properties Investment Properties As of December 31, 2006, the Company owned 710 Investment Properties with an aggregate gross leasable area of 9,341,000 square feet, located in 44 states. Approximately 98 percent of the gross leasable area was leased at December 31, 2006. Reference is made to the Schedule of Real Estate and Accumulated Depreciation and Amortization filed with this report for a listing of the Company’s Investment Properties and their respective carrying costs. During 2006, the Company disposed of the properties leased to the United States of America which had accounted for more than 10 percent of the Company’s total rental income in 2005. As of December 31, 2006, the Company does not have any one tenant that accounts for ten percent or more of its rental income. The following table summarizes the Company’s Investment Properties as of December 31, 2006 (dollars in thousands): Land Building High 2,223,000 135,000 Size (1) Low Average High 7,000 1,000 112,000 14,000 $ 10,197 13,877 Cost (2) Low $ 25 44 Average $ 1,001 1,352 (1) Approximate square feet. (2) Costs vary depending upon size and local demographic factors. In connection with the development of 11 Investment Properties, the Company has agreed to fund construction commitments (including land costs) of $35,020,000, of which $17,845,000 has been funded as of December 31, 2006. Leases. Although there are variations in the specific terms of the leases, the following is a summary of the general structure of the Company’s leases. Generally, the leases of the Investment Properties owned by the Company provide for initial terms of 10 to 20 years. As of December 31, 2006, the weighted average remaining lease term was approximately 12 years. The Investment Properties are generally leased under net leases pursuant to which the tenant typically will bear responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. In addition, the majority of the Company’s leases provide that the tenant is responsible for roof and structural repairs. The leases of the Investment Properties provide for annual base rental payments (payable in monthly installments) ranging from $11,000 to $1,635,000 (average of $210,000). Tenant leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume. Generally, the Investment Property leases provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions as the initial lease. Some of the leases also provide that in the event the Company wishes to sell the Investment Property subject to that lease, the Company first must offer the lessee the right to purchase the Investment Property on the same terms and conditions as any offer which the Company intends to accept for the sale of the Investment Property. Certain of the Company’s Investment Properties have leases that provide the tenant with a purchase option to acquire the Investment Property from the Company. The purchase price calculations are generally stated in the lease agreement or are based on current market value. 15 The following table summarizes the lease expirations of the Company’s Investment Portfolio as of December 31, 2006 (dollars in thousands): % of Total(1) # of Properties Gross Leasable Area(2) % of Total(1) # of Properties 2007 2008 2009 2010 2011 2012 1.2% 1.8% 2.6% 3.9% 3.8% 4.6% 13 22 25 36 23 30 2013 206,000 2014 406,000 2015 490,000 2016 383,000 439,000 2017 531,000 Thereafter 5.6% 7.3% 4.6% 4.2% 7.2% 53.2% 30 39 22 22 28 407 (1) Based on annualized base rent for all leases in place as of December 31, 2006. (2) Approximate square feet. Gross Leasable Area(2) 690,000 591,000 621,000 508,000 808,000 3,500,000 The following table summarizes the diversification of trade of the Company’s Investment Portfolio based on the top 10 lines of trade as of December 31, 2006 (dollars in thousands): Top 10 Lines of Trade 2006(1) 2005(1) 2004(1) 1. Convenience Stores 2. Restaurants – Full Service 3. Drug Stores 4. Sporting Goods 5. Books 6. Grocery 7. Consumer Electronics 8. Restaurants – Limited Service 9. Furniture 10. Office Supplies Other 16.3% 12.1% 8.3% 7.3% 5.7% 5.7% 5.6% 4.7% 4.2% 4.1% 26.0% 12.1% 6.6% 10.0% 7.4% 5.8% 6.3% 5.9% 3.0% 4.7% 4.4% 33.8% 0.7% 6.7% 11.5% 7.8% 6.9% 7.7% 7.1% 3.1% 5.0% 5.2% 38.3% 100.0% 100.0% 100.0% (1) Based on annualized base rent for all leases in place as of December 31 of the respective year. The following table summarizes the diversification by state of the Company’s Investment Portfolio as of December 31, 2006: State 1. Texas 2. Florida 3. Pennsylvania 4. Georgia 5. Virginia 6. California 7. Tennessee 8. Illinois 9. Missouri 10. Ohio Other # of Properties % of Annual Base Rent(1) 149 77 77 37 19 18 19 22 14 23 255 710 22.2% 13.4% 5.4% 5.1% 3.9% 3.7% 3.5% 3.4% 3.3% 3.0% 33.1% 100.0% (1) Based on annualized base rent for all leases in place as of December 31, 2006. 16 Structured Finance Investments Structured finance agreements (included in mortgages, notes and accrued interest receivable on the consolidated balance sheets) are typically loans secured by a borrower’s pledge of its ownership interest in the entity that owns the real estate. These agreements are typically subordinated to senior loans secured by first mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. In 2006 and 2005, the Company made structured finance investments of $16,477,000 and $5,988,000, respectively. As of December 31, 2006, the structured finance investments bear a weighted average interest rate of 13.3% per annum, of which 10.1% is payable monthly and the remaining 3.2% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which range between November 2007 and January 2009. The structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the subsidiaries which own the respective real estate. As of December 31, 2006 and 2005, the outstanding principal balance of the structured finance investments was $13,917,000 and $27,805,000, respectively. Mortgage Residual Interests OAMI, a majority owned and consolidated subsidiary of the Company holds the residual interests from seven commercial real estate loan securitizations. Each of the Residuals is recorded at fair value based upon a third party valuation, with adjustments subsequent to the initial acquisition of the Company’s interest in OAMI recorded through earnings. The Residuals had a fair value of $31,512,000 at December 31, 2006. Inventory Assets The NNN TRS develops Inventory Properties (“Development Properties” or “Development Portfolio”) as well as acquires existing Inventory Properties (“Exchange Properties” or “Exchange Portfolio”). The Company’s Inventory Portfolio is held with the intent to sell the properties to purchasers who are looking for replacement like-kind exchange property or to other purchasers with different investment objectives. As of December 31, 2006, NNN TRS owned 29 Development Properties (11 completed, five under construction and 13 land parcels) and 68 Exchange Properties. Reference is made to the Schedule of Real Estate and Accumulated Depreciation and Amortization filed with this report for a listing of the Inventory Properties and their respective carrying costs. The following table summarizes the 11 completed Development Properties and 68 Exchange Properties as of December 31, 2006 (dollars in thousands): High Size (1) Low Average High Cost (2) Low Average Completed Development Properties: Land Building Exchange Properties: Land Building 527,000 71,000 42,000 5,000 205,000 20,000 $ 6,149 10,852 $ 396,000 50,000 8,000 2,000 45,000 5,000 2,927 8,905 387 112 59 74 $ 1,598 3,492 606 955 (1) Approximate square feet. (2) Costs vary depending upon size and local demographic factors. Under Construction. In connection with the development of five Inventory Properties by the NNN TRS, the Company has agreed to fund total construction commitments (including land costs) of $36,728,000, of which $27,263,000 has been funded as of December 31, 2006. 17 Governmental Regulations Affecting Properties Property Environmental Considerations. The Company may acquire a property that contains some level of contamination or potential contamination exists, subject to a determination of the level of risk and potential cost of remediation. Investments in real property create a potential for substantial environmental liability on the part of the owner of such property from the presence or discharge of hazardous substances on the property, regardless of fault. It is the Company’s policy, as a part of its acquisition due diligence process, generally to obtain an environmental site assessment for each property. In such cases that the Company intends to acquire real estate where contamination or potential contamination exists, the Company generally requires the seller or tenant to (i) remediate the problem, (ii) indemnify the Company for environmental liabilities, or (iii) agree to other arrangements deemed appropriate by the Company to address environmental conditions at the property. The Company has 25 Investment Properties currently under some level of environmental remediation. In general, the seller, the tenant or an adjacent land owner is responsible for the cost of the environmental remediation for each of these Investment Properties. Americans with Disabilities Act of 1990. The Investment and Inventory Properties, as commercial facilities, are required to comply with Title III of the Americans with Disabilities Act of 1990 (the “ADA”). Investigation of a property may reveal non-compliance with the ADA. The tenants will typically have primary responsibility for complying with the ADA, but the Company may incur costs if the tenant does not comply. As of February 15, 2007, the Company has not been notified by any governmental authority of, nor is the Company’s management aware of, any non-compliance with the ADA that the Company’s management believes would have a material adverse effect on its business, financial condition or results of operations. Other Regulations. State and local fire, life-safety and similar requirements regulate the use of the Company’s Investment and Inventory Properties. The leases generally require that each tenant will have primary responsibility for complying with regulations, but 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. Item 3. Legal Proceedings In the ordinary course of its business, the Company is a party to various legal actions that management believes is routine in nature and incidental to the operation of the business of the Company. Management believes that the outcome of these proceedings will not have a material adverse effect upon its operations, financial condition or liquidity. Item 4. Submission of Matters to a Vote of Security Holders None. 18 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The common stock of the Company currently is traded on the New York Stock Exchange (“NYSE”) under the symbol “NNN.” Set forth below is a line graph comparing the cumulative total stockholder return on the Company’s common stock, based on the market price of the common stock and assuming reinvestment of dividends (“NNN”), with the FTSE National Association of Real Estate Investment Trusts Equity Index (“NAREIT”) and the S&P 500 Index (“S&P 500”) for the five year period commencing December 31, 2001 and ending December 31, 2006. The graph assumes the investment of $100 on December 31, 2001. Indexed Total Annual Return (As of December 31, 2006) e u l a V x e d n I 300 250 200 150 100 50 0 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 NNN S&P 500 NAREIT 19 For each calendar quarter indicated, the following table reflects respective high, low and closing sales prices for the common stock as quoted by the NYSE and the dividends paid per share in each such period. 2006 High Low Close Dividends paid per share 2005 High Low Close Dividends paid per share First Quarter Second Quarter Third Quarter Fourth Quarter Year $ $ 23.540 20.220 23.300 0.325 $ 20.880 18.000 18.450 0.325 $ $ 23.370 18.810 19.950 0.325 20.990 18.300 20.470 0.325 $ $ 22.460 19.820 21.600 0.335 21.650 18.530 20.000 0.325 $ $ 24.100 21.250 22.950 0.335 20.970 18.060 20.370 0.325 24.100 18.810 22.950 1.320 21.650 18.000 20.370 1.300 The following presents the characterizations for tax purposes of such common stock dividends for the years ended December 31: Ordinary dividends Qualified dividends Capital gain Unrecaptured Section 1250 Gain Nontaxable distributions 2006 2005 $ 1.151 - 0.150 0.019 - 87.18% $ - 11.38% 1.44% - 1.068 0.225 - 0.002 0.005 82.19% 17.27% - 0.17% 0.37% $ 1.320 100.00% $ 1.300 100.00% The Company intends to pay regular quarterly dividends to its stockholders, although all future distributions will be declared and paid at the discretion of the board of directors and will depend upon cash generated by operating activities, the Company’s financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, and such other factors as the board of directors deems relevant. In February 2007 the Company paid dividends to its stockholders of $20,115,000 or $0.335 per share of common stock. On February 15, 2007, there were 1,526 stockholders of record of common stock. 20 Item 6. Selected Financial Data Historical Financial Highlights (dollars in thousands, except per share data) Gross revenues(1) Earnings from continuing operations Net earnings Total assets Total debt Total equity Cash dividends declared to: Common stockholders Series A Preferred Stock stockholders Series B Convertible Preferred Stock stockholders Series C Redeemable Preferred Stock stockholders Weighted average common shares: 2006 2005 2004 2003 2002 $ 180,876 73,538 182,505 1,916,785 776,737 1,096,505 $ 151,831 44,083 89,400 1,733,416 861,045 828,087 $ 133,875 38,216 64,934 1,300,048 524,241 756,998 $ 112,073 30,653 53,473 1,213,778 467,419 730,754 $ 102,067 28,098 48,058 958,300 386,912 549,141 76,035 69,018 66,272 55,473 51,178 4,376 419 923 4,008 1,675 - 4,008 1,675 - 4,008 4,010 502 - - - Basic Diluted 57,428,063 58,079,875 52,984,821 54,640,143 51,312,434 51,742,518 43,108,213 43,896,800 40,383,405 40,588,957 Per share information: Earnings from continuing operations: Basic Diluted Net earnings: Basic Diluted Dividends declared to: Common stockholders Series A Preferred Stock stockholders Series B Convertible Preferred Stock stockholders Series C Redeemable Preferred Stock depositary stockholders Other data: Cash flows provided by (used in): Operating activities Investing activities Financing activities Funds from operations – diluted(2) 1.18 1.17 3.08 3.05 1.32 2.45625 0.72 0.73 1.58 1.56 1.30 2.25 0.63 0.63 1.15 1.15 1.29 2.25 0.61 0.61 1.14 1.13 1.28 2.25 41.875 167.50 167.50 50.25 0.250955 - - - 0.60 0.59 1.09 1.09 1.27 2.25 - - 18,561 (106,984) 81,864 97,121 30,930 (242,487) 217,844 81,803 85,800 (69,963) (19,225) 73,065 54,215 (256,870) 205,965 61,749 111,589 (15,142) (101,654) 54,595 (1) Gross revenues include revenues from the Company’s continuing and discontinued operations. The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and broadens the presentation of discontinued operations in the income statement to include a component of an entity. Accordingly, the results of operations related to these certain properties that have been classified as held for sale or have been disposed of subsequent to December 31, 2001, the effective date of SFAS No. 144, have been reclassified as earnings from discontinued operations. (2) The National Association of Real Estate Investment Trusts (“NAREIT”) developed FFO as a relative non-GAAP financial measure of performance of a REIT in order to recognize that income-producing real estate historically has 21 not depreciated on the basis determined under GAAP. FFO is defined by NAREIT and is used by the Company as follows: net earnings (computed in accordance with GAAP) plus depreciation and amortization of assets unique to the real estate industry, excluding gains (or including losses) on the disposition of real estate held for investment, and the Company’s share of these items from the Company’s unconsolidated partnerships. FFO is generally considered by industry analysts to be the most appropriate measure of operating performance of real estate companies. FFO does not necessarily represent cash provided by operating activities in accordance with GAAP and should not be considered an alternative to net income as an indication of the Company’s operating performance or to cash flow as a measure of liquidity or ability to make distributions. Management considers FFO an appropriate measure of operating performance of an equity REIT because it primarily excludes the assumption that the value of the real estate assets diminishes predictably over time, and because industry analysts have accepted it as an operating performance measure. The Company’s computation of FFO may differ from the methodology for calculating FFO used by other equity REITs, and therefore, may not be comparable to such other REITs. The Company has earnings from discontinued operations in each of its segments, investment assets and inventory assets, real estate held for investment and real estate held for sale. All property dispositions from the Company’s investment segment are classified as discontinued operations. In addition, certain properties in the Company’s inventory segment that have generated revenues before disposition are classified as discontinued operations. These inventory properties have not historically been classified as discontinued operations, therefore, prior period comparable consolidated financial statements have been restated to include these properties in its earnings from discontinued operations. These adjustments resulted in a decrease in the Company’s reported total revenues and total and per share earnings from continuing operations and an increase in the Company’s earnings from discontinued operations. However, the Company’s total and per share net earnings available to common stockholders is not affected. The following table reconciles FFO to their most directly comparable GAAP measure, net earnings for the years ended December 31: 2006 2005 2004 2003 2002 Reconciliation of funds from operations: Net earnings Real estate depreciation and amortization: Continuing operations Discontinued operations Partnership real estate depreciation Partnership gain on sale of asset Gain on disposition of equity investment Gain on disposition of investment assets Extraordinary gain FFO Series A Preferred Stock dividends Series B Convertible Preferred Stock dividends Series C Redeemable Preferred Stock dividends FFO available to common stockholders – basic Series B Convertible Preferred Stock dividends, if dilutive $ 182,505 $ 89,400 $ 64,934 $ 53,473 $ 48,058 20,874 1,545 463 (262) (11,373) (91,332) - 102,420 (4,376) (419) (923) 14,871 5,536 606 - - (9,816) (14,786) 85,811 (4,008) (1,675) - 11,296 4,419 622 - - (2,523) - 78,748 (4,008) (1,675) - 9,572 2,300 699 - - (287) - 65,757 (4,008) (502) - 8,822 1,506 479 - - (260) - 58,605 (4,010) - - 96,702 80,128 73,065 61,247 54,595 419 1,675 - 502 - FFO available to common stockholders – diluted $ 97,121 $ 81,803 $ 73,065 $ 61,749 $ 54,595 For a discussion of material events affecting the comparability of the information reflected in the selected financial data, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.” 22 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation The following discussion and analysis should be read in conjunction with Item 6. “Selected Financial Data,” and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K, and the forward-looking disclaimer language in italics before Item 1. “Business.” National Retail Properties, Inc., a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. The terms “Registrant” or “Company” refer to National Retail Properties, Inc. and its majority owned and controlled subsidiaries. These subsidiaries include the wholly owned qualified REIT subsidiaries of National Retail Properties, Inc., as well as the taxable REIT subsidiaries and their majority owned and controlled subsidiaries (the “NNN TRS”). Effective May 1, 2006, Commercial Net Lease Realty, Inc. changed its name to National Retail Properties, Inc. Overview The Company’s operations are divided into two primary business segments: (i) investment assets, including real estate assets, structured finance investments (included in mortgages, notes and accrued interest receivable on the consolidated balance sheets) and mortgage residual interests (collectively, “Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). The Investment Assets are operated through National Retail Properties, Inc. and its wholly owned qualified REIT subsidiaries. The Company acquires, owns, invests in, manages and develops properties that are leased primarily to retail tenants under long-term net leases (“Investment Properties” or “Investment Portfolio”). The Inventory Assets are operated through the NNN TRS. The NNN TRS, directly and indirectly, through investment interests, owns real estate primarily for the purpose of selling the real estate (“Inventory Properties” or “Inventory Portfolio”). As of December 31, 2006, the Company owned 710 Investment Properties, with an aggregate leasable area of 9,341,000 square feet, located in 44 states. Approximately 98 percent of the Company’s Investment Portfolio was leased at December 31, 2006. In addition to the Investment Properties, as of December 31, 2006, the Company had $13,917,000 and $31,512,000 in structured finance investments and mortgage residual interests, respectively. As of December 31, 2006, the NNN TRS owned 97 Inventory Properties. As of October 31, 2005, the Inventory Assets were operated through Commercial Net Lease Realty Services, Inc. (“Services”) and its majority owned and controlled subsidiaries. Effective November 1, 2005, Services merged with and into National Retail Properties, Inc., and a former Services subsidiary, CNLRS Exchange I, Inc., became the holding company for the Company’s development and exchange activities. Effective October 2, 2006, CNLRS Exchange I, Inc. changed its name to NNN TRS, Inc. The NNN TRS, directly and indirectly, through investment interests, owns real estate primarily for the purpose of selling the real estate (“Inventory Properties” or “Inventory Portfolio”). The NNN TRS acquires and develops Inventory Properties (“Development Properties” or “Development Portfolio”) and also acquires existing Inventory Properties (“Exchange Properties” or “Exchange Portfolio”). As of December 31, 2006, the NNN TRS owned 29 Development Properties (11 completed inventory, five under construction and 13 land parcels) and 68 Exchange Properties. The Company’s management team focuses on certain key indicators to evaluate the financial condition and operating performance of the Company. The key indicators for the Company include items such 23 as: the composition of the Company’s Investment Portfolio and structured finance investments (such as tenant, geographic and industry classification diversification), the occupancy rate of the Company’s Investment Portfolio, certain financial performance ratios and profitability measures, industry trends and performance compared to that of the Company, and returns the Company receives on its invested capital. The Company has recently increased its investments in the convenience store and restaurant sectors. Both of these sectors represent a large part of the freestanding retail property marketplace which the Company believes represents areas of attractive investment opportunity. Similarly, the Company has some geographic focus in Texas and Florida which the Company believes are areas of above average population growth which provide relatively strong investment opportunity for retailers and retail real estate investments. Critical Accounting Policies and Estimates The preparation of the Company’s consolidated financial statements in conformance with accounting principles generally accepted in the United States of America requires management to make numerous estimates and judgments on assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as other disclosures in our financial statements. On an ongoing basis, management evaluates its estimates and judgments. However, actual results may differ from these estimates and assumptions which in turn could have a material impact on the Company’s financial statements. A summary of the Company’s accounting policies and procedures are included in Note 1 of the Company’s consolidated financial statements. Management believes the following critical accounting policies among others affect its more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. Real Estate – Investment Portfolio. The Company records the acquisition of real estate at cost, including acquisition and closing costs. The cost of properties developed by the Company includes direct and indirect costs of construction, property taxes, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. Purchase Accounting for Acquisition of Real Estate Subject to a Lease – For acquisitions of real estate subject to a lease subsequent to June 30, 2001, the effective date of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” (“SFAS 141”), the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases value of tenant relationships, based in each case on their relative fair values. Real estate is generally leased to tenants on a net lease basis, whereby the tenant is responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance and repairs. The leases are accounted for using either the operating or the direct financing method. Such methods are described below: Operating method – Leases accounted for using the operating method are recorded at the cost of the real estate. Revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. Buildings are depreciated on the straight- line method over their estimated useful lives (generally 35 to 40 years). Leasehold interests are amortized on the straight-line method over the terms of their respective leases. When scheduled 24 rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis. Direct financing method – Leases accounted for using the direct financing method are recorded at their net investment (which at the inception of the lease generally represents the cost of the property). Unearned income is deferred and amortized into income over the lease terms so as to produce a constant periodic rate of return on the Company’s net investment in the leases. Management periodically assesses its real estate for possible impairment whenever events or changes in circumstances indicate that the carrying value of the asset, including accrued rental income, may not be recoverable through operations. Management determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the real estate, with the carrying cost of the individual asset. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Real Estate – Inventory Portfolio. The NNN TRS acquires, develops and owns properties that it intends to sell. The properties that are classified as held for sale at any given time may consist of properties that have been acquired in the marketplace with the intent to sell and properties that have been, or are currently being, constructed by the NNN TRS. The NNN TRS records the acquisition of the real estate at cost, including the acquisition and closing costs. The cost of the real estate developed by the NNN TRS includes direct and indirect costs of construction, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. Real estate held for sale is not depreciated. Mortgage Residual Interests, at Fair Value. Mortgage residual interests, classified as available for sale, are reported at their market values with unrealized gains and losses reported as other comprehensive income in stockholders’ equity. The mortgage residual interests were acquired in connection with the acquisition of 78.9 percent equity interest of OAMI. The Company recognizes the excess of all cash flows attributable to the mortgage residual interests estimated at the acquisition/ transaction date over the initial investment (the accretable yield) as interest income over the life of the beneficial interest using the effective yield method. Losses are considered other than temporary valuation impairments if and when there has been a change in the timing or amount of estimated cash flows, exclusive of changes in interest rates, that leads to a loss in value. Certain of the mortgage residual interests have been pledged as security for notes payable. Revenue Recognition. Rental revenues for non-development real estate assets are recognized when earned in accordance with SFAS 13, “Accounting for Leases,” based on the terms of the lease at the time of acquisition of the leased asset. Rental revenues for properties under construction commence upon completion of construction of the leased asset and delivery of the leased asset to the tenant. Use of Estimates. Additional critical accounting policies of the Company include management’s estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Additional critical accounting policies include management’s estimates of the useful lives used in calculating depreciation expense relating to the Company’s real estate assets, the recoverability of the carrying 25 value of long-lived assets, including the mortgage residual interests, the collectibility of receivables from tenants, including accrued rental income, and capitalized overhead relating to development projects. Actual results could differ from those estimates. Results of Operations Property Analysis – Investment Portfolio General. The following table summarizes the Company’s Investment Portfolio as of December 31: 2006 2005 2004 Investment Properties Owned: Number Total gross leasable area (square feet) 710 9,341,000 524 9,227,000 362 8,542,000 Investment Properties Leased: Number Total gross leasable area (square feet) Percent of total gross leasable area Weighted average remaining lease term (years) 697 9,173,000 98% 12 512 9,066,000 98% 11 351 8,322,000 97% 10 The following table summarizes the lease expirations of the Company’s Investment Portfolio as of December 31, 2006. % of Total(1) # of Properties Gross Leasable Area(2) % of Total(1) # of Properties 2007 2008 2009 2010 2011 2012 1.2% 1.8% 2.6% 3.9% 3.8% 4.6% 13 22 25 36 23 30 2013 206,000 2014 406,000 2015 490,000 2016 383,000 2017 439,000 531,000 Thereafter 5.6% 7.3% 4.6% 4.2% 7.2% 53.2% 30 39 22 22 28 407 (1) Based on the annualized base rent for all leases in place as of December 31, 2006. (2) Approximate square feet. Gross Leasable Area(2) 690,000 591,000 621,000 508,000 808,000 3,500,000 The following table summarizes the diversification of the Company’s Investment Portfolio based on the top 10 lines of trade as of December 31, 2006 (dollars in thousands): Top 10 Lines of Trade 2006(1) 2005(1) 2004(1) 1. Convenience Stores 2. Restaurants – Full Service 3. Drug Stores 4. Sporting Goods 5. Books 6. Grocery 7. Consumer Electronics 8. Restaurants – Limited Service 9. Furniture 10. Office Supplies Other 16.3% 12.1% 8.3% 7.3% 5.7% 5.7% 5.6% 4.7% 4.2% 4.1% 26.0% 12.1% 6.6% 10.0% 7.4% 5.8% 6.3% 5.9% 3.0% 4.7% 4.4% 33.8% 0.7% 6.7% 11.5% 7.8% 6.9% 7.7% 7.1% 3.1% 5.0% 5.2% 38.3% 100.0% 100.0% 100.0% (1) Based on the annualized base rent for all leases in place as of December 31 of the respective year. 26 The following table shows the top 10 states in which the Company’s Investment Properties are located in as of December 31, 2006 (dollars in thousands): State 1. Texas 2. Florida 3. Pennsylvania 4. Georgia 5. Virginia 6. California 7. Tennessee 8. Illinois 9. Missouri 10. Ohio Other Number of Properties % of Annual Base Rent(1) 149 77 77 37 19 18 19 22 14 23 255 710 22.2% 13.4% 5.4% 5.1% 3.9% 3.7% 3.5% 3.4% 3.3% 3.0% 33.1% 100.0% (1) Based on annualized base rent for all leases in place as of December 31, 2006. Property Acquisitions. The following table summarizes the Investment Property acquisitions for each of the years ended December 31 (dollars in thousands): Acquisitions: Number of Investment Properties Gross leasable area (square feet) 2006 2005 2004 213 1,130,000 170 1,150,000 36 825,000 Total dollars invested (1) $ 371,898 $ 332,461 $ 139,303 (1) Includes dollars invested on projects currently under construction. Property Dispositions. The following table summarizes the Investment Properties sold by the Company for each of the years ended December 31 (dollars in thousands): Number of properties Gross leasable area (square feet) Net sales proceeds Net gain Property Analysis – Inventory Portfolio 2006 2005 2004 30 1,015,000 319,361 91,332 $ $ 12 476,000 40,377 9,816 $ 20 155,000 32,544 2,523 General. The following summarizes the number of properties held for sale in the Company’s Inventory Portfolio as of December 31: Development Portfolio: Completed Inventory Properties Properties under construction Land parcels Exchange Portfolio: Inventory Properties Total Inventory Properties 27 2006 2005 2004 11 5 13 29 68 97 1 12 4 17 46 63 4 7 4 15 6 21 Property Acquisitions. The following table summarizes the property acquisitions and dollars invested in the Inventory Portfolio for each of the years ended December 31 (dollars in thousands): Development Portfolio: Number of properties acquired Dollars invested (1) Exchange Portfolio: Number of properties acquired Dollars invested Total dollars invested 2006 2005 2004 16 82,524 77 118,553 201,077 $ $ $ 58 66,527 4 10,714 134,373 $ $ $ 33 48,318 8 26,366 76,647 $ $ $ (1) Includes dollars invested on projects currently under construction. Property Dispositions. The following table summarizes the number of Inventory Properties sold and the corresponding gain recognized from the disposition of real estate held for sale included in earnings from continuing and discontinued operations for each of the years ended December 31 (dollars in thousands): 2006 # of Properties 9 55 - - 64 Gain $ 9,698 3,892 190 (4,114) $ 9,666 2005 # of Properties 12 16 - - 28 2004 # of Properties 16 8 - - 24 Gain $20,673 1,912 817 (6,422) $16,980 Gain $18,065 2,641 921 (5,999) $15,628 Development Exchange Intercompany eliminations Minority interest, Development Business Combinations Orange Avenue Mortgage Investments, Inc. On May 2, 2005, the Company exercised its option to acquire 78.9 percent of the common shares of OAMI for $9,379,000. In December 2004, OAMI sold its loan origination, securitization and servicing operations and the majority of its assets and liabilities to a third party, leaving OAMI with an interest in seven commercial real estate loan securitization residual interests. The loans in each of the securitizations are secured by first mortgages on commercial real estate and generally borrower personal guarantees. As a result of the option exercise, the Company has consolidated OAMI in its consolidated financial statements. In accordance with SFAS No. 141, “Business Combinations,” (“SFAS 141”), the Company recorded the assets and liabilities of OAMI at fair value. The Company recognized an extraordinary gain of $14,786,000, equal to the excess fair value over the option price, as all assets acquired were financial assets and current assets. Between June 2001 and July 2003, a wholly owned subsidiary of the Company, Net Lease Funding, Inc. (“NLF”), entered into five limited liability company agreements with OAMI to create five limited liability companies (collectively, the “LLCs”). Kevin B. Habicht, an officer and director of the Company is an officer, director and indirect stockholder of OAMI. Craig Macnab, an officer and director of the Company and Julian E. Whitehurst, an officer of the Company, are each an officer and director of OAMI. Each of the LLCs holds an interest in mortgage loans and is 100 percent equity financed. Prior to the acquisition of the 78.9 percent equity interest in OAMI, NLF held a non-voting 28 and non-controlling interest in each of the LLCs ranging between 36.7 and 44.0 percent and accounted for its investment under the equity method of accounting. As a result of the Company’s acquisition of 78.9 percent equity interest in OAMI, the Company’s interest in the LLCs is no longer accounted for as an equity investment and is now included as part of OAMI in the Company’s consolidated financial statements. In addition, certain officers and directors of the Company own preferred shares of OAMI. Prior to the acquisition of 78.9 percent equity interest in OAMI, the Company received $2,749,000 and $10,562,000 in distributions from the LLCs during the years ended December 31, 2005 and 2004, respectively. For the years ended December 31, 2005 and 2004, the Company recognized $1,467,000 and $5,042,000 of earnings, respectively, from the LLCs. In connection with the independent valuations of the Residuals’ fair value, the Company reduced the carrying value of the Residuals to reflect such fair value at December 31, 2005. The reduction in the Residuals’ value that related to the Residuals acquired at the time of the option exercise was recorded as a purchase price allocation adjustment. The reduction in the Residuals’ value acquired at the time of the option exercise that related to the period subsequent to the option exercise, as well as the reduction in the value related to the portion of the Residuals owned by NLF, was recorded as an aggregate other than temporary valuation impairment of $8,779,000 and $2,382,000 for the years ended December 31, 2006 and 2005, respectively. Unrealized gains of $1,992,000 were recorded as other comprehensive income in the Statement of Stockholders Equity during the year ended December 31, 2006. The Company merged certain of its wholly owned subsidiaries into National Retail Properties, Inc. and elected to convert OAMI to a REIT. As a result, effective January 1, 2005, OAMI was taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. Upon making the REIT conversion, $3,453,000 of OAMI’s tax liability was eliminated and recorded as an adjustment to the net assets acquired at the time of the option exercise. The remaining tax liability will be reduced over the next ten years in proportion to the reduction of the basis of the respective mortgage residual interests. National Properties Corporation. On June 16, 2005, the Company acquired 100 percent of National Properties Corporation (“NAPE”), a publicly traded company, which owned 43 freestanding properties located in 12 states. Results of NAPE operations have been included in the consolidated financial statements since the date of acquisition. NAPE stockholders received 1,636,532 newly issued shares of the Company’s common stock. In accordance with SFAS 141, the acquisition price of $32,199,000 was allocated to the assets acquired and liabilities assumed at their fair values. Revenue from Continuing Operations Analysis General. During the year ended December 31, 2006, the Company’s rental income increased primarily due to the acquisition of Investment Properties (See “Results of Operations – Property Analysis – Investment Portfolio – Property Acquisitions”). The Company anticipates any significant increase in rental income will continue to come primarily from additional property acquisitions. 29 The following summarizes the Company’s revenues from continuing operations for each of the years ended December 31 (dollars in thousands): 2006 2005 2004 2006 Percent of Total 2005 2004 2006 Versus 2005 Percent Increase (Decrease) 2005 Versus 2004 Percent Increase (Decrease) $ 134,196 $ 100,836 $ 84,546 89.0% 85.1% 88.9% 33.1% 19.3% 4,862 4,094 2,828 3.2% 3.5% 3.0% 18.8% 44.8% 4,462 6,143 7,695 3.0% 5.2% 8.1% (27.4)% (20.2)% Rental Income (1) Real estate expense reimbursement from tenants Interest and other income from real estate transactions Interest income on mortgage residual interests Total revenues $ 150,788 $ 118,422 $ 95,069 100.0% 100.0% 100.0% 7,268 7,349 - 4.8% 6.2% - (1.1)% 27.3% 100.0% 24.6% (1) Includes rental income from operating leases, earned income from direct financing leases and contingent rental income from continuing operations (“Rental Income”). Revenue from Operations by Source of Income. The Company has identified two primary business segments, and thus, sources of revenue: (i) earnings from the Company’s Investment Assets and (ii) earnings from the Company’s Inventory Assets. The revenues generated by each of the Company’s two primary operating segments have remained relatively consistent as a percentage of the Company’s total revenues from continuing operations. The following table summarizes the revenues from continuing operations for each of the years ended December 31, (dollars in thousands): 2006 2005 2004 2006 Percent of Total 2005 2004 Investment Assets Inventory Assets $ 134,334 $ 113,865 4,557 16,454 $ 91,018 4,051 89.1% 10.9% 96.2% 3.8% 95.7% 4.3% Total revenues $ 150,788 $ 118,422 $ 95,069 100.0% 100.0% 100.0% 2006 Versus 2005 Percent Increase 2005 Versus 2004 Percent Increase (Decrease) 18.0% 261.1% 27.3% 25.1% 12.5% 24.6% Comparison of Year Ended December 31, 2006 to Year Ended December 31, 2005. Rental Income. The Company’s Rental Income increased primarily due to the addition of an aggregate gross leasable area of 1,130,000 square feet to the Company’s Investment Portfolio resulting from the acquisition of an additional 213 Investment Properties during the year ended December 31, 2006, of which 38 Investment Properties with an aggregate 272,000 square feet of gross leasable area were acquired in the last three months of 2006. The Investment Portfolio occupancy rate remained relatively stable at approximately 98 percent for each of the years ended December 31, 2006 and 2005. Real Estate Expense Reimbursements from Tenants. Real estate expense reimbursements from tenants remained fairly constant as a percent of total revenues from continuing operations. The increase for the 30 year ended December 31, 2006 as compared to the year ended December 31, 2005 was attributable to a full year of reimbursements from certain tenants acquired in 2005 and the reimbursements from the newly acquired Investment Properties in 2006. Interest and Other Income from Real Estate Transactions. Interest and other income from real estate transactions decreased for the year ended December 31, 2006, primarily due to a decrease in interest earned on the structured finance investments compared to the year ended December 31, 2005. The weighted average outstanding principal balance of the structured finance investments during the year ended December 31, 2006 and 2005 was $16,834,000 and $27,584,000, respectively. In addition, the Company received $886,000 of disposition and development fee income during the year ended December 31, 2005. There was no fee income recognized in 2006. Interest Income on Mortgage Residual Interests. The Company recognizes interest income on mortgage residual interests as a result of its acquisition of 78.9 percent equity interest in OAMI in May 2005. As a result of the timing of the acquisition, the Company recognized such income for the entire year ended December 31, 2006, versus a partial period in 2005 (see “Business Combinations”). However, the increase in interest income from the mortgage residual interests for the year ended December 31, 2006, is partially offset by a decrease in interest income as a result of the amortization and prepayments of the underlying loans. Gain from Disposition of Real Estate, Inventory Portfolio. Inventory Properties typically are operating properties and are classified as discontinued operations. However, the gains on the sale of Inventory Properties which are sold prior to rent commencement are reported in continuing operations. The increase in the gain from the disposition of real estate is primarily due to the varying gross margin on sales of these Inventory Properties and the timing of such sales. The following table summarizes the Inventory Property dispositions included in continuing operations for the years ended December 31 (dollars in thousands): 2006 2005 # of Properties Gain # of Properties Gain Gain Minority interest Gain, net of minority interest 6 - 6 $ $ 8,000 (3,609) 4,391 6 - 6 $ $ 2,010 - 2,010 Comparison of Year Ended December 31, 2005 to Year Ended December 31, 2004. Rental Income. Rental Income increased for the year ended December 31, 2005, as compared to the year ended December 31, 2004, primarily due to the addition of an aggregate gross leasable area of 1,150,000 square feet to the Company’s Investment Portfolio resulting from the acquisition of 170 Investment Properties during the year ended December 31, 2005. Real Estate Expense Reimbursements from Tenants. Real estate expense reimbursements from tenants increased for the year ended December 31, 2005, as compared to the year ended December 31, 2004, primarily due to a full year of expense reimbursements during 2005 from certain tenants acquired during 2004. Gain from Disposition of Real Estate, Inventory Portfolio. The gain on disposition of real estate held for sale included in continuing operations decreased for the year ended December 31, 2005, as 31 compared to the year ended December 31, 2004, primarily due to the number of properties sold and the varying gross margin on sales of Inventory Properties. The following table summarizes the property dispositions included in continuing operations for the year ended December 31 (dollars in thousands): 2005 2004 # of Properties Gain # of Properties Gain Gain Minority interest Gain, net of minority interest 6 - 6 $ $ 2,010 - 2,010 7 - 7 $ $ 4,700 (1,717) 2,983 Interest and Other Income from Real Estate Transactions. Interest and other income from real estate transactions decreased for the year ended December 31, 2005, as compared to the year ended December 31, 2004, primarily due to a decrease in interest earned on the structured finance investments for the year ended December 31, 2005. The weighted average outstanding principal balance of the structured finance investments during the year ended December 31, 2005 and 2004 was $27,584,000 and $44,424,000, respectively. However, the decrease was partially offset by the $886,000 and $175,000 of disposition and development fee income received during the year ended December 31, 2005 and 2004, respectively. Analysis of Expenses from Continuing Operations General. During 2006 operating expenses from continuing operations increased primarily as a result of the acquisition of additional properties but remained generally proportionate to the Company’s total revenues from continuing operations. The following summarizes the Company’s expenses from continuing operations (dollars in thousands): General and administrative Real estate Depreciation and amortization Impairment – real estate, Investment Portfolio Impairment – mortgage residual interests valuation adjustment Restructuring costs Transition costs Total operating expenses Interest and other income Interest expense Total other expenses (revenues) 2006 2005 2004 $ $ $ $ $ 24,012 7,088 22,971 - 8,779 1,580 - $ 22,418 5,938 16,792 1,673 2,382 - - 64,430 $ 49,203 $ 21,664 4,986 12,975 - - - 3,741 43,366 (3,815) $ 45,874 (2,039) $ 33,309 (3,760) 27,972 42,059 $ 31,270 $ 24,212 32 Percentage of Total Operating Expenses 2005 2006 2004 Percentage of Revenues from Continuing Operations 2005 2004 2006 2006 Versus 2005 Percent Increase (Decrease) 2005 Versus 2004 Percent Increase (Decrease) General and administrative Real estate Depreciation and amortization Impairment – real estate, Investment Portfolio Impairment – mortgage residual interests valuation adjustment Restructuring costs Transition costs 37.3% 11.0% 35.7% 45.6% 12.1% 34.1% 50.0% 11.5% 29.9% 15.9% 4.7% 15.2% 18.9% 5.0% 14.2% 22.8% 5.2% 13.6% 7.1% 19.4% 36.8% 3.5% 19.1% 29.4% - 3.4% - - 1.4% - (100.0)% 100.0% 13.6% 2.4% - 4.8% - - - - 8.6% 5.8% 1.1% - 2.0% - - - - 3.9% 268.6% 100.0% - 100.0% - (100.0)% Total operating expenses 100.0% 100.0% 100.0% 47.2% 41.5% 45.5% 30.9% 13.5% Interest and other income Interest expense (9.1)% (6.5)% (15.5)% 109.1% 106.5% 115.5% (2.5)% 30.4% (1.7)% 28.1% (4.0)% 29.4% 87.1% (45.8)% 19.1% 37.7% Total other expenses (revenues) 100.0% 100.0% 100.0% 27.9% 26.4% 25.5% 34.5% 29.2% Comparison of Year End December 31, 2006 to Year Ended December 31, 2005. General and Administrative. General and administrative expenses increased for the year ended December 31, 2006, however, such expenses decreased as a percentage of total operating expenses from continuing operations for the year ended December 31, 2006. The increase in general and administrative expenses for 2006 was primarily attributable to (i) an increase in expenses related to personnel compensation, (ii) an increase in professional services provided to the Company, and (iii) an increase in lost pursuit costs. The increase in 2006 was partially offset by the decrease in expenses related to personnel as a result of a workforce reduction in April 2006 and an increase in costs capitalized to projects under development. Real Estate. Real estate expenses increased for the year ended December 31, 2006, as compared to the year ended December 31, 2005; however, such expenses remained fairly consistent as a percentage of total operating expenses and total revenues from continuing operations. The increase in real estate expenses for 2006 when compared to the same period for 2005 is primarily attributable to (i) an increase in tenant reimbursable real estate expenses, (ii) an increase in expenses related to vacant properties, and (iii) an increase in certain real estate expenses that were not reimbursable by tenants. Depreciation and Amortization. Depreciation and amortization expenses increased for the year ended December 31, 2006, as compared to the year ended December 31, 2005; however, such expenses remained fairly consistent as a percentage of total operating expenses and total revenues from continuing operations. The increase for the year ended December 31, 2006, when compared to the same period in 2005 is attributable to (i) the acquisition of 213 Investment Properties with an aggregate gross leasable area of 1,130,000 square feet in 2006 and (ii) a full year of depreciation and amortization on the 170 Investment Properties with an aggregate gross leasable area of 1,150,000 square feet acquired in 2005. The increase in depreciation and amortization was partially offset by the disposition of 30 Investment Properties with an aggregate gross leasable area of 1,015,000 square feet during the year ended December 31, 2006. Impairment – Real Estate, Investment Portfolio. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset 33 may not be recoverable. Events or circumstances that may occur include changes in real estate market conditions, the ability of the Company to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, the Company calculates a possible impairment by comparing the future cash flows to the current net book value. Impairments are measured as the amount by which the current book value of the asset exceeds the fair value of the asset. Impairment – Mortgage Residual Interests Valuation Adjustment. In connection with the independent valuations of the Residuals’ fair value, the Company reduced the carrying value of the Residuals to reflect such fair value at December 31, 2006 and 2005. The reduction in the Residuals’ value that related to the Residuals acquired at the time of the option exercise was recorded as a purchase price allocation adjustment. The reduction in the Residuals’ value acquired at the time of the option exercise that related to the period subsequent to the option exercise, as well as the reduction in value related to the portion of the Residuals previously owned by NLF, were recorded as an aggregate other than temporary valuation impairment in 2005 (see “Business Combinations”). The Company reduced the carrying value of the Residuals during the year ended December 31, 2006, based upon the fair value as determined by an independent valuation. The decrease in the value of the Residuals was primarily the result of the increase in prepayment speeds of the underlying loans. The valuation adjustments that are considered other than temporary are recorded as a reduction of earnings from operations. Restructuring Costs. During the year ended December 31, 2006, the Company recorded restructuring costs of $1,580,000, which included severance costs and accelerated vesting of restricted stock in connection with a workforce reduction in April 2006. Interest Expense. The increase in interest expense for the year ended December 31, 2006, over the year ended December 31, 2005, was primarily due to a $241,104,000 increase in the weighted average long-term debt outstanding for the year ended December 31, 2006. The increase in the weighted average long-term debt outstanding is attributable to the increase in Investment and Inventory Properties and the acquisition of the 78.9 percent equity interest in OAMI. This increase was offset slightly by a 25 basis point decrease in the overall weighted average interest rate for 2006 compared to 2005. The following represents the primary changes in debt: (i) (ii) (iii) (iv) (v) (vi) issuance of $150,000,000 of notes payable in November 2005 with an effective interest rate of 6.185% due in December 2015, the increase in the weighted average debt outstanding on the revolving credit facility (increased by $61,819,000), issuance of $172,500,000 of notes payable in September 2006 with an effective interest rate of 3.95% due in September 2026, the $20,800,000 variable rate term note assumed in connection with the acquisition of NAPE in June 2005, the $32,000,000 secured notes payable acquired in May 2005 in connection with the 78.9 percent equity interest in OAMI, and repayment of a mortgage in February 2006 with a balance of $18,538,000 at December 31, 2005 with an interest rate of 7.435%. 34 Comparison of Year Ended December 31, 2005 to Year Ended December 31, 2004. General and Administrative. General and administrative expenses increased for the year ended December 31, 2005 compared to the year ended December 31, 2004, primarily as a result of (i) an increase in professional services provided to the Company, and (ii) increases in expenses related to personnel. Real Estate. Real estate expenses for the year ended December 31, 2005 compared to the year ended December 31, 2004, increased primarily due to a decrease in tenant reimbursable real estate expenses and a decrease in property expenses related to vacant properties due to an increased Investment Property occupancy rate from 97 percent as of December 31, 2004 to 98 percent as of December 31, 2005. Depreciation and Amortization. The increase in depreciation and amortization expense for the year ended December 31, 2005 compared to the year ended December 31, 2004, is primarily attributable to (i) the depreciation on the 170 Investment Properties with an aggregate gross leasable area of 1,150,000 square feet acquired during the year ended December 31, 2005, and (ii) a full year of depreciation on the 36 Investment Properties with an aggregate gross leasable area of 825,000 square feet acquired during the year ended December 31, 2004. Transition Costs. During the year ended December 31, 2004, the Company recorded transition costs of $3,741,000, including severance, accelerated vesting of restricted stock and recruitment costs in connection with the appointment of Craig Macnab as Chief Executive Officer in February 2004, and the resignation of Gary M. Ralston as President and Chief Operating Officer in May 2004. Interest Expense. The increase in interest expense for the year ended December 31, 2005 over the year ended December 31, 2004 was primarily attributable to a $69,982,000 increase in the average long- term debt outstanding for the year ended December 31, 2005. Weighted average interest rates remained fairly consistent. The increase in the weighted average debt outstanding is primarily attributable to the increase in Investment and Inventory Property acquisitions and the acquisition of the 78.9 percent equity interest in OAMI. The following represents the changes in debt: (i) (ii) (iii) (iv) (v) (vi) (vii) the increase in the weighted average debt outstanding on the revolving credit facility (increased by $21,905,000), the $32,000,000 secured notes payable acquired in May 2005 in connection with the 78.9 percent equity interest in OAMI, the $20,800,000 variable rate term note assumed in connection with the acquisition of NAPE in June 2005, issuance of $150,000,000 of notes payable in November 2005 with an effective interest rate of 6.185% due in December 2015, issuance of $150,000,000 of notes payable in June 2004 with an effective interest rate of 5.910% due in June 2014, repayment of $100,000,000 of notes payable in June 2004 with an effective interest rate of 7.547%, and repayment of the $20,000,000 variable rate term note in November 2004. Unconsolidated Affiliates For details on each of the Company’s unconsolidated affiliates, see “Capital Resources – Investments in Unconsolidated Affiliates.” 35 During the years ended December 31, 2006, 2005 and 2004, the Company recognized equity in earnings of unconsolidated affiliates of $122,000, $1,209,000, and $4,724,000, respectively. The decrease in equity in earnings of unconsolidated affiliates subsequent to the year ended December 31, 2004, was primarily attributable to the decrease in the income earned on investments in mortgage residual interests as a result of the acquisition of 78.9 percent equity interest in OAMI in May 2005. The Company’s interest in the LLCs is no longer accounted for as an equity investment and is now included as a part of OAMI in the Company’s consolidated financial statements. In October 2006, the Company sold its equity investment in CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”) for $10,239,000 and recognized a gain of $11,373,000. Plaza owns a 346,000 square foot office building and an interest in an adjacent parking garage. In connection with the sale, the Company was released as a guarantor of Plaza’s $14,000,000 unsecured promissory note. Earnings from Discontinued Operations In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company classified as discontinued operations the revenues and expenses related to its Investment Properties that were sold and its leasehold interests that expired subsequent to December 31, 2001, as well as, the revenues and expenses related to any Investment Property that was held for sale at December 31, 2006. The Company also classified as discontinued operations the revenues and expenses of its Inventory Properties that were sold which generated rental revenues, as well as, the revenues and expenses related to its Inventory Properties held for sale which generated rental revenues as of December 31, 2006. The Company records discontinued operations by the Company’s identified segments: (i) Investment Assets and (ii) Inventory Assets. The following table summarizes the earnings from discontinued operations for the years ended December 31 (dollars in thousands): 2006 2005 2004 # of Sold Properties Gain Earnings # of Sold Properties Gain Earnings # of Sold Properties Gain Earnings Investment Assets Inventory Assets, net of minority interest 30 $ 91,332 $ 100,925 12 $ 9,816 $ 21,151 20 $ 2,523 $ 17,171 58 88 5,275 8,042 $ 96,607 $ 108,967 22 34 13,618 9,380 $ 23,434 $ 30,531 17 37 13,997 9,547 $ 16,520 $ 26,718 The Company occasionally sells Investment Properties and may reinvest the proceeds of the sales to purchase new properties. The Company evaluates its ability to pay dividends to stockholders by considering the combined effect of income from continuing and discontinued operations. Extraordinary Gain During the year ended December 31, 2005, the Company recognized an extraordinary gain of $14,786,000, which resulted from the difference between the Company’s portion of the fair value of net assets acquired in the acquisition of 78.9 percent equity interest in OAMI and the purchase price (see “Business Combinations”). 36 Impact of Inflation The Company’s leases typically contain provisions to mitigate the adverse impact of inflation on the Company’s results of operations. Tenant leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume. During times when inflation is greater than increases in rent, rent increases may not keep up with the rate of inflation. The Investment Properties are leased to tenants under long-term, net leases which typically require the tenant to pay certain operating expenses of a property, thus, the Company’s exposure to inflation is reduced. Inflation may have an adverse impact on the Company’s tenants. Liquidity General. The Company’s demand for funds has been and will continue to be primarily for (i) payment of operating expenses and dividends; (ii) property acquisitions and development, structured finance investments and capital expenditures; (iii) payment of principal and interest on its outstanding indebtedness, and (iv) other investments. The Company expects to meet these requirements (other than amounts required for additional property investments and structured finance investments) through cash provided from operations and the Company’s revolving credit facility. The Company utilizes its credit facility to meet its short term working capital requirements. As of December 31, 2006, $28,000,000 was outstanding and approximately $272,000,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $5,159,000. The Company anticipates that any additional investments in properties and structured finance investments during the next 12 months will be funded with cash provided from operations, long-term unsecured debt and the issuance of common or preferred equity, each of which may be initially funded with proceeds from the Company’s revolving credit facility. However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to the Company. Below is a summary of the Company’s cash flows for each of the years ended December 31 (in thousands): Cash and cash equivalents: Provided by operating activities Used in investing activities Provided by (used in) financing activities Increase (decrease) January 1 December 31 2006 2005 2004 $ 18,561 (106,984) 81,864 $ 30,930 (242,487) 217,844 $ 85,800 (69,963) (19,225) (6,559) 8,234 $ 1,675 $ 6,287 1,947 8,234 (3,388) 5,335 $ 1,947 Cash provided by operating activities represents cash received primarily from rental income from tenants, gain on the disposition of Inventory Properties and interest income less general and administrative expenses and interest expense. The change in cash provided by operations for the years ended December 31, 2006, 2005 and 2004, is primarily the result of changes in revenues and expenses as discussed in “Results of Operations.” Cash generated from operations is expected to fluctuate in the future. Changes in cash for investing activities are primarily attributable to the acquisitions and dispositions of Investment Properties. 37 The Company’s financing activities for the year ended December 31, 2006 included the following significant transactions: • $172,500,000 in gross proceeds from the issuance of 3.95% convertible senior notes payable • $76,035,000 in dividends paid to common stockholders • $5,718,000 in aggregate dividends paid to Series A, B and C Preferred Stock stockholders • $134,300,000 in net payments on the Company’s Credit Facility • $92,000,000 in gross proceeds from the issuance of 3,680,000 depositary shares of Series C Preferred Stock • $65,722,000 in net proceeds from the issuance of 3,046,408 common shares in connection with the Dividend Reinvestment and Stock Purchase Plan (“DRIP”) Financing Strategy The Company’s financing objective is to manage its capital structure effectively in order to provide sufficient capital to execute its operating strategy while servicing its debt requirements and providing value to the Company’s stockholders. The Company generally utilizes debt and equity security offerings, bank borrowings, the sale of properties, and to a lesser extent, internally generated funds to meet its capital needs. The Company typically funds its short-term liquidity requirements including investments in additional retail properties with cash from its $300,000,000 unsecured revolving credit facility (“Credit Facility”). As of December 31, 2006, $28,000,000 was outstanding and approximately $272,000,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $5,159,000. For the year ended December 31, 2006, the Company’s ratio of total indebtedness to total gross assets (before accumulated depreciation) was approximately 41 percent and the secured indebtedness to total gross assets was approximately three percent. The total debt to total market capitalization was approximately 35 percent. Certain financial agreements to which the Company is a party contain covenants that limit the Company’s ability to incur debt under certain circumstances. The organizational documents of the Company do not limit the absolute amount or percentage of indebtedness that the Company may incur. Additionally, the Company may change its financing strategy. Contractual Obligations and Commercial Commitments. The information in the following table summarizes the Company’s contractual obligations and commercial commitments outstanding as of December 31, 2006. The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of December 31, 2006. As the table incorporates only those exposures that exist as of December 31, 2006, it does not consider those exposures or positions which may arise after that date. Total 2007 Expected Maturity Date (dollars in thousands) 2009 2010 2008 2011 Thereafter Long-term debt (1) Revolving Credit Facility Operating lease $ 749,733 $ 20,913 $ 113,190 $ 21,800 $ 21,022 $ 173,598 - - 917 839 28,000 865 28,000 7,076 - 891 - 815 $ 399,210 - 2,749 Total contractual cash obligations(2) $ 784,809 $ 21,728 $ 114,029 $ 50,665 $ 21,913 $ 174,515 $ 401,959 38 (1) (2) Includes amounts outstanding under the mortgages payable, secured notes payable, convertible notes payable, notes payable and financing lease obligation and excludes unamortized note discounts and unamortized interest rate hedge gain. Excludes $5,989 of accrued interest payable. In addition to the contractual obligations outlined above, the Company has agreed to fund construction commitments in connection with the development of additional properties as outlined below (dollars in thousands): # of Properties Total Construction Commitment(1) Amount Funded at December 31, 2006 11 5 16 $ $ 35,020 $ 36,728 71,748 $ 17,845 27,263 45,108 Investment Portfolio Inventory Portfolio (1) Including land costs. As of December 31, 2006 the Company had outstanding letters of credit totaling $5,159,000 under its revolving credit facility. As of December 31, 2006, the Company does not have any other contractual cash obligations, such as purchase obligations, financing lease obligations or other long-term liabilities other than those reflected in the table. In addition to items reflected in the table, the Company has preferred stock with cumulative preferential cash distributions, as described below under “Dividends.” Management anticipates satisfying these obligations with a combination of the Company’s current capital resources on hand, its revolving credit facility and debt or equity financings. Many of the Investment Properties are recently constructed and are generally net leased. Therefore, management anticipates that capital demands to meet obligations with respect to these Investment Properties will be modest for the foreseeable future and can be met with funds from operations and working capital. Certain of the Company’s Investment Properties, are subject to leases under which the Company retains responsibility for certain costs and expenses associated with the Investment Property. Management anticipates the costs associated with the Company’s vacant Investment Properties or those Investment Properties that become vacant will also be met with funds from operations and working capital. The Company may be required to borrow under the Company’s revolving Credit Facility or use other sources of capital in the event of unforeseen significant capital expenditures. The lost revenues and increased property expenses resulting from the rejection by any bankrupt tenant of any of their respective leases with the Company could have a material adverse effect on the liquidity and results of operations of the Company if the Company is unable to release the Investment Properties at comparable rental rates and in a timely manner. As of January 31, 2007, the Company owns nine vacant, unleased Investment Properties which account for approximately two percent of the total gross leasable area of the Company’s Investment Portfolio and four unleased land parcels. Additionally, less than one percent of the total gross leasable area of the Company’s Investment Portfolio is leased to a tenant that has filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, the tenant has the right to reject or affirm its lease with the Company. Dividends. The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. The Company generally 39 will not be subject to federal income tax on income that it distributes to its stockholders, provided that it distributes 100 percent of its REIT taxable income and meets certain other requirements for qualifying as a REIT. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost. Such an event could materially affect the Company’s income and its ability to pay dividends. The Company believes it has been organized as, and its past and present operations qualify the Company as, a REIT. Additionally, the Company intends to continue to operate so as to remain qualified as a REIT for federal income tax purposes. One of the Company’s primary objectives, consistent with its policy of retaining sufficient cash for reserves and working capital purposes and maintaining its status as a REIT, is to distribute a substantial portion of its funds available from operations to its stockholders in the form of dividends. During the years ended December 31, 2006, 2005 and 2004, the Company declared and paid dividends to its common stockholders of $76,035,000, $69,018,000, and $66,272,000 and, respectively, or $1.32, $1.30 and $1.29 per share, respectively, of common stock. The following presents the characterizations for tax purposes of such common stock dividends for the years ended December 31: 2006 2005 2004 Ordinary dividends Qualified dividends Capital gain Unrecaptured Section 1250 Gain Nontaxable distributions $ 1.151 - 0.150 0.019 - 87.18% $ - 11.38% 1.44% - 1.068 0.225 - 0.002 0.005 82.19% $ 17.27% - 0.17% 0.37% $ 1.320 100.00% $ 1.300 100.00% $ 0.916 - 0.040 0.041 0.293 1.290 70.99% - 3.13% 3.21% 22.67% 100.00% In February 2007, the Company paid dividends to its common stockholders of $20,115,000, or $0.335 per share of common stock. Holders of each of the Company’s preferred stock issuances are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions based on the stated rate and liquidation preference per annum. The following table outlines each issuance of the Company’s preferred stock (dollars in thousands, except per share data): Non-Voting Preferred Stock Issuance Shares Outstanding At December 31, 2006 Liquidation Preference (per share) Fixed Annual Cash Distribution (per share) Dividends Declared and Paid For the Year Ended December 31, 2005 2006 2004 Total Per Share Total Per Share Total Per Share 9% Series A (1) 6.7% Series B Convertible (2) 7.375% Series C Redeemable (3) 1,781,589 $ 25.00 $ 2.25 $ 4,376 $ 2.45625 $ 4,008 $ 2.25 $ 4,008 $ 2.25 - 2,500.00 167.50 419 41.875 1,675 167.50 1,675 167.50 3,680,000 25.00 1.84375 923 0.250955 - - - - (1) Effective January 2, 2007, the Company redeemed all 1,781,589 shares of Series A Preferred Stock, at their redemption price of $25.00 per share plus all accumulated and unpaid dividends through the redemption date of $0.20625 per share, for an aggregate redemption price of $25.20625. Dividends declared and paid in 2006 include $368 of dividends payable. In April 2006, the holder of the Company’s Series B Convertible Preferred Stock elected to convert those 10,000 shares into 1,293,996 shares of common stock. In October 2006, the Company issued 3,680,000 depositary shares, each representing 1/100th of a share of 7.375% Series C Redeemable Preferred Stock. See “Capital Resources – Debt and Equity Securities.” (2) (3) 40 In February 2007, the Company declared dividends of $1,696,000 or $0.4609375 per depositary share of Series C Redeemable Preferred Stock payable in March 2007. Restricted Cash. Restricted cash consists of amounts held in restricted accounts in connection with the sale of certain assets of OAMI to a third party (the “Buyer”). The use of the cash is restricted pursuant to agreements with the Buyer and will be released in December 2007 subject to any pending indemnity claims. The amount held in these accounts at December 31, 2006 and 2005 was $36,728,000 and $30,530,000, respectively. The carrying value for restricted cash was $36,587,000 and $30,191,000 at December 31, 2006 and 2005, respectively, and is calculated as the present value of the expected release of monies. Capital Resources Generally, cash needs for property acquisitions, structured finance investments, capital expenditures, development and other investments have been funded by equity and debt offerings, bank borrowings, the sale of properties and, to a lesser extent, from internally generated funds. Cash needs for other items have been met from operations. Potential future sources of capital include proceeds from the public or private offering of the Company’s debt or equity securities, secured or unsecured borrowings from banks or other lenders, proceeds from the sale of properties, as well as undistributed funds from operations. Debt The following is a summary of the Company’s total outstanding debt as of December 31 (dollars in thousands): Line of credit payable Mortgages payable Notes payable – secured Notes payable – convertible Notes payable Financing lease obligation Total outstanding debt $ 2006 28,000 35,892 24,500 172,500 489,804 26,041 Percentage of Total 2005 Percentage of Total 3.6% $ 4.6% 3.2% 22.2% 63.1% 3.3% 162,300 151,133 28,250 - 493,321 26,041 18.8% 17.6% 3.3% - 57.3% 3.0% $ 776,737 100.0% $ 861,045 100.0% Line of Credit Payable. In December 2005, the Company entered into an amended and restated loan agreement for a $300,000,000 revolving credit facility (the “Credit Facility”). The Credit Facility amended the Company’s existing loan agreement by (i) increasing the borrowing capacity to $300,000,000 from $225,000,000, (ii) lowering the interest rates of the tiered rate structure from a maximum of 135 points above LIBOR to a maximum rate of 112.5 basis points above LIBOR (based upon the debt rating of the Company, the current interest rate is 80 basis points above LIBOR), (iii) requiring the Company to pay a commitment fee based on a tiered rate structure to a maximum of 25 basis points per annum (based upon the debt rating of the Company, the current commitment fee is 20 basis points), (iv) providing for a competitive bid option for up to 50 percent of the facility amount, (v) extending the expiration date to May 8, 2009 and (vi) amending certain of the financial covenants of the Company. The principal balance is due in full upon expiration of the Credit Facility in May 2009, which the Company may request to be extended for an additional 12 months. As of December 31, 2006, $28,000,000 was outstanding and approximately $272,000,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $5,159,000. 41 In accordance with the terms of the Credit Facility, the Company is required to meet certain restrictive financial covenants, which, among other things, require the Company to maintain certain (i) maximum leverage ratios, (ii) debt service coverage, (iii) cash flow coverage and (iv) investment limitations. At December 31, 2006, the Company was in compliance with those covenants. In the event that the Company violates any of these restrictive financial covenants, its access to the debt or equity markets may become impaired. Mortgages Payable. In February 2006, upon maturity, the Company repaid the outstanding principal balance of its long-term, fixed rate loan with an original principal balance of $39,450,000, which was secured by a first mortgage on certain of the Company’s Investment Properties. Upon repayment of the loan, the Investment Properties were released from the mortgage. As of December 31, 2005, the outstanding principal balance was $18,538,000. In May 2006, the Company disposed of three Investment Properties that were subject to a first mortgage with an original and outstanding principal balance of $95,000,000. Upon disposition of these Investment Properties, the buyer assumed the mortgage. Note Payable. In connection with the acquisition of NAPE, the Company assumed a $20,800,000 term note payable (“Term Note”), and a line of credit with an outstanding balance of $7,400,000, which was paid in full with proceeds from the Company’s existing line of credit in June 2005. The principal balance on the Term Note is due in full upon its expiration in June 2009. The Term Note bears interest based on a tiered rate structure to a maximum rate of 165 basis points above LIBOR. Based on the current debt rating of the Company, the current interest rate is 120 basis points above LIBOR or 6.55% at December 31, 2006. In accordance with the terms of the Term Note, the Company is required to meet certain restrictive financial covenants, which, among other things, require the Company to maintain certain (i) maximum leverage ratios, (ii) debt service coverage and (iii) cash flow coverage. Debt and Equity Securities. The Company has used, and expects to use in the future, issuances of debt and equity securities primarily to pay down its outstanding indebtedness and to finance investment acquisitions. The Company has maintained investment grade debt ratings from Standard and Poor’s, Moody’s Investor Service and Fitch Ratings on its senior, unsecured debt since 1998. In February 2006, the Company filed a shelf registration statement with the Securities and Exchange Commission which permits the issuance by the Company of an indeterminate amount of debt and equity securities. Each of the Company’s outstanding series of publicly held non-convertible notes are summarized in the table below (dollars in thousands). Notes 2008 (1) 2010 (1) 2012 (1) 2014 (1)(2)(5) 2015 (1) $ Issue Date March 1998 September 2000 June 2002 June 2004 November 2005 Principal Discount(3) 100,000 $ 20,000 50,000 150,000 150,000 271 $ 126 287 440 390 Net Price 99,729 19,874 49,713 149,560 149,610 Stated Rate 7.125% 8.500% 7.750% 6.250% 6.150% Effective Rate(4) Commencement of Semi- Annual Interest Payments 7.163% September 1998 8.595% March 2001 7.833% December 2002 5.910% June 2004 6.185% June 2006 Maturity Date March 2008 September 2010 June 2012 June 2014 December 2015 (1) (2) (3) (4) (5) The proceeds from the note issuance were used to pay down outstanding indebtedness of the Company’s Credit Facility. The proceeds from the note issuance were used to repay the obligation of the 2004 Notes. The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest method. Includes the effects of the discount, treasury lock gain and swap gain (as applicable). The Company entered into a forward starting interest rate swap agreement which fixed a swap rate of 4.61% on a notional amount of $94,000. Upon issuance of the 2014 Notes, the Company terminated the forward starting interest rate swap agreement resulting in a gain of $4,148. The gain has been deferred and is being amortized as an adjustment to interest expense over the term of the 2014 Notes using the effective interest method. 42 Each series of notes represent senior, unsecured obligations of the Company and are subordinated to all secured indebtedness of the Company. The notes are redeemable at the option of the Company, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the notes being redeemed plus accrued interest thereon through the redemption date and (ii) the make-whole amount, as defined in the respective supplemental indenture relating to the notes. In connection with the note offerings, the Company incurred debt issuance costs totaling $4,542,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. Debt issuance costs for all note issuances have been deferred and are being amortized over the term of the respective notes using the effective interest method. In accordance with the terms of the indenture, pursuant to which the Company’s notes have been issued, the Company is required to meet certain restrictive financial covenants, which, among other things, require the Company to maintain (i) certain leverage ratios and (ii) certain interest coverage. At December 31, 2006, the Company was in compliance with those covenants. In the event that the Company violates any of the certain restrictive financial covenants, its access to the debt or equity markets may become impaired. Convertible Notes – In September 2006, the Company filed a prospectus supplement to the prospectus contained in its February 2006 shelf registration statement and issued $150,000,000 of 3.95% convertible senior notes due September 2026 (with a 2011 put option). Subsequently, the Company issued an additional $22,500,000 in connection with the underwriters’ over-allotment option (collectively, the “Convertible Notes”). The Convertible Notes were sold at par with interest payable semi-annually commencing on March 15, 2007 (effective interest rate of 3.95%). The notes are convertible, at the option of the holder, at any time on or after September 15, 2025. Prior to September 15, 2025, holders may convert their Convertible Notes under certain circumstances. The initial conversion rate per $1,000 principal amount of Convertible Notes is 40.9015 shares of the Company’s common stock, which is equivalent to an initial conversion price of $24.4490 per share of common stock. The initial conversion rate is subject to adjustment in certain circumstances. Upon conversion of each $1,000 principal amount of Convertible Notes, the Company will settle any amounts up to the principal amount of the notes in cash and the remaining conversion value, if any, will be settled, at the Company’s option, in cash, common stock or a combination thereof. The Convertible Notes are redeemable at the option of the Company, in whole or in part, on or after September 20, 2011 for cash equal to 100% of the principal amount of the Convertible Notes being redeemed plus unpaid interest accrued to, but not including, the redemption date. In addition, on September 20, 2011, September 15, 2016 and September 15, 2021 note holders may require the Company to repurchase the notes for cash equal to the principal amount of the Convertible Notes to be repurchased plus accrued interest thereon. In connection with the Convertible Notes offering, the Company incurred debt issuance costs totaling $3,850,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. Debt issuance costs have been deferred and are being amortized over the period to the earliest put option of the holders, September 20, 2011 using the effective interest method. The Company used the proceeds of the Convertible Notes to pay down outstanding indebtedness under the Credit Facility. 43 7.375% Series C Cumulative Redeemable Preferred Stock – In October 2006, the Company filed a prospectus supplement to the prospectus contained in its February 2006 shelf registration statement and issued 3,200,000 depositary shares, each representing 1/100th of a share of 7.375% Series C Cumulative Redeemable Preferred Stock (“Series C Redeemable Preferred Stock”), and received gross proceeds of $80,000,000. Subsequently, the Company issued an additional 480,000 depositary shares in connection with the underwriters’ over-allotment option and received gross proceeds of $12,000,000. In connection with this offering, the Company incurred stock issuance costs of approximately $3,098,000, consisting primarily of underwriting commissions and fees, legal and accounting fees and printing expenses. Holders of the depositary shares are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash dividends at the rate of 7.375 percent of the $25.00 liquidation preference per depositary share per annum (equivalent to a fixed annual amount of $1.84375 per depositary share). The Series C Redeemable Preferred Stock underlying the depositary shares ranks senior to the Company’s common stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company. The Company may redeem the Series C Redeemable Preferred Stock underlying the depositary shares on or after October 12, 2011, for cash, at a redemption price of $2,500.00 per share (or $25.00 per depositary share), plus all accumulated, accrued and unpaid dividends. The Company used $44,540,000 of the net proceeds from the offering to redeem the Series A Preferred Stock in January 2007, and used the remainder of the net proceeds to repay borrowings under the Credit Facility. Dividend Reinvestment and Stock Purchase Plan – In February 2006, the Company filed a shelf registration statement with the Securities and Exchange Commission for its Dividend Reinvestment and Stock Purchase Plan (“DRIP”), which permits the issuance by the Company of 12,191,394 shares of common stock. The DRIP provides an economical and convenient way for current stockholders and other interested new investors to invest in the Company’s common stock. The following outlines the common stock issuances pursuant to the Company’s DRIP for each of the years ended December 31 (dollars in thousands): 2006 2005 Shares of common stock Net proceeds 3,046,408 65,722 $ 1,048,746 20,747 $ The proceeds from the issuances were used to pay down outstanding indebtedness under the Company’s Credit Facility. In June 2005, in connection with the acquisition of National Properties Corporation (see “Results of Operations – Business Combination”), the Company issued 1,636,532 newly issued shares of the Company’s common stock in exchange for 100 percent of the common stock of NAPE. Financing Lease Obligation. In July 2004, the Company sold five investment properties for approximately $26,041,000 and subsequently leased back the properties under a 10-year financing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the financing lease. In accordance with the provisions of SFAS No. 66, “Accounting for Sales of Real Estate,” the Company has recognized the sale as a financing transaction. 44 The 10-year financing lease bears an interest rate of 5.00% annually with monthly interest payments of $109,000 and expires in June 2014 unless either the put or call option is exercised. The Company used the proceeds from two properties to reinvest in other Investment Properties and the remaining proceeds to pay down outstanding indebtedness of the Company’s Credit Facility. Structured Finance Investments. Structured finance agreements are typically loans secured by a borrower’s pledge of ownership interests in the entity that owns the real estate. These agreements are typically subordinated to senior loans secured by first mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. As of December 31, 2006, the structured finance investments bear a weighted average interest rate of 13.3% per annum, of which 10.1% is payable monthly and the remaining 3.2% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which range between November 2007 and January 2009. The structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the certain subsidiaries which own the respective real estate. The following table summarizes the activity of the structured finance investments for each of the last two years ended December 31 (dollars in thousands): 2006 2005 Balance at January 1 New investments Principal repayments $ 27,805 16,477 (30,365) $ 29,390 5,988 (7,573) Balance at December 31 $ 13,917 $ 27,805 Mortgage Residual Interests. In connection with the independent valuations of the mortgage residual interests’ (the “Residuals”) fair value, the Company reduced the carrying value of the Residuals to reflect such fair value at December 31, 2006. The reduction in the Residuals’ value that related to the Residuals acquired at the time of the option exercise was recorded as a purchase price allocation adjustment. The reduction in the Residuals’ value acquired at the time of the option exercise that related to the period subsequent to the option exercise, as well as the reduction in the value related to the portion of the Residuals owned by NLF, were recorded as an aggregate other than temporary valuation impairment of $8,779,000 and $2,382,000, for the years ended December 31, 2006 and 2005, respectively. Unrealized gains of $1,992,000 were recorded as other comprehensive income in the Statement of Stockholders’ Equity for the year ended December 31, 2006. 45 Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to interest changes primarily as a result of its variable rate Credit Facility and its long-term, fixed rate debt used to finance the Company’s development and acquisition activities, and for general corporate purposes. The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows at both fixed and variable rates on its long-term debt. The Company had no outstanding derivatives as of December 31, 2006 and 2005. The information in the table below summarizes the Company’s market risks associated with its debt obligations outstanding as of December 31, 2006 and 2005. The table presents principal cash flows and related interest rates by year for debt obligations outstanding as of December 31, 2006. The variable interest rates shown represent the weighted average rates for the Credit Facility and Term Note at the end of the periods. As the table incorporates only those exposures that exist as of December 31, 2006, it does not consider those exposures or positions which could arise after this date. Moreover, because firm commitments are not presented in the table below, the information presented therein has limited predictive value. As a result, the Company’s ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the Company’s hedging strategies at that time and interest rates. If interest rates on the Company’s variable rate debt increased by 1%, the Company’s interest expense would have increased by approximately three percent for the year ended December 31, 2006. Variable Rate Debt Credit Facility & Term Note Debt Obligations (dollars in thousands) Fixed Rate Debt Mortgages Unsecured Debt(2)(3) Secured Debt Weighted Average Interest Rate(1) - - 5.98% - - - Weighted Average Interest Rate 7.12% 7.04% 7.02% 7.01% 7.00% 6.99% Debt Obligation 8,413 1,190 1,000 1,022 1,098 23,169 Debt Obligation - - 48,800 - - - Debt Obligation - 99,956 - 19,941 172,500 375,148 Effective Interest Rate - 7.16% - 8.60% 3.95% 6.21% Debt Obligation 10,500 14,000 - - - - Weighted Average Interest Rate 10.00% 10.00% - - - - $ 48,800 5.98% $ 35,892 7.12% $ 667,545 5.84% $ 24,500 10.00% $ 48,800 5.98% $ 35,892 7.12% $ 690,198 5.84% $ 24,500 10.00% 2007 2008 2009 2010 2011 Thereafter Total Fair Value: December 31, 2006 December 31, 2005 $ 183,100 4.81% $ 151,133 6.18% $ 520,144 6.50% $ 28,250 10.00% (1) (2) (3) The Credit Facility interest rate varies based upon a tiered rate structure ranging from 55 to 112.5 basis points above LIBOR based upon the debt rating of the Company. The Term Note interest rate varies based upon a tiered rate structure ranging from 85 to 165 basis points above LIBOR based upon the debt rating of the Company. Includes Company’s notes payable, net of unamortized note discounts and convertible notes payable. In July 2004, the Company sold five investment properties for $26,041 and subsequently leased back the properties under a 10-year financing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the financing lease. The Company is also exposed to market risks related to the Company’s Residuals. Factors that may impact the market value of the Residuals include delinquencies, loan losses, prepayment speeds and interest rates. The Residuals, which are reported at market value, had a carrying value of $31,512,000 and $55,184,000 as of December 31, 2006 and December 31, 2005, respectively. Unrealized gains and losses are reported as other comprehensive income in stockholders’ equity. Losses are considered other than temporary and reported as a valuation impairment in earnings from operations if and when there has been a change in the timing or amount of estimated cash flows that leads to a loss in value. 46 [Intentionally left blank] 47 Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders National Retail Properties, Inc. and Subsidiaries: We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that National Retail Properties, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). National Retail Properties, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit. We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that National Retail Properties, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, National Retail Properties, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of National Retail Properties, Inc. and subsidiaries as of December 31, 2006, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for the year then ended, and our report dated February 13, 2007 expressed an unqualified opinion thereon. February 13, 2007 Miami, Florida Certified Public Accountants 48 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders National Retail Properties, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheet of National Retail Properties, Inc. and subsidiaries as of December 31, 2006, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for the year then ended. Our audit also included the financial statement schedules listed in the index at Item 15. 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 schedules based on our audit. We conducted our audit 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Retail Properties and subsidiaries at December 31, 2006, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of National Retail Properties’ internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 13, 2007 expressed an unqualified opinion thereon. February 13, 2007 Miami, Florida Certified Public Accountants 49 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders National Retail Properties, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheet of National Retail Properties, Inc. and subsidiaries as of December 31, 2005, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedules III and IV for the years ended December 31, 2005 and 2004. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules for 2005 and 2004 information based on our audits. We conducted our audits 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Retail Properties, Inc. and subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the 2005 and 2004 information included in the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Orlando, Florida February 17, 2006, except as to notes 2, 3, 20, 26 and 27 which are as of February 16, 2007 Certified Public Accountants 50 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) ASSETS December 31, 2006 December 31, 2005 Real estate, Investment Portfolio: Accounted for using the operating method, net of accumulated depreciation and amortization: Held for investment Held for sale Accounted for using the direct financing method: Held for investment Held for sale Real estate, Inventory Portfolio, held for sale Mortgages, notes and accrued interest receivable, net of allowance of $634 and $676, respectively Mortgage residual interests Cash and cash equivalents Restricted cash Receivables, net of allowance of $722 and $847, respectively Accrued rental income, net of allowance Debt costs, net of accumulated amortization of $11,339 and $9,567, respectively Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Line of credit payable Mortgages payable Notes payable – secured Notes payable – convertible Notes payable, net of unamortized discount of $996 and $1,133, respectively, and an unamortized interest rate hedge gain of $3,653 at December 31, 2005 Financing lease obligation Accrued interest payable Other liabilities Income tax liability Total liabilities Commitments and contingencies (Note 28) Minority interest Stockholders’ equity: Preferred stock, $0.01 par value. Authorized 15,000,000 shares Series A, 1,781,589 shares issued and outstanding, stated liquidation value of $25 per share Series B Convertible, 10,000 shares issued and outstanding at December 31, 2005, stated liquidation value of $2,500 per share Series C Redeemable, 3,680,000 depositary shares issued and outstanding at December 31, 2006, stated liquidation value of $25 per share Common stock, $0.01 par value. Authorized 190,000,000 shares; 59,823,031 and 55,130,876 shares issued and outstanding at December 31, 2006 and 2005, respectively Excess stock, $0.01 par value. Authorized 205,000,000 shares; none issued or outstanding Capital in excess of par value Retained earnings (accumulated dividends in excess of net earnings) Accumulated other comprehensive income Total stockholders’ equity $ 1,439,002 1,994 $ 1,297,254 1,139 70,683 651 228,159 30,945 31,512 1,675 36,587 7,915 26,413 8,180 33,069 1,916,785 28,000 35,892 24,500 172,500 489,804 26,041 5,989 30,116 6,340 819,182 $ $ 94,134 1,570 131,074 51,086 55,184 8,234 30,191 8,547 27,999 6,096 20,908 1,733,416 162,300 151,133 28,250 - 493,321 26,041 5,539 20,058 13,748 900,390 1,098 4,939 44,540 - 92,000 598 - 873,885 80,263 5,219 1,096,505 1,916,785 $ 44,540 25,000 - 551 - 778,485 (20,489) - 828,087 1,733,416 $ $ $ See accompanying notes to consolidated financial statements. 51 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Years Ended December 31, 2006, 2005 and 2004 (dollars in thousands, except per share data) Revenues: Rental income from operating leases Earned income from direct financing leases Contingent rental income Real estate expense reimbursement from tenants Interest and other income from real estate transactions Interest income on mortgage residual interests Disposition of real estate, Inventory Portfolio: Gross proceeds Costs Gain Operating expenses: General and administrative Real estate Depreciation and amortization Impairment – real estate, Investment Portfolio Impairment – mortgage residual interests valuation adjustment Restructuring costs Transition costs Earnings from operations Other expenses (revenues): Interest and other income Interest expense Earnings from continuing operations before income tax benefit, minority interest, equity in earnings of unconsolidated affiliates and gain on disposition of equity investment Income tax benefit Minority interest Equity in earnings of unconsolidated affiliates Gain on disposition of equity investment Earnings from continuing operations Earnings from discontinued operations: Real estate, Investment Portfolio Real estate, Inventory Portfolio, net of income tax expense and minority interest Earnings before extraordinary gain Extraordinary gain Net earnings Other comprehensive income Total comprehensive income Year Ended December 31, 2005 2004 2006 $ $ 126,173 7,291 732 4,862 4,462 7,268 150,788 $ 92,714 7,678 444 4,094 6,143 7,349 118,422 36,705 (28,705) 8,000 13,569 (11,559) 2,010 24,012 7,088 22,971 - 8,779 1,580 - 64,430 94,358 (3,815) 45,874 42,059 52,299 11,143 (1,399) 122 11,373 73,538 22,418 5,938 16,792 1,673 2,382 - - 49,203 71,229 (2,039) 33,309 31,270 39,959 2,778 137 1,209 - 44,083 100,925 21,151 8,042 108,967 182,505 - 9,380 30,531 74,614 14,786 182,505 5,219 $ 187,724 89,400 - $ 89,400 $ 76,272 7,938 336 2,828 7,695 - 95,069 20,888 (16,188) 4,700 21,664 4,986 12,975 - - - 3,741 43,366 56,403 (3,760) 27,972 24,212 32,191 2,544 (1,243) 4,724 - 38,216 17,171 9,547 26,718 64,934 - 64,934 - 64,934 See accompanying notes to consolidated financial statements. 52 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS – CONTINUED (dollars in thousands, except per share data) Year Ended December 31, 2005 2006 2004 Net earnings Series A preferred stock dividends Series B Convertible preferred stock dividends Series C Redeemable preferred stock dividends Net earnings available to common stockholders – basic Series B convertible preferred stock dividends, if dilutive $ $ 182,505 (4,376) (419) (923) 176,787 419 $ 89,400 (4,008) (1,675) - 83,717 1,675 64,934 (4,008) (1,675) - 59,251 - Net earnings available to common stockholders – diluted $ 177,206 $ 85,392 $ 59,251 Net earnings per share of common stock: Basic: Continuing operations Discontinued operations Extraordinary gain Net earnings Diluted: Continuing operations Discontinued operations Extraordinary gain Net earnings Weighted average number of common shares outstanding: Basic Diluted $ $ $ $ $ $ $ 1.18 1.90 - 3.08 1.17 1.88 - $ $ $ 0.72 0.58 0.28 1.58 0.73 0.56 0.27 3.05 $ 1.56 $ 0.63 0.52 - 1.15 0.63 0.52 - 1.15 57,428,063 52,984,821 51,312,434 58,079,875 54,640,143 51,742,518 See accompanying notes to consolidated financial statements. 53 . C N I , S E I T R E P O R P L I A T E R L A N O I T A N I S E I R A D I S B U S d n a Y T I U Q E ’ S R E D L O H K C O T S F O S T N E M E T A T S D E T A D I L O S N O C 4 0 0 2 d n a 5 0 0 2 , 6 0 0 2 , 1 3 r e b m e c e D d e d n E s r a e Y ) a t a d e r a h s r e p t p e c x e , s d n a s u o h t n i s r a l l o d ( l a t o T 4 3 9 , 4 6 4 5 7 , 0 3 7 $ ) 8 0 0 , 4 ( ) 5 7 6 , 1 ( ) 5 1 2 , 5 6 ( 8 4 1 , 4 ) 1 ( 8 3 1 , 2 1 9 4 4 , 7 1 - ) 6 ( 8 2 6 , 2 ) 8 4 1 , 4 ( 0 0 4 , 9 8 8 9 9 , 6 5 7 ) 8 0 0 , 4 ( ) 5 7 6 , 1 ( ) 3 3 3 , 6 6 ( 1 5 6 , 2 9 5 1 , 1 3 2 7 0 , 8 1 - ) 8 ( 1 3 8 , 1 7 8 0 , 8 2 8 $ d e t a l u m u c c A r e h t O e v i s n e h e r p m o C e m o c n I d e n i a t e R s g n i n r a E d e t a l u m u c c A ( n i s d n e d i v i D t e N f o s s e c x E ) s g n i n r a E n i l a t i p a C f o s s e c x E e u l a V r a P n o m m o C k c o t S C s e i r e S B s e i r e S e l b a m e e d e R e l b i t r e v n o C d e r r e f e r P k c o t S d e r r e f e r P k c o t S A s e i r e S d e r r e f e r P k c o t S - - - - - 8 4 1 , 4 - - - - - - ) 8 4 1 , 4 ( - - - - - - - - - - - - - - - - - - - - 4 3 9 , 4 6 ) 8 0 0 , 4 ( ) 5 7 6 , 1 ( ) 2 7 2 , 6 6 ( ) 8 8 1 , 5 3 ( 0 0 4 , 9 8 ) 8 0 0 , 4 ( ) 5 7 6 , 1 ( ) 8 1 0 , 9 6 ( - - - - - - - - - - - 6 5 0 , 1 ) 2 ( ) 6 ( - 8 2 6 , 2 9 2 1 , 2 1 0 4 4 , 7 1 - - - 1 - - 9 9 2 - - - - - - 4 8 6 , 2 3 4 1 , 1 3 9 4 6 , 2 3 6 0 , 8 1 ) 2 ( ) 8 ( 1 3 8 , 1 - - - 1 2 9 2 - - 6 1 5 2 1 , 2 2 7 1 2 5 $ ) 7 6 1 , 8 2 ( $ 0 8 8 , 8 8 6 $ 0 0 5 $ $ ) 9 8 4 , 0 2 ( $ 5 8 4 , 8 7 7 $ 1 5 5 $ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ) 1 ( - - - - - - $ 0 0 0 , 5 2 $ 1 4 5 , 4 4 $ - - - - - - - - - - - - - - - - - - - - 0 0 0 , 5 2 0 4 5 , 4 4 $ 0 0 0 , 5 2 $ 0 4 5 , 4 4 $ y l l a n i g i r o k c o t s n o m m o c f o s e r a h s 1 5 d n a k c o t s d e r r e f e r p f o s e r a h s 6 5 f o l a s r e v e R 1 0 0 2 n i r e g r e m e h t h t i w n o i t c e n n o c n i s r e d l o h k c o t s g n i t n e s s i d e h t o t d e r e f f o k c o t S d e r r e f e r P e l b i t r e v n o C B s e i r e S f o e r a h s r e p . 0 5 7 6 1 $ k c o t S d e r r e f e r P A s e i r e S f o e r a h s r e p 5 2 2 $ . p a w s e t a r t s e r e t n i f o e u l a v r i a f n i s e g n a h c d e r r e f e D k c o t s n o m m o c f o e r a h s r e p 9 2 1 $ . 3 0 0 2 , 1 3 r e b m e c e D t a s e c n a l a B : d i a p d n a d e r a l c e d s d n e d i v i D s g n i n r a e t e N k c o t S d e r r e f e r P e l b i t r e v n o C B s e i r e S f o e r a h s r e p . 0 5 7 6 1 $ k c o t S d e r r e f e r P A s e i r e S f o e r a h s r e p 5 2 2 $ . n o i t a n i b m o c s s e n i s u b h t i w n o i t c e n n o c n i s e r a h s 2 3 5 , 6 3 6 1 , m a r g o r p e s a h c r u p k c o t s d e t n u o c s i d r e d n u s e r a h s s e r a h s 0 8 5 0 8 1 , 4 3 3 2 1 9 , k c o t s n o m m o c d e t c i r t s e r f o s e r a h s 8 6 1 , 6 1 2 f o e c n a u s s I k c o t s n o m m o c f o e r a h s r e p 0 3 1 $ . : k c o t s n o m m o c f o e c n a u s s I n o i t a s n e p m o c d e r r e f e d f o n o i t a z i t r o m A s t s o c e c n a u s s i k c o t S 5 0 0 2 , 1 3 r e b m e c e D t a s e c n a l a B 4 0 0 2 , 1 3 r e b m e c e D t a s e c n a l a B : d i a p d n a d e r a l c e d s d n e d i v i D s g n i n r a e t e N k c o t s n o m m o c d e t c i r t s e r f o s e r a h s 9 7 5 , 5 0 2 f o e c n a u s s I t s e r e t n i p i h s r e n t r a p a r o f e g n a h c x e n i s e r a h s s e r a h s 2 6 9 6 8 8 , 1 5 5 3 5 9 , : k c o t s n o m m o c f o e c n a u s s I 54 p a w s e t a r t s e r e t n i f o s s a l c e r d n a n o i t a n i m r e T n o i t a s n e p m o c d e r r e f e d f o n o i t a z i t r o m A s t s o c e c n a u s s i k c o t S . s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c o t s e t o n g n i y n a p m o c c a e e S d e t a l u m u c c A r e h t O e v i s n e h e r p m o C e m o c n I d e n i a t e R s g n i n r a E d e t a l u m u c c A ( n i s d n e d i v i D t e N f o s s e c x E ) s g n i n r a E n i l a t i p a C f o s s e c x E e u l a V r a P n o m m o C k c o t S C s e i r e S B s e i r e S e l b a m e e d e R e l b i t r e v n o C d e r r e f e r P k c o t S d e r r e f e r P k c o t S A s e i r e S d e r r e f e r P k c o t S . C N I , S E I T R E P O R P L I A T E R L A N O I T A N I S E I R A D I S B U S d n a D E U N I T N O C – Y T I U Q E ’ S R E D L O H K C O T S F O S T N E M E T A T S D E T A D I L O S N O C 4 0 0 2 d n a 5 0 0 2 , 6 0 0 2 , 1 3 r e b m e c e D d e d n E s r a e Y ) a t a d e r a h s r e p t p e c x e , s d n a s u o h t n i s r a l l o d ( ) 9 1 4 ( ) 3 2 9 ( ) 6 7 3 , 4 ( ) 9 5 9 , 8 6 ( - 0 0 0 , 2 9 - 7 5 6 , 4 9 5 6 , 8 5 ) 1 1 1 , 3 ( 6 6 1 , 3 3 5 6 , 3 ) 5 4 3 ( 2 9 9 , 1 ) 1 8 ( l a t o T 7 8 0 , 8 2 8 5 0 5 , 2 8 1 $ - - - - - - - - - - - - - ) 5 4 3 ( 3 5 6 , 3 2 9 9 , 1 ) 1 8 ( 5 0 5 , 2 8 1 ) 9 1 4 ( ) 3 2 9 ( ) 6 7 3 , 4 ( ) 5 3 0 , 6 7 ( - - - - - - - - - - - - - - - - 3 7 0 , 7 7 8 9 , 4 2 4 5 6 , 4 2 3 6 , 8 5 ) 1 ( ) 1 1 1 , 3 ( 6 6 1 , 3 - - - - - - - - 3 3 1 - 3 1 7 2 - - - - - - $ ) 9 8 4 , 0 2 ( $ 5 8 4 , 8 7 7 $ 1 5 5 $ - - - - - - - 0 0 0 , 2 9 - - - - - - - - - 5 0 5 , 6 9 0 , 1 $ 9 1 2 , 5 $ 3 6 2 , 0 8 $ 5 8 8 , 3 7 8 $ 8 9 5 $ 0 0 0 , 2 9 $ $ 0 0 0 , 5 2 $ 0 4 5 , 4 4 $ - - - - - ) 0 0 0 , 5 2 ( - - - - - - - - - - - - - - - - - - - - - - - - - - - $ 0 4 5 , 4 4 $ k c o t S d e r r e f e r P e l b a m e e d e R C s e i r e S f o e r a h s y r a t i s o p e d r e p 5 5 9 0 5 2 0 $ . ) 1 ( k c o t S d e r r e f e r P e l b i t r e v n o C B s e i r e S f o e r a h s r e p 5 7 8 1 4 $ . k c o t S d e r r e f e r P A s e i r e S f o e r a h s r e p 5 2 2 $ . o t k c o t S d e r r e f e r P e l b i t r e v n o C B s e i r e S f o s e r a h s 0 0 0 , 0 1 f o n o i s r e v n o C k c o t s n o m m o c f o e r a h s r e p 2 3 1 $ . 5 0 0 2 , 1 3 r e b m e c e D t a s e c n a l a B : d i a p d n a d e r a l c e d s d n e d i v i D s g n i n r a e t e N d e r r e f e r P e l b a m e e d e R C s e i r e S f o s e r a h s y r a t i s o p e d 0 0 0 , 0 8 6 , 3 f o e c n a u s s I m a r g o r p e s a h c r u p k c o t s d e t n u o c s i d – s e r a h s 5 3 2 , 5 1 7 2 , k c o t s n o m m o c d e t c i r t s e r f o s e r a h s 0 0 5 , 9 7 f o e c n a u s s I ) 2 ( p a w s e t a r t s e r e t n i n o n i a g – k c o l y r u s a e r T n o i t a s n e p m o c d e r r e f e d f o n o i t a z i t r o m A p a w s e t a r t s e r e t n i f o n o i t a z i t r o m A s t s e r e t n i l a u d i s e r e g a g t r o M – n i a g d e z i l a e r n U s t s o c e c n a u s s i k c o t S 6 0 0 2 , 1 3 r e b m e c e D t a s e c n a l a B t n e m t s u j d a e u l a v k c o t S : k c o t s n o m m o c f o e c n a u s s I s e r a h s 4 8 1 2 7 2 , k c o t S k c o t s n o m m o c f o s e r a h s , 6 9 9 3 9 2 1 , 55 . s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c o t s e t o n g n i y n a p m o c c a e e S e h t m o r f g n i t l u s e r n i a g e g d e h e t a r t s e r e t n i d e z i t r o m a n u e h t m o r f e l b a y a p s e t o n d e r u c e s n u s ’ y n a p m o C e h t m o r f d e i f i s s a l c e r n o i t a z i t r o m a r a e y r o i r p f o t e n s p a w s e t a r t s e r e t n i f o e u l a v r i a F . 4 0 0 2 e n u J n i p a w s 0 0 0 , 0 0 0 , 4 9 $ e h t f o n o i t a n i m r e t . 7 0 0 2 y r a u n a J n i d i a p s d n e d i v i d 8 6 3 $ s e d u l c n I ) 1 ( ) 2 ( NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Year Ended December 31, 2005 2006 2004 Cash flows from operating activities: Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities: $ 182,505 $ 89,400 $ 64,934 Stock compensation expense Depreciation and amortization Impairment – real estate Impairment – mortgage residual interests valuation adjustment Amortization of notes payable discount Amortization of deferred interest rate hedge gains Equity in earnings of unconsolidated affiliates Distributions received from unconsolidated affiliates Minority interests Gain on disposition of real estate, Investment Portfolio Gain on disposition of equity investment Gain on disposition of real estate, Inventory Portfolio Extraordinary gain Deferred income taxes Transition costs Change in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations: Additions to real estate, Inventory Portfolio Proceeds from disposition of real estate, Inventory Portfolio Decrease in real estate leased to others using the direct financing method Increase in work in process Increase in mortgages, notes and accrued interest receivable Decrease (increase) in receivables Decrease in mortgage residual interests Increase in accrued rental income Decrease (increase) in other assets Increase in accrued interest payable Increase (decrease) in other liabilities Increase (decrease) in current tax liability 3,170 24,524 693 8,779 137 (345) (122) 864 2,622 (91,165) (11,373) (13,781) - (8,366) - (195,956) 101,324 2,982 (3,315) 795 642 16,885 (5,777) (520) 450 1,951 958 1,971 22,350 3,729 2,382 105 (326) (1,209) 3,293 (5,854) (9,816) - (21,627) (14,786) (1,709) - (137,286) 79,065 2,915 (4,355) 6,465 7,730 11,704 593 877 913 (4,365) (1,229) Net cash provided by operating activities 18,561 30,930 978 17,398 - - 123 (457) (5,064) 11,008 1,828 (2,523) - (23,402) - 2,726 1,929 (74,024) 87,321 2,770 (2,093) 6,243 (1,642) - (3,438) (1,456) 485 1,646 510 85,800 Cash flows from investing activities: Proceeds from the disposition of real estate, Investment Portfolio Proceeds from the disposition of equity investment Additions to real estate, Investment Portfolio: Accounted for using the operating method Accounted for using the direct financing method Investment in unconsolidated affiliates Increase in mortgages and notes receivable Mortgage and notes payments received Increase in mortgages and other receivables from unconsolidated affiliates Payments received on mortgages and other receivables from unconsolidated affiliates Business combination, net of cash acquired Restricted cash Acquisition of 1.3 percent interest in Services Payment of lease costs Other 222,778 10,239 38,982 - 32,639 - (351,100) (1,449) - (18,371) 39,075 - - - (6,396) - (2,790) 1,030 (267,488) (309) - (17,738) 16,846 - - 2,183 (12,764) (829) (1,253) (117) (134,565) - (4) (6,857) 23,301 (115,600) 132,200 1,068 - - (1,491) (654) Net cash used in investing activities (106,984) (242,487) (69,963) See accompanying notes to consolidated financial statements. 56 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED (dollars in thousands) Cash flows from financing activities: Proceeds from line of credit payable Repayment of line of credit payable Proceeds from mortgages payable Repayment of mortgages payable Proceeds from notes payable – convertible Proceeds from notes payable Proceeds from forward starting interest rate swap Repayment of notes payable Payment of debt costs Proceeds from financing lease obligation Proceeds from issuance of common stock Proceeds from issuance of preferred stock Payment of Series A Preferred Stock dividends Payment of Series B Convertible Preferred Stock dividends Payment of Series C Redeemable Preferred Stock dividends Payment of common stock dividends Minority interest distributions Minority interest contributions Stock issuance costs Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure of cash flow information: Interest paid, net of amount capitalized Taxes paid Supplemental disclosure of non-cash investing and financing activities: Issued 79,500, 223,468 and 205,579 shares of restricted and unrestricted common stock in 2006, 2005 and 2004, respectively, pursuant to the Company’s 2000 Performance Incentive Plan, including grants in connection with transition costs Converted 10,000 shares of Series B Convertible Preferred Stock to 1,293,996 shares of common stock Issued 14,062 shares of common stock in 2006 to directors pursuant to the Company’s 2000 Performance Incentive Plan Issued 33,379 shares of common stock in 2006 pursuant to the Company’s Deferred Director Fee Plan Surrender of 30,135 and 29,926 shares of restricted common stock in 2005 and 2004, respectively Dividends or unvested restricted stock shares Change in other comprehensive income Change in lease classification Transfer of real estate from Inventory Portfolio to Investment Portfolio Note and mortgage notes receivable accepted in connection with real estate transactions Acquisition of real estate held for investment and assumption of related mortgage payable Assignment of mortgage payable in connection with the disposition of real estate Issued 953,551 shares of common stock in exchange for a partnership interest Issued 1,636,532 shares of common stock in connection with the acquisition of National Properties Corporation (“NAPE”) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Year Ended December 31, 2005 2006 2004 379,000 (513,300) - (20,241) 172,500 - - (3,750) (3,864) - 70,392 88,902 (4,376) (419) (923) (76,039) (5,817) 2 (203) 81,864 (6,559) 8,234 373,500 (229,100) - (6,644) - 149,610 - (11,150) (3,073) - 23,268 - (4,008) (1,675) - (69,018) (3,858) - (8) 217,844 6,287 1,947 1,675 $ 8,234 $ 350,900 (360,800) 406 (9,163) - 149,560 4,148 (120,000) (1,450) 26,041 13,230 - (4,008) (1,675) - (66,272) (140) - (2) (19,225) (3,388) 5,335 1,947 50,774 $ 38,684 $ 33,855 1,137 $ 4,494 $ 60 1,763 $ 4,003 $ 3,016 25,000 $ 307 $ 655 $ - $ 4 - $ - $ - $ - - - 461 $ 473 - 5,219 $ 1,254 $ 885 $ 2,158 $ 12,933 $ 4,752 $ 1,582 $ 2,415 $ - $ - $ 95,000 $ 406 $ 7,357 2,251 - $ - $ 17,449 - $ 31,160 $ - - - - - - See accompanying notes to consolidated financial statements. 57 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2006, 2005 and 2004 Note 1 – Organization and Summary of Significant Accounting Policies: Organization and Nature of Business – National Retail Properties, Inc. (formerly known as Commercial Net Lease Realty, Inc.), a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. The term “Company” refers to National Retail Properties, Inc. and its majority owned and controlled subsidiaries. These subsidiaries include the wholly owned qualified REIT subsidiaries of National Retail Properties, Inc., as well as the taxable REIT subsidiaries and their majority owned and controlled subsidiaries (collectively, the “NNN TRS”). Effective May 1, 2006, Commercial Net Lease Realty, Inc. changed its name to National Retail Properties, Inc. Prior to January 1, 2005, the Company held a 98.7 percent, non-controlling and non-voting interest in Commercial Net Lease Realty Services, Inc. and its majority owned and controlled subsidiaries (“Services”). Kevin B. Habicht, an officer and director of the Company, James M. Seneff, Jr. and Gary M. Ralston, each a former officer and director of the Company, (collectively the “Services Investors”) owned the remaining 1.3 percent interest, which was 100 percent of the voting interest in Services. Effective January 1, 2005, the Company acquired the remaining 1.3 percent interest in Services, increasing the Company’s ownership in Services to 100 percent. Effective November 1, 2005, Commercial Net Lease Realty Services, Inc. merged into National Retail Properties, Inc. CNLRS Exchange I, Inc., a taxable REIT subsidiary (“TRS”), became the TRS holding company for the Company’s development and exchange activities. Effective October 2, 2006, CNLRS Exchange I, Inc. changed its name to NNN TRS, Inc. The Company’s operations are divided into two primary business segments: (i) investment assets, including real estate assets, structured finance investments (included in mortgages and notes receivable on the consolidated balance sheets) and mortgage residual interests (collectively, “Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). The Investment Assets are operated through National Retail Properties, Inc. and its wholly owned qualified REIT subsidiaries. The Company acquires, owns, invests in, manages and develops properties that are leased primarily to retail tenants under long-term net leases (“Investment Properties” or “Investment Portfolio”). As of December 31, 2006, the Company owned 710 Investment Properties, with an aggregate gross leasable area of 9,341,000 square feet, located in 44 states. In addition to the Investment Properties, as of December 31, 2006, the Company had $13,917,000 and $31,512,000 in structured finance investments and mortgage residual interests, respectively. The Inventory Assets are operated through the NNN TRS. The NNN TRS, directly and indirectly, through investment interests, acquires and develops real estate primarily for the purpose of selling the real estate (“Inventory Properties” or “Inventory Portfolio”). As of December 31, 2006, the NNN TRS owned 97 Inventory Properties. Principles of Consolidation – In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”). This Interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities. 58 The Company’s consolidated financial statements include the accounts of each of the respective majority owned and controlled affiliates. All significant intercompany account balances and transactions have been eliminated. The Company applies the equity method of accounting to investments in partnerships and joint ventures that are not subject to control by the Company due to the significance of rights held by other parties. The NNN TRS develops real estate through various joint venture development affiliate agreements. The NNN TRS consolidates the joint venture development entities listed in the table below based upon either the Company being the primary beneficiary of the respective variable interest entity or the Company having a controlling interest over the respective entity. The Company eliminates significant intercompany balances and transactions and records a minority interest for its other partners’ ownership percentage. The following table summarizes each of the investments, as of December 31, 2006: Date of Agreement Entity Name November 2002 February 2003 February 2004 September 2004 December 2004 December 2005 February 2006 February 2006 September 2006 September 2006 WG Grand Prairie TX, LLC Gator Pearson, LLC CNLRS Yosemite Park CO, LLC CNLRS Bismarck ND, LLC CNLRS WG Long Beach MS, LLC CNLRS P&P, L.P. CNLRS BEP, L.P. CNLRS Rockwall, L.P. NNN Harrison Crossing, L.P. CNLRS RGI Bonita Springs, LLC NNN TRS’ Ownership % 60% 50% 50% 50% 50% 50% 50% 50% 50% 50% The Company no longer holds an interest in the collective partnership interest of CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”). In October 2006, the Company sold its equity investment for $10,239,000 (see Note 4). In May 2005, the Company (through a wholly owned subsidiary of the Services) exercised its option to purchase 78.9 percent of the common shares of Orange Avenue Mortgage Investments, Inc. (“OAMI”) (formerly CNL Commercial Finance, Inc.). As a result, the Company has consolidated OAMI in its consolidated financial statements (see Note 23). Real Estate – Investment Portfolio – The Company records the acquisition of real estate at cost, including acquisition and closing costs. The cost of properties developed by the Company includes direct and indirect costs of construction, property taxes, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. Purchase Accounting for Acquisition of Real Estate Subject to a Lease – For acquisitions of real estate subject to a lease subsequent to June 30, 2001, the effective date of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” (“SFAS 141”), the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases and value of tenant relationships, based in each case on their relative fair values. 59 The fair value of the tangible assets of an acquired leased property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on the determination of the relative fair values of these assets. The as-if-vacant fair value of a property is provided to management by a qualified appraiser. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded as other assets or liabilities based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term. The aggregate value of other acquired intangible assets, consisting of in-place leases, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as-if-vacant, determined as set forth above. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off. The value of tenant relationships is reviewed on individual transactions to determine if future value was derived from the acquisition. Real estate is generally leased to tenants on a net lease basis, whereby the tenant is responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance and repairs. The leases are accounted for using either the operating or the direct financing method. Such methods are described below: Operating method – Leases accounted for using the operating method are recorded at the cost of the real estate. Revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives (generally 35 to 40 years). Leasehold interests are amortized on the straight-line method over the terms of their respective leases. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis. Direct financing method – Leases accounted for using the direct financing method are recorded at their net investment (which at the inception of the lease generally represents the cost of the property). Unearned income is deferred and amortized into income over the lease terms so as to produce a constant periodic rate of return on the Company’s net investment in the leases. Management periodically assesses its real estate for possible impairment whenever events or changes in circumstances indicate that the carrying value of the asset, including accrued rental 60 income, may not be recoverable through operations. Management determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the real estate, with the carrying cost of the individual asset. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Real Estate – Inventory Portfolio – The NNN TRS acquires, develops and owns properties that it intends to sell. The properties that are classified as held for sale at any given time may consist of properties that have been acquired in the marketplace with the intent to sell and properties that have been, or are currently being, constructed by the NNN TRS. The NNN TRS records the acquisition of the real estate at cost, including the acquisition and closing costs. The cost of the real estate developed by the NNN TRS includes direct and indirect costs of construction, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. Real estate held for sale is not depreciated. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the NNN TRS classifies its real estate held for sale as discontinued operations for each property in which rental revenues are generated (see Note 20). Real Estate Dispositions – When real estate is disposed of, the related cost, accumulated depreciation or amortization and any accrued rental income for operating leases and the net investment for direct financing leases are removed from the accounts and gains and losses from the dispositions are reflected in income. Gains from the disposition of real estate are generally recognized using the full accrual method in accordance with the provisions of SFAS No. 66 “Accounting for Real Estate Sales,” provided that various criteria relating to the terms of the sale and any subsequent involvement by the Company with the real estate sold are met. Lease termination fees are recognized when the related leases are cancelled and the Company no longer has a continuing obligation to provide services to the former tenants. Valuation of Mortgages, Notes and Accrued Interest – The allowance related to the mortgages, notes and accrued interest is the Company’s best estimate of the amount of probable credit losses. The allowance is determined on an individual note basis in reviewing any payment past due for over 90 days. Any outstanding amounts are written off against the allowance when all possible means of collection have been exhausted. Investment in Unconsolidated Affiliates – The Company accounts for each of its investments in unconsolidated affiliates under the equity method of accounting (see Note 4). Mortgage Residual Interests, at Fair Value – Mortgage residual interests, classified as available for sale, are reported at their market values with unrealized gains and losses reported as other comprehensive income in stockholders’ equity. The mortgage residual interests were acquired in connection with the acquisition of 78.9 percent equity interest of OAMI. The Company recognizes the excess of all cash flows attributable to the mortgage residual interests estimated at the acquisition/transaction date over the initial investment (the accretable yield) as interest income over the life of the beneficial interest using the effective yield method. Losses are considered other than temporary valuation impairments if and when there has been a change in the timing or amount of estimated cash flows, exclusive of changes in interest rates, that leads to a loss in value. Certain of the mortgage residual interests have been pledged as security for notes payable. 61 Cash and Cash Equivalents – The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash and money market accounts. Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash accounts maintained on behalf of the Company in demand deposits at commercial banks and money market funds may exceed federally insured levels; however, the Company has not experienced any losses in such accounts. The Company limits investment of temporary cash investments to financial institutions with high credit standing; therefore, management believes it is not exposed to any significant credit risk on cash and cash equivalents. Restricted Cash – Restricted cash consists of amounts held in restricted escrow accounts in connection with the sale of certain assets of OAMI to a third party (the “Buyer”) in December 2004 (prior to the Company exercising its option) (see Note 23). The use of the cash is restricted pursuant to agreements with the Buyer and will be released in December 2007 subject to any pending indemnity claims. The amount held in these accounts at December 31, 2006 and 2005 was $36,728,000 and $30,530,000, respectively. Carrying value for restricted cash was $36,587,000 and $30,191,000 at December 31, 2006 and 2005, respectively, and is calculated as the present value of the expected release of monies. Valuation of Receivables – The Company estimates of the collectibility of its accounts receivable related to rents, expense reimbursements and other revenues. The Company analyzes accounts receivable and historical bad debt levels, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims. Debt Costs – Debt costs incurred in connection with the Company’s $300,000,000 line of credit and mortgages payable have been deferred and are being amortized over the term of the respective loan commitment using the straight-line method, which approximates the effective interest method. Debt costs incurred in connection with the issuance of the Company’s notes payable have been deferred and are being amortized over the term of the respective debt obligation using the effective interest method. Revenue Recognition – Rental revenues for non-development real estate assets are recognized when earned in accordance with SFAS 13, “Accounting for Leases,” based on the terms of the lease at the time of acquisition of the leased asset. Rental revenues for properties under construction commence upon completion of construction of the leased asset and delivery of the leased asset to the tenant. Earnings Per Share – Basic net earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted net earnings per common share is computed by dividing net earnings available to common stockholders for the period by the number of common shares that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the periods. 62 The following is a reconciliation of the denominator of the basic net earnings per common share computation to the denominator of the diluted net earnings per common share computation for each of the years ended December 31: 2006 2005 2004 Weighted average number of common shares outstanding Unvested restricted stock 57,698,533 (270,470) 53,272,997 (288,176) 51,546,814 (234,380) Weighted average number of common shares outstanding used in basic earnings per share 57,428,063 52,984,821 51,312,434 Weighted average number of common shares outstanding used in basic earnings per share 57,428,063 52,984,821 51,312,434 Effect of dilutive securities: Restricted stock Common stock options Assumed conversion of Series B Convertible Preferred Stock to common stock Directors’ deferred fee plan 114,367 107,909 221,337 128,944 234,380 192,370 400,607 28,929 1,293,996 11,045 - 3,334 Weighted average number of common shares outstanding used in diluted earnings per share 58,079,875 54,640,143 51,742,518 The Series B Convertible Preferred shares were not included in computing diluted earnings per common share for the year ended December 31, 2004 because their effects would be antidilutive. In April 2006, the Series B Convertible Preferred shares were converted into 1,293,996 shares of common stock and therefore are included in the computation of both basic and diluted weighted average shares outstanding. In addition, the potential dilutive shares related to convertible notes payable were not included in computing earnings per common share because their effects would be antidilutive. Stock-Based Compensation – On January 1, 2006, the Company adopted the provisions of SFAS No. 123 (R), “Share-Based Payments” (“SFAS 123R”), under the modified prospective method. Under the modified prospective method, compensation cost is recognized for all awards granted after the adoption of this standard and for the unvested portion of previously granted awards that are outstanding as of that date. In accordance with SFAS 123R, the Company will estimate the fair value of restricted stock and stock option grants at the date of grant and amortize those amounts into expense on a straight line basis or amount vested, if greater, over the appropriate vesting period. Adoption of SFAS 123R did not have a significant impact on the Company’s earnings from continuing operations, net earnings, cash flow from operations, cash flow from financing activities and basic and diluted earnings per share for the year ended December 31, 2006. Income Taxes – The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. The Company generally will not be subject to federal income taxes on amounts distributed to stockholders, providing it distributes 100 percent of its real estate investment trust taxable income and meets certain other requirements for qualifying as a REIT. For each of the years in the three-year period ended December 31, 2006, the Company believes it has qualified as a REIT. Notwithstanding the Company’s qualification for taxation as a REIT, the Company is subject to certain state taxes on its income and real estate. The Company and its taxable REIT subsidiaries have made timely TRS elections pursuant to the provisions of the REIT Modernization Act. A TRS is able to engage in activities resulting in 63 income that previously would have been disqualified from being eligible REIT income under the federal income tax regulations. As a result, certain activities of the Company which occur within its TRS entities are subject to federal and state income taxes (See Note 3). All provisions for federal income taxes in the accompanying consolidated financial statements are attributable to the Company’s taxable REIT subsidiaries and to OAMI’s built-in-gain tax liability. Income taxes are accounted for under the asset and liability method as required by SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the temporary differences based on estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. New Accounting Standards – In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact, if any, of applying the various provisions of FIN 48. In September 2006, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin (“SAB”) Topic 1N, “Financial – Statements – Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB 108 references both the “iron curtain” and “rollover” approaches to quantifying a current year misstatement for purposes of determining its materiality. The iron curtain approach focuses on how the current year’s balance sheet would be affected in correcting a misstatement without considering the year(s) in which the misstatement originated. The rollover approach focuses on the amount of the misstatement that originated in the current year’s income statement. SAB 108 states that registrants must quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. Both the iron curtain approach and rollover approach should be used in assessing the materiality of a current year misstatement. SAB 108 provides that once a current year misstatement has been quantified, the guidance in SAB Topic 1M, “Financial Statements - Materiality,” (“SAB 99”) should be applied to determine whether the misstatement is material and should result in an adjustment to the financial statements. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a significant impact on the Company’s financial position or results of operations. 64 In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands the disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements. The changes to current practice resulting from the application of the SFAS 157 relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurements. The definition focuses on the price that would be received to sell the asset or paid to transfer the liability at the measurement date (an exit price) and not the price that would be paid to acquire the asset or received to assume the liability at the measurement date (an entry price). This statement also emphasizes that fair value is a market-based measurement, not an entity specific measurement and subsequently a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. The statement also clarifies that the market participant assumptions include assumptions about risk, and assumptions about the effect of a restriction on the sale or use of an asset. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. This statement should be applied prospectively as of the beginning of the year in which this statement is initially applied. A limited form of retrospective application of SFAS 157 is allowed for certain financial instruments. The Company is currently evaluating the provisions of SFAS 157 to determine the potential impact, if any, the adoption will have on the Company’s financial position or results of operations. In October 2006, FASB issued FASB Staff Position (“FSP”) FAS 123 (R)-5 amending FSP FAS 123 (R)-1. This FSP addresses whether a modification of an instrument in connection with an entity restructuring should be considered a modification for purposes of applying FSP FAS 123 (R)-1, “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R).” Prior to FSP FAS 123 (R)-5, entities were required to apply the recognition and measurement provisions of SFAS 123R throughout the life of an instrument, unless the instrument was modified when the holder was no longer an employee. FSP FAS 123 (R)-5 prescribes that there should be no change in recognition or the measurement (due to a change in classification) of those instruments that were originally issued as employee compensation and then modified, and the modification is made to the terms of the instrument solely to reflect an equity restructuring that occurs when the holders are no longer employees if both of the following conditions are met: (i) there is no increase in fair value of the award (or the ratio of intrinsic value to the exercise price of the award is preserved), or the antidilution provision is not added to the terms of the award in contemplation of an equity restructuring, and (ii) all holders of the same class of equity instruments are treated in the same manner. The adoption of this FSP does not have a significant impact on the Company’s financial position or results of operations. In December 2006, FASB issued a FSP on EITF 00-19-2 which addresses an issuer’s accounting for registration payment arrangements for financial instruments such as equity shares, warrants or debt instruments. This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, “Accounting for Contingencies” and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss.” The financial instrument(s) subject to the 65 registration payment arrangement shall be recognized and measured in accordance with other applicable Generally Acceptable Accounting Principles, (“GAAP”) without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. An entity should recognize and measure a registration payment arrangement as a separate unit of account from the financial instrument(s) subject to that arrangement. Adoption of this FSP may require additional disclosures relating to the nature of the registration payment, settlement alternatives, current carrying amount of the liability representing the issuer’s obligations and the maximum potential amount of consideration, undiscounted that the issuer could be required to transfer. This FSP shall be effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issuance of this FSP. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of this FSP, this guidance shall be effective for financial statements issued for fiscal years beginning after December 15, 2006. The adoption of this FSP will not have a significant impact on the Company’s financial position or results of operations. Use of Estimates – Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Significant estimates include provision for impairment and allowances for certain assets, accruals, useful lives of assets and capitalization of costs. Actual results could differ from those estimates. Reclassification – Certain items in the prior year’s consolidated financial statements and notes to consolidated financial statements have been reclassified to conform to the 2006 presentation. These reclassifications had no effect on stockholders’ equity or net earnings. Note 2 – Real Estate - Investment Portfolio: Leases – The Company generally leases its Investment Properties to established tenants. As of December 31, 2006, 674 of the Investment Property leases have been classified as operating leases and 49 leases have been classified as direct financing leases. For the Investment Property leases classified as direct financing leases, the building portions of the property leases are accounted for as direct financing leases while the land portions of 28 of these leases are accounted for as operating leases. Substantially all leases have initial terms of 10 to 20 years (expiring between 2007 and 2030) and provide for minimum rentals. In addition, the tenant leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume. Generally, the tenant is also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building and carry property and liability insurance coverage. Certain of the Company’s Investment Properties are subject to leases under which the Company retains responsibility for certain costs and expenses of the property. As of December 31, 2006, the weighted average remaining lease term was approximately 12 years. Generally, the leases of the Investment Properties provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions as the initial lease. 66 Held for Investment – Accounted for Using the Operating Method – Real estate subject to operating leases consisted of the following as of December 31 (dollars in thousands): Land and improvements Buildings and improvements Leasehold interests Less accumulated depreciation and amortization Work in progress Less impairment 2006 2005 $ $ 692,048 829,565 2,532 574,150 799,291 2,532 1,524,145 (87,329) 1,436,816 3,769 1,440,585 (1,583) 1,375,973 (79,198) 1,296,775 3,012 1,299,787 (2,533) $ 1,439,002 $ 1,297,254 Some leases provide for scheduled rent increases throughout the lease term. Such amounts are recognized on a straight-line basis over the terms of the leases. For the years ended December 31, 2006, 2005 and 2004, the Company recognized collectively in continuing and discontinued operations, $3,160,000, $2,053,000, and $3,452,000, respectively, of such income. At December 31, 2006 and 2005, the balance of accrued rental income, net of allowances of $2,536,000 and $2,057,000, respectively, was $26,510,000 and $30,717,000 (excluding $97,000 and $2,718,000 in deferred rental income), respectively. In connection with the development of 11 Investment Properties, the Company has agreed to fund construction commitments (including land costs) of $35,020,000, of which $17,845,000 has been funded as of December 31, 2006. The following is a schedule of future minimum lease payments to be received on noncancellable operating leases held for investment at December 31, 2006 (dollars in thousands): 2007 2008 2009 2010 2011 Thereafter $ 138,842 137,691 134,995 132,585 128,051 1,084,105 $ 1,756,269 Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the initial lease terms. In addition, this table does not include amounts for potential variable rent increases that are based on the Consumer Price Index (“CPI”) or future contingent rents which may be received on the leases based on a percentage of the tenant’s gross sales. 67 Held for Investment – Accounted for Using the Direct Financing Method – The following lists the components of net investment in direct financing leases at December 31 (dollars in thousands): Minimum lease payments to be received Estimated unguaranteed residual values Less unearned income Net investment in direct financing leases 2006 2005 $ $ $ 103,938 24,793 (58,048) 145,605 31,110 (82,581) 70,683 $ 94,134 The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment at December 31, 2006 (dollars in thousands): 2007 2008 2009 2010 2011 Thereafter $ 9,827 9,831 9,910 9,930 9,916 54,524 $ 103,938 The above table does not include future minimum lease payments for renewal periods, potential variable CPI rent increases or contingent rental payments that may become due in future periods (See Real Estate – Accounted for Using the Operating Method). Impairments – As a result of the Company’s review of long lived assets for impairment, including identifiable intangible assets, the Company recognized the following impairments for each of the years ended December 31 (dollars in thousands): 2006 2005 2004 Continuing operations: Real estate Intangibles(1) Discontinued operations: Real estate $ $ $ - - - 693 693 $ 1,673 1,328 3,001 2,056 $ 2,056 $ - - - - - (1) Included in Other Assets on the Consolidated Balance Sheets. 68 Note 3 – Real Estate – Inventory Portfolio: As of December 31, 2006, the NNN TRS owned 97 Inventory Properties: 79 completed inventory, five under construction and 13 land parcels. As of December 31, 2005, the NNN TRS owned 63 Inventory Properties: 47 complete inventory, 12 under construction and four land parcels. The real estate Inventory Portfolio consisted of the following (dollars in thousands): Inventory: Land Building Construction projects: Land Work in process 2006 2005 $ $ 62,554 101,168 163,722 42,303 22,134 64,437 26,430 37,081 63,511 44,168 23,395 67,563 $ 228,159 $ 131,074 In connection with the development of five Inventory Properties by the NNN TRS, the Company has agreed to fund construction commitments of $36,728,000, of which $27,263,000, including land costs, has been funded as of December 31, 2006. The following table summarizes the number of Inventory Properties sold and the corresponding gain recognized on the disposition of Inventory Properties included in continuing and discontinued operations for the years ended December 31 (dollars in thousands): 2006 2005 2004 # of Properties Gain # of Properties Gain # of Properties Gain Continuing operations Minority interest Total continuing operations Discontinued operations Intersegment eliminations Minority interest Total discontinued operations 6 $ 58 8,000 (3,609) 4,391 5,590 190 (505) 5,275 6 $ 22 2,010 - 2,010 18,696 921 (5,999) 13,618 7 $ 17 4,700 (1,717) 2,983 17,885 817 (4,705) 13,997 64 $ 9,666 28 $ 15,628 24 $ 16,980 Note 4 – Investments in Unconsolidated Affiliate: CNL Plaza. In May 2002, the Company purchased a 25 percent partnership interest in Plaza for $750,000. The remaining partnership interests in Plaza are owned by affiliates of James M. Seneff, Jr. and Robert A. Bourne, each a former member of the Company’s board of directors. Plaza owns a 346,000 square foot office building and an interest in an adjacent parking garage. The Company had severally guaranteed 41.67 percent of a $14,000,000 unsecured promissory note on behalf of Plaza. In October 2006, the Company sold its equity investment in Plaza for $10,239,000 and recognized a gain of $11,373,000. In connection with the sale, the Company was released as guarantor of Plaza’s $14,000,000 unsecured promissory note. 69 During the years ended December 31, 2006, 2005 and 2004 the Company received $1,042,000, $471,000 and $446,000, respectively, in distributions from Plaza. For the years ended December 31, 2006, the Company recognized earnings from Plaza of $122,000, and a loss of $218,000 and $276,000 for the years ended December 31, 2005 and 2004, respectively. Since November 1999, the Company has leased its office space from Plaza. The Company’s lease expires in October 2014. In October 2006, the Company amended its lease with Plaza to reduce the square footage leased by the Company. During the years ended December 31, 2006, 2005 and 2004, the Company incurred rental expenses in connection with the lease of $1,024,000, $1,035,000 and $1,018,000, respectively. In May 2000, the Company subleased a portion of its office space to affiliates of James M. Seneff, Jr. In October 2006, the Company terminated these subleases in connection with the Company’s amendment. During the years ended December 31, 2006, 2005 and 2004, the Company earned $337,000, $397,000 and $345,000, respectively, in rental and accrued rental income from these affiliates. The following is a schedule of the Company’s future minimum lease payments related to the office space leased from Plaza at December 31, 2006 (dollars in thousands): 2007 2008 2009 2010 2011 Thereafter $ 815 839 865 891 917 2,749 $ 7,076 Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the initial lease terms. The Company has the option to renew its lease with Plaza for three successive five-year periods subject to similar terms and conditions as the initial lease. Note 5 – Mortgages, Notes and Accrued Interest Receivable: As of December 31, 2006, the structured finance investments bear a weighted average interest rate of 13.3% per annum, of which 10.1% is payable monthly and the remaining 3.2% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which ranges between November 2007 and January 2009. The structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the certain subsidiaries which own the respective real estate. The following table summarizes the activity of the structured finance investments for each of the years ended December 31 (dollars in thousands): Balance at January 1 New investments Principal repayments 2006 2005 $ 27,805 16,477 (30,365) $ 29,390 5,988 (7,573) Balance at December 31 $ 13,917 $ 27,805 70 Note 6 – Mortgage Residual Interests: OAMI holds the mortgage residual interests (“Residuals”) from seven securitizations. The following table summarizes the investment interests in each of the transactions: Securitization Company (1) OAMI (2) 3rd Party Investment Interest BYL 99-1 CCMH I, LLC CCMH II, LLC CCMH III, LLC CCMH IV, LLC CCMH V, LLC CCMH VI, LLC - 42.7% 44.0% 36.7% 38.3% 38.4% - 59.0% 57.3% 56.0% 63.3% 61.7% 61.6% 100.0% 41.0% - - - - - - (1) The Company owned these investment interests prior to its acquisition of the equity interest in OAMI. (2) The Company owns 78.9 percent of OAMI’s investment interest. Each of the Residuals is recorded at fair value based upon a third party valuation. Unrealized gains and losses are reported as other comprehensive income in stockholders’ equity, and other than temporary losses as a result of a change in the timing or amount of estimated cash flows are recorded as an other than temporary valuation impairment. As a result of the increase in historical prepayments of the underlying loans of the Residuals, the third party valuation increased the average life equivalent Constant Prepayment Rate (“CPR”) speeds assumption from a range of 18.7% to 22.9% up to a range of 38.7% to 47.6%. As a result of the increase in historical prepayments and subsequently the change in the assumption in future prepayments, the Company recognized an other than temporary valuation impairment of $8,779,000 for the year ended December 31, 2006. The following table summarizes the key assumptions used in determining the value of these assets as of December 31: Discount rate Average life equivalent CPR speeds range Foreclosures: Frequency curve default model Loss severity of loans in foreclosure Yield: LIBOR Prime 2006 2005 17% 38.7% to 47.6% CPR 17% 18.7% to 22.9% CPR 1.1% maximum rate 10% 1.1% maximum rate 30% Forward 3-month curve Forward 3-month curve Forward curve Forward curve 71 The following table shows the effects on the key assumptions affecting the fair value of the Residuals at December 31, 2006 (dollars in thousands). Carrying amount of retained interests Discount rate assumption Fair value at 20% discount rate Fair value at 22% discount rate Prepayment speed assumption Fair value of 1% increases above the CPR Index Fair value of 2% increases above the CPR Index Expected credit losses Fair value 2% adverse change Fair value 3% adverse change Yield Assumptions Fair value of Prime/LIBOR spread contracting 25 basis points Fair value of Prime/LIBOR spread contracting 50 basis points Residuals $ $ $ $ $ $ $ $ $ 31,512 30,233 29,407 31,439 31,394 31,504 31,499 32,270 33,029 These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on adverse variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation of a particular assumption on the fair value of the retained interest is calculated without changing any other assumptions; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Note 7 – Line of Credit Payable: In December 2005, the Company entered into an amended and restated loan agreement for a $300,000,000 revolving credit facility (the “Credit Facility”) which amended the Company’s existing loan agreement by (i) increasing the borrowing capacity to $300,000,000 from $225,000,000, (ii) lowering the interest rates of the tiered rate structure to a maximum rate of 112.5 basis points above LIBOR (based upon the debt rating of the Company, the current interest rate is 80 basis points above LIBOR), (iii) requiring the Company to pay a commitment fee based on a tiered rate structure to a maximum of 25 basis points per annum (based upon the debt rating of the Company the current commitment fee is 20 basis points), (iv) providing for a competitive bid option for up to 50 percent of the facility amount, (v) extending the expiration date to May 8, 2009, and (vi) amending certain of the financial covenants of the Company. The principal balance is due in full upon expiration of the Credit Facility in May 2009, which the Company may request to be extended for an additional 12-month period. As of December 31, 2006 and 2005, $28,000,000 and $162,300,000, respectively, was outstanding under the Credit Facility. The Credit Facility had a weighted average interest rate of 5.91% and 4.77% for the years ended December 31, 2006 and 2005, respectively. In accordance with the terms of the Credit Facility, the Company is required to meet certain restrictive financial covenants, which, among other things, require the Company to maintain certain (i) maximum leverage ratios, (ii) debt service coverage, (iii) cash flow coverage and (iv) investment and dividend limitations. At December 31, 2006, the Company was in compliance with those covenants. 72 For the years ended December 31, 2006, 2005 and 2004, interest cost incurred was $7,310,000, $2,948,000, and $1,084,000 respectively, of which $2,278,000, $2,563,000 and $271,000, respectively, was capitalized by the Company as a cost of buildings constructed. For December 31, 2006, 2005 and 2004, $5,032,000, $385,000 and $813,000, respectively, were charged to operations. Note 8 – Mortgages Payable: The following table outlines the mortgages payable included in the Company’s consolidated financial statements (dollars in thousands): Entered Balance Interest Rate Maturity (4) January 1996 June 1996(2) December 1999 December 2001 December 2001 December 2001 June 2002 November 2003 February 2004 (2) February 2004 (3) March 2005 (2) $ 39,450 1,916 350 623 698 485 21,000 95,000 6,952 12,000 1,015 7.435% February 2006 8.250% December 2008 8.500% December 2009 9.000% April 2014 9.000% April 2019 9.000% April 2019 6.900% July 2012 5.420% November 2013 6.900% January 2017 7.370% September 2007 8.140% September 2016 Carrying Value of Encumbered Asset(s) (1) Outstanding Principal Balance at December 31, 2006 2005 $ -(6) $ 1,779(5) 3,314 1,021 1,380 1,357 26,181 -(7) 11,894 28,233 1,398 - 506 136 398 463 236 20,027 - 5,907 7,304 915 $ 18,538 729 175 435 482 246 20,276 95,000 6,299 7,979 974 $ 76,557 $ 35,892 $ 151,133 (1) Each loan is secured by a first mortgage lien on certain of the Company’s properties. The carrying values of the assets are as of December 31, 2006. (2) Date entered represents the date that the Company acquired real estate subject to a mortgage securing a loan. The corresponding original principal balance represents the outstanding principal balance at the time of acquisition. (3) The Company assumed this long term fixed rate loan when the company increased its ownership in Net Lease Institutional Realty, L.P. (see Note 14). (4) Monthly payments include interest and principal, if any; the balance is due at maturity. (5) The Company has a $604,000 letter of credit that also secures the loan. (6) In February 2006, upon maturity, the Company repaid the outstanding principal balance and the properties were released from the mortgage lien. In May 2006, the Company disposed of the properties that secured the loan at which time the buyer assumed the mortgage outstanding. (7) The following is a schedule of the annual maturities of the Company’s mortgages payable at December 31, 2006 (dollars in thousands): 2007 2008 2009 2010 2011 Thereafter $ 8,413 1,190 1,000 1,022 1,098 23,169 $ 35,892 73 Note 9 – Notes Payable – Secured: The Company’s consolidated financial statements included the following notes payable as a result of the acquisition of OAMI (see Note 22) at December 31 (dollars in thousands): 02-1 Notes (1) (2) 03-1 Notes (2) (3) Principal Balance 2005 2006 $ 10,500 14,000 $ 12,250 16,000 $ 24,500 $ 28,250 Stated Rate 10% 10% Maturity Date December 2007 June 2008 (1) Interest is payable quarterly with annual principal payments of $1,750 payable December 31 (2) Secured by certain equity investments in mortgage residual interests of the Company with a carrying value of $8,690 (3) Interest is payable quarterly with annual principal payments of $2,000 payable June 30 Each issuance of notes can be prepaid at the option of OAMI, in whole or in part, without premium or penalty after the pre-payment date, as defined in each respective note. Note 10 – Notes Payable: The Company filed a prospectus supplement to its shelf registration for each issuance of notes outlined in the table below (dollars in thousands). Notes Issue Date Principal Discount(3) 2008 (1) 2010 (1) 2012 (1) 2014 (1)(2)(5) 2015 (1) $ March 1998 September 2000 June 2002 June 2004 November 2005 100,000 $ 20,000 50,000 150,000 150,000 271 $ 126 287 440 390 Stated Rate Effective Rate(4) Commencement of Semi- Annual Interest Payments Maturity Date 7.125% 7.163% September 1998 March 2008 8.500% 8.595% March 2001 7.750% 7.833% December 2002 6.250% 5.910% June 2004 6.150% 6.185% June 2006 September 2010 June 2012 June 2014 December 2015 Net Price 99,729 19,874 49,713 149,560 149,610 (1) (2) (3) (4) (5) The proceeds from the note issuance were used to pay down outstanding indebtedness of the Company’s Credit Facility. The proceeds from the note issuance were used to repay the obligation of the 2004 Notes. The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest method. Includes the effects of the discount, treasury lock gain and swap gain (as applicable). The Company entered into a forward starting interest rate swap agreement which fixed a swap rate of 4.61% on a notional amount of $94,000. Upon issuance of the 2014 Notes, the Company terminated the forward starting interest rate swap agreement resulting in a gain of $4,148. The gain has been deferred and is being amortized as an adjustment to interest expense over the term of the 2014 Notes using the effective interest method. Each series of the notes represent senior, unsecured obligations of the Company and are subordinated to all secured indebtedness of the Company. Each of the notes are redeemable at the option of the Company, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the notes being redeemed plus accrued interest thereon through the redemption date and (ii) the make-whole amount, as defined in the respective supplemental indenture notes. In connection with the debt offerings, the Company incurred debt issuance costs totaling $4,542,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. Debt issuance costs for all note issuances have been deferred and are being amortized over the term of the respective notes using the effective interest method. 74 In accordance with the terms of the indenture, pursuant to which the Company’s notes have been issued, the Company is required to meet certain restrictive financial covenants, which, among other things, require the Company to maintain (i) certain leverage ratios and (ii) certain interest coverage. At December 31, 2006, the Company was in compliance with those covenants. Term Note – In connection with the acquisition of NAPE, the Company assumed a $20,800,000 term note payable (“Term Note”). The principal balance on the Term Note is due in full upon the expiration in June 2009. The Term Note bears interest based on a tiered rate structure to a maximum rate of 165 basis points above LIBOR, (based on the debt rating of the Company, the current interest rate is 120 basis points above LIBOR or 6.55% at December 31, 2006). The Term Note had a weighted average interest rate of 6.33% and 5.00% for the years ended December 31, 2006 and 2005, respectively. In accordance with the terms of Term Note, the Company is required to meet certain restrictive financial covenants, which among other things, require the Company to maintain certain (i) maximum leverage ratios, (ii) debt service coverage and (iii) cash flow coverage. Note 11 – Notes Payable – Convertible: In September 2006, the Company filed a prospectus supplement to the prospectus contained in its February 2006 shelf registration statement and issued $150,000,000 of 3.95% convertible senior notes due September 2026 (with a 2011 put option). Subsequently, the Company issued an additional $22,500,000 in connection with the underwriters’ over-allotment option (collectively, the “Convertible Notes”). The Convertible Notes were sold at par with interest payable semi-annually commencing on March 15, 2007 (effective interest rate of 3.95%). The notes are convertible, at the option of the holder, at any time on or after September 15, 2025. Prior to September 15, 2025, holders may convert their Convertible Notes under certain circumstances. The initial conversion rate per $1,000 principal amount of Convertible Notes is 40.9015 shares of the Company’s common stock. This is equivalent to an initial conversion price of $24.4490 per share of common stock. The initial conversion rate is subject to adjustment in certain circumstances. Upon conversion of each $1,000 principal amount of Convertible Notes, the Company will settle any amounts up to the principal amount of the notes in cash and the remaining conversion value, if any, will be settled, at the Company’s option, in cash, common stock or a combination thereof. The Convertible Notes are redeemable at the option of the Company, in whole or in part, on or after September 20, 2011 for cash equal to 100% of the principal amount of the Convertible Notes being redeemed plus unpaid interest accrued to, but not including, the redemption date. In addition, on September 20, 2011, September 15, 2016 and September 15, 2021 note holders may require the Company to repurchase the notes for cash equal to the principal amount of the Convertible Notes to be repurchased plus accrued interest thereon. In connection with the Convertible Note offering, the Company incurred debt issuance costs totaling $3,850,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. Debt issuance costs have been deferred and are being amortized over the period to the earliest put option of the holders, September 20, 2011 using the effective interest method. 75 Note 12 – Financing Lease Obligation: In July 2004, the Company sold five investment properties for approximately $26,041,000 and subsequently leased back the properties under a 10-year financing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the financing lease. In accordance with the provisions of SFAS No. 66, “Accounting for Sales of Real Estate,” the Company has recorded this transaction as a financing transaction. The 10-year financing lease bears an interest rate of 5% annually with monthly interest payments of $109,000 and expires in June 2014 unless either the put or call option is exercised. Note 13 – Preferred Stock: The following table outlines each issuance of the Company’s preferred stock (dollars in thousands): Non-Voting Preferred Stock Issuance 9% Series A 6.7% Series B Convertible 7.375% Series C Redeemable Depositary Shares Shares Outstanding At December 31, 2006 Liquidation Preference (per share) Fixed Annual Cash Distribution (per share) 1,781,589 $ 25.00 $ 2.25 - 3,680,000 2,500.00 25.00 167.50 1.84375 9% Non-Voting Series A Preferred Stock. In December 2001, the Company issued 1,999,974 shares of 9% Non-Voting Series A Preferred Stock (the “Series A Preferred Stock”) in connection with the acquisition of Captec. Holders of the Series A Preferred Stock are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions at a rate of nine percent of the $25.00 liquidation preference per annum (equivalent to a fixed annual amount of $2.25 per share). The Series A Preferred Stock ranked senior to the Company’s common stock with respect to distribution rights and rights upon liquidation, dissolution or winding up of the Company. In January 2007, the Company redeemed all 1,781,589 shares of Series A Preferred Stock at a redemption price of $25.00 per share, plus all accumulated and unpaid distributions through the redemption date of $0.20625 per share. 6.70% Non-Voting Series B Cumulative Convertible Perpetual Preferred Stock. In August 2003, the Company filed a prospectus supplement to its shelf registration statement and issued 10,000 shares of 6.70% Non-Voting Series B Cumulative Convertible Perpetual Preferred Stock (the “Series B Convertible Preferred Stock”) and received gross proceeds of $25,000,000. In connection with this offering, the Company incurred stock issuance costs totaling approximately $687,000, consisting primarily of placement fees and legal and accounting fees. Holders of the Series B Convertible Preferred Stock were entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions based on the stated rate and liquidation preferences per annum. In April 2006, the holder of the Company’s Series B Convertible Preferred Stock elected to convert those 10,000 shares into 1,293,996 shares of common stock. 7.375% Series C Cumulative Redeemable Preferred Stock. In October 2006, the Company filed a prospectus supplement to the prospectus contained in its February 2006 shelf registration statement and issued 3,200,000 depositary shares, each representing 1/100th of a share of 76 7.375% Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”), and received gross proceeds of $80,000,000. In addition, the Company issued an additional 480,000 depositary shares in connection with the underwriters’ over-allotment option and received gross proceeds of $12,000,000. In connection with this offering the Company incurred stock issuance costs of approximately $3,098,000, consisting primarily of underwriting commissions and fees, legal and accounting fees and printing expenses. Holders of the depositary shares are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash dividends at the rate of 7.375 percent of the $25.00 liquidation preference per depositary share per annum (equivalent to a fixed annual amount of $1.84375 per depositary share). The Series C Preferred Stock underlying the depositary shares ranks senior to the Company’s common stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company. The Company may redeem the Series C Preferred Stock underlying the depositary shares on or after October 12, 2011, for cash, at a redemption price of $2,500.00 per share (or $25.00 per depositary share), plus all accumulated, accrued and unpaid dividends. Note 14 – Common Stock: In September 1997, the Company entered into a partnership, Net Lease Institutional Realty, L.P. (the “Partnership”), with the Northern Trust Company, as Trustee of the Retirement Plan for Chicago Transit Authority Employees (“CTA”). Under the terms of the limited partnership agreement of the Partnership, CTA had the option to convert its 80 percent limited partnership interest into shares of the Company’s common stock. In October 2003, CTA exercised that right, and based on the terms of and calculation defined in the limited partnership agreement, the Company issued 953,551 shares of common stock to CTA in a private transaction in February 2004 in exchange for CTA’s 80 percent limited partnership interest, increasing the Company’s ownership in the Partnership to 100 percent. Prior to CTA’s exercise, the Company accounted for its 20 percent interest in the Partnership under the equity method of accounting. Net income and losses of the Partnership were allocated to the partners in accordance with their respective percentage interest during the Partnership’s term. In June 2005, the Company issued 1,636,532 shares of common stock pursuant to the acquisition of National Properties Corporation (“NAPE”) (see Note 23). Dividend Reinvestment and Stock Purchase Plan. In February 2006, the Company filed a shelf registration statement with the Securities and Exchange Commission for its Dividend Reinvestment and Stock Purchase Plan (“DRIP”) which permits the issuance by the Company of 12,191,394 shares of common stock. The Company’s DRIP provides an economical and convenient way for current stockholders and other interested new investors to invest in the Company’s common stock. The following outlines the common stock issuances pursuant to the Stock Plan for each of the years ended December 31 (dollars in thousands): 2006 2005 Shares of common stock Net proceeds 3,046,408 65,722 $ 1,048,746 20,747 $ Note 15 – Employee Benefit Plan: Effective January 1, 1998, the Company adopted a defined contribution retirement plan (the “Retirement Plan”) covering substantially all of the employees of the Company. The 77 Retirement Plan permits participants to defer up to a maximum of 60 percent of their compensation, as defined in the Retirement Plan, subject to limits established by the Internal Revenue Code. The Company matches up to 60 percent of the participants’ contributions based on a tiered rate structure up to a maximum of eight percent of a participant’s annual compensation. The Company’s contributions to the Retirement Plan for the years ended December 31, 2006, 2005 and 2004 totaled $248,000, $194,000, and $140,000, respectively. Note 16 – Dividends: The following presents the characterization for tax purposes of common stock dividends paid to stockholders for the years ended December 31: 2006 2005 2004 Ordinary dividends Qualified dividends Capital gain Unrecaptured Section 1250 Gain Nontaxable distributions $ 1.151 $ - 0.150 0.019 - 1.068 $ 0.225 - 0.002 0.005 $ 1.320 $ 1.300 $ 0.916 - 0.040 0.041 0.293 1.290 The following presents the characterization for tax purposes of preferred stock dividends per share paid to stockholders for the year ended December 31, 2006. Total Ordinary Dividends Capital Gain Unrecaptured Section 1250 Gain $ $ 2.25 41.875 0.250955 $ 1.962 36.507 0.218784 $ 0.256 4.767 0.028567 0.032 0.601 0.003604 2.25 167.50 2.25 167.50 2.25 167.50 2.25 167.50 - - - - - - - - 2006: Series A Series B Convertible Series C Redeemable(1) 2005: Series A Series B Convertible 2004: Series A Series B Convertible (1) Issued in October 2006. Note 17 – Restructuring Costs: During the year ended December 31, 2006, the Company recorded restructuring costs of $1,580,000, which included severance costs and accelerated vesting of restricted stock in connection with a workforce reduction in April 2006. Note 18 – Transition Costs: During the year ended December 31, 2004, the Company recorded a transition cost of $3,741,000 including severance, accelerated vesting of restricted stock, and recruitment costs in connection with the appointment of Craig Macnab as Chief Executive Officer in February 2004, and the resignation of Gary M. Ralston as President and Chief Operating Officer in May 2004. 78 Note 19 – Income Taxes: For income tax purposes, the Company has taxable REIT subsidiaries in which certain real estate activities are conducted. Additionally, the Company has its 78.9 percent equity interest in OAMI. The Company has consolidated OAMI in its financial statements as a result of the Company’s acquisition in May 2005. OAMI, upon making its REIT conversion, has remaining tax liabilities relating to the built-in-gain of its assets. As a result, the Company treats some depreciation expense and certain other items differently for tax than for financial reporting purposes. The principal differences between the Company’s effective tax rates for the years ended December 31, 2006, 2005 and 2004, and the statutory rates relate to state taxes and nondeductible expenses such as meals and entertainment expenses. The components of the net income tax asset (liability) consist of the following at December 31 (dollars in thousands): 2006 2005 Temporary differences: Built-in-gain Depreciation Stock based compensation Other Excess interest expense carryforward Net operating loss carryforward Net deferred income tax asset (liability) Current income tax asset (payable) Income tax asset (liability) (600) - 8 2,010 1,961 $ (6,101) $ (239) $ (9,480) $ (14,551) (315) 35 (180) - 544 (14,467) 719 (6,340) $ (13,748) $ In assessing the ability to realize a deferred tax asset, management considers whether it is more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The net operating loss carryforwards were generated by the Company’s taxable REIT subsidiaries. The net operating loss carryforwards expire in 2026. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize all of the benefits of these deductible differences that existed as of December 31, 2006. The income tax (expense) benefit consists of the following components for the years ended December 31 (dollars in thousands): Net earnings before income taxes Provision for income tax benefit (expense): Current: Federal State and local Deferred: Federal State and local Total provision for income taxes 2006 2005 2004 $ 176,282 $ 92,361 $ 68,231 (1,804) (339) 6,493 1,873 6,223 (2,401) (451) (44) (65) (2,961) (420) (90) (2,356) (431) (3,297) Total net earnings $ 182,505 $ 89,400 $ 64,934 79 Note 20 – Earnings from Discontinued Operations: Real Estate – Investment Portfolio – In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has classified the revenues and expenses related to (i) all Investment Properties that were sold and expired leasehold interests, and (ii) any Investment Property that was held for sale as of December 31, 2006, as discontinued operations. The following is a summary of the earnings from discontinued operations from the Investment Portfolio for each of the years ended December 31 (dollars in thousands): Revenues: Rental income from operating leases Earned income from direct financing leases Contingent rental income Real estate expense reimbursement from tenants Interest and other income from real estate transactions Operating expenses: General and administrative Real estate Depreciation and amortization Impairments – real estate Other expenses (revenues): Interest and other income Interest expense Earnings before gain on disposition of real estate and loss on extinguishment of mortgage payable Gain on disposition of real estate Loss on extinguishment of mortgage payable 2006 2005 2004 $ 13,314 1,901 34 834 308 16,391 $ 22,904 2,841 36 2,256 358 $ 25,787 3,169 74 2,931 259 28,395 32,220 93 2,484 1,545 693 4,815 - 1,816 1,816 (82) 6,411 5,536 2,056 137 8,027 4,419 - 13,921 12,583 (15) 3,154 3,139 (105) 5,094 4,989 9,760 11,335 14,648 91,332 (167) 9,816 - 2,523 - Earnings from discontinued operations $ 100,925 $ 21,151 $ 17,171 The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Events or circumstances that may occur include changes in real estate market conditions, the ability of the Company to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, the Company makes a provision for impairment loss if estimated future undiscounted operating cash flows plus estimated disposition proceeds are less than the current book value. Impairment losses are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset. After such review, the Company recognized a $693,000 and $2,056,000 impairment in discontinued operations during the years ended December 31, 2006 and 2005, respectively. Real Estate – Inventory Portfolio – The Company has classified the revenues and expenses related to (i) its Inventory Properties, which generated rental revenues prior to disposition, and 80 (ii) the Inventory Properties which had generated rental revenues and were held for sale as of December 31, 2006, as discontinued operations. The following is a summary of the earnings from discontinued operations from the Inventory Portfolio for each of the years ended December 31 (dollars in thousands): Revenues: Rental income from operating leases Contingent rental income Real estate expense reimbursement from tenants Interest and other from real estate transactions Disposition of real estate: Gross proceeds Costs Gain Operating expenses: General and administrative Real estate Depreciation and amortization Other expenses: Interest expense Earnings before income tax expense and minority interest Income tax expense Minority interest 2006 2005 2004 $ 9,235 - $ 1,986 6 $ 2,314 22 311 336 69 899 183 202 9,882 2,960 2,721 80,856 (75,076) 70,967 (51,350) 66,738 (48,036) 5,780 19,617 18,702 57 365 8 430 1,047 8 318 21 347 815 12 364 5 381 511 14,185 (4,920) (1,223) 21,415 (5,739) (6,296) 20,531 (5,841) (5,143) Earnings from discontinued operations $ 8,042 $ 9,380 $ 9,547 Note 21 – Derivatives: SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS No. 133, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. To date, such derivatives have been used to hedge the variable cash flows associated with floating rate debt and forecasted interest payments of a forecasted issuance of debt. 81 For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is re-designated as a hedging instrument or management determines that designation of the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued, the Company continues to carry the derivative at its fair value on the balance sheet, and recognizes any changes in its fair value in earnings or may choose to cash settle the derivative at that time. In June 2004, the Company terminated its forward-starting interest rate swaps with a notional amount of $94,000,000 that was hedging the risk of changes in forecasted interest payments on a forecasted issuance of long-term debt. The fair value of the interest rate swaps when terminated was an asset of $4,148,000, which was deferred in other comprehensive income. During the year ended December 31, 2005, the Company amortized $326,000 as a reduction to interest expense from unamortized interest rate hedge gain. During the year ended December 31, 2006, the Company reclassified $345,000 out of other comprehensive income as a reduction to interest expense. As of December 31, 2006, $3,308,000 remains in other comprehensive income related to the fair value of the interest rate swaps. The Company estimates an additional $366,000 will be reclassified as a reduction to interest expense during the year ended December 31, 2007 as interest payments are made on the hedged debt. Additionally, the Company does not use derivatives for trading or speculative purposes or currently have any derivatives that are not designated as hedges. The Company has no derivative financial instruments outstanding at December 31, 2006 and 2005. Note 22 – Performance Incentive Plan: The Company’s 2000 Performance Incentive Plan (“2000 Plan”) allows the Company to award or grant to key employees, directors and persons performing consulting or advisory services for the Company or its affiliates, stock options, stock awards, stock appreciation rights, Phantom Stock Awards, Performance Awards and Leveraged Stock Purchase Awards, each as defined in the 2000 Plan. The 2000 Plan permits the issuance of up to 3,900,000 shares of common stock. The following summarizes the Company’s stock-based compensation activity for each of the years ended December 31: Outstanding, January 1 Options granted Options exercised Options surrendered Number of Shares 2005 2006 461,175 - (224,804) - 639,765 - (173,280) (5,310) Outstanding, December 31 236,371 461,175 Exercisable, December 31 236,371 457,000 82 The following represents the weighted average option exercise price information for each of the years ended December 31: Outstanding, January 1 Granted during the year Exercised during the year Outstanding, December 31 Exercisable, December 31 2006 2005 $ 15.66 - 16.43 14.92 14.92 $ 15.33 - 14.48 15.66 15.67 The following summarizes the outstanding options and the exercisable options at December 31, 2006: Outstanding options: Number of shares Weighted-average exercise price Weighted-average remaining contractual life in years Exercisable options: Number of shares Weighted-average exercise price Option Price Range $14.5700 to $17.8750 $10.1875 to $13.6875 Total 55,734 11.32 3.7 55,734 11.32 180,637 16.03 4.0 180,637 16.03 $ $ 236,371 14.92 3.9 236,371 14.92 $ $ $ $ One-third of the option grant to each individual becomes exercisable at the end of each of the first three years of service following the date of the grant and the options’ maximum term is 10 years. At December 31, 2006, the intrinsic value of options outstanding was $1,899,000. All options outstanding at December 31, 2006, were exercisable. During the years ended December 31, 2006 and 2005, the Company received proceeds totaling $3,694,000 and $2,509,000, respectively, in connection with the exercise of options. The Company issued new common stock to satisfy share option exercises. The total intrinsic value of options exercised during the year ended December 31, 2006 and 2005, was $1,300,000 and $1,026,000, respectively. Pursuant to the 2000 Plan, the Company has granted and issued shares of restricted stock to certain officers, directors and key associates of the Company. The following summarizes the activity for the year ended December 31, 2006 of such grants. Non-vested restricted shares, January 1 Restricted shares granted Restricted shares vested Restricted shares forfeited Non-vested restricted shares, December 31 Number of Shares Weighted Average Share Price 398,441 79,500 (193,252) - $ 17.02 22.18 17.06 - 284,689 18.44 In May 2006, the Company accelerated the vesting and immediately vested 33,661 shares of restricted stock held by certain officers and resulted in the recognition of $557,000 of additional compensation expense for the year ended December 31, 2006. These shares would have otherwise vested through January 2009. 83 During 2005, the Company cancelled 30,135 shares of restricted stock. There were no shares cancelled in 2006. Compensation expense for the restricted stock which is not tied to performance goals is determined based upon the fair value at the date of grant, assuming a 1.3% forfeiture rate, and is recognized as the greater of the amount amortized over a straight lined basis or the amount vested over the vesting periods. Vesting periods for officers and key associates of the Company range from four to seven years and generally vest yearly on a straight line basis. Vesting periods for directors are over a two year period and vest yearly on a straight line basis. Compensation expense for the restricted stock grants whose vesting is contingent upon certain performance goals of the Company is based upon the fair value of the grant calculated by a third party using a Monte Carlo Simulation model coupled with a binomial lattice model using the following assumptions: (i) average interest rate of 4.43%, (ii) $0.01 increase in annual dividend, (iii) expected life of five years, and (iv) volatility of 21.26%. Volatility is based upon the historical volatility of the Company’s stock and other factors. The term is assumed to be the vesting date for each tranche. Vesting of these shares is contingent upon achievement of certain performance goals by January 1, 2010. The following summarizes other grants made during the year ended December 31, 2006, pursuant to the 2000 Plan. Other share grants under the 2000 Plan: Directors’ fees Deferred Directors’ fees Weighted Average Share Price 21.85 21.98 21.91 Shares 14,062 10,678 24,740 Shares available under the 2000 Plan for grant, end of period 1,156,006 The total compensation cost for share-based payments for the years ended December 31, 2006, and 2005, totaled $3,766,000 and $2,156,000, respectively, of such compensation expense. At December 31, 2006, the Company had $3,380,000 of unrecognized compensation cost related to non-vested share-based compensation arrangements under the 2000 Plan. This cost is expected to be recognized over a weighted average period of 2.8 years. Note 23 – Business Combinations: Orange Avenue Mortgage Investments, Inc. – On May 2, 2005, the Company exercised its option to acquire 78.9 percent of the common shares of OAMI for $9,379,000. In December 2004, OAMI sold its loan origination, securitization and servicing operations and the majority of its assets and liabilities to a third party, resulting in OAMI becoming a passive owner in a pool of seven commercial real estate loan securitization residual interests. The loans in each of the securitizations are secured by first mortgages on commercial real estate and generally borrower personal guarantees. As a result of the option exercise, the Company has consolidated OAMI in its consolidated financial statements. In accordance with SFAS 141, the Company recorded the assets and liabilities of OAMI at fair value. The Company recognized an extraordinary gain of $14,786,000, equal to the excess fair value over the option price, as all assets acquired were financial assets and current assets. 84 Based upon independent appraisals and management’s evaluation, the following table summarizes the estimated fair values of the assets and liabilities of OAMI on May 2, 2005 (dollars in thousands): Mortgage residual interests Notes receivable Cash and cash equivalents Restricted cash Other assets Total assets acquired Notes payable – secured Other liabilities Deferred tax liability Total liabilities assumed Minority interest Net assets $ $ $ $ 68,327 3,272 10,285 17,427 6,794 106,105 32,000 1,028 14,787 47,815 27,315 30,975 The following table summarizes the extraordinary gain recognized by the Company (dollars in thousands) during the year ended December 31, 2005: Company’s share of net assets acquired Less option price Basis of option Extraordinary gain $ $ 24,434 (9,379) (269) 14,786 The Company’s net earnings for the year ended December 31, 2005, includes 78.9 percent of OAMI’s net earnings since the date of the acquisition in the amount of $1,411,000. Between June 2001 and July 2003, a wholly owned subsidiary of the Company, Net Lease Funding, Inc. (“NLF”), entered into five limited liability company agreements with OAMI to create five limited liability companies (collectively, the “LLCs”). Kevin B. Habicht, an officer and director of the Company, is an officer, director and indirect stockholder of OAMI. Craig Macnab, an officer and director of the Company and Julian E. Whitehurst, an officer of the Company, are each an officer and director of OAMI. Each of the LLCs holds an interest in mortgage loans and is 100 percent equity financed. Prior to the acquisition of the 78.9 percent equity interest in OAMI, the Company held a non-voting and non-controlling interest in each of the LLCs ranging between 36.7 and 44.0 percent and accounted for its investment under the equity method of accounting (see Note 6). As a result of the Company’s acquisition of 78.9 percent equity interest in OAMI, the Company’s interest in the LLCs is no longer accounted for as an equity investment and is now included as part of OAMI in the Company’s consolidated financial statements. In addition, certain officers and directors of the Company own preferred shares of OAMI. Prior to the acquisition of 78.9 percent equity interest in OAMI, the Company received $2,749,000 and $10,562,000 in distributions from the LLCs during the years ended December 31, 2005 and 2004, respectively. For the years ended December 31, 2005 and 2004, the Company recognized $1,467,000 and $5,042,000 of earnings, respectively, from the LLCs. 85 In 2003, in connection with a loan to OAMI, the Company pledged a portion of its interest in two of the LLCs as partial collateral for the notes payable-secured (see Note 9). In connection with the independent valuations of the Residuals’ fair value, the Company reduced the carrying value of the Residuals to reflect such fair value at December 31, 2006 and 2005. The reduction in the Residuals’ value that related to the Residuals acquired at the time of the option exercise was recorded as a purchase price allocation adjustment. The reduction in the Residuals’ value acquired at the time of the option exercise that related to the period subsequent to the option exercise, as well as the reduction in the value related to the portion of the Residuals owned by NLF, was recorded as an aggregate other than temporary valuation impairment of $8,779,000 and $2,382,000 for the years ended December 31, 2006 and 2005, respectively. Unrealized gains of $1,992,000 were recorded as other comprehensive income in the Statement of Stockholders’ Equity during the year ended December 31, 2006. The Company merged certain of its wholly owned subsidiaries into National Retail Properties, Inc. and elected to convert OAMI to a REIT. As a result, effective January 1, 2005, OAMI was taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. Upon making the REIT conversion, $3,453,000 of OAMI’s tax liability was eliminated and recorded as an adjustment to the net assets acquired at the time of the option exercise. The remaining tax liability will be reduced over the next ten years in proportion to the reduction of the basis of the respective mortgage residual interests. National Properties Corporation – On June 16, 2005, the Company acquired 100 percent of National Properties Corporation (“NAPE”), a publicly traded company, which owned 43 freestanding properties located in 12 states. Results of NAPE operations have been included in the consolidated financial statements since the date of acquisition. NAPE stockholders received 1,636,532 newly issued shares of the Company’s common stock. In accordance with SFAS 141, the acquisition price of $32,199,000 was allocated to the assets acquired and liabilities assumed at their fair values. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the acquisition (dollars in thousands): Real estate, Investment Portfolio: Accounted for using the operating method Cash and cash equivalents Other assets Total assets acquired Note payable Other liabilities Total liabilities assumed $ $ $ 58,542 1,276 6,757 66,575 28,200 6,176 34,376 Net assets acquired $ 32,199 The Company’s net earnings for the year ended December 31, 2005, includes NAPE’s net earnings since the date of acquisition in the amount of $1,867,000. Note 24 – Fair Value of Financial Instruments: The Company believes the carrying value of its Credit Facility approximates fair value based upon its nature, terms and variable interest rate. The Company believes the carrying value of its 86 financing lease obligation approximates fair value based upon its nature, terms and interest rate. The Company believes that the carrying value of its cash and cash equivalents, restricted cash, mortgages, notes and accrued interest receivable, receivables, mortgages payable, note payable – secured, accrued interest payable and other liabilities at December 31, 2006 and 2005 approximate fair value, based upon current market prices of similar issues. At December 31, 2006 and 2005, the fair value of the Company’s notes and convertible notes, collectively, was $664,157,000 and $494,103,000, respectively, based upon the quoted market price. Note 25 – Related Party Transactions: For additional related party disclosures see Note 4 and Note 23. In June 2005, James M. Seneff, Jr. and Robert A. Bourne each retired from the Board of Directors (“Retired Directors”). The Company has revolving lines of credit with the NNN TRS that allow for an aggregate borrowing capacity of $280,000,000, as of December 31, 2006. The lines of credit each bear interest at prime times 0.75 plus 4.10% per annum and expire on May 8, 2009 and are secured by a pledge of the real estate and/or the other assets owned by the respective borrower. The outstanding aggregate principal balance of the lines of credit at December 31, 2006 and 2005 was $208,395,000 and $110,067,000, respectively, and bore interest at a rate of 10.29% and 7.50%, respectively, per annum. In connection with the lines of credit from the NNN TRS, the Company earned $16,287,000, $3,511,000 and $3,819,000 in interest and fees during the years ended December 31, 2006, 2005 and 2004, respectively, each of which was eliminated in consolidation. In 2005 and 2004, the Company provided disposition and development services to an affiliate of the Retired Directors. In connection therewith, the Company received an aggregate of $886,000 and $175,000 in fees during the years ended December 31, 2005 and 2004, respectively. There were no fees recognized during the year ended December 31, 2006. In September 2000, a wholly owned subsidiary of Services entered into a $15,000,000 line of credit agreement with OAMI. Interest was payable monthly and the principal balance was due in full upon termination of the line of credit. In March 2004, the maturity date of the line of credit agreement was extended to March 31, 2005. In December 2003, the line of credit was amended to have a borrowing capacity of $35,000,000. In May 2004, the line of credit agreement was amended to temporarily increase the available credit to $45,000,000 until September 2004, at which time the available credit decreased to $35,000,000. In December 2004, the credit agreement was terminated. During the years ended December 31, 2004, the Company recognized $1,732,000 of interest and fee income related to the line of credit. An affiliate of James M. Seneff, Jr., a former director of the Company, provided certain administrative, tax and technology services to the Company. In connection therewith, the Company paid $999,000 in fees relating to these services during the year ended December 31, 2004. In 2002, the Company extended the maturity dates to dates between June and December 2007 on four mortgages securing an original aggregate principal indebtedness totaling $8,514,000 from affiliates of the Retired Directors. In June 2005, the Company received the outstanding 87 principal balance for three of the mortgage loans. In July 2005, the Company received the entire outstanding principal balance for the remaining mortgage loan. In connection therewith, the Company recorded $96,000 and $243,000, as interest and other income from real estate transactions during the years ended December 31, 2005 and 2004, respectively. Prior to January 2005, the Company held a 98.7 percent, non-controlling and non-voting interest in Services. In January 2005, the Company entered into a purchase agreement with Services Investors, which provided that the Company would acquire their collective 1.3 percent interest, which was 100 percent of the voting interest in Services. Effective January 1, 2005, the Company acquired the remaining interest in Services increasing the Company’s ownership in Services to 100 percent. The Company paid the Services Investors $870,000 cash for the 1.3 percent interest, as determined by a third-party valuation. The Company allocated the difference between the purchase price, including transaction costs, and the book value of the 1.3 percent interest to the fair market value of the assets and liabilities acquired. The fair value of the assets and liabilities was determined by the third-party valuation, and the excess purchase price was allocated to the acquired assets on a pro rata basis, in accordance with the third-party valuation report. Note 26 – Quarterly Financial Data (unaudited): The following table outlines the Company’s quarterly financial data (dollars in thousands, except per share data): 2006 First Quarter Second Quarter Third Quarter Fourth Quarter Revenues as originally reported (1) Reclassified to discontinued operations $ 37,026 (1,378) $ 37,570 (1,362) $ 37,966 (612) $ 41,578 - Adjusted revenue $ 35,648 $ 36,208 $ 37,354 $ 41,578 Net earnings $ 23,448 $ 80,201 $ 21,455 $ 57,401 Net earnings per share (2): Basic Diluted 2005 $ $ 0.40 0.39 $ 1.38 1.37 $ 0.35 0.35 0.93 0.93 Revenues as originally reported (1) Reclassified to discontinued operations $ 32,612 (6,952) $ 36,000 (6,855) $ 34,856 (3,757) $ 39,734 (7,216) Adjusted Revenue $ 25,660 $ 29,145 $ 31,099 $ 32,518 Net earnings before extraordinary gain Extraordinary gain $ 26,004 - $ 16,888 11,805 $ 16,530 - $ 15,192 2,981 Net earnings $ 26,004 $ 28,693 $ 16,530 $ 18,173 Net earnings per share (2): Basic Diluted $ $ 0.47 0.47 $ 0.52 0.51 $ 0.28 0.28 0.31 0.31 (1) Revenues as originally reported have been adjusted to conform to the 2006 presentation. As a result, the gain (loss) on disposition of real estate, Inventory Portfolio has been reclassified. (2) Calculated independently for each period and consequently, the sum of the quarters may differ from the annual amount. 88 Note 27 – Segment Information: The Company has identified two primary financial segments: (i) Investment Assets and (ii) Inventory Assets. The following tables represent the segment data and a reconciliation to the Company’s consolidated totals for the years ended December 31, 2006, 2005 and 2004 (dollars in thousands): Investment Assets Inventory Assets Eliminations (Intercompany) Consolidated Totals 2006 External revenues Intersegment revenues Interest revenue Interest revenue on mortgage residuals interests Gain on the disposition of real estate, Inventory Portfolio Interest expense Depreciation and amortization Operating expenses Impairments Equity in earnings of unconsolidated affiliates Gain on disposition of equity investment Income tax benefit Minority interest Earnings (loss) from continuing operations Earnings from discontinued operations Net earnings Assets Additions to long-lived assets: Real estate $ $ 139,716 16,379 7,119 7,268 - 48,801 22,913 22,470 8,779 (2,677) 11,335 5,050 353 $ 440 - 60 - 8,000 12,354 58 10,212 - - 38 6,093 (1,752) 81,580 (9,745) 100,925 182,505 1,909,690 352,549 $ $ $ 7,851 (1,894) $ 242,066 195,956 $ $ $ $ $ $ - (16,379) - 140,156 - 7,179 - - (15,281) - (2) - 2,799 - - - 1,703 191 1,894 $ 7,268 8,000 45,874 22,971 32,680 8,779 122 11,373 11,143 (1,399) 73,538 108,967 182,505 (234,971) $ 1,916,785 - $ 548,505 89 Investment Assets Inventory Assets Eliminations (Intercompany) Consolidated Totals 2005 External revenues Intersegment revenues Interest revenue Interest revenue on mortgage residuals interests Gain on the disposition of real estate, Inventory Portfolio Interest expense Depreciation and amortization Operating expenses Equity in earnings of unconsolidated affiliates Impairments Income tax benefit Minority interest Earnings (loss) from continuing operations Earnings from discontinued operations Extraordinary gain Net earnings $ $ 105,707 3,511 5,730 7,349 - 32,554 16,571 18,970 2,859 4,055 835 (378) 1,239 - 436 - 2,010 3,335 221 9,395 (40) - 1,943 515 53,463 (6,848) 21,151 14,786 $ 89,400 $ 8,459 - 1,611 Assets $ 1,726,701 $ 137,196 Additions to long-lived assets: Real estate $ 267,797 $ 137,286 $ $ $ $ $ - (3,511) - 106,946 - 6,166 - - (2,580) - (9) (1,610) - - - (2,532) 921 - (1,611) (130,481) - $ $ $ 7,349 2,010 33,309 16,792 28,356 1,209 4,055 2,778 137 44,083 30,531 14,786 89,400 1,733,416 405,083 Investment Assets Inventory Assets Eliminations (Intercompany) Consolidated Totals 2004 External revenues Intersegment revenues Interest revenue Gain on the disposition of real estate, Inventory Portfolio Interest expense Depreciation and amortization Operating expenses Equity in earnings of unconsolidated affiliates Income tax benefit Minority interest Earnings (loss) from continuing operations Earnings from discontinued operations Net earnings Assets $ 88,417 3,819 7,974 - 28,489 12,811 19,880 8,733 - - $ $ 552 - 1,886 4,700 2,467 164 10,528 (68) 2,544 (1,243) 47,763 (4,788) 17,171 64,934 $ $ 1,294,755 8,730 3,942 70,980 74,024 $ $ $ $ $ $ - (3,819) - - (2,984) - (17) (3,941) - - (4,759) 817 (3,942) (65,687) - $ $ $ $ 88,969 - 9,860 4,700 27,972 12,975 30,391 4,724 2,544 (1,243) 38,216 26,718 64,934 1,300,048 208,589 Additions to long-lived assets: Real estate $ 134,565 90 Note 28 – Major Tenants: For the years ended December 31, 2005 and 2004, the Company recorded rental and earned income from one of the Company’s tenants, the United States of America, of $18,827,000 and $18,181,000, respectively. The rental and earned income from the United States of America represented more than 10 percent of the Company’s rental and earned income for each of the respective years. As of December 31, 2006, the Company does not have any one tenant that accounts for ten percent or more of its rental and earned income. Note 29 – Commitments and Contingencies: As of December 31, 2006, the Company had letters of credit totaling $5,159,000 outstanding under its Credit Facility. In the ordinary course of its business, the Company is a party to various other legal actions which management believes is routine in nature and incidental to the operation of the business of the Company. Management believes that the outcome of the proceedings will not have a material adverse effect upon its operations, financial condition or liquidity. 91 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Process for Assessment and Evaluation of Disclosure Controls and Procedures and Internal Control over Financing Reporting. The Company carried out an assessment as of December 31, 2006 of the effectiveness of the design and operation of its disclosure controls and procedures and its internal control over financial reporting. This assessment was done under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer. Rules adopted by the Commission require the Company to present the conclusions of the Chief Executive Officer and Chief Financial Officer about the effectiveness of the Company’s disclosure controls and procedures and the conclusions of the Company’s management about the effectiveness of the Company’s internal control over financial reporting as of the end of the period covered by this annual report. CEO and CFO Certifications. Included as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K are forms of “Certification” of the Company’s Chief Executive Officer and Chief Financial Officer. The forms of Certification are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Annual Report on Form 10-K that you are currently reading is the information concerning the assessment referred to in the Section 302 certifications and this information should be read in conjunction with the Section 302 certifications for a more complete understanding of the topics presented. Disclosure Controls and Procedures and Internal Control over Financial Reporting. Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s Chief Executive Officer and Chief Financial Officer, and affected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”) and includes those policies and procedures that: • • pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made in accordance with authorizations of management or the board of directors; and 92 • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material adverse effect on the Company’s financial statements. Scope of the Assessments. The assessment by the Company’s Chief Executive Officer and Chief Financial Officer of the Company’s disclosure controls and procedures and the assessment by the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the Company’s internal control over financial reporting included a review of procedures and discussions with the Company’s management and others at the Company. In the course of the assessments, the Company sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. The Company’s internal control over financial reporting is also assessed on an ongoing basis by personnel in the Company’s Accounting department and by the Company’s internal auditors in connection with their internal audit activities. The overall goals of these various assessment activities are to monitor the Company’s disclosure controls and procedures and the Company’s internal control over financial reporting and to make modifications as necessary. The Company’s intent in this regard is that the disclosure controls and procedures and the internal control over financial reporting will be maintained and updated (including with improvements and corrections) as conditions warrant. Among other matters, management sought in its assessment to determine whether there were any “significant deficiencies” or “material weaknesses” in the Company’s internal control over financial reporting, or whether management had identified any acts of fraud involving personnel who have a significant role in the Company’s internal control over financial reporting. In the Public Company Accounting Oversight Board’s Auditing Standard No. 2, a “significant deficiency” is a “control deficiency,” or a combination of control deficiencies, that adversely affects the ability to initiate, authorize, record, process or report external financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the annual or interim financial statements that is more than inconsequential will not be prevented or detected. A “control deficiency” exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A “material weakness” is defined in Auditing Standard No. 2 as a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management also sought to deal with other control matters in the assessment, and in each case if a problem was identified, management considered what revision, improvement and/or correction was necessary to be made in accordance with the Company’s on-going procedures. The assessments of the Company’s disclosure controls and procedures and the Company’s internal control over financial reporting is done on a quarterly basis so that the conclusions concerning effectiveness of those controls can be reported in the Company’s Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. Assessment of Effectiveness of Disclosure Controls and Procedures. Based upon the assessments, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2006, the Company’s disclosure controls and procedures were effective. Management’s Report on Internal Control over Financial Reporting. Management, including the Company’s Chief Executive Officer and Chief Financial Officer, are responsible for establishing and maintaining adequate internal control over financial reporting for the 93 Company. Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework to assess the effectiveness of the Company’s internal control over financial reporting. Based upon the assessments, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2006, the Company’s internal control over financial reporting was effective. The Company’s independent registered public accounting firm has audited the consolidated financial statements in this Annual Report on Form 10-K and have issued an attestation report on management’s assessment of the Company’s internal control over financial reporting and its opinion on the effectiveness of internal control over financial reporting, which appears in this Annual Report on Form 10-K. Changes in Internal Control over Financial Reporting. During the three months ended December 31, 2006, there were no changes in the Company’s internal control over financial reporting that has materially affected, or are reasonably likely to materially affect, the Company’s internal control for financial reporting. Limitations on the Effectiveness of Controls. Management, including the Company’s Chief Executive Officer and Chief Financial Officer, do not expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Item 9B. Other Information. None. 94 PART III Item 10. Directors, Executive Officers and Corporate Governance Reference is made to the Registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the sections thereof captioned “Proposal I: Election of Directors - Nominees,” “Proposal I: Election of Directors - Executive Officers,” “Proposal I: Election of Directors - Code of Business Conduct” and “Security Ownership,” and the information in such sections is incorporated herein by reference. Item 11. Executive Compensation Reference is made to the Registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the sections thereof captioned “Proposal I: Election of Directors - Compensation of Directors,” “Executive Compensation” and “Compensation Committee Report,” and the information in such sections are incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Reference is made to the Registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned “Executive Compensation - Equity Compensation Plan Information,” and “Security Ownership,” and the information in such sections are incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence Reference is made to the Registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned “Certain Transactions,” and the information in such section is incorporated herein by reference. Item 14. Principal Accountant Fees and Services Reference is made to the Registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned “Audit Committee Report,” and the information in such section is incorporated herein by reference. 95 PART IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this report. (1) Financial Statements Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2006 and 2005 Consolidated Statements of Earnings for the years ended December 31, 2006, 2005 and 2004 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004 Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 Notes to Consolidated Financial Statements (2) Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation and Amortization and Notes as of December 31, 2006 Schedule IV – Mortgage Loans on Real Estate and Notes as of December 31, 2006 All other schedules are omitted because they are not applicable or because the required information is shown in the financial statements or the notes thereto. (3) Exhibits The following exhibits are filed as a part of this report. 2. Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession. 2.1 2.2 2.3 Agreement and Plan of Merger, dated January 14, 2005, among National Retail Properties, Inc., NAPE Acquisition, Inc., National Properties Corporation and Raymond Di Paglia (filed as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated January 19, 2005, and incorporated herein by reference). Real Estate Purchase and Sale Agreement, dated November 28, 2005, between the Company and SSP Partners, as amended (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated December 21, 2005, and incorporated herein by reference). Real Estate Purchase and Sale Agreement, dated December 1, 2005, between the Company and SSP Partners, as amended (filed as Exhibit 2.2 to the Registrant’s Current Report on Form 8-K dated December 21, 2005, and incorporated herein by reference). 96 2.4 2.5 2.6 2.7 2.8 2.9 Real Estate Purchase Contract dated February 9, 2006, among CNLR DC Acquisitions I, LLC, Brookfield Financial Properties, L.P. and the Registrant (filed as Exhibit 10.10 to the Registrant’s Form 10-K filed with Securities and Exchange Commission on February 27, 2006, and incorporated herein by reference). Amendment to Real Estate Purchase Contract, dated February 14, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed as Exhibit 10.11 to the Registrant’s Form 10-K filed with the Securities and Exchange Commission on February 27, 2006, and incorporated herein by reference). Second Amendment to Real Estate Purchase Contract, dated February 15, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed as Exhibit 10.12 to the Registrant’s Form 10-K filed with the Securities and Exchange Commission on February 27, 2006, and incorporated herein by reference). Third Amendment to Real Estate Purchase Contract, dated April 16, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed as Exhibit 2.4 to the Registrant’s Current Report on Form 8-K dated May 16, 2006, and incorporated herein by reference). Fourth Amendment to Real Estate Purchase Contract, dated May 10, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed as Exhibit 2.5 to the Registrant’s Current Report on Form 8-K dated May 16, 2006, and incorporated herein by reference). Fifth Amendment to Real Estate Purchase Contract, dated May 12, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed as Exhibit 2.6 to the Registrant’s Current Report on Form 8-K dated May 16, 2006, and incorporated herein by reference). 3. Articles of Incorporation and By-laws 3.1 3.2 3.3 First Amended and Restated Articles of Incorporation of the Registrant, as amended (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated May 1, 2006, and incorporated herein by reference). Articles Supplementary Establishing and Fixing the Rights and Preferences of 7.375% Series C Cumulative Preferred Stock, par value $0.01 per share, dated October 11, 2006 (filed as Exhibit 3.2 to the Registrant’s Form 8-A dated October 11, 2006 and filed with the Securities and Exchange Commission on October 12, 2006, and incorporated herein by reference). Third Amended and Restated Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K dated May 1, 2006, and incorporated herein by reference). 97 4. Instruments Defining the Rights of Security Holders, Including Indentures 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 Specimen Certificate of Common Stock, par value $0.01 per share, of the Registrant (filed as Exhibit 3.4 to the Registrant’s Registration Statement No. 1-11290 on Form 8-B and incorporated herein by reference). Indenture, dated as of March 25, 1998, between the Registrant and First Union National Bank, as trustee (filed as Exhibit 4.4 to the Registrant’s Form S-3 (Registration No. 333-132095) filed with the Securities and Exchange Commission on February 28, 2006, and incorporated herein by reference). Form of Supplemental Indenture No. 1 dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference). Form of 7.125% Note due 2008 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference). Form of Supplemental Indenture No. 3 dated September 20, 2000, by and among Registrant and First Union National Bank, Trustee, relating to $20,000,000 of 8.5% Notes due 2010 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 20, 2000, and incorporated herein by reference). Form of 8.5% Notes due 2010 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated September 20, 2000, and incorporated herein by reference). Form of Supplemental Indenture No. 4 dated as of May 30, 2002, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $50,000,000 of 7.75% Notes due 2012 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 4, 2002, and incorporated herein by reference). Form of 7.75% Notes due 2012 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated June 4, 2002, and incorporated herein by reference). Form of Supplemental Indenture No. 5 dated as of June 18, 2004, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $150,000,000 of 6.25% Notes due 2014 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated June 15, 2004, and incorporated herein by reference). Form of 6.25% Notes due 2014 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 15, 2004, and incorporated herein by reference). Form of Supplemental Indenture No. 6 dated as of November 17, 2005, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to 98 4.12 4.13 4.14 4.15 4.16 $150,000,000 of 6.15% Notes due 2015 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated November 14, 2005, and incorporated herein by reference). Seventh Supplemental Indenture, dated as of September 13, 2006, between National Retail Properties, Inc. and U.S. Bank National Association (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated September 7, 2006, and incorporated herein by reference). Form of 6.15% Notes due 2015 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated November 14, 2005, and incorporated herein by reference). Form of 3.95% Convertible Senior Notes due 2026 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 7, 2006, and incorporated herein by reference). Specimen certificate representing the 7.375% Series C Cumulative Redeemable Preferred Stock, par value $.01 per share, of the Registrant (filed as Exhibit 4.4 to the Registrant’s Form 8-A dated October 11, 2006 and filed with the Securities and Exchange Commission on October 12, 2006, and incorporated herein by reference). Deposit Agreement, among the Registrant, American Stock Transfer & Trust Company, as Depositary, and the holders of depositary receipts (filed as Exhibit 4.18 to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on November 6, 2006, and incorporated herein by reference). 10. Material Contracts 10.1 10.2 10.3 10.4 2000 Performance Incentive Plan (filed as Exhibit 99 to the Registrant’s Registration Statement No. 333-64794 on Form S-8 and incorporated herein by reference). Form of Restricted Stock Agreement between the Company and the Participant of the Company (filed as Exhibit 10.2 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference). Employment Agreement dated May 16, 2006, between the Registrant and Craig Macnab (filed as Exhibit 10.3 to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on August 3, 2006, and incorporated herein by reference). Employment Agreement dated August 17, 2006, between the Registrant and Julian E. Whitehurst (filed as Exhibit 10.1 to the Registrant’s Form 8-K dated August 17, 2006, and filed with the Securities and Exchange Commission on August 22, 2006, and incorporated herein by reference). 99 10.5 10.6 10.7 10.8 Employment Agreement dated August 17, 2006, as amended, between the Registrant and Kevin B. Habicht (filed as Exhibit 10.2 to the Registrant’s Form 8-K dated August 17, 2006, and filed with the Securities and Exchange Commission on August 22, 2006, and incorporated herein by reference). Eighth Amended and Restated Line of Credit and Security Agreement, dated December 13, 2005, by and among Registrant, certain lenders and Wachovia Bank, N.A., as the Agent, relating to a $300,000,000 loan (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 15, 2005, and incorporated herein by reference). Form of Lease Agreement, between an affiliate of National Retail Properties, Inc., as landlord and SSP Partners, as tenant (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 21, 2005, and incorporated herein by reference). First Amendment to Eighth Amended and Restated Line of Credit and Security Agreement, dated February 20, 2007, by and among Registrant, certain lenders and Wachovia Bank, N.A., as the Agent, relating to a $300,000,000 loan (filed herewith). Statement of Computation of Ratios of Earnings to Fixed Charges (filed herewith). Subsidiaries of the Registrant (filed herewith). Consent of Independent Accountants 23.1 Ernst & Young LLP dated February 13, 2007 (filed herewith). 23.2 KPMG LLP dated February 16, 2007 (filed herewith). Power of Attorney (included on signature page). Section 302 Certifications 12. 21. 23. 24. 31. 31.1 31.2 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32. Section 906 Certifications 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 100 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 99. Additional Exhibits 99.1 Certification of Chief Executive Officer pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company Manual (filed herewith). 101 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 21st day of February, 2007. NATIONAL RETAIL PROPERTIES, INC. By: /s/ Craig Macnab Craig Macnab Director and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose signature appears below hereby constitutes and appoints each of Craig Macnab and Kevin B. Habicht as his attorney-in-fact and agent, with full power of substitution and resubstitution for him in any and all capacities, to sign any or all amendments to this report and to file same, with exhibits thereto and other documents in connection therewith, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that such attorney-in-fact and agent or his substitutes may do or cause to be done by virtue hereof. Signature Title Date /s/ Clifford R. Hinkle Clifford R. Hinkle Chairman of the Board of Directors /s/ G. Nicholas Beckwith III G. Nicholas Beckwith III /s/ Richard B. Jennings Richard B. Jennings /s/ Ted B. Lanier Ted B. Lanier /s/ Robert C. Legler Robert C. Legler /s/ Robert Martinez Robert Martinez /s/ Craig Macnab Craig Macnab /s/ Kevin B. Habicht Kevin B. Habicht Director Director Director Director Director Director and Chief Executive Officer Director, Chief Financial Officer (Principal Financial and Accounting Officer), Executive Vice President, Assistant Secretary and Treasurer 102 February 21, 2007 February 21, 2007 February 21, 2007 February 21, 2007 February 21, 2007 February 21, 2007 February 21, 2007 February 21, 2007 NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2006 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed Real Estate Held for Investment the Company has Invested in Under Operating Leases: Academy: Houston, TX . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . N. Richland Hills, TX . . . . . . . Houston, TX . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . Baton Rouge, LA . . . . . . . . . . San Antonio, TX . . . . . . . . . . . Beaumont, TX . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . Pasadena, TX . . . . . . . . . . . . . College Station, TX . . . . . . . . Franklin, TN . . . . . . . . . . . . . . $ — — — — — — 705,676(t) — — — — — $1,074,232 $ 699,165 1,307,655 2,098,895 795,005 1,547,501 973,123 1,423,701 2,310,845 899,768 1,407,855 1,807,096 — $ — — — — — — 2,449,261 1,627,872 2,180,574 2,230,756 2,108,278 — $— $1,074,232 $ — — — — — — — — — — — 699,165 1,307,655 2,098,895 795,005 1,547,501 973,123 1,423,701 2,310,845 899,768 1,407,855 1,807,096 — — — — — — — — — — — (c) $1,074,232 699,165 (c) 1,307,655 (c) 2,098,895 (c) 795,005 (c) 1,547,501 (c) 973,123 (c) 3,872,962 2,449,261 3,938,717 1,627,872 3,080,342 2,180,574 3,638,611 2,230,756 3,915,374 2,108,278 $ (c) (c) (c) (c) (c) (c) (c) 477,096 317,096 424,758 85,977 108,342 1994 1995 1996 1996 1996 1997 1996 1992 1976 1994 2002 1999 05/95 06/95 08/95(f) 02/96(f) 06/96(f) 08/96(f) 09/97 03/99 03/99 03/99 06/05 06/05 (c) (c) (c) (c) (c) (c) (c) 40 years 40 years 40 years 40 years 30 years Ace Hardware and Lighting: Bourbonnais, IL . . . . . . . . . . . Advanced Auto Parts: Miami, FL . . . . . . . . . . . . . . . . AJ Petroleum: Deerfield Beach, FL . . . . . . . . Lake Placid, FL . . . . . . . . . . . . Albertsons: Sonora, CA . . . . . . . . . . . . . . . American Payday Loans: Des Moines, IA . . . . . . . . . . . . AmerUs Group Warehouse: Des Moines, IA . . . . . . . . . . . . Amoco: Miami, FL . . . . . . . . . . . . . . . . Sunrise, FL . . . . . . . . . . . . . . . Amscot: Tampa, FL . . . . . . . . . . . . . . . . Orlando, FL . . . . . . . . . . . . . . . Orlando, FL . . . . . . . . . . . . . . . Orlando, FL . . . . . . . . . . . . . . . Orlando, FL . . . . . . . . . . . . . . . Clearwater, FL . . . . . . . . . . . . Applebee’s: Ballwin, MO . . . . . . . . . . . . . . Arby’s: Albuquerque, NM . . . . . . . . . . Colorado Springs, CO . . . . . . . Santa Fe, NM . . . . . . . . . . . . . Thomson, GA . . . . . . . . . . . . . Washington Courthouse, OH . . . . . . . . . Whitmore Lake, MI Ashley Furniture: — — — — — — — — — — — — — — — — — — — — — 298,192 1,329,492 — — 298,192 1,329,492 1,627,684 192,895 1997 11/98 37.4 years 867,177 — 1,035,275 — 867,177 1,035,275 1,902,452 39,901 2005 12/04(g) 40 years 2,531,533 769,522 1,292,535 273,756 — — — — 2,531,533 769,522 1,292,535 273,756 3,824,068 1,043,278 33,660 7,129 1980 1990 12/05 12/05 40 years 40 years 587,782 1,620,311 — — 587,782 1,620,311 2,208,093 129,962 1984 03/99 40 years 108,421 379,067 — — 108,421 379,067 487,488 14,610 1979 06/05 40 years 28,465 85,396 — — 28,465 85,396 113,861 13,165 1949 06/05 10 years 969,156 949,185 — — — — — — 969,156 949,185 — — 969,156 949,185 — — (i) (i) 05/03 06/03 (i) (i) 1,159,733 764,473 664,213 358,354 546,475 455,524 352,305 — 1,010,821 — — 331,614 — — — 865,674 — — 922,218 — 937,758 — — — 1,159,733 764,473 664,213 358,354 546,475 455,524 352,305 865,674 1,010,821 922,218 937,758 331,614 1,512,038 1,630,147 1,675,034 1,280,572 1,484,233 787,138 10,643 13,526 5,265 10,567 8,791 2,418 1981 2006 2006 2006 2006 1967 10/05 12/05 12/05 02/06(g) 02/06(g) 09/06(g) 40 years 40 years 40 years 40 years 40 years 40 years 1,496,173 1,403,581 — — 1,496,173 1,403,581 2,899,754 176,910 1995 12/01 40 years 442,991 205,957 450,358 267,842 156,875 170,515 507,790 533,540 341,960 503,550 545,841 468,916 — — — — — — — — — — — — 442,991 205,957 450,358 267,842 156,875 170,515 507,790 533,540 341,960 503,550 545,841 468,916 950,781 739,497 792,318 771,392 702,716 639,431 64,003 67,248 43,101 63,468 68,798 59,103 1993 1998 1992 1997 1998 1993 12/01 12/01 12/01 12/01 12/01 12/01 09/97 03/05 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years Altamonte Springs, FL . . . . . . Louisville, KY . . . . . . . . . . . . — — 315,000 — — See accompanying report of independent registered public accounting firm. 4,877,225 4,989,452 1,171,151 223,486 2,906,409 1,666,700 5,192,225 4,989,452 2,906,409 1,666,700 8,098,634 6,656,152 — 1997 2005 F-1 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed — — — — — — — — — — — — — — — — — — — — — — 830,689 2,611,867 3,442,556 1,678,794 2,301,909 3,980,703 686,159 290,136 1,476,407 1,527,150 3,003,557 3,244,785 2,722,087 5,966,872 3,307,562 2,396,024 5,703,586 457,308 833,751 673,890 3,616,457 (c) 3,616,457 (c) 2,917,219 2,260,663 5,177,882 1,412,614 3,223,467 4,636,081 497,179 1,625,702 2,122,881 1,573,875 2,241,639 3,815,514 2,831,370 4,318,554 7,149,924 617,287 775,647 387,798 163,453 877,206 1996 1996 1995 1994 1995 1996 1995 1996 1997 1997 1995 06/96 12/01 40 years 40 years 08/94(f) 40 years 09/94 40 years 10/94(f) 40 years 05/95(f) (c) 01/96 05/97 06/97 09/97 11/98 40 years 40 years 40 years 40 years 40 years 1,257,729 2,622,952 — — 1,257,729 2,622,952 3,880,681 79,235 1980 10/05 40 years Sarasota, FL . . . . . . . . . . . . . . . . . 1,371,327(t) 1,077,802 1,795,174 — — 1,077,802 1,795,174 2,872,976 137,028 1996 09/97 40 years Beautiful America Dry Cleaners: Orlando, FL . . . . . . . . . . . . . . . . . 70,882(u) 40,200 110,531 — — 40,200 110,531 150,731 7,944 2001 02/04 40 years Babies “R” Us: Arlington, TX . . . . . . . . . . . . . . . . Independence, MO . . . . . . . . . . . . Barnes & Noble: Brandon, FL . . . . . . . . . . . . . . . . . Denver, CO . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . — — — — — 830,689 2,611,867 1,678,794 2,301,909 1,476,407 1,527,150 3,244,785 2,722,087 3,307,562 2,396,024 Plantation, FL . . . . . . . . . . . . . . . . 4,885,291(p) 3,616,357 — Freehold, NJ (r) . . . . . . . . . . . . . . Dayton, OH . . . . . . . . . . . . . . . . . Redding, CA . . . . . . . . . . . . . . . . — — — 2,917,219 2,260,663 1,412,614 3,223,467 497,179 1,625,702 Memphis, TN . . . . . . . . . . . . . . . . 1,023,924(t) 1,573,875 2,241,639 2,831,370 4,318,554 Marlton, NJ . . . . . . . . . . . . . . . . . Bassett Furniture: Fairview Heights, IL . . . . . . . . . . — — Beall’s: Bed, Bath & Beyond: Richmond, VA . . . . . . . . . . . . . . . Glendale, AZ . . . . . . . . . . . . . . . . Midland, MI . . . . . . . . . . . . . . . . . 2,800,106(p) — — Bedford Furniture: Everett, PA . . . . . . . . . . . . . . . . . . Beneficial: Eden Prairie, MN . . . . . . . . . . . . . Bennigan’s: Milford, CT (r) . . . . . . . . . . . . . . . Altamonte Springs, FL . . . . . . . . . Schaumburg, IL . . . . . . . . . . . . . . Wichita Falls, TX . . . . . . . . . . . . . Best Buy: — — — — — — 921,200 697,298 1,088,282 924,425 2,064,964 1,311,190 818,611 1,107,418 Brandon, FL . . . . . . . . . . . . . . . . . Evanston, IL . . . . . . . . . . . . . . . . . Cuyahoga Falls, OH . . . . . . . . . . . Rockville, MD . . . . . . . . . . . . . . . Fairfax, VA . . . . . . . . . . . . . . . . . St. Petersburg, FL . . . . . . . . . . . . Pittsburgh, PA . . . . . . . . . . . . . . . Denver, CO . . . . . . . . . . . . . . . . . — — — — — 4,468,254(p) — — 2,985,156 2,772,137 — 1,850,996 3,708,980 2,359,377 6,233,342 3,418,783 3,052,477 3,218,018 4,031,744 2,610,980 2,330,847 2,292,932 8,881,890 4,372,684 Billy Bob’s: 1,184,144 2,842,759 1,082,092 231,356 — — 2,758,452 — — 2,702,271 — — 1,184,144 2,842,759 1,082,092 2,758,452 231,356 2,702,271 4,026,903 3,840,544 2,933,627 325,732 514,336 8,873 1997 1999 2006 06/98 12/98(g) 07/03 40 years 40 years 40 years 226,366 1,159,833 7,830 — 226,366 817,667 1,044,033 127,110 1998 11/98 40 years 75,736 210,628 94,277 — 75,736 304,905 380,641 34,848 1997 12/01 40 years — — — — — — — — — — — — — — — — — — — — — — — — 921,200 697,298 1,088,282 924,425 2,064,964 1,311,190 818,611 1,107,418 1,618,498 2,012,707 3,376,154 1,926,029 87,888 116,516 165,265 139,581 2,985,156 2,772,137 (c) 1,850,996 3,708,980 2,359,377 6,233,342 3,418,783 3,052,477 3,218,018 4,031,744 2,610,980 2,330,847 2,292,932 8,881,890 4,372,684 5,757,293 1,850,996 6,068,357 9,652,125 6,270,495 6,642,724 4,623,779 13,254,574 684,371 (c) 562,809 808,400 754,223 341,914 489,636 605,798 1985 1979 1998 1982 1996 1994 1970 1995 1995 1997 1997 1991 12/01 12/01 12/01 12/01 02/97 02/97 06/97 07/97 08/97 09/97 06/98 06/01 40 years 40 years 40 years 40 years 40 years (c) 40 years 40 years 40 years 35 years 40 years 40 years Gresham, OR . . . . . . . . . . . . . . . . — 817,311 108,294 — — 817,311 108,294 925,605 13,650 1993 12/01 40 years BJ’s Wholesale Club: Orlando, FL . . . . . . . . . . . . . . . . . 5,487,413(u) 3,137,500 8,626,657 — — 3,137,500 8,626,657 11,764,157 620,042 2001 02/04 40 years Blockbuster Video: Conyers, GA . . . . . . . . . . . . . . . . Alice, TX . . . . . . . . . . . . . . . . . . . Gainesville, GA . . . . . . . . . . . . . . Glasgow, KY . . . . . . . . . . . . . . . . Kingsville, TX . . . . . . . . . . . . . . . Mobile, AL . . . . . . . . . . . . . . . . . . Mobile, AL . . . . . . . . . . . . . . . . . . BMW: — — — — — — — 320,029 556,282 318,285 294,882 302,859 498,849 491,453 843,121 578,268 611,570 560,904 457,695 498,488 562,498 — — — — — — — — — — — — — — 320,029 556,282 318,285 294,882 302,859 498,849 491,453 843,121 578,268 611,570 560,904 457,695 498,488 562,498 876,311 896,553 906,452 863,763 956,544 989,941 1,405,619 132,696 72,886 77,083 70,697 57,687 62,830 70,898 1997 1995 1997 1997 1995 1997 1997 06/97 12/01 12/01 12/01 12/01 12/01 12/01 40 years 40 years 40 years 40 years 40 years 40 years 40 years Duluth, GA . . . . . . . . . . . . . . . . . . — — See accompanying report of independent registered public accounting firm. 4,433,613 4,080,186 4,034,588 4,080,186 8,114,774 514,273 — 1984 12/01 40 years F-2 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed Borders Books & Music: Wilmington, DE . . . . . . . . . Richmond, VA . . . . . . . . . . Ft. Lauderdale, FL . . . . . . . Bangor, ME . . . . . . . . . . . . Altamonte Springs, FL . . . . — — 4,706,561(p) — — 3,030,764 6,061,538 2,177,310 2,599,587 3,164,984 3,319,234 1,546,915 2,486,761 — 1,947,198 — — — — — — — — — — — — — — — — — — — — — — — — 2,994,400 6,061,538 2,177,310 2,599,587 3,164,984 3,319,234 1,546,915 2,486,761 (c) 1,947,198 9,055,938 4,776,897 6,484,218 4,033,676 1,947,198 1,822,535 751,353 461,005 654,502 (c) 619,778 1,125,347 601,800 835,669 562,384 562,446 1,115,457 707,242 893,485 389,065 297,567 377,244 467,592 872,736 1,327,020 2,018,832 990,865 1,133,236 939,628 1,030,038 1,988,193 89,142 114,860 50,156 43,035 50,347 58,936 112,213 1994 1995 1995 1996 1997 1997 1996 1996 1995 1995 1997 1995 12/94 06/95 02/96 06/96 09/97 12/01 12/01 12/01 12/01 12/01 12/01 12/01 40 years 40 years 33 years 40 years (c) 40 years 40 years 40 years 40 years 40 years 40 years 40 years 619,778 707,242 1,125,347 1,036,952 460,521 651,108 556,201 467,592 1,115,457 1,014,184 601,800 835,669 562,384 562,446 162,538 492,007 — — 162,538 492,007 654,545 62,013 1996 12/01 40 years 662,345 609,787 — — 662,345 609,787 1,272,132 76,858 1997 12/01 40 years 439,076 1,363,447 1,369,836 1,018,659 1,007,432 1,205,512 729,291 681,386 644,148 536,023 — — — — — — — — — — 439,076 1,363,447 1,369,836 1,018,659 1,007,432 1,205,512 1,802,523 2,388,495 2,212,944 171,851 128,394 151,945 729,291 681,386 644,148 536,023 1,373,439 1,217,409 49,653 82,636 2000 1994 1995 1984 1988 12/01 12/01 12/01 06/05 06/05 40 years 40 years 40 years 20 years 10 years 10,197,135 — 8,128,062 — 10,197,135 8,128,062 18,325,197 431,803 2004 04/04(f) 40 years 43,043 112,764 — — 43,043 112,764 155,807 14,213 1997 12/01 40 years 1,112,876 — 1,418,552 — 1,112,876 1,418,552 2,531,428 51,718 2005 04/04(f) 40 years 3,032,965 1,641,820 1,760,020 1,724,220 — — — — 3,032,965 1,641,820 1,760,020 1,724,220 4,674,785 3,484,240 206,937 217,323 1999 2000 12/01 12/01 40 years 40 years 286,834 423,837 — — 286,834 423,837 710,671 27,676 1979 05/04 40 years 256,568 — — — 256,568 (c) 256,568 (c) 1988 07/92 (c) 421,897 1,915,483 — — 421,897 1,915,483 2,337,380 49,882 1995 12/05 40 years 626,897 1,887,732 516,118 1,996,627 800,329 1,717,221 — — — — — — 626,897 1,887,732 516,118 1,996,627 800,329 1,717,221 2,514,629 2,512,745 2,517,550 60,958 64,474 44,719 2005 2005 2004 09/05 09/05 12/05 40 years 40 years 40 years 639,584 1,015,173 — — 639,584 1,015,173 1,654,757 127,954 1996 12/01 40 years 1,418,158 1,140,080 — — 1,418,158 1,044,075 2,462,233 140,174 1999 12/01 40 years 2,548,040 3,879,911 1,740,807 5,406,298 2,271,634 3,404,843 1,556,732 2,013,650 2,530,892 2,920,575 — — — — — — — — — — 2,548,040 3,879,911 1,740,807 5,406,298 2,271,634 3,404,843 6,427,951 7,147,105 5,676,477 198,037 197,104 663,235 1,556,732 2,013,650 2,530,892 2,920,575 3,570,382 5,451,467 253,804 368,114 2004 2005 1998 2000 2000 12/04 06/05(g) 12/98(f) 40 years 40 years 40 years 12/01 12/01 40 years 40 years Boston Market: Burton, MI . . . . . . . . . . . . . Geneva, IL . . . . . . . . . . . . . North Olmsted, OH . . . . . . Novi, MI . . . . . . . . . . . . . . . Orland Park, IL . . . . . . . . . Warren, OH . . . . . . . . . . . . Wheaton, IL . . . . . . . . . . . . Buffalo Wild Wings: Michigan City, IN . . . . . . . Burger King: Colonial Heights, VA . . . . Carino’s: Beaumont, TX . . . . . . . . . . Lewisville, TX . . . . . . . . . . Lubbock, TX . . . . . . . . . . . Carl’s Jr: Chandler, AZ . . . . . . . . . . . Tucson, AZ . . . . . . . . . . . . CarMax: Albuquerque, NM . . . . . . . Cash Advance: Mesa,AZ . . . . . . . . . . . . . . Certified Auto Sales: Albuquerque, NM . . . . . . . Champps: Alpharetta, GA . . . . . . . . . . Irving, TX . . . . . . . . . . . . . Charhut: Sunrise, FL . . . . . . . . . . . . . Checkers: Orlando, FL . . . . . . . . . . . . Children’s Pediatric Center: Houston, TX . . . . . . . . . . . . Chili’s: Camden, SC . . . . . . . . . . . . Milledgeville, GA . . . . . . . Sumter, SC . . . . . . . . . . . . . Chili Verde Restaurant: Indianapolis, IN . . . . . . . . . China Star: Montgomery, AL . . . . . . . . Circuit City: Gastonia, NC . . . . . . . . . . . St. Peters, MO . . . . . . . . . . East Palo Alto, CA . . . . . . . Claim Jumper: Roseville, CA . . . . . . . . . . . Tempe, AZ . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — See accompanying report of independent registered public accounting firm. F-3 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed Colonial Bank: Tampa, FL . . . . . . . . . . . . . . CompUSA: Baton Rouge, LA (r) . . . . . . Roseville, MN . . . . . . . . . . . CORA Rehabilitation Clinics: — — — 604,683 884,940 — — 604,683 884,940 1,489,623 29,580 1995 12/95 40 years 609,069 913,603 1,599,311 1,419,396 — — — — 609,069 913,603 1,522,672 251,302 1,599,311 1,419,396 3,018,707 36,963 1995 1994 12/95 12/05 40 years 40 years Orlando, FL . . . . . . . . . . . . . 141,763(u) 80,400 221,063 — — 80,400 221,063 301,463 15,888 2001 02/04 40 years Corpus Christi Flea Market: Corpus Christi, TX . . . . . . . CVS: San Antonio, TX . . . . . . . . . Amarillo, TX . . . . . . . . . . . . Lafayette, LA . . . . . . . . . . . Midwest City, OK . . . . . . . . Irving, TX . . . . . . . . . . . . . . Pantego, TX . . . . . . . . . . . . . Ellenwood, GA . . . . . . . . . . Flower Mound, TX . . . . . . . Ft. Worth, TX . . . . . . . . . . . Arlington, TX . . . . . . . . . . . Leavenworth, KS . . . . . . . . . Lewisville, TX . . . . . . . . . . . Forest Hill, TX . . . . . . . . . . Del City, OK . . . . . . . . . . . . Garland, TX . . . . . . . . . . . . . Garland, TX . . . . . . . . . . . . . Oklahoma City, OK . . . . . . Dallas, TX . . . . . . . . . . . . . . Gladstone, MO . . . . . . . . . . Fridley, MN . . . . . . . . . . . . . DD’s Discounts: Moreno Valley, CA . . . . . . . Dave & Buster’s: Hilliard, OH . . . . . . . . . . . . . Denny’s: Columbus, TX . . . . . . . . . . . Alexandria, VA . . . . . . . . . . Amarillo, TX . . . . . . . . . . . . Arlington Heights, IL . . . . . Austintown, OH . . . . . . . . . Boardman Township, OH . . Campbell, CA . . . . . . . . . . . Carson, CA . . . . . . . . . . . . . Chelais, WA . . . . . . . . . . . . Chubbock, ID . . . . . . . . . . . Clackamus, OR . . . . . . . . . . Collinsville, IL . . . . . . . . . . Colorado Springs, CO . . . . . Colorado Springs, CO . . . . . Corpus Christi, TX . . . . . . . Dallas, TX . . . . . . . . . . . . . . Enfield ,CT . . . . . . . . . . . . . Fairfax, VA . . . . . . . . . . . . . Federal Way, WA . . . . . . . . Florissant, MO . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . Hermitage, PA . . . . . . . . . . . Hialeah, FL . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 223,998 2,158,955 — — 223,998 2,158,955 2,382,953 420,546 1983 03/99 40 years 440,985 650,864 967,528 — — — 673,369 1,103,351 — — — — — — 394,670(t) 398,757(t) 484,462(t) — — — — — — — — — 136,500 — 1,000,222 1,016,062 616,289 932,233 558,657 2,078,542 726,438 789,237 692,165 1,387,362 1,476,838 522,461 1,581,480 2,617,656 1,851,374 939,073 — — 1,448,911 — 921,173 — 881,448 — — — — 1,396,508 — 1,330,830 — 1,335,426 — 1,174,549 — — 1,400,278 — 1,418,531 — 1,471,105 — 2,570,569 — 1,739,568 — 1,637,329 — — — — — — — — — — — — — — — — — — — — — 440,985 650,864 967,528 (c) (c) (c) 440,985 650,864 967,528 (c) (c) (c) 673,369 1,103,351 1,776,720 298,602 1,000,222 1,016,062 616,289 932,233 558,657 2,078,542 726,438 789,237 692,165 1,387,362 1,476,838 522,461 1,581,480 2,617,656 1,851,374 939,073 (c) 1,000,222 2,464,973 1,537,462 1,813,681 558,657 3,475,050 2,057,268 2,124,663 1,866,714 (c) 1,387,362 2,877,116 1,940,992 3,052,585 5,188,225 3,590,942 2,576,402 1,448,911 921,173 881,448 (c) 1,396,508 1,330,830 1,335,426 1,174,549 1,400,278 1,418,531 1,471,105 2,570,569 1,739,568 1,637,329 (c) 346,626 67,169 64,272 (c) 292,393 284,188 276,823 245,921 (c) 284,432 285,183 292,688 206,181 277,244 210,422 1993 1994 1995 1996 1996 1997 1996 1996 1996 1998 1998 1998 1998 1998 1998 1998 1999 2003 2000 1983 12/93 12/94 01/96 03/96 12/96 06/97 09/97 09/97 09/97 11/97(g) 11/97(g) 04/98(g) 04/98(g) 05/98 06/98(g) 06/98(g) 08/98(g) 06/99 12/99(g) 12/01(v) (c) (c) (c) 40 years (c) 40 years 40 years 40 years (c) 40 years 40 years 40 years 40 years (c) 40 years 40 years 40 years 40 years 40 years 40 years 516,154 1,123,471 712,917 — 516,154 1,836,388 2,352,542 260,710 1983 03/99 40 years 934,210 4,689,004 — — 934,210 4,689,004 5,623,214 14,653 1998 11/06 40 years 428,429 603,730 589,996 469,593 466,124 497,083 459,751 1,245,768 414,994 350,461 468,281 675,704 321,006 585,425 344,821 497,170 684,235 768,438 542,951 442,700 392,306 320,918 816,644 195,658 632,121 227,673 397,387 257,518 238,205 157,375 287,174 394,243 407,268 282,912 376,744 390,275 775,618 149,862 228,981 682,921 192,650 237,959 314,262 419,980 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 428,429 603,730 589,996 469,593 466,124 497,083 459,751 1,245,768 414,994 350,461 468,281 675,704 321,006 585,425 344,821 497,170 684,235 768,438 542,951 442,700 392,306 320,918 816,644 195,658 632,121 227,673 397,387 257,518 238,205 157,375 287,174 394,243 407,268 282,912 376,744 390,275 775,618 149,862 228,981 682,921 192,650 237,959 314,262 419,980 1,245,073 799,388 1,222,117 697,266 863,511 754,601 697,956 1,403,143 702,168 744,704 875,549 958,616 697,750 975,700 1,120,439 647,032 913,216 1,451,359 735,601 680,659 706,568 740,898 102,931 2,853 9,218 3,320 5,795 3,755 3,474 2,295 4,188 5,749 5,939 4,126 5,692 5,494 11,311 2,186 3,339 9,959 2,809 3,470 4,583 6,125 1997 1981 1982 1977 1980 1977 1976 1975 1977 1983 1993 1979 1984 1978 1980 1979 1976 1979 1977 1977 1974 1980 12/01 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 40 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years — 1978 See accompanying report of independent registered public accounting firm. 432,479 432,479 175,245 175,245 607,724 2,556 — — F-4 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Encum- brances (k) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Land 503,797 325,937 310,383 358,295 222,629 231,236 406,544 423,516 527,596 671,665 702,789 630,007 368,152 496,963 855,381 356,591 450,257 500,352 545,175 496,452 370,120 436,153 764,431 519,038 475,420 1,094,361 515,866 232,670 401,401 519,641 315,186 580,288 324,751 922,401 619,003 883,538 383,194 514,340 347,749 511,345 589,689 766,627 482,909 511,175 557,465 773,096 379,327 76,507 179,699 271,268 813,167 259,581 151,216 729,175 161,978 129,840 305,344 314,303 238,145 393,590 161,462 216,015 301,725 482,297 279,400 126,149 330,496 265,824 334,027 200,559 313,897 290,221 160,924 176,136 492,602 476,967 1,920,032 2,680,532 3,526,868 3,916,889 239,014 241,650 242,896 626,170 511,624 528,692 405,113 463,582 19,625 71,570 417,603 445,593 344,022 534,243 413,438 574,666 474,267 — — — — 995,209 998,900 — 568,606 1,326,748 1,088,896 1,707,448 Houston, TX . . . . . . . . . . . . . Indianapolis, IN . . . . . . . . . . Indianapolis, IN . . . . . . . . . . Indianapolis, IN . . . . . . . . . . Indianapolis, IN . . . . . . . . . . Indianapolis, IN . . . . . . . . . . Kernersville, NC . . . . . . . . . Lafayette, IN . . . . . . . . . . . . Laurel, MD . . . . . . . . . . . . . . Little Rock, AR . . . . . . . . . . Little Rock, AR . . . . . . . . . . Maplewood, MN . . . . . . . . . Merrivile, IN . . . . . . . . . . . . Middleburg Heights, OH . . . N. Miami, FL . . . . . . . . . . . . Nampa, ID . . . . . . . . . . . . . . North Palm Beach, FL . . . . . North Richland Hills, TX . . . Novi, MI . . . . . . . . . . . . . . . . Omaha, NE . . . . . . . . . . . . . . Parma, OH . . . . . . . . . . . . . . Pompano Beach, FL . . . . . . . Portland, OR . . . . . . . . . . . . Provo, UT . . . . . . . . . . . . . . . Pueblo, CO . . . . . . . . . . . . . . Raleigh, NC . . . . . . . . . . . . . Santa Ana, CA . . . . . . . . . . . Sherman, TX . . . . . . . . . . . . Southfield, MI . . . . . . . . . . . St. Louis, MO . . . . . . . . . . . . Sugarland, TX . . . . . . . . . . . Tacoma, WA . . . . . . . . . . . . Tulsa, OK . . . . . . . . . . . . . . . Tuscon, AZ . . . . . . . . . . . . . W. Palm Beach, FL . . . . . . . Weathersfield, CT . . . . . . . . Worcester, MA . . . . . . . . . . . Boise, ID . . . . . . . . . . . . . . . Dick’s Sporting Goods: Taylor, MI . . . . . . . . . . . . . . White Marsh, MD . . . . . . . . Dollar Tree: Garland, TX . . . . . . . . . . . . . Copperas Cove, TX . . . . . . . Moreno Valley, CA . . . . . . . Donato’s: Medina, OH . . . . . . . . . . . . . Dr. Clean Dry Cleaners: Monticello, NY . . . . . . . . . . Eckerd: Millville, NJ . . . . . . . . . . . . . Atlanta, GA . . . . . . . . . . . . . Mantua, NJ . . . . . . . . . . . . . . Glassboro, NJ . . . . . . . . . . . . Douglasville, GA . . . . . . . . . Conyers, GA . . . . . . . . . . . . Chattanooga, TN . . . . . . . . . Augusta, GA . . . . . . . . . . . . Riverdale, GA . . . . . . . . . . . Warner Robins, GA . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 194,167 69,277 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Building, Improve- ments and Leasehold Interests 347,749 511,345 589,689 Total 851,546 837,282 900,072 5,071 7,455 7,042 766,627 1,124,922 11,180 482,909 511,175 557,465 705,538 742,411 964,009 7,457 8,600 8,130 773,096 1,196,612 11,274 379,327 76,507 179,699 271,268 906,923 748,172 882,488 901,275 5,532 1,116 2,621 3,956 813,167 1,181,319 11,859 259,581 756,544 151,216 1,006,597 729,175 1,085,766 161,978 129,840 305,344 314,303 238,145 393,590 161,462 216,015 301,725 482,297 279,400 126,149 330,496 265,824 334,027 200,559 313,897 290,221 160,924 176,136 492,602 476,967 612,235 630,192 850,519 810,755 608,265 829,743 925,893 735,053 777,145 1,576,658 795,266 358,819 731,897 785,465 649,213 780,847 638,648 1,212,622 779,927 1,059,674 875,796 991,307 3,786 2,205 2,362 10,634 1,894 4,453 4,584 3,473 5,740 2,355 3,150 4,400 7,034 4,075 1,840 4,820 3,877 4,871 2,925 4,232 4,578 2,347 2,569 7,184 991 Land 503,797 325,937 310,383 358,295 222,629 231,236 406,544 423,516 527,596 671,665 702,789 630,007 368,152 496,963 855,381 356,591 450,257 500,352 545,175 496,452 370,120 436,153 764,431 519,038 475,420 1,094,361 515,866 232,670 401,401 519,641 315,186 580,288 324,751 922,401 619,003 883,538 383,194 514,340 1,920,032 2,680,532 3,526,868 3,916,889 5,446,900 6,597,420 907,789 1,008,178 239,014 241,650 242,896 626,170 705,791 597,969 865,184 947,441 840,865 86,098 126,962 84,893 1976 1978 1981 1978 1979 1974 2000 1978 1976 1979 1979 1983 1976 1976 1977 1979 1977 1970 1979 1994 1977 1976 1977 1978 1980 1984 1977 1969 1980 1973 1997 1984 1978 1979 1984 1978 1978 1983 1996 1996 1994 1972 1983 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 09/06 12/06 08/96 08/96 02/94 11/98 03/99 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 40 years 40 years 40 years 40 years 40 years 405,113 463,582 868,695 58,430 1996 12/01 40 years 19,625 71,570 91,195 3,206 1996 03/05 40 years 417,603 445,593 344,022 534,243 413,438 574,666 457,659 (c) (c) (c) 417,603 445,593 344,022 (c) 995,209 534,243 1,408,647 998,900 (c) 1,573,566 457,659 568,606 1,326,748 1,895,354 1,088,896 1,707,448 2,796,344 (c) (c) (c) (c) 271,747 238,279 (c) 299,900 385,954 1994 1994 1994 1994 1996 1997 1997 1997 1997 03/94 03/94 06/94 12/94 01/96 06/97 09/97 12/97 12/97 03/98(g) (c) (c) (c) (c) 40 years 40 years (c) 40 years 40 years 40 years — 1999 See accompanying report of independent registered public accounting firm. — 1,227,330 1,227,330 1,934,818 244,188 707,488 707,488 — F-5 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed Vineland, NJ . . . . . . . . . . . Falls Church, VA . . . . . . . . West Mifflin, PA . . . . . . . . Norfolk, VA . . . . . . . . . . . . Thorndale, PA . . . . . . . . . . El Meskal: Hammond, LA . . . . . . . . . . El Paso Barbeque: Tuscon, AZ . . . . . . . . . . . . Enterprise Rent-A-Car: Wilmington, NC . . . . . . . . . Family Dollar: Cohoes, NY . . . . . . . . . . . . Hudson Falls, NY . . . . . . . Monticello, NY . . . . . . . . . Fantastic Sams: Eden Prairie, MN . . . . . . . . Fazoli’s Restaurant: Bay City, MI . . . . . . . . . . . Food 4 Less: — — — — — — — — — — — — — 2,068,089 3,127,139 — — — 2,424,664 1,401,632 2,043,862 2,742,194 1,796,508 2,260,618 2,472,039 — — — — — — — — 2,068,089 (c) 2,068,089 (c) 3,127,139 2,412,036(q) 5,539,175 1,401,632 2,043,862 3,445,494 2,742,194 1,796,508 4,538,702 2,260,618 2,472,039 4,732,657 286,429 249,095 218,949 301,279 1999 2002 1999 2001 2001 09/98 10/01 02/02 02/02 02/02 (c) 40 years 40 years 40 years 40 years 247,600 813,514 61,688 — 247,600 627,002 874,602 93,429 1997 12/01 40 years 993,637 — — — 993,637 — 993,637 — (e) 12/06 (e) 218,126 327,329 — — 218,126 327,329 545,455 41,257 1981 12/01 40 years 95,644 51,055 96,445 515,502 379,789 351,721 — — — — — — 95,644 51,055 96,445 515,502 379,789 351,721 611,146 430,844 448,166 29,534 21,759 15,754 1994 1993 1996 09/04 09/04 03/05 40 years 40 years 40 years 64,916 180,538 80,809 — 64,916 261,347 326,263 29,870 1997 12/01 40 years 647,055 633,899 — — 647,055 633,899 1,280,954 79,897 1997 12/01 40 years Chula Vista, CA . . . . . . . . . — 3,568,862 — — — 3,568,862 (c) 3,568,862 (c) 1995 11/98 (c) Fresh Market: Gainesville, FL . . . . . . . . . . Furr’s Family Dining: Las Cruces, NM . . . . . . . . . Tuscon, AZ . . . . . . . . . . . . Gander Mountain: — — — 317,386 1,248,404 — — 317,386 1,248,404 1,565,790 100,132 1982 03/99 40 years 947,476 1,167,503 — 2,181,954 — — — 947,476 1,167,503 2,181,954 — 3,129,430 1,167,503 15,911 — 2006 (e) 01/06 07/06 40 years (e) Amarillo, TX . . . . . . . . . . . — 1,513,714 5,781,294 — — 1,513,714 5,781,294 7,295,008 307,131 2004 11/04 40 years Gate Petroleum: Concord, NC . . . . . . . . . . . Rocky Mountain, NC . . . . . — — 852,225 258,764 1,200,862 1,164,438 — — — — 852,225 258,764 1,200,862 1,164,438 2,053,087 1,423,202 46,283 44,879 2001 2000 06/05 06/05 40 years 40 years GCS Wireless: Orlando, FL . . . . . . . . . . . . 64,975(u) 36,850 101,320 — — 36,850 101,320 138,170 7,282 2001 02/04 40 years Gen-X Clothing: Federal Way, WA . . . . . . . — 2,037,392 1,661,577 257,414 — 2,037,392 1,918,991 3,956,383 375,463 1998 06/98 40 years Golden Corral: Abbeville, LA . . . . . . . . . . Lake Placid, FL . . . . . . . . . Tampa, FL . . . . . . . . . . . . . Dallas, TX . . . . . . . . . . . . . Temple Terrace, FL . . . . . . Goodyear Truck & Tire: Wichita, KS . . . . . . . . . . . . GymKix: Copperas Cove, TX . . . . . . H&R Block: Swansea, IL . . . . . . . . . . . . Hancock Fabrics: Arlington, TX . . . . . . . . . . . Hastings: Nacogdoches, TX . . . . . . . . Haverty’s: — — — — — — — — — — 98,577 115,113 1,329,793 362,416 305,074 1,390,502 1,138,129 1,024,747 1,187,614 1,339,000 — 43,797 — — — — — — — — 98,577 115,113 1,329,793 362,416 348,871 1,390,502 460,993 463,984 2,720,295 1,138,129 1,024,747 2,162,876 1,187,614 1,339,000 2,526,614 230,393 199,859 175,261 129,161 168,770 1985 1985 1998 1994 1997 04/85 05/85 12/01 12/01 12/01 35 years 35 years 40 years 40 years 40 years 213,640 686,700 — — 213,640 686,700 900,340 52,933 1989 06/05 20 years 203,908 431,715 171,477 — 203,908 603,192 807,100 108,067 1972 11/98 40 years 45,842 132,440 69,029 — 45,842 201,469 247,311 24,238 1997 12/01 40 years 317,838 1,680,428 242,483 — 317,838 1,922,911 2,240,749 417,570 1996 06/96 38 years 397,074 1,257,402 — — 397,074 1,257,402 1,654,476 255,409 1997 11/98 40 years Clearwater, FL . . . . . . . . . . — 1,184,438 2,526,207 44,005 — 1,184,438 2,570,212 3,754,650 866,385 1992 Orlando, FL . . . . . . . . . . . . — 1992 See accompanying report of independent registered public accounting firm. 3,181,543 2,184,721 2,361,146 750,321 176,425 820,397 820,397 — 05/93 05/93 40 years 40 years F-6 Pensacola, FL . . . . . . . . . . . . Bowie, MD . . . . . . . . . . . . . . 505,603 — 633,125 1,965,508 1,595,405 4,221,074 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed — — — — — 175,183 1,038,492 469,781 631,712 813,073 931,931 282,200 245,462 603,190 592,730 778,874 520,623 732,477 1,149,251 1,186,705 933,314 261,238 — — — — — — — — — — — — — — 603,111 1,965,508 1,595,405 4,221,074 2,198,516 6,186,582 419,237 817,719 1994 1997 06/96 12/97 40 years 38.5 years 175,183 1,038,492 1,213,675 1,082 1997 12/06 40 years 469,781 631,712 813,073 931,931 1,282,854 1,563,643 165,155 189,251 543,438 245,462 603,190 592,730 778,874 520,623 732,477 1,149,251 1,186,705 933,314 1,064,061 977,939 1,752,441 1,779,435 1,712,188 65,620 92,323 29,928 30,904 24,305 1968 1968 1998 1998 1999 1998 1997 11/98 11/98 12/01 12/01 12/05 12/05 12/05 40 years 40 years 40 years 40 years 40 years 40 years 40 years Sunrise, FL . . . . . . . . . . . . . . — 5,148,657 — — — 5,148,657 — 5,148,657 — (i) 05/03 (i) 977,839 1,414,261 937,301 — 977,839 2,351,562 3,329,401 291,972 1995 12/95 40 years Healthy Pet: Suwannee, GA . . . . . . . . . . . Heilig-Meyers: Baltimore, MD . . . . . . . . . . . Glen Burnie, MD . . . . . . . . . Hollywood Video: Cincinnati, OH . . . . . . . . . . . Clifton, CO . . . . . . . . . . . . . . Lafayette, LA . . . . . . . . . . . . Montgomery, AL . . . . . . . . . Ridgeland, MS . . . . . . . . . . . Home Depot: — — — — — — — — HomeGoods: Fairfax, VA . . . . . . . . . . . . . Hooters: Tampa, FL . . . . . . . . . . . . . . Hope Rehab: Houston, TX . . . . . . . . . . . . . Horizon Travel Plaza: Midland City, AL . . . . . . . . . Humana: Sunrise, FL . . . . . . . . . . . . . . Hy-Vee: — — — — — St. Joseph, MO . . . . . . . . . . . — 1,579,583 2,849,246 International House of Pancakes: Sunset Hills, MO . . . . . . . . . Matthews, NC . . . . . . . . . . . Midwest City, OK . . . . . . . . Ankeny, IA . . . . . . . . . . . . . . Jack-in-the-Box: — — — — 271,853 380,043 407,268 692,956 — — — 515,035 Plano, TX . . . . . . . . . . . . . . . — 1,055,433 1,236,590 783,923 504,768 112,150 509,179 728,990 2,538,232 800,271 252,717 60,517 112,390 955,134 1,196,900 1,270,517 1,675,739 1,336,152 1,182,150 1,215,818 1,439,597 — — — — — — — Jacobson Industrial: Des Moines, IA . . . . . . . . . . Jared Jewelers: Richmond, VA . . . . . . . . . . . Brandon, FL . . . . . . . . . . . . . Lithonia, GA . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . Jo-Ann Etc: Corpus Christi, TX . . . . . . . . Kane Realty: Raleigh, NC . . . . . . . . . . . . . Kangaroo Express: Belleview, FL . . . . . . . . . . . . Carthage, NC . . . . . . . . . . . . Jacksonville, FL . . . . . . . . . . Jacksonville, FL . . . . . . . . . . Sanford, NC . . . . . . . . . . . . . Sanford, NC . . . . . . . . . . . . . Siler City, NC . . . . . . . . . . . West End, NC . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — 783,923 504,768 1,288,691 63,622 1993 12/01 40 years 112,150 509,179 621,329 13,260 1995 12/05 40 years 728,990 2,538,232 3,267,222 2,644 2006 12/06 40 years 800,271 252,717 1,052,988 16,529 1984 05/04 40 years — 1,579,583 2,849,246 4,428,829 305,707 1991 09/02 40 years — — — — 271,853 380,043 407,268 692,956 (c) (c) — 515,035 271,853 380,043 407,268 1,207,991 (c) (c) — 26,467 1993 1993 (i) 2002 10/93 12/93 11/00 06/05 (c) (c) (i) 30 years — 1,055,433 1,236,590 2,292,023 47,660 2001 06/05 40 years — — — — — 60,517 112,390 172,907 8,663 1973 06/05 20 years 955,134 1,196,900 1,270,517 1,675,739 1,336,152 1,182,150 1,215,818 1,439,597 2,291,286 2,379,050 2,486,335 3,115,336 168,410 136,825 140,722 145,459 1998 2001 2001 1999 12/01 05/02 05/02 12/02 40 years 40 years 40 years 40 years 818,448 896,395 12,222 — 818,448 908,617 1,727,065 297,583 1967 11/93 40 years 793,017 — 810,059(j) — 1,603,076 — 1,603,076 (j) (i) 12/01 (i) — — — — — — — — 471,029 485,461 807,477 684,639 666,330 1,638,444 586,174 426,114 2006 1989 1975 1969 2000 2003 1998 1999 See accompanying report of independent registered public accounting firm. 471,029 485,461 807,477 684,639 666,330 1,638,444 586,174 426,114 1,451,277 353,643 1,239,085 1,361,897 660,594 1,370,558 645,290 516,010 1,922,306 839,104 2,046,562 2,046,536 1,326,924 3,009,002 1,231,464 942,124 1,451,277 353,643 1,239,085 1,361,897 660,594 1,370,558 645,290 516,010 13,606 3,315 11,616 12,768 6,193 12,849 6,050 4,838 — — — — — — — — — — — — — — — — 08/06 08/06 08/06 08/06 08/06 08/06 08/06 08/06 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years F-7 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1,365,569 1,192,192 2,557,761 1,433,652 1,124,109 2,557,761 518,814 679,169 490,309 521,023 275,897 474,297 — 518,814 552,393 1,231,562 741,222 1,231,531 709,784 1,230,807 954,910 1,230,807 756,510 1,230,807 3,194,938 1,403,297 4,598,235 440,413 1,096,748 1,537,161 322,476 1,221,661 1,544,137 335,851 1,925,276 2,261,127 470,600 1,343,746 1,814,346 397,443 1,255,513 526,792 455,605 649,236 794,722 853,048 1,904,749 1,321,514 516,508 646,779 369,740 496,092 545,592 766,635 1,012,600 1,192,371 1,136,375 8,693 8,197 — 2,881 3,868 739 995 494 1,462 1,142 97,987 154,423 107,780 57,425 81,831 100,168 62,528 68,767 11,979 2000 2000 (e) 1990 1995 1999 1999 1999 2001 1998 1983 1983 1983 1981 1992 1981 1996 1996 2004 09/06 09/06 10/06 10/06 10/06 12/06 12/06 12/06 12/06 12/06 03/99 03/99 03/99 12/01 12/01 12/01 12/01 12/01 05/06 Life on Which Depreciation and Amortization in Latest Income Statement is Computed 40 years 40 years (e) 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years Destin, FL . . . . . . . . . . . . Niceville, FL . . . . . . . . . . Interlachen, FL . . . . . . . . . Kill Devil Hills, NC . . . . . Kill Devil Hills, NC . . . . . Clarksville, TN . . . . . . . . . Clarksville, TN . . . . . . . . . Gallatin,TN . . . . . . . . . . . Naples, FL . . . . . . . . . . . . Oxford, MS . . . . . . . . . . . Kash N’ Karry: — — — — — — — — — — 1,365,569 1,192,192 1,433,652 1,124,109 518,814 679,169 490,309 521,023 275,897 474,297 — 552,393 741,222 709,784 954,910 756,510 3,194,938 1,403,297 440,413 1,096,748 Brandon, FL . . . . . . . . . . . 3,166,503(p) 322,476 1,221,661 335,851 1,925,276 470,600 1,343,746 397,443 1,255,513 526,792 455,605 649,236 794,722 516,508 646,779 369,740 496,092 545,592 766,635 Palm Harbor, FL . . . . . . . Sarasota, FL . . . . . . . . . . . Keg Steakhouse: Bellingham, WA(r) . . . . . Lynnwood, WA . . . . . . . . Tacoma, WA . . . . . . . . . . KFC: Erie, PA . . . . . . . . . . . . . . Marysville, WA . . . . . . . . Evansville, IN . . . . . . . . . Kohl’s: Florence, AL . . . . . . . . . . Kum & Go: Omaha, NE . . . . . . . . . . . . Light Restaurant: — — — — — — — — — — 817,661 — 1,046,515 — 817,661 1,046,515 1,864,176 6,541 (i) 06/04 40 years 392,847 214,280 — — 392,847 214,280 607,127 16,517 1979 06/05 20 years Columbus, OH . . . . . . . . . — 1,032,008 1,107,250 — — 1,032,008 1,107,250 2,139,258 139,560 1998 12/01 40 years Lil’ Champ: Gainesville, FL . . . . . . . . . Jacksonville, FL . . . . . . . . Ocala, FL . . . . . . . . . . . . . Logan’s Roadhouse: Alexandria, LA . . . . . . . . Beckley, WV . . . . . . . . . . Cookeville, TN . . . . . . . . . Fort Wayne, IN . . . . . . . . Greenwood, IN . . . . . . . . . Hurst, TX . . . . . . . . . . . . . Jackson, TN . . . . . . . . . . . Lake Charles, LA . . . . . . . McAllen, TX . . . . . . . . . . Opelika, AL . . . . . . . . . . . Roanoke, VA . . . . . . . . . . San Marcos, TX . . . . . . . . Sanford, FL . . . . . . . . . . . Smyrna, TN . . . . . . . . . . . Warner Robins, GA . . . . . Franklin, TN . . . . . . . . . . . Southaven, MS . . . . . . . . . Lowe’s: — — — — — — — — — — — — — — — — — — — — 900,422 2,225,177 845,827 — 315,315 — 1,217,567 1,396,024 1,262,430 1,274,315 1,341,188 1,857,628 1,199,765 1,284,898 1,607,806 1,028,484 2,302,414 836,979 1,677,782 1,334,998 905,301 2,519,485 1,297,767 3,048,693 2,404,817 2,270,596 2,109,860 2,105,213 1,915,877 2,246,330 2,202,447 2,177,715 1,753,045 1,947,141 1,453,300 1,730,390 2,047,465 1,533,748 1,704,790 1,338,118 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 900,422 2,225,177 845,827 — 315,315 — 900,422 2,540,492 845,827 — 10,839 — (e) 2006 (e) 1,217,567 1,396,024 1,262,430 1,274,315 1,341,188 1,857,628 1,199,765 1,284,898 1,607,806 1,028,484 2,302,414 836,979 1,677,782 1,334,998 905,301 2,519,485 1,297,767 3,048,693 2,404,817 2,270,596 2,109,860 2,105,213 1,915,877 2,246,330 2,202,447 2,177,715 1,753,045 1,947,141 1,453,300 1,730,390 2,047,465 1,533,748 1,704,790 1,338,118 4,266,260 3,800,841 3,533,026 3,384,175 3,446,401 3,773,505 3,446,095 3,487,345 3,785,521 2,781,529 4,249,555 2,290,279 3,408,172 3,382,463 2,439,049 4,224,275 2,635,885 9,527 7,515 7,096 6,593 6,579 5,987 7,020 6,883 6,805 5,478 6,085 4,541 5,407 6,398 4,793 1,776 1,394 1998 2006 1997 2003 2000 1999 1994 1998 2005 2005 1998 2000 1999 2002 2004 1995 2005 07/05 08/05 02/06 11/06 11/06 11/06 11/06 11/06 11/06 11/06 11/06 11/06 11/06 11/06 11/06 11/06 11/06 11/06 12/06 12/06 (e) 40 years (e) 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years Memphis, TN . . . . . . . . . . — 3,214,835 9,169,885 — — 3,214,835 9,169,885 12,384,720 1,042,223 2001 06/02 40 years Magic China Café: Orlando, FL . . . . . . . . . . . 70,882(u) 40,200 110,531 — — 40,200 110,531 150,731 7,944 2001 02/04 40 years Magic Dollar: Memphis, TN . . . . . . . . . . — 549,309 539,643 364,460 — 549,309 904,103 1,453,412 152,879 1998 11/98 40 years See accompanying report of independent registered public accounting firm. F-8 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land — 1,235,214 — 1,330,427 — 1,461,333 — 1,651,570 — 2,505,249 977,290 — 611,366 — 361,371 — — 786,159 — 1,554,411 — 2,407,203 1,222,434 3,858,445 1,673,229 2,017,770 2,138,400 2,368,447 1,608,555 1,029,053 1,233,984 1,228,778 2,050,580 179,835 — 233,812 — — 398,132 — 1,030,156 623,607 — 426,895 259,046 507,743 306,147 577,948 — — — — — — — — — — 248,000 — — — — — — — — — — — — — — — — — — — — — 1,235,214 1,330,427 1,461,333 1,651,570 2,505,249 977,290 611,366 361,371 786,159 1,554,411 2,407,203 179,835 233,812 398,132 1,030,156 623,607 Building, Improve- ments and Leasehold Interests 1,222,434 3,858,445 1,673,229 2,017,770 2,138,400 2,368,447 1,608,555 1,029,053 1,233,984 1,228,778 2,298,580 Total 2,457,648 5,188,872 3,134,562 3,669,340 4,643,649 3,345,737 2,219,921 1,390,424 2,020,143 2,783,189 4,705,783 426,895 259,046 507,743 306,147 577,948 606,730 492,858 905,875 1,336,303 1,201,555 Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed 57,301 180,864 78,432 94,583 100,237 111,021 75,401 48,237 24,422 47,359 81,693 19,121 11,603 22,743 13,713 25,887 1990 1996 1999 2000 1988 1997 1974 1993 2006 1982 1971 1986 1986 1986 1974 1983 02/05 02/05 02/05 02/05 02/05 02/05 02/05 02/05 05/05(g) 06/05 06/05 03/05 03/05 03/05 03/05 03/05 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years Majestic Liquors: Arlington, TX . . . . . . . . . . . . Coffee City, TX . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . Hudson Oaks, TX . . . . . . . . Granbury, TX . . . . . . . . . . . . Dallas, TX . . . . . . . . . . . . . . Dallas, TX . . . . . . . . . . . . . . Merchant’s Tires: Hampton, VA . . . . . . . . . . . . Newport News, VA . . . . . . . Norfolk, VA . . . . . . . . . . . . . Rockville, MD . . . . . . . . . . . Washington, DC . . . . . . . . . . Mi Pueblo Foods: Watsonville, CA . . . . . . . . . . — 805,056 1,648,934 — — 805,056 1,648,934 2,453,990 132,258 1984 03/99 40 years Michaels: Fairfax, VA . . . . . . . . . . . . . Grapevine, TX . . . . . . . . . . . Plymouth Meeting, PA . . . . 986,131 — — 1,017,934 — 2,911,111 1,426,254 2,066,715 706,501 — — 2,250,620 — — — 986,131 1,017,934 2,911,111 2,132,755 2,066,715 2,250,620 3,118,886 3,084,649 5,161,731 292,242 441,330 433,713 1995 1998 1999 12/95 06/98 10/98(g) 40 years 40 years 40 years Mortgage Marketing: Swansea, IL . . . . . . . . . . . . . Mountain Jack’s: Centerville, OH . . . . . . . . . . Mr. E’s Music Supercenter: Arlington, TX . . . . . . . . . . . . Muchas Gracias Mexican Restaurant: Salem, OR . . . . . . . . . . . . . . New Covenant Church: Augusta, GA . . . . . . . . . . . . Office Depot: — — — — — 91,709 264,956 — — 91,709 264,956 356,665 33,424 1997 12/01 40 years 850,625 1,059,430 — — 850,625 1,059,430 1,910,055 133,532 1986 12/01 40 years 435,002 2,299,881 334,059 — 435,002 2,633,940 3,068,942 563,439 1996 06/96 40 years 555,951 735,651 — — 555,951 735,651 1,291,602 92,773 1996 12/06 40 years 176,656 674,253 — — 176,656 674,253 850,909 84,984 1998 12/01 40 years Arlington, TX . . . . . . . . . . . . Richmond, VA . . . . . . . . . . . Hartsdale, NY . . . . . . . . . . . — — 596,024 888,772 1,730,026(t) 4,508,753 1,411,432 1,948,036 2,327,448 OfficeMax: Dallas, TX . . . . . . . . . . . . . . Cincinnati, OH . . . . . . . . . . . Evanston, IL . . . . . . . . . . . . . Altamonte Springs, FL . . . . . Cutler Ridge, FL . . . . . . . . . Sacramento, CA . . . . . . . . . . Salinas, CA . . . . . . . . . . . . . Redding, CA . . . . . . . . . . . . Kelso, WA . . . . . . . . . . . . . . Lynchburg, VA . . . . . . . . . . Leesburg, FL . . . . . . . . . . . . Dover, NJ . . . . . . . . . . . . . . . Griffin, GA . . . . . . . . . . . . . . Tigard, OR . . . . . . . . . . . . . . Orlando Metro Gymnastics: — 1,118,500 543,489 — — 1,867,831 — 1,689,793 — 989,370 — 1,144,167 — 1,353,217 667,174 — 868,003 — 561,509 — — 640,019 — 1,138,296 — 685,470 — 1,539,873 — — — — — — — — — — — 1,709,891 1,574,551 1,757,618 3,050,160 1,479,119 2,961,206 1,829,325 2,181,563 — 1,805,539 — 1,851,326 — 1,929,028 — — 1,801,905 — 3,238,083 2,247,321 — — — — — — — — — — — — — — — — — 596,024 888,772 4,508,753 1,411,432 1,948,036 2,327,448 2,007,456 2,836,808 6,836,201 455,694 515,680 169,645 1,118,500 543,489 1,867,831 1,689,793 989,370 1,144,167 1,353,217 667,174 868,003 561,509 640,019 1,138,296 685,470 1,539,873 1,709,891 1,574,551 1,757,618 3,050,160 1,479,119 2,961,206 1,829,325 2,181,563 1,805,539 1,851,326 1,929,028 3,238,083 1,801,905 2,247,321 2,828,391 2,118,040 3,625,449 4,739,953 2,468,489 4,105,373 3,182,542 2,848,737 2,673,542 2,412,835 2,569,047 4,376,379 2,487,375 3,787,194 555,832 491,373 508,000 829,522 388,577 740,498 451,614 520,394 404,365 383,764 387,815 657,735 347,242 456,487 1991 1996 1996 1993 1994 1995 1995 1995 1996 1995 1997 1998 1998 1998 1995 1999 1995 01/94 05/96 09/97 12/93 07/94 06/95 01/96 06/96 12/96 02/97 06/97 09/97(g) 02/98 08/98 11/98 11/98(g) 11/98 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years Orlando, FL . . . . . . . . . . . . . — 427,661 1,344,660 — — 427,661 1,344,660 1,772,321 65,832 2003 01/05 40 years Party City: Memphis, TN . . . . . . . . . . . . — 1999 See accompanying report of independent registered public accounting firm. — 1,136,334 1,136,334 1,402,717 214,246 266,383 266,383 — 06/99 40 years F-9 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed Perfect Teeth: Rio Rancho, NM . . . . . . . . . . . . . — 61,517 122,142 Perkins Restaurant: Des Moines, IA . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . Newton, IA . . . . . . . . . . . . . . . . . . Urbandale, IA . . . . . . . . . . . . . . . . — — — — — 255,874 225,922 269,938 353,816 376,690 136,103 203,330 218,248 401,630 581,414 Petco: Grand Forks, ND . . . . . . . . . . . . . — 306,629 909,671 PETsMART: Chicago, IL . . . . . . . . . . . . . . . . . — 2,724,138 3,565,721 Picture Factory: — — — — — — — — — — — — — — — 61,517 122,142 183,659 15,408 1997 12/01 40 years 255,874 225,922 269,938 353,816 376,690 136,103 391,977 203,330 429,252 218,248 488,186 401,630 755,446 581,414 958,104 20,983 31,347 33,647 61,918 44,817 1976 1976 1977 1979 1979 06/05 06/05 06/05 06/05 06/05 10 years 10 years 10 years 10 years 20 years 306,629 909,671 1,216,300 205,647 1996 12/97 40 years — 2,724,138 3,565,721 6,289,859 739,135 1998 09/98 40 years Sarasota, FL . . . . . . . . . . . . . . . . . — 1,167,618 1,903,810 218,564 — 1,167,618 2,122,374 3,289,992 149,037 1996 09/97 40 years Pier 1 Imports: Anchorage, AK . . . . . . . . . . . . . . Memphis, TN . . . . . . . . . . . . . . . . Sanford, FL . . . . . . . . . . . . . . . . . Knoxville, TN . . . . . . . . . . . . . . . Mason, OH . . . . . . . . . . . . . . . . . . Harlingen, TX . . . . . . . . . . . . . . . Valdosta, GA . . . . . . . . . . . . . . . . — — — — — — — Pizza Hut: 928,321 1,662,584 821,770 713,319 803,082 738,051 734,833 467,169 885,047 593,571 756,406 316,640 805,912 390,838 Monroeville, AL . . . . . . . . . . . . . — 547,300 44,237 Pizza Place, The: Cohoes, NY . . . . . . . . . . . . . . . . . — 16,396 88,372 Pueblo Viejo Restaurant: — — — — — — — — — — — — — — — — — — 928,321 1,662,584 2,590,905 821,770 1,535,089 713,319 803,082 1,541,133 738,051 734,833 1,202,002 467,169 885,047 1,478,618 593,571 756,406 1,073,046 316,640 805,912 1,196,750 390,838 450,522 196,026 176,511 146,201 166,868 136,310 143,553 1995 1997 1998 1999 1999 1999 1999 02/96 09/96(f) 06/97(f) 01/98(f) 06/98(f) 11/98(f) 01/99(f) 40 years 40 years 40 years 40 years 40 years 40 years 40 years 547,300 44,237 591,537 5,575 1976 12/01 40 years 16,396 88,372 104,768 5,063 1994 09/04 40 years Chandler, AZ . . . . . . . . . . . . . . . . — 654,765 765,164 7,500 — 654,765 772,664 1,427,429 102,647 1997 12/01 40 years Popeye’s: Snellville, GA . . . . . . . . . . . . . . . — 642,169 436,512 Pull-A-Part: Birmingham, AL . . . . . . . . . . . . . Augusta, GA . . . . . . . . . . . . . . . . Conley, GA . . . . . . . . . . . . . . . . . Norcross, GA . . . . . . . . . . . . . . . . Louisville, KY . . . . . . . . . . . . . . . Harvey, LA . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . Knoxville, TN . . . . . . . . . . . . . . . Nashville, TN . . . . . . . . . . . . . . . . Lafayette, LA . . . . . . . . . . . . . . . . Cleveland, OH . . . . . . . . . . . . . . . Montgomery, AL . . . . . . . . . . . . . Jackson, MS . . . . . . . . . . . . . . . . . QuikTrip: Alpharetta, GA . . . . . . . . . . . . . . . Clive, IA . . . . . . . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . Gainesville, GA . . . . . . . . . . . . . . Herculaneum, MO . . . . . . . . . . . . Johnston, IA . . . . . . . . . . . . . . . . . Lee’s Summit, MO . . . . . . . . . . . Norcross, GA . . . . . . . . . . . . . . . . Norcross, GA . . . . . . . . . . . . . . . . Norcross, GA . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — 1,164,780 2,090,094 1,414,381 — 1,685,604 1,387,170 1,831,129 1,040,317 3,205,591 1,531,842 1,881,371 — 2,912,842 1,724,045 — 2,164,234 1,414,129 961,067 1,020,544 4,541,398 919,737 1,300,560 1,048,309 623,473 258,759 379,435 592,192 — — — — 606,916 556,970 792,448 455,322 912,962 856,001 1,612,887 385,119 394,289 373,770 1,224,099 293,896 948,051 844,216 966,145 296,867 202,430 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 642,169 436,512 1,078,681 55,019 1995 12/01 40 years 1,164,780 2,090,094 3,254,874 1,414,381 — 1,414,381 1,685,604 1,387,170 3,072,774 1,831,129 1,040,317 2,871,446 3,205,591 1,531,842 4,737,433 1,881,371 — 1,881,371 2,912,842 1,724,045 4,636,887 961,067 2,164,234 1,414,129 3,578,363 961,067 — 1,020,544 4,541,398 919,737 1,300,560 — 1,020,544 — 4,541,398 — 919,737 — 1,300,560 1,048,309 606,916 1,655,225 623,473 258,759 379,435 592,192 556,970 1,180,443 792,448 1,051,207 455,322 834,757 912,962 1,505,154 856,001 1,612,887 2,468,888 779,408 385,119 394,289 373,770 1,224,099 1,597,869 293,896 1,241,947 948,051 844,216 966,145 296,867 1,141,083 202,430 1,168,575 19,595 (e) 13,005 9,753 14,361 (e) 16,163 (e) 13,257 (e) (e) (e) (e) 23,391 28,622 40,723 23,398 46,916 82,884 19,791 47,179 15,103 15,256 10,403 1964 (e) 1999 1998 2006 (e) 2006 (e) 2006 (e) (e) (e) (e) 1996 1994 1990 1996 1989 1991 1991 1999 1993 1989 1994 08/06 08/06 08/06 08/06 08/06 08/06 08/06 08/06 08/06 08/06 08/06 11/06 12/06 06/05 06/05 06/05 06/05 06/05 06/05 06/05 06/05 06/05 06/05 06/05 06/05 40 years (e) 40 years 40 years 40 years (e) 40 years (e) 40 years (e) (e) (e) (e) 40 years 30 years 30 years 30 years 30 years 30 years 30 years 40 years 30 years 30 years 30 years 40 years Olathe, KS . . . . . . . . . . . . . . . . . . — — See accompanying report of independent registered public accounting firm. 792,656 1,391,981 2,184,637 792,656 1,391,981 53,649 — 1999 F-10 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Improve- ments Carrying Costs Land — — — — — — — — — Tulsa, OK . . . . . . . . . . . . . Urbandale, IA . . . . . . . . . . Wichita, KS . . . . . . . . . . . . Wichita, KS . . . . . . . . . . . . Woodstock, GA . . . . . . . . . Quizno’s: Rio Rancho, NM . . . . . . . . Qwest Corporation Service Center: Cedar Rapids, IA . . . . . . . . Decorah, IA . . . . . . . . . . . . Rally’s: Toledo, OH . . . . . . . . . . . . Red Lion Chinese Restaurant: Cohoes, NY . . . . . . . . . . . . Reliable: Building, Improve- ments and Leasehold Interests 649,917 764,025 542,934 453,891 1,041,883 1,224,843 339,566 127,250 118,012 488,383 48,566 96,428 13,398 184,490 71,899 628,943 271,620 125,882 319,770 — 27,327 147,286 — — — — — — — — — — — — — — — — — — — Building, Improve- ments and Leasehold Interests 649,917 764,025 542,934 453,891 1,041,883 Total 1,874,760 1,103,591 670,184 571,903 1,530,266 1,224,843 339,566 127,250 118,012 488,383 Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed 33,398 29,447 27,901 23,324 40,156 1990 1993 1990 1989 1997 06/05 06/05 06/05 06/05 06/05 30 years 40 years 30 years 30 years 40 years 48,566 109,826 158,392 13,431 1997 12/01 40 years 184,490 71,899 628,943 271,620 813,433 343,519 48,481 41,875 1976 1974 06/05 06/05 20 years 10 years 125,882 319,770 445,652 119,616 1989 07/92 38.8 years St. Louis, MO . . . . . . . . . . — 2,077,893 13,871,728 — 27,327 147,286 174,613 8,438 1994 09/04 40 years — 2,077,893 13,871,728 15,949,621 847,581 1975 05/04 40 years Rent-A-Center: Rio Rancho, NM . . . . . . . . — 145,698 289,284 40,193 Rite Aid: Mobile, AL . . . . . . . . . . . . Orange Beach, AL . . . . . . . Albany, NY . . . . . . . . . . . . Albany, NY . . . . . . . . . . . . Cohoes, NY . . . . . . . . . . . . Hudson Falls, NY . . . . . . . Saratoga Springs, NY . . . . Ticonderoga, NY . . . . . . . . Monticello, NY . . . . . . . . . — — — — — — — — 914,666 1,136,618 1,409,980 24,707 33,794 107,451 56,737 762,303 88,867 664,400 1,694,187 1,996,043 867,257 823,923 579,237 780,091 590,978 688,622 768,795 — — — — — — — — — — — — — — — — — — — Rite Rug: 145,698 329,477 475,175 40,616 1997 12/01 40 years 1,136,618 1,409,980 24,707 33,794 107,451 56,737 762,303 88,867 664,400 1,694,187 1,996,043 867,257 823,923 579,237 780,091 590,978 688,622 768,795 2,830,805 3,406,023 891,964 857,717 686,688 836,828 1,353,281 777,489 1,433,195 213,538 251,585 49,687 47,204 33,185 44,693 33,858 39,452 34,436 2000 2000 1994 1992 1994 1990 1980 1993 1996 12/01 12/01 09/04 09/04 09/04 09/04 09/04 09/04 03/05 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years Columbus, OH . . . . . . . . . . — 1,596,197 934,236 13,345 — 1,604,615 939,163 2,543,778 49,859 1970 11/04 40 years Roadhouse Grill: Cheektowaga, NY . . . . . . . Road Ranger: Belvidere, IL . . . . . . . . . . . Brazil, IN . . . . . . . . . . . . . . Cherry Valley, IL . . . . . . . . Cottage Grove, WI . . . . . . . Decatur, IL . . . . . . . . . . . . . Dekalb, IL . . . . . . . . . . . . . Elk Run Heights, IA . . . . . Lake Station, IN . . . . . . . . . Mendota, IL . . . . . . . . . . . . Oakdale, WI . . . . . . . . . . . . Rockford, IL . . . . . . . . . . . Rockford, IL . . . . . . . . . . . Springfield, IL . . . . . . . . . . Springfield, IL . . . . . . . . . . Robb & Stucky: — — — — — — — — — — — — — — — 689,040 386,251 748,237 2,199,280 1,409,312 2,174,548 815,213 747,109 1,537,734 3,171,775 959,012 1,844,068 1,094,045 623,214 704,648 1,794,961 1,256,106 907,034 1,897,360 1,733,398 1,314,354 1,657,951 2,470,191 1,111,643 1,295,780 1,663,137 1,661,684 1,331,082 1,500,279 1,862,562 Ft. Myers, FL . . . . . . . . . . . — 2,188,440 6,225,401 Roger & Mary’s: Kenosha, WI . . . . . . . . . . . — 1,917,606 3,431,364 Ross Dress For Less: Coral Gables, FL . . . . . . . . Lodi, CA . . . . . . . . . . . . . . — — 1,782,346 613,710 1,661,174 1,414,592 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 689,040 386,251 1,075,291 48,684 1994 12/01 40 years 748,237 2,199,280 1,409,312 2,174,548 815,213 747,109 1,537,734 3,171,775 959,012 1,844,068 1,094,045 623,214 704,648 1,794,961 1,256,106 907,034 1,897,360 1,733,398 1,314,354 1,657,951 2,470,191 1,111,643 1,295,780 1,663,137 1,661,684 1,331,082 1,500,279 1,862,562 2,004,344 3,106,314 3,306,672 3,907,946 2,129,568 2,405,060 4,007,925 4,283,418 2,254,792 3,507,205 2,755,729 1,954,296 2,204,927 3,657,523 17,010 12,283 25,693 23,473 17,798 22,451 33,451 15,053 17,547 22,522 22,502 18,025 20,316 25,222 1997 1990 1991 1990 2002 2000 1989 1987 1996 1998 1996 2000 1997 1978 06/06 06/06 06/06 06/06 06/06 06/06 06/06 06/06 06/06 06/06 06/06 06/06 06/06 06/06 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years — 2,188,440 6,225,401 8,413,841 1,422,944 1997 12/97 40 years — 1,917,606 3,431,364 5,348,970 842,429 1992 02/97 40 years — — 1,782,346 613,710 1,661,174 1,414,592 3,443,520 2,028,302 383,763 113,462 1994 1984 06/96 03/99 40 years 40 years See accompanying report of independent registered public accounting firm. F-11 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed Schlotzsky’s Deli: Phoenix, AZ . . . . . . . . . . . . . Scottsdale, AZ . . . . . . . . . . . 7-Eleven: Land O’ Lakes, FL . . . . . . . . Tampa, FL . . . . . . . . . . . . . . Shek’s Express: Eden Prairie, MN . . . . . . . . . Shoes on a Shoestring: — — — — — 706,306 717,138 315,469 310,610 — — 1,076,572 1,080,670 — — 816,944 917,432 — — — — 706,306 717,138 315,469 1,021,775 310,610 1,027,748 39,762 39,150 1,076,572 816,944 1,893,516 1,080,670 917,432 1,998,102 162,538 178,708 1995 1995 1999 1999 12/01 12/01 40 years 40 years 10/98(g) 12/98(g) 40 years 40 years 64,916 261,347 — — 64,916 261,347 326,263 29,870 1997 12/01 40 years Albuquerque, NM . . . . . . . . — 1,441,777 2,335,475 — — 1,441,777 2,335,475 3,777,252 557,108 1997 06/97 40 years Shop-a-Snak: Jasper, AL . . . . . . . . . . . . . . Bessemer, AL . . . . . . . . . . . . Birmingham, AL . . . . . . . . . Birmingham, AL . . . . . . . . . Birmingham, AL . . . . . . . . . Chelsea, AL . . . . . . . . . . . . . Homewood, AL . . . . . . . . . . Hoover, AL . . . . . . . . . . . . . Hoover, AL . . . . . . . . . . . . . Hoover, AL . . . . . . . . . . . . . Trussville, AL . . . . . . . . . . . Tuscaloosa, AL . . . . . . . . . . Tuscaloosa, AL . . . . . . . . . . Tuscaloosa, AL . . . . . . . . . . Shop & Save: — — — — — — — — — — — — — — 551,417 563,863 489,664 438,536 361,182 391,275 467,950 712,752 764,461 445,980 271,728 385,947 525,165 431,917 747,418 742,457 769,343 704,005 744,195 627,502 656,964 864,527 1,156,598 671,989 541,741 732,669 462,868 559,403 — — — — — — — — — — — — — — — — — — — — — — — — — — — — 551,417 563,863 489,664 438,536 361,182 391,275 467,950 712,752 764,461 445,980 271,728 385,947 525,165 431,917 747,418 1,298,835 742,457 1,306,320 769,343 1,259,007 704,005 744,195 627,502 656,964 864,527 1,156,598 671,989 541,741 732,669 462,868 559,403 1,142,541 1,105,377 1,018,777 1,124,914 1,577,279 1,921,059 1,117,969 813,469 1,118,616 988,033 991,320 11,678 11,601 12,021 11,000 11,628 9,805 10,265 13,508 18,072 10,499 8,465 11,448 7,232 8,741 1998 2002 1992 1989 1989 1981 1990 1998 2005 1989 1992 1991 1991 1991 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years Homestead, PA . . . . . . . . . . — 1,139,419 — 2,158,167(s) — 1,139,419 2,158,167 3,297,586 97,776 1994 02/97 40 years Skipper’s Fish & Chips: Spokane, WA . . . . . . . . . . . . Soaks Express Car Wash: Ankeny, IA . . . . . . . . . . . . . . Sofa Express: — — 470,840 530,289 — — 470,840 530,289 1,001,129 66,838 1996 12/01 40 years 661,958 — — — 661,958 — 661,958 — (e) 06/05 (e) Buford, GA . . . . . . . . . . . . . — 1,925,129 5,034,846 — — 1,925,129 5,034,846 6,959,975 309,433 2004 07/04 40 years Spa and Nails Club: Orlando, FL . . . . . . . . . . . . . 70,882(u) 40,200 110,531 — — 40,200 110,531 150,731 7,944 2001 02/04 40 years Spencer’s A/C & Appliances: Glendale, AZ . . . . . . . . . . . . — 341,713 982,429 — — 341,713 982,429 1,324,142 182,740 1999 12/98(g) 40 years Sports Authority: Dallas, TX . . . . . . . . . . . . . . Tampa, FL . . . . . . . . . . . . . . Sarasota, FL . . . . . . . . . . . . . Memphis, TN . . . . . . . . . . . . Little Rock, AR . . . . . . . . . . Woodbridge, NJ . . . . . . . . . . — — 1,311,440 2,127,503 725,280(t) 1,427,840 820,340 — 1,521,730 1,702,852 — — — — 2,573,264 — — — 3,113,375 3,749,990 2,660,206 5,982,660 — — — — — — — — — — 1,311,440 2,127,503 1,427,840 820,340 3,113,375 3,749,990 (c) 1,311,440 3,649,233 3,130,692 3,393,604 1,521,730 1,702,852 2,573,264 2,660,206 5,982,660 5,773,581 9,732,650 1,526,340 4,139,363 5,665,703 (c) 399,771 124,166 528,055 551,438 592,032 306,140 1994 1994 1996 1998 1997 1994 1997 03/94 06/96 09/97 12/97(g) 09/98 01/03 01/04 (c) 40 years 40 years 40 years 40 years 40 years 40 years Bradenton, FL . . . . . . . . . . . — 1,526,340 4,139,363 Sportsman’s Warehouse: Sioux Falls, SD . . . . . . . . . . — 2,619,810 1,929,895 — — 2,619,810 1,929,895 4,549,705 99,175 1998 06/05 30 years Steak & Ale: Jacksonville, FL . . . . . . . . . . — 986,565 855,523 — — 986,565 855,523 1,842,088 107,832 1996 12/01 40 years Stone Mountain Chevrolet: Lilburn, GA . . . . . . . . . . . . . — 3,027,056 4,685,189 — — 3,027,056 4,685,189 7,712,245 278,183 2004 08/04 40 years Stop & Go: Grand Prairie, TX . . . . . . . . Kennedale, TX . . . . . . . . . . . — — 421,254 399,988 684,568 692,190 — — — — 421,254 399,988 684,568 1,105,822 692,190 1,092,178 86,284 87,244 1986 1985 12/01 12/01 40 years 40 years See accompanying report of independent registered public accounting firm. F-12 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed Stripes: Brownsville, TX . . . . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . . . . Donna, TX . . . . . . . . . . . . . . . . . . . . . Edinburg, TX . . . . . . . . . . . . . . . . . . . Edinburg, TX . . . . . . . . . . . . . . . . . . . Falfurias, TX . . . . . . . . . . . . . . . . . . . . Freer, TX . . . . . . . . . . . . . . . . . . . . . . George West, TX . . . . . . . . . . . . . . . . Harlingen, TX . . . . . . . . . . . . . . . . . . . Harlingen, TX . . . . . . . . . . . . . . . . . . . Harlingen, TX . . . . . . . . . . . . . . . . . . . La Feria, TX . . . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . . . . Lawton, OK . . . . . . . . . . . . . . . . . . . . Los Indios, TX . . . . . . . . . . . . . . . . . . McAllen, TX . . . . . . . . . . . . . . . . . . . . McAllen, TX . . . . . . . . . . . . . . . . . . . . Mission, TX . . . . . . . . . . . . . . . . . . . . Mission, TX . . . . . . . . . . . . . . . . . . . . Olmito, TX . . . . . . . . . . . . . . . . . . . . . Pharr, TX . . . . . . . . . . . . . . . . . . . . . . Pharr, TX . . . . . . . . . . . . . . . . . . . . . . Pharr, TX . . . . . . . . . . . . . . . . . . . . . . Port Isabel, TX . . . . . . . . . . . . . . . . . . Portland, TX . . . . . . . . . . . . . . . . . . . . Progresso, TX . . . . . . . . . . . . . . . . . . . Riviera, TX . . . . . . . . . . . . . . . . . . . . . San Benito, TX . . . . . . . . . . . . . . . . . . San Benito, TX . . . . . . . . . . . . . . . . . . San Juan, TX . . . . . . . . . . . . . . . . . . . San Juan, TX . . . . . . . . . . . . . . . . . . . South Padre Island, TX . . . . . . . . . . . . Wichita Falls, TX . . . . . . . . . . . . . . . . Wichita Falls, TX . . . . . . . . . . . . . . . . Wichita Falls, TX . . . . . . . . . . . . . . . . Palm View, TX . . . . . . . . . . . . . . . . . . Harlingen, TX . . . . . . . . . . . . . . . . . . . Rio Grande City . . . . . . . . . . . . . . . . . San Juan, TX . . . . . . . . . . . . . . . . . . . Zapata, TX . . . . . . . . . . . . . . . . . . . . . Subway: Eden Prairie, MN . . . . . . . . . . . . . . . . Albany, NY . . . . . . . . . . . . . . . . . . . . Cohoes, NY . . . . . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 933,149 840,629 736,451 459,027 1,842,992 1,418,941 1,181,713 1,105,326 2,915,173 1,800,409 2,416,656 1,828,304 1,015,092 1,307,774 1,038,788 1,144,916 1,392,201 1,443,817 1,279,447 1,014,702 2,529,864 1,124,953 2,033,467 1,287,564 699,086 1,384,743 1,418,948 852,629 1,416,208 1,399,622 1,530,910 703,182 1,036,506 1,003,876 1,126,591 1,317,408 1,623,891 970,145 1,286,006 4,243,940 4,458,007 1,150,862 1,158,251 695,074 1,243,224 906,427 952,530 753,595 1,152,311 755,002 600,721 900,096 1,346,774 1,552,558 1,774,827 738,907 670,332 459,946 1,494,871 1,400,482 533,047 964,441 1,386,972 1,456,932 975,217 1,029,752 893,376 987,020 880,169 1,101,301 1,125,457 1,213,398 3,687,971 2,880,099 981,840 1,177,948 804,743 784,402 2,426,134 1,880,867 2,062,009 1,298,501 914,512 1,768,974 1,811,221 2,351,060 2,158,069 1,103,210 1,586,235 790,629 1,857,158 1,123,838 1,171,582 1,424,383 1,545,557 1,366,721 1,388,764 905,117 1,350,908 827,999 484,202 439,646 751,484 835,383 1,372,061 638,186 1,806,562 1,871,354 1,612,282 815,902 1,433,890 1,332,662 1,772,564 675,128 696,670 655,735 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 54,097 2,734 21,862 150,449 66,667 117,829 67,341 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 933,149 840,629 736,451 459,027 1,842,992 1,418,941 3,261,933 1,181,713 1,105,326 2,287,039 2,915,173 1,800,409 4,715,582 2,416,656 1,828,304 4,244,960 1,015,092 1,307,774 2,322,866 1,038,788 1,144,916 2,183,704 1,392,201 1,443,817 2,836,018 1,279,447 1,014,702 2,294,149 2,529,864 1,124,953 3,654,817 2,033,467 1,287,564 3,321,031 699,086 1,632,235 1,384,743 1,418,948 2,803,691 852,629 1,416,208 2,268,837 1,399,622 1,530,910 2,930,532 703,182 1,036,506 1,739,688 1,003,876 1,126,591 2,130,466 1,317,408 1,623,891 2,941,299 970,145 1,286,006 2,256,151 4,243,940 4,458,007 8,701,947 1,150,862 1,158,251 2,309,113 695,074 1,938,298 1,243,224 906,427 952,530 1,858,957 753,595 1,152,311 1,905,906 755,002 600,721 1,355,723 900,096 1,346,774 2,246,870 1,552,558 1,774,827 3,327,385 738,907 1,579,536 670,332 1,406,783 918,973 459,946 1,494,871 1,400,482 2,895,353 533,047 1,208,175 964,441 1,661,111 1,386,972 1,456,932 2,843,904 975,217 1,029,752 2,004,969 893,376 1,880,396 987,020 880,169 1,101,301 1,981,470 1,125,457 1,213,398 2,338,855 3,687,971 2,880,099 6,568,070 981,840 1,177,948 2,159,788 804,743 1,589,145 784,402 2,426,134 1,880,867 4,307,001 2,062,009 1,298,501 3,360,510 914,512 1,570,247 1,768,974 1,811,221 3,580,195 2,351,060 2,158,069 4,509,129 1,103,210 1,586,235 2,689,445 790,629 1,857,158 2,647,787 1,123,838 1,171,582 2,295,420 1,424,383 1,545,557 2,969,940 1,366,721 1,388,764 2,755,485 905,117 1,350,908 2,256,025 827,999 1,312,201 484,202 439,646 751,484 1,191,130 835,383 1,372,061 2,207,444 638,186 1,806,562 2,444,748 1,871,354 1,612,282 3,483,636 815,902 1,433,890 2,249,792 1,332,662 1,772,564 3,105,226 675,128 696,670 655,735 36,952 28,785 46,886 47,612 34,057 29,816 37,599 26,425 29,296 33,530 18,205 36,952 36,880 39,867 26,992 29,338 42,289 33,490 116,094 30,163 18,101 24,806 30,008 15,644 35,072 46,220 19,242 17,457 11,978 36,471 13,881 25,116 37,941 26,817 23,265 28,680 31,599 75,003 30,676 20,956 48,981 33,815 23,815 47,167 56,200 41,308 48,364 30,510 40,249 36,166 35,179 21,563 19,570 7,146 1,882 1,679 1,494 1,842 54,097 2,734 21,862 217,790 66,667 117,829 271,887 69,401 139,691 24,891 3,819 6,750 2000 2000 2000 2000 2003 2004 2005 1990 1990 1995 1999 1982 2005 1984 1986 1995 1999 2003 2002 1984 1996 1991 1999 1987 1988 2000 2001 1984 1983 1993 1993 1984 2005 2003 1999 1999 2003 2002 1988 2000 2003 1994 1983 1999 2005 2005 1994 1996 2004 1988 2000 1983 1984 2005 2006 2006 2006 2006 1997 1992 1994 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 10/06 12/06 12/06 12/06 12/06 12/01 09/04 09/04 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years See accompanying report of independent registered public accounting firm. F-13 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed SuperValu: Huntington, WV . . . . . . . . . . . . . Maple Heights, OH . . . . . . . . . . . Warwick, RI . . . . . . . . . . . . . . . . Swansea Quick Cash: Swansea, IL . . . . . . . . . . . . . . . . Taco Bell: Ocala, FL . . . . . . . . . . . . . . . . . . Ormond Beach, FL . . . . . . . . . . . Phoenix, AZ . . . . . . . . . . . . . . . . Bedford, IN . . . . . . . . . . . . . . . . . Columbus, IN . . . . . . . . . . . . . . . Columbus, IN . . . . . . . . . . . . . . . Evansville, IN . . . . . . . . . . . . . . . Evansville, IN . . . . . . . . . . . . . . . Evansville, IN . . . . . . . . . . . . . . . Fishers, IN . . . . . . . . . . . . . . . . . Greensburg, IN . . . . . . . . . . . . . . Indianapolis, IN . . . . . . . . . . . . . Indianapolis, IN . . . . . . . . . . . . . Madisonville, KY . . . . . . . . . . . . Owensboro, KY . . . . . . . . . . . . . Shelbyville, IN . . . . . . . . . . . . . . Speedway, IN . . . . . . . . . . . . . . . Terre Haute, IN . . . . . . . . . . . . . . Terre Haute, IN . . . . . . . . . . . . . . Vincennes, IN . . . . . . . . . . . . . . . Taco Bron Restaurant: — — — — — — — — — — — — — — — — — — — — — — — — 1,254,238 1,034,758 1,699,330 760,602 2,874,414 — 45,815 132,365 275,023 632,337 593,718 796,772 1,256,948 754,990 525,616 282,777 936,942 2,054,570 690,142 1,212,681 221,196 828,023 308,068 1,300,511 524,368 1,815,101 989,998 648,296 1,031,743 547,218 682,108 638,693 670,216 407,707 1,037,327 1,313,692 501,783 486,260 1,079,007 1,649,975 703,287 1,192,867 1,326,161 1,755,847 1,426,319 1,655,660 2,249,313 879,791 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1,254,238 1,034,758 1,699,330 760,602 2,874,414 2,014,840 3,909,172 (c) 1,699,330 187,774 709,621 (c) 1971 1985 1992 02/97 02/97 02/97 40 years 40 years (c) 45,815 132,365 178,180 16,685 1997 12/01 40 years 275,023 632,337 593,718 796,772 1,256,948 754,990 525,616 282,777 936,942 2,054,570 1,030,013 1,157,953 876,495 1,733,714 3,311,518 690,142 1,212,681 1,902,823 221,196 828,023 1,049,219 308,068 1,300,511 1,608,579 524,368 1,815,101 2,339,469 989,998 648,296 1,031,743 547,218 682,108 638,693 670,216 407,707 1,037,327 1,313,692 501,783 486,260 1,079,007 1,649,975 703,287 1,192,867 1,326,161 1,755,847 1,426,319 1,655,660 2,249,313 879,791 1,476,258 1,727,303 2,681,718 1,250,505 1,874,975 1,964,854 2,426,063 1,834,026 2,692,987 3,563,005 1,381,574 95,160 66,249 35,642 14,640 32,103 18,948 12,938 20,321 28,361 7,598 16,859 25,781 10,989 18,639 20,721 27,435 22,286 25,870 35,145 13,747 2001 2001 1995 1989 1990 2005 2003 2000 2005 1998 1998 2004 2004 1999 2005 1998 2003 2003 2003 2004 12/01 12/01 12/01 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years Tucson, AZ . . . . . . . . . . . . . . . . . — 827,002 305,209 17,814 — 844,816 305,209 1,150,025 43,946 1974 12/01 40 years Texas Roadhouse: Grand Junction, CO . . . . . . . . . . Thornton, CO . . . . . . . . . . . . . . . — — 584,237 598,556 920,143 1,019,164 TGI Friday’s: Corpus Christi, TX . . . . . . . . . . . — 1,209,702 1,532,125 Thomasville: Buford, GA . . . . . . . . . . . . . . . . . — 1,266,527 2,405,629 Top’s: Lacey, WA . . . . . . . . . . . . . . . . . — 2,777,449 7,082,150 Uni-Mart: Avis, PA . . . . . . . . . . . . . . . . . . . Bear Creek, PA . . . . . . . . . . . . . . Bloomsburg, PA . . . . . . . . . . . . . Bloomsburg, PA . . . . . . . . . . . . . Bloomsburg, PA . . . . . . . . . . . . . Chambersburg, PA . . . . . . . . . . . Coraopolis, PA . . . . . . . . . . . . . . Dallas, PA . . . . . . . . . . . . . . . . . . East Brady, PA . . . . . . . . . . . . . . Emporium, PA . . . . . . . . . . . . . . Hazleton, PA . . . . . . . . . . . . . . . . Hazleton, PA . . . . . . . . . . . . . . . . Johnsonburg, PA . . . . . . . . . . . . Larksville, PA . . . . . . . . . . . . . . . Luzerne, PA . . . . . . . . . . . . . . . . Moosic, PA . . . . . . . . . . . . . . . . . Pleasant Gap, PA . . . . . . . . . . . . Port Vue, PA . . . . . . . . . . . . . . . . Punxsutawney, PA . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — 391,801 190,558 206,402 540,561 515,108 75,678 475,572 890,855 269,433 380,032 670,271 2,529,165 780,536 245,870 170,866 323,126 331,885 824,158 252,648 326,046 230,193 501,424 146,127 888,074 197,035 347,360 1,435,745 583,204 568,625 377,355 727,550 503,662 333,875 415,295 308,844 592,844 117,629 541,842 — — — — — — — — — — — — — — — — — — — — — — — — — — 584,237 598,556 920,143 1,019,164 1,504,380 1,617,720 115,976 128,457 1997 1998 12/01 12/01 40 years 40 years — 1,209,702 1,532,125 2,741,827 193,112 1995 12/01 40 years — 1,266,527 2,405,629 3,672,156 147,846 2004 07/04 40 years — 2,777,449 7,082,150 9,859,599 1,748,406 1992 02/97 40 years — — — — — — — — — — — — — — — — — — — 391,801 190,558 206,402 540,561 515,108 75,678 475,572 890,855 269,433 380,032 670,271 2,529,165 780,536 245,870 170,866 323,126 331,885 824,158 252,648 326,046 230,193 501,424 146,127 888,074 197,035 347,360 1,435,745 583,204 568,625 377,355 727,550 503,662 333,875 415,295 308,844 592,844 117,629 541,842 717,847 420,751 707,826 686,688 1,403,182 272,713 822,932 2,326,601 852,637 948,657 1,047,626 3,256,715 1,284,198 579,745 586,161 631,970 924,729 941,787 794,490 22,415 15,826 34,472 10,046 61,055 13,546 23,881 98,707 40,095 39,093 25,943 50,019 34,626 22,953 28,551 21,233 40,757 8,087 37,251 1976 1980 1981 1967 1998 1990 1983 1995 1987 1996 1974 2001 1978 1990 1989 1980 1996 1953 1983 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years Ridgway, PA . . . . . . . . . . . . . . . — — See accompanying report of independent registered public accounting firm. 641,081 382,341 258,740 382,341 258,740 17,788 — 1975 F-14 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed Shamokin, PA . . . . . . . . . . . . . . . . . . . Shippensburg, PA . . . . . . . . . . . . . . . . St. Clair, PA . . . . . . . . . . . . . . . . . . . . St. Mary’s, PA . . . . . . . . . . . . . . . . . . Taylor, PA . . . . . . . . . . . . . . . . . . . . . White Haven, PA . . . . . . . . . . . . . . . . Wilkes-Barre, PA . . . . . . . . . . . . . . . . Wilkes-Barre, PA . . . . . . . . . . . . . . . . Wilkes-Barre, PA . . . . . . . . . . . . . . . . Williamsport, PA . . . . . . . . . . . . . . . . Yeagertown, PA . . . . . . . . . . . . . . . . . Ashland, PA . . . . . . . . . . . . . . . . . . . . Bear Creek, PA . . . . . . . . . . . . . . . . . . Mountaintop, PA . . . . . . . . . . . . . . . . Abbottstown, PA . . . . . . . . . . . . . . . . Beech Creek, PA . . . . . . . . . . . . . . . . Canisteo, NY . . . . . . . . . . . . . . . . . . . Carlisle, PA . . . . . . . . . . . . . . . . . . . . . Curwensville, PA . . . . . . . . . . . . . . . . Dansville, PA . . . . . . . . . . . . . . . . . . . Effort, PA . . . . . . . . . . . . . . . . . . . . . . Ellwood City, PA . . . . . . . . . . . . . . . . Export, PA . . . . . . . . . . . . . . . . . . . . . Hastings, PA . . . . . . . . . . . . . . . . . . . . Howard, PA . . . . . . . . . . . . . . . . . . . . Hughesville, PA . . . . . . . . . . . . . . . . . Jersey Shore, PA . . . . . . . . . . . . . . . . . Leeper, PA . . . . . . . . . . . . . . . . . . . . . Lewisberry, PA . . . . . . . . . . . . . . . . . . McSherrytown, PA . . . . . . . . . . . . . . . Mercersburg, PA . . . . . . . . . . . . . . . . Milesburg, PA . . . . . . . . . . . . . . . . . . Minersville, PA . . . . . . . . . . . . . . . . . . Montoursville, PA . . . . . . . . . . . . . . . Nanticoke, PA . . . . . . . . . . . . . . . . . . . New Florence, PA . . . . . . . . . . . . . . . Newstead, NY . . . . . . . . . . . . . . . . . . Nuangola, PA . . . . . . . . . . . . . . . . . . . Phillipsburg, PA . . . . . . . . . . . . . . . . . Pittsburgh, PA . . . . . . . . . . . . . . . . . . Plainfield, PA . . . . . . . . . . . . . . . . . . . Plains, PA . . . . . . . . . . . . . . . . . . . . . . Punxsutawney, PA . . . . . . . . . . . . . . . Reynoldsville, PA . . . . . . . . . . . . . . . . Summerville, PA . . . . . . . . . . . . . . . . Warriors Mark, PA . . . . . . . . . . . . . . . Williamsport, PA . . . . . . . . . . . . . . . . Zelienople, PA . . . . . . . . . . . . . . . . . . United Rentals: Carrollton, TX . . . . . . . . . . . . . . . . . . Cedar Park, TX . . . . . . . . . . . . . . . . . . Clearwater, FL . . . . . . . . . . . . . . . . . . Fort Collins, CO . . . . . . . . . . . . . . . . . Irving, TX . . . . . . . . . . . . . . . . . . . . . . La Porte, TX . . . . . . . . . . . . . . . . . . . . Littleton, CO . . . . . . . . . . . . . . . . . . . . Oklahoma City, OK . . . . . . . . . . . . . . Perrysberg, OH . . . . . . . . . . . . . . . . . . Plano, TX . . . . . . . . . . . . . . . . . . . . . . Temple, TX . . . . . . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 323,994 506,335 203,610 330,098 212,150 475,086 274,323 260,942 180,533 526,884 485,984 866,602 178,104 471,437 171,040 422,438 875,774 1,956,613 908,758 122,164 142,061 180,073 355,322 545,140 689,374 274,920 422,770 616,488 110,362 400,101 476,516 612,664 141,912 347,858 226,015 179,736 196,089 221,840 199,089 136,416 290,136 514,708 285,510 412,356 134,501 672,259 133,831 679,595 158,346 174,583 298,364 254,635 485,183 411,491 607,989 359,203 1,297,431 1,201,954 526,155 214,852 455,379 374,695 566,229 381,372 643,886 533,848 364,946 746,309 372,913 581,718 415,372 482,239 812,449 835,411 1,062,388 1,202,832 268,962 428,193 905,332 1,346,177 382,518 243,945 401,264 204,417 649,800 293,717 327,933 113,312 271,832 92,798 404,981 148,499 295,036 160,219 378,715 437,168 477,893 534,807 535,091 829,241 1,173,292 1,810,665 2,057,322 708,389 977,971 910,786 1,114,553 2,125,426 1,743,092 1,943,650 744,145 1,264,885 641,867 1,119,085 1,030,426 1,148,065 1,159,775 1,360,379 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 323,994 506,335 830,329 203,610 330,098 533,708 212,150 475,086 687,236 274,323 260,942 535,265 180,533 526,884 707,417 485,984 866,602 1,352,586 178,104 471,437 649,541 171,040 422,438 593,478 34,811 22,694 32,662 17,940 36,223 59,579 32,411 29,042 875,774 1,956,613 2,832,387 134,517 908,758 122,164 1,030,922 142,061 180,073 322,134 355,322 545,140 900,462 689,374 274,920 964,294 422,770 616,488 1,039,258 110,362 400,101 510,462 476,516 612,664 1,089,180 141,912 347,858 226,015 179,736 196,089 221,840 199,089 136,416 290,136 514,708 285,510 412,356 134,501 672,259 133,831 679,595 158,346 174,583 298,364 254,635 485,183 627,095 411,491 759,349 607,989 834,004 359,203 538,939 1,297,431 1,201,954 2,499,385 722,244 526,155 436,692 214,852 654,468 455,379 511,111 374,695 856,365 566,229 896,080 381,372 929,396 643,886 946,204 533,848 364,946 499,447 746,309 1,418,568 372,913 506,744 581,718 1,261,313 573,718 415,372 656,822 482,239 812,449 1,110,813 835,411 1,090,046 1,062,388 1,202,832 2,265,220 697,155 268,962 428,193 905,332 1,346,177 2,251,509 626,463 382,518 243,945 605,681 401,264 204,417 943,517 649,800 293,717 441,245 327,933 113,312 364,630 271,832 92,798 553,480 404,981 148,499 295,036 160,219 378,715 437,168 673,751 597,387 477,893 534,807 1,012,700 535,091 829,241 1,364,332 1,173,292 1,810,665 2,983,957 2,057,322 708,389 977,971 3,035,293 910,786 1,619,175 8,399 12,380 35,207 17,755 39,815 9,586 14,678 11,624 9,859 14,566 8,606 28,796 12,606 5,147 10,910 8,977 13,566 9,137 15,426 12,790 8,743 17,880 8,934 13,937 9,951 11,554 19,464 20,015 28,818 6,444 32,252 9,164 9,614 15,568 7,856 6,513 9,703 9,073 10,486 27,297 42,326 92,419 49,917 46,488 1,114,553 2,125,426 3,239,979 1,743,092 1,943,650 3,686,742 108,485 99,207 744,145 1,264,885 2,009,030 641,867 1,119,085 1,760,952 1,030,426 1,148,065 2,178,491 1,159,775 1,360,379 2,520,154 64,562 57,120 58,599 69,436 1956 1989 1984 1979 1973 1990 1989 1999 1998 1950 1977 1977 1980 1987 2000 1988 1983 1988 1983 1988 2000 1987 1988 1989 1987 1977 1960 1987 1988 1988 1988 1987 1974 1988 1988 1989 1990 2000 1978 1967 1988 1994 1983 1983 1988 1995 1988 1988 1981 1990 2001 1975 1984 2000 2002 1997 1979 1996 1998 Ft. Worth, TX . . . . . . . . . . . . . . . . . . . — — See accompanying report of independent registered public accounting firm. 510,490 1,127,796 1,638,286 510,490 1,127,796 55,215 — 1997 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 08/05 09/05 09/05 09/05 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 01/06 12/04 12/04 12/04 12/04 12/04 12/04 12/04 12/04 12/04 12/04 12/04 01/05 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years F-15 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs — 64,222 607,128 — — — — — — Building, Improve- ments and Leasehold Interests — 64,222 607,128 Land 1,427,764 2,950,886 746,558 Land 1,427,764 2,950,886 746,558 Total 1,427,764 3,015,108 1,353,686 Life on Which Depreciation and Amortization in Latest Income Statement is Computed Accumulated Depreciation and Amortization Date of Con- struction Date Acquired — 2,743 24,665 (i) 1972 1970 01/05 04/05 05/05 (i) 40 years 40 years 673,238 744,154 — — 673,238 744,154 1,417,392 93,794 1997 12/01 40 years 587,251 351,261 1,077,210 303,063 152,609 1,287,630 1,937,017 54,999 88,457 73,290 893,270 1,456,113 307,068 — — — — — — — — — — — — 399,801 1,952,791 1,284,901 202,085 368,317 520,950 978,344 2,505,022 496,410 — — — — — — — — — — — — 76,664 — — — — — 587,251 351,261 1,077,210 303,063 152,609 1,287,630 1,937,017 54,999 88,457 73,290 893,270 1,456,113 307,068 — — — — 399,801 1,952,791 1,284,901 202,085 368,317 520,950 1,055,008 2,505,022 496,410 587,251 351,261 1,077,210 303,063 552,410 3,240,421 3,221,918 257,084 456,774 594,240 1,948,278 3,961,135 803,478 — — — — 50,391 176,973 116,444 12,420 235,306 65,661 345,761 626,592 218,586 (e) (e) (e) (e) 1997 1997 1997 1984 1985 1986 1967 1995 1985 03/06 06/04 06/04 06/04 12/01 05/03 05/03 07/04 01/85 12/01 11/93 12/96 07/92 (e) (e) (e) (e) 40 years 40 years 40 years 40 years 35 years 40 years 40 years 40 years 33 years 2,490,210 2,937,449 — — 2,490,210 2,937,449 5,427,659 272,327 1996 04/03 40 years 3,762,030 — 3,006,391 — 3,762,030 3,006,391 6,768,421 660,780 1998 03/98(g) 40 years 1,957,974 1,193,187 1,400,970 3,055,724 190,505 507,231 630,043 1,344,244 419,811 2,640,175 2,315,424 3,131,407 1,483,362 1,684,505 3,135,036 5,470,606 — — — — — — — — — — — — — — — — 1,957,974 1,193,187 1,400,970 3,055,724 3,358,944 4,248,911 126,962 117,773 1994 2003 190,505 507,231 630,043 1,344,244 419,811 2,640,175 2,315,424 3,131,407 1,483,362 1,684,505 2,830,680 2,822,655 3,761,450 2,827,606 2,104,316 514,284 451,025 609,972 288,947 328,128 1983 1983 1983 1982 1983 05/03 06/05 03/99 03/99 03/99 03/99 03/99 40 years 40 years 40 years 40 years 40 years 40 years 40 years 3,135,036 5,470,606 8,605,642 1,350,556 1965 02/97 40 years 192,830 278,892 83,773 — 192,830 362,665 555,495 46,807 1995 12/95 40 years 585,872 501,136 — 333,445 624,318 290,860 418,975 — 1,031,974 502,623 696,950 1,209,307 1,023,371 1,874,875 — — — — — — — — — — — — — — 585,872 501,136 — 333,445 585,872 834,581 — 42,028 (i) 1980 02/98 12/01 (i) 40 years 624,318 290,860 418,975 — 1,043,293 290,860 52,808 — 1995 (e) 12/01 12/06 40 years (e) 1,031,974 502,623 696,950 1,209,307 1,728,924 1,711,930 87,845 31,492 1997 1994 12/01 12/05 40 years 40 years 1,023,371 1,874,875 2,898,246 162,098 1984 07/03 40 years 366,448 643,759 38,660 — 405,108 643,759 1,048,867 93,026 1976 12/01 40 years 307,846 199,234 311,313 148,106 1,168,258 1,104,939 2,532,133 — — — — — — — — — 307,846 199,234 311,313 148,106 619,159 347,340 14,593 7,097 1990 1961 02/05 02/05 40 years 40 years 1,168,258 1,104,939 2,273,197 57,705 2000 06/05 30 years 2,532,133 — 2,532,133 1,335,498 — (n) (m) Encum- brances (k) Ft. Worth, TX . . . . . . . Fairfax, VA . . . . . . . . . Melbourne, FL . . . . . . . United Trust Bank: Bridgeview, IL . . . . . . . Vacant Land: Longwood, FL . . . . . . . Florence, AL . . . . . . . . Florence, AL . . . . . . . . Florence, AL . . . . . . . . Vacant Property: Mesa, AZ . . . . . . . . . . . Dallas, GA . . . . . . . . . . Woodstock, GA . . . . . . Bonham, TX . . . . . . . . Atlanta, TX . . . . . . . . . Red Oak, TX . . . . . . . . Corpus Christi, TX . . . Foothill Ranch, CA . . . Fenton, MO . . . . . . . . . Value City: Florissant, MO . . . . . . . Value City Furniture: White Marsh, MD . . . . Walgreens: Sunrise, FL . . . . . . . . . Tulsa, OK . . . . . . . . . . Wal-Mart: Aransas Pass, TX . . . . . Beeville, TX . . . . . . . . . Corpus Christi, TX . . . Sealy, TX . . . . . . . . . . . Winfield, AL . . . . . . . . Waremart: Eureka, CA . . . . . . . . . Washington Bike Center: Fairfax, VA . . . . . . . . . Wendy’s Old Fashioned Hamburger: Sacramento, CA . . . . . . New Kensington, PA . . Whataburger: Albuquerque, NM . . . . Brunswick, GA . . . . . . Wherehouse Music: Homewood, AL . . . . . . Independence, MO . . . Winn-Dixie: Columbus, GA . . . . . . . Zheng China Buffet: Southfield, MI . . . . . . . Ziebart: Maplewood, MN . . . . . Middleburg Heights, OH Zio’s Restaurant: Aurora, CO . . . . . . . . . Leasehold Interests: . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — $34,324,403 $695,064,749 $765,073,623 $66,524,726 $— $695,719,022 $828,866,461 $1,524,585,483 $87,359,317 See accompanying report of independent registered public accounting firm. F-16 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Total Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed Real Estate Held for Investment the Company has Invested in Under Direct Financing Leases: Academy: Houston, TX . . . . . . . . . . . . . . . . . . $ — $ — $1,924,740 $ Houston, TX . . . . . . . . . . . . . . . . . . N. Richland Hills, TX . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . . Baton Rouge, LA . . . . . . . . . . . . . . San Antonio, TX . . . . . . . . . . . . . . . Barnes and Noble: Plantation, FL . . . . . . . . . . . . . . . . . Best Buy: Evanston, IL . . . . . . . . . . . . . . . . . . Borders Books & Music: Altamonte Springs, FL . . . . . . . . . . Checkers: Orlando, FL . . . . . . . . . . . . . . . . . . . CVS: San Antonio, TX . . . . . . . . . . . . . . . Amarillo, TX . . . . . . . . . . . . . . . . . . Amarillo, TX . . . . . . . . . . . . . . . . . . Lafayette, LA . . . . . . . . . . . . . . . . . Irving, TX . . . . . . . . . . . . . . . . . . . . Oklahoma City, OK . . . . . . . . . . . . Oklahoma City, OK . . . . . . . . . . . . Del City, OK . . . . . . . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . . . . . . Haltom City, TX . . . . . . . . . . . . . . . Denny’s: — — — — — — — — — — — — — — — — — — — — 1,867,519 — 2,253,408 — 2,112,335 — 1,910,697 — 2,405,466 — 1,961,017 — 3,498,559 — 3,400,057 — 3,267,579 — 286,910 783,974 — 869,846 — 855,348 158,851 949,128 — — 1,228,436 (l) 1,365,125 (l) 1,419,093 — 1,376,025 — 1,135,067 1,660,859 470,432(t) 413,918 — — — — — — — — — — — — — — — — — — — — — Stockton, CA . . . . . . . . . . . . . . . . . . — 939,974 508,573 — — Eckerd: Millville, NJ . . . . . . . . . . . . . . . . . . Atlanta, GA . . . . . . . . . . . . . . . . . . . Mantua, NJ . . . . . . . . . . . . . . . . . . . Vineland, NJ . . . . . . . . . . . . . . . . . . Glassboro, NJ . . . . . . . . . . . . . . . . . East Point, GA . . . . . . . . . . . . . . . . Chattanooga, TN . . . . . . . . . . . . . . . Kennett Square, PA . . . . . . . . . . . . . Arlington, VA . . . . . . . . . . . . . . . . . Food 4 Less: Chula Vista, CA . . . . . . . . . . . . . . . Food Lion: Keystone Heights, FL . . . . . . . . . . . Chattanooga, TN . . . . . . . . . . . . . . . Lynchburg, VA . . . . . . . . . . . . . . . . Martinsburg, WV . . . . . . . . . . . . . . Heilig-Meyers: Marlow Heights, MD . . . . . . . . . . . York, PA . . . . . . . . . . . . . . . . . . . . . International House of Pancakes: Sunset Hills, MO . . . . . . . . . . . . . . . Matthews, NC . . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — 336,610 828,942 668,390 951,795 — — — — 1,901,335 887,497 1,173,529 — 1,344,240 (l) — 3,201,489 — — — — 1,984,435 — — 4,266,181 — — — 88,604 336,488 128,216 448,648 1,845,988 1,701,072 1,674,167 1,543,573 415,926 1,397,178 279,312 1,109,609 — — 736,345 655,668 — — — — — — — — — — — — — — — — (d) (d) (d) (d) (d) (d) — — $— $— $(c) $(c) $(c) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (d) — — (l) (l) — — (d) (d) — — — — — (d) — (l) — (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (c) (c) (c) (c) (c) (c) (d) (d) (c) (c) (c) (c) (c) (d) (c) (c) (c) (c) (d) (d) (d) (d) (d) (d) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (c) (c) (c) (c) (c) (c) (d) (d) (c) (c) (c) (c) (c) (d) (c) (c) (c) (c) (d) (d) (d) (d) (d) (d) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (c) (c) (c) (c) (c) (c) (d) (d) (c) (c) (c) (c) (c) (d) (c) (c) (c) (c) (d) (d) (d) (d) (d) (d) (c) (c) 1994 1995 1996 1996 1996 1997 1996 05/95 06/95 08/95(f) 02/96(f) 06/96(f) 08/96(f) 09/97(f) 1996 05/95 1994 02/97 1997 09/97 1988 07/92 1993 1994 1994 1995 1996 1997 1997 1998 1996 1996 12/93 12/94 12/94 01/96 12/96 06/97 06/97 05/98 09/97 09/97 1982 09/06 1994 1994 1994 1999 1994 1996 1997 2000 2002 03/94 03/94 06/94 03/99(h) 12/94 12/96 09/97 12/00 02/02 1995 11/98 1993 1993 1994 1994 1968 1997 1993 1993 05/93 10/93 01/94 08/94 11/98 11/98 10/93 12/93 (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (c) (c) (c) (c) (c) (c) (d) (d) (c) (c) (c) (c) (c) (d) (c) (c) (c) (c) (d) (d) (d) (d) (d) (d) (c) (c) See accompanying report of independent registered public accounting firm. F-17 Life on Which Depreciation and Amortization in Latest Income Statement is Computed (c) (c) (c) (c) (c) (d) (c) (c) (d) — — — — — — — Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Jared Jewelers: Glendale, AZ . . . . . . . . . Lewisville, TX . . . . . . . . Oviedo, FL . . . . . . . . . . . Phoenix, AZ . . . . . . . . . . Toledo, OH . . . . . . . . . . — 236,347 462,780 398,427 — Kash N’ Karry: Building, Improve- ments and Leasehold Interests (l) (l) (l) (l) (l) 1,599,105 1,502,903 1,500,145 1,241,825 1,457,625 Valrico, FL . . . . . . . . . . . — 1,234,519 3,255,257 — — — — 2,658,975 — 2,978,154 41,774 267,667 Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total — — — — — — — — — — — — — — — — — — (l) (l) (l) (l) (l) (d) — — (d) (c) (c) (c) (c) (c) (d) (c) (c) (d) (c) (c) (c) (c) (c) (d) (c) (c) (d) (c) (c) (c) (c) (c) 1998 1998 1998 1998 1998 12/01 12/01 12/01 12/01 12/01 (d) 1997 06/02 (c) (c) 1994 03/94 1992 02/97 (d) 1990 08/05 $1,567,986 $4,822,841 $77,487,083 $3,885,770 $— $ — $ — $ — $— Sports Authority: Dallas, TX . . . . . . . . . . . SuperValu: Warwick, RI . . . . . . . . . . Uni-Mart: Olean, NY . . . . . . . . . . . Real Estate Held for Sale the Company has Invested in: AJ Petroleum: Brandon, FL . . . . . . . . . . $ Hollywood, FL . . . . . . . . Hollywood, FL . . . . . . . . — — — 516,188 $ 417,487 645,533 342,694 $ 318,173 387,651 Century Bank: Farmers Branch, TX . . . — 2,202,250 111,597 Chili’s: Austin, TX . . . . . . . . . . . — 824,514 595,250 Dave & Buster’s: Addison, IL . . . . . . . . . . — 2,927,300 8,904,957 Denny’s: Arlington, TX . . . . . . . . . — 606,540 504,282 La-Z Boy: Newington, CT . . . . . . . . — 1,543,425 3,588,416 Logan’s Roadhouse: Johnson City, TN . . . . . . Florence, AL . . . . . . . . . Tuscaloosa, AL . . . . . . . Fairfax, VA . . . . . . . . . . Tampa, FL . . . . . . . . . . . Houston, TX . . . . . . . . . . Waco, TX . . . . . . . . . . . . Killean, TX . . . . . . . . . . Long John Silver’s: — 1,406,893 — 1,810,838 — 1,549,033 — 1,589,903 — 1,176,322 — 698,654 — 1,189,018 — 1,246,030 2,062,633 2,532,741 2,198,023 1,289,834 1,306,418 1,138,942 1,604,071 1,635,630 Houston, TX . . . . . . . . . . — 418,562 751,259 Power Center: Big Flats, NY . . . . . . . . . Bismarck, ND . . . . . . . . Midland, MI . . . . . . . . . . Whiting, NJ . . . . . . . . . . Topsham, ME . . . . . . . . . Rite Aid: — 2,248,422 — 1,838,965 — 1,085,180 — 3,656,873 — 6,148,981 7,159,309 10,262,109 1,634,602 — 10,852,400 Fredricksburg, VA . . . . . — 1,611,109 — Road Ranger: Rockford, IL . . . . . . . . . . Rockford, IL . . . . . . . . . . Rockford, IL . . . . . . . . . . Freeport, IL . . . . . . . . . . 635,452 — — 898,673 — 1,465,863 594,629 — 1,118,486 1,456,340 1,189,686 1,109,178 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — $ 516,188 $ 417,487 645,533 342,694 $ 318,173 387,651 858,882 735,660 1,033,184 2,202,250 111,597 2,313,847 824,514 595,250 1,419,764 2,927,300 8,904,957 11,832,257 606,540 504,282 1,110,822 1,543,425 3,588,416 5,131,841 1,406,893 1,810,838 1,549,033 1,589,903 1,176,322 698,654 1,189,018 1,246,030 2,062,633 2,532,741 2,198,023 1,289,834 1,306,418 1,138,942 1,604,071 1,635,630 3,469,526 4,343,579 3,747,056 2,879,737 2,482,740 1,837,596 2,793,089 2,881,660 418,562 751,259 1,169,821 2,248,422 1,838,965 1,085,180 3,656,873 6,148,981 7,159,309 10,262,109 1,634,602 — 10,852,400 9,407,731 12,101,074 2,719,782 3,656,873 17,001,381 1,611,109 — 1,611,109 635,452 898,673 1,465,863 594,629 1,118,486 1,456,340 1,189,686 1,109,178 1,753,938 2,355,013 2,655,550 1,703,807 — — — — — — — — — — — — — — — — — — — — — — — — — — 1971 1961 1960 12/05 12/05 12/05 1993 02/06 1993 02/06 1995 11/06 1990 02/06 (e) 08/05 (e) 1996 1996 1997 1998 1999 2000 2004 2004 11/06 11/06 11/06 11/06 11/06 11/06 11/06 11/06 — — — — — — — — (i) 12/05 (i) 2006 2006 2005 (e) (e) 08/05 10/04 05/05 06/05 08/06 (e) 09/06 1988 2001 1996 2002 06/06 06/06 06/06 06/06 — — — (e) (e) (e) — — — — See accompanying report of independent registered public accounting firm. F-18 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed Stock Building Supply: Hillman, MI . . . . . . . . . . . . . . . . — 166,886 822,950 — Stripes: Brownsville, TX . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . Elsa, TX . . . . . . . . . . . . . . . . . . . Victoria, TX . . . . . . . . . . . . . . . . Weslaco, TX . . . . . . . . . . . . . . . . Taco Bell: Evansville, IN . . . . . . . . . . . . . . . Martinsville, IN . . . . . . . . . . . . . Connersville, IN . . . . . . . . . . . . . Brazil, IN . . . . . . . . . . . . . . . . . . Princeton, IN . . . . . . . . . . . . . . . . Henderson, KY . . . . . . . . . . . . . . Elwood, IN . . . . . . . . . . . . . . . . . Robinson, IL . . . . . . . . . . . . . . . . Owensboro, KY . . . . . . . . . . . . . Washington, IN . . . . . . . . . . . . . . Linton, IN . . . . . . . . . . . . . . . . . . Spencer, IN . . . . . . . . . . . . . . . . . Anderson, IN . . . . . . . . . . . . . . . Vincennes, IN . . . . . . . . . . . . . . . Uni-Mart: Cuba, NY . . . . . . . . . . . . . . . . . . Bradford, PA . . . . . . . . . . . . . . . Bradford, PA . . . . . . . . . . . . . . . Harrisburg, PA . . . . . . . . . . . . . . Kane, PA . . . . . . . . . . . . . . . . . . Springdale, PA . . . . . . . . . . . . . . Midway, PA . . . . . . . . . . . . . . . . Clairton, PA . . . . . . . . . . . . . . . . Lewistown, PA . . . . . . . . . . . . . . Houtzdale, PA . . . . . . . . . . . . . . . Altoona, PA . . . . . . . . . . . . . . . . Burgettstown, PA . . . . . . . . . . . . Burnham, PA . . . . . . . . . . . . . . . Duncannon, PA . . . . . . . . . . . . . Hummelstown, PA . . . . . . . . . . . Knox, PA . . . . . . . . . . . . . . . . . . Lemoyne, PA . . . . . . . . . . . . . . . Linglestown, PA . . . . . . . . . . . . . Mechanicsburg, PA . . . . . . . . . . Port Royal, PA . . . . . . . . . . . . . . Richfield, PA . . . . . . . . . . . . . . . Shamokin, PA . . . . . . . . . . . . . . . Sunbury, PA . . . . . . . . . . . . . . . . Williamsport, PA . . . . . . . . . . . . Williamsport, PA . . . . . . . . . . . . Vacant Land: Grand Prairie, TX . . . . . . . . . . . . Whiting, NJ . . . . . . . . . . . . . . . . . Whiting, NJ . . . . . . . . . . . . . . . . . Fairfield Township, OH . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 800,356 535,129 1,308,398 2,151,142 606,629 643,379 565,233 1,010,988 1,082,047 530,990 282,667 544,357 871,812 808,203 593,006 863,706 1,977,940 1,076,322 683,444 1,078,464 388,992 1,029,134 1,143,755 308,484 971,568 511,044 741,453 407,315 841,261 866,818 410,558 731,387 296,273 671,931 239,917 869,544 1,465,430 1,009,606 942,850 843,526 892,351 740,651 1,371,287 863,675 987,502 697,599 1,077,434 1,270,897 374,010 184,231 84,803 148,741 156,967 426,789 310,893 215,405 58,687 311,707 146,196 202,043 264,741 104,667 255,604 90,979 205,302 224,572 120,639 238,052 225,501 90,084 76,499 98,308 140,467 179,259 761,512 443,237 293,940 913,017 74,490 708,427 700,821 218,925 729,052 316,157 427,963 510,262 297,745 501,965 230,616 504,841 467,058 357,897 635,213 372,010 293,742 309,471 274,070 277,093 386,807 733,707 499,330 3,198,359 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 166,886 822,950 989,836 800,356 535,129 1,335,485 1,308,398 2,151,142 3,459,540 606,629 643,379 1,250,008 565,233 1,010,988 1,576,221 1,082,047 871,812 1,953,859 530,990 282,667 544,357 808,203 1,339,193 593,006 875,673 863,706 1,408,063 1,977,940 1,076,322 3,054,262 683,444 1,078,464 1,761,908 388,992 1,029,134 1,418,126 1,143,755 308,484 971,568 511,044 741,453 407,315 841,261 866,818 410,558 731,387 296,273 671,931 239,917 869,544 1,465,430 1,009,606 942,850 843,526 892,351 740,651 1,371,287 863,675 987,502 697,599 1,077,434 1,270,897 374,010 184,231 84,803 148,741 156,967 426,789 310,893 215,405 58,687 311,707 146,196 202,043 264,741 104,667 255,604 90,979 205,302 224,572 120,639 238,052 225,501 90,084 76,499 98,308 140,467 386,807 733,707 499,330 179,259 761,512 443,237 293,940 913,017 74,490 708,427 700,821 218,925 729,052 316,157 427,963 510,262 297,745 501,965 230,616 504,841 467,058 357,897 635,213 372,010 293,742 309,471 274,070 277,093 — — — 2,013,299 1,773,914 1,981,174 1,453,894 1,584,979 1,299,666 1,581,912 2,238,105 1,274,233 1,718,889 993,872 1,749,365 1,510,814 553,269 945,743 528,040 442,681 1,069,984 501,279 1,019,320 916,226 277,612 1,040,759 462,353 630,006 775,003 402,412 757,569 321,595 710,143 691,630 478,536 873,265 597,511 383,826 385,970 372,378 417,560 386,807 733,707 499,330 3,198,359 — 3,198,359 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1952 10/06 1980 1995 1976 1984 1978 1983 1982 2006 2002 1996 1985 1986 1998 1998 1992 1992 1998 1994 1994 1995 1996 1999 1998 2000 1961 1983 1988 1989 1984 1953 1990 1986 1970 1977 1974 1975 1978 1973 1970 1982 1988 1973 1972 1989 1989 1975 1971 1971 1971 (e) (e) (e) (e) 12/05 12/05 12/05 12/05 12/05 12/05 12/05 10/06 12/06 12/05 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 08/05 08/05 08/05 08/05 08/05 08/05 01/06 01/06 07/06 01/06 07/06 07/06 07/06 07/06 07/06 07/06 07/06 07/06 07/06 07/06 07/06 07/06 07/06 07/06 07/06 12/02 06/05 06/05 08/06 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (e) (e) (e) (e) See accompanying report of independent registered public accounting firm. F-19 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land 148,614 552,156 1,465,113 452,538 233,589 311,714 1,309,073 17,256,753 2,562,836 9,157,846 — — — — — — — — — — — — — — — — — — — — — — — — 583,650 504,900 548,190 662,760 179,510 405,177 365,713 545,257 Encum- brances (k) Bonita Springs, FL . . . Topsham, ME . . . . . . . Lapeer, MI . . . . . . . . . Lapeer, MI . . . . . . . . . Lapeer, MI . . . . . . . . . Topsham, ME . . . . . . . Independence, KY . . . Rockwall, TX . . . . . . . Harlingen, TX . . . . . . Plano, TX . . . . . . . . . . Vacant Property: North Richland Hills, TX . . . . . . . . . . . . . Irving, TX . . . . . . . . . Mesquite, TX . . . . . . . Waxahachie, TX . . . . Wawa: — — — — — — — — — — — — — — Ziebart: Lansing, MI . . . . . . . . — $— Whiting, NJ . . . . . . . . — 1,297,846 — — Building, Improve- ments and Leasehold Interests — — — — — — — — — — Land 148,614 552,156 1,465,113 452,538 233,589 311,714 1,309,073 17,256,753 2,562,836 9,157,846 Total 148,614 552,156 1,465,113 452,538 233,589 311,714 1,309,073 17,256,753 2,562,836 9,157,846 583,650 504,900 548,190 662,760 179,510 405,177 365,713 545,257 763,160 910,077 913,903 1,208,017 1,297,846 — 1,297,846 203,019 302,498 505,517 — — — — — — — — — — — — — — — — Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed (e) (e) (e) (e) (e) (e) (e) (e) (e) (e) 1989 1987 1988 1995 09/06 02/06 09/06 09/06 06/06 02/06 08/06 02/06 10/06 12/05 02/06 02/06 02/06 02/06 (e) (e) (e) (e) (e) (e) (e) (e) (e) (e) — — — — (e) 06/05 (e) 1974 03/06 — — — — — — — — — — — — — — — — — $— 203,019 302,498 — $104,857,027 $101,168,207 $— $— $104,857,027 $101,168,207 $206,025,233 See accompanying report of independent registered public accounting firm. F-20 NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2006 (dollars in thousands) (a) Transactions in real estate and accumulated depreciation during 2006, 2005, and 2004 are summarized as follows: 2006 2005 2004 Land, buildings, and leasehold interests: Balance at the beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions, completed construction and tenant improvements . . . . . . . Disposition of land, buildings, and leasehold interests . . . . . . . . . . . . . . Provision for loss on impairment of real estate . . . . . . . . . . . . . . . . . . . . $1,508,664 558,766 (310,223) (693) $1,129,126 469,384 (87,446) (2,400) $ 982,076 240,699 (93,649) — Balance at the close of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,756,514 $1,508,664 $1,129,126 Accumulated depreciation and amortization: Balance at the beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposition of land, buildings, and leasehold interests . . . . . . . . . . . . . . Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79,197 (12,413) 20,575 $ 61,802 (1,665) 19,060 $ 49,109 (2,119) 14,812 Balance at the close of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87,359 $ 79,197 $ 61,802 (b) As of December 31, 2006, the leases are treated as either operating or financing leases for federal income tax purposes. As of December 31, 2006, the aggregate cost of the properties owned by the Company that under operating leases were $1,672,154 and financing leases were $10,711. (c) For financial reporting purposes, the portion of the lease relating to the building has been recorded as a direct financing lease; therefore, depreciation is not applicable. (d) For financial reporting purposes, the lease for the land and building has been recorded as a direct financing lease; therefore, depreciation is not applicable. (e) The Company owns only the land for this property. (f) Date acquired represents acquisition date of land. Pursuant to lease agreement, the Company purchased the buildings from the tenants upon completion of construction, generally within 12 months from the acquisition of the land. (g) Date acquired represents acquisition date of land. The Company developed the buildings, generally completing construction within 12 months from the acquisition date of the land. (h) Date acquired represents date of building construction completion. The land has been recorded as operating lease. (i) The Company owns only the land for this property, which is subject to a ground lease between the Company and the tenant. The tenant funded the improvements on the property. (j) In 2005, the Company amended this property’s lease to a ground lease, and thus reclassed the building’s net book value to land only. Therefore, depreciation is not applicable. (k) Encumbered properties for which the portion of the lease relating to the land is accounted for as an operating lease and the portion of the lease relating to the building is accounted for as a direct financing lease, the total amount of the encumbrance is listed with the land portion of the property. (l) The Company owns only the building for this property. The land is subject to a ground lease between the Company and an unrelated third party. (m) The leasehold interests are amortized over the life of the respective leases which range from 12 years to 12.5 years. (n) The leasehold interest sites were acquired between August 1999 and August 2001. (o) In 2002, this property was contributed down to a wholly-owned subsidiary of the Company at the property’s net book value. (p) Property is encumbered as a part of the Company’s $21,000 long-term, fixed rate mortgage and security agreement. (q) In 2002, this property was owned by a wholly-owned limited liability entity that was dissolved into the Company. (r) The tenant of this property has subleased the property. The tenant continues to be responsible for complying with all the terms of the lease agreement and is continuing to pay rent on this property to the Company. (s) In 2005, there was a lease amendment to this property, resulting in a reclassification from a direct financing lease to an operating lease. (t) Property is encumbered as a part of the Company’s $12,000 long-term, fixed rate mortgage and security agreement. (u) Property is encumbered as a part of the Company’s $6,952 long-term, fixed rate mortgage and security agreement. (v) In 2005, this property was distributed from a taxable REIT subsidiary to the Company at the property’s net book value. See accompanying report of independent registered public accounting firm. F-21 NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE December 31, 2006 (dollars in thousands) Description Interest Rate First mortgages on properties: Maturity Date Periodic Payment Terms Prior Liens Face Amount of Mortgages Carrying Amount of Mortgages (e) Principal Amount of Loans Subject to Delinquent Principal or Interest National City, CA . . . . . . San Jose, CA . . . . . . . . . . Bellingham, WA . . . . . . . Lake Jackson, TX . . . . . . . Sports Authority, NJ . . . . Jackson, MS . . . . . . . . . . . Topsham, ME . . . . . . . . . . Des Moines, IA . . . . . . . . Terre Haute, IN . . . . . . . . 11.5% 11.5% 7.2% 7.5% 9.0% 4.5% 4.5% 8.0% 7.0% 2009 2009 2013 2008 2022 2012 2008 2010 2011 (b) — (b) — (b) — (b) — (b) — (b) — (c) — (d) — (c) — $ 2,765 2,565 2,605 1,875 6,000 1,000 5,750 400 1,582 $24,542 $ 751 772 2,518 1,783 5,841 — — 380 1,582 $13,627(a) $— — — — — — — — — $— (a) The following shows the changes in the carrying amounts of mortgage loans during the years: Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . New mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deductions during the year: 2006 2005 2004 $19,418 1,582(f) $11,528 13,150(f) $19,773 — Collections of principal . . . . . . . . . . . . . . . . . . . . . . . . (7,373) (5,260) (8,245) Balance at the close of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,627 $19,418 $11,528 (b) Principal and interest is payable at level amounts over the life of the loan. (c) Interest only payments are due monthly. Principal is due at maturity. (d) Principal and interest is payable at level amounts over the life of the loan with a principal balloon payment at maturity. (e) Mortgages held by the Company and its subsidiaries for federal income tax purposes for the years ended December 31, 2006, 2005 and 2004 were $13,627, $19,418 and $11,528, respectively. (f) Mortgages totaling $1,582 and $13,150 were accepted in connection with real estate transactions for the year ended December 31, 2006 and 2005, respectively. See accompanying report of independent registered public accounting firm. F-22 NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES Exhibit 12 The following table sets forth the Company’s consolidated ratios of earnings to fixed charges for the periods as shown (dollars in thousands). Net Earnings, before Extraordinary Item . . . . . . . . . . . . . . . . . . . $182,505 $ 74,614 $64,934 $53,473 $48,058 Fixed Charges: 2006 2005 2004 2003 2002 Interest on Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of Discount Relating to Indebtedness . . . . . . Amortization of Treasury Lock Gain . . . . . . . . . . . . . . . . . . Amortization of Deferred Charges . . . . . . . . . . . . . . . . . . . . 48,947 136 (345) 1,613 37,035 104 (326) 1,508 33,454 28,356 27,239 127 (554) 963 146 (596) 1,334 123 (457) 1,260 Net Earnings Before Fixed Charges . . . . . . . . . . . . . . . . . . . . . . . $232,856 $112,935 $99,314 $82,713 $75,833 50,351 38,321 34,380 29,240 27,775 Divided by Fixed Charges Fixed Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,351 $ 38,321 $34,380 $29,240 $27,775 (600) Capitalized and Deferred Interest . . . . . . . . . . . . . . . . . . . . . 2,563 2,278 102 271 Ratio of Net Earnings to Fixed Charges . . . . . . . . . . . . . . . . . . . . 4.42 2.76 2.87 2.82 2.79 $ 52,629 $ 40,884 $34,651 $29,342 $27,175 Net Earnings Before Fixed Charges . . . . . . . . . . . . . . . . . . . . . . . $232,856 $112,935 $99,314 $82,713 $75,833 — Gain of Disposition of DC Office Buildings (May 2006) . . . . . . (59,496) — — — Ratio of Net Earnings to Fixed Charges adjusted for DC Office Bldgs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.29 2.76 2.87 2.82 2.79 $173,360 $112,935 $99,314 $82,713 $75,833 Preferred Stock Dividends Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,376 $ Series B Convertible Preferred Stock . . . . . . . . . . . . . . . . . Series C Redeemable Preferred Stock . . . . . . . . . . . . . . . . . 419 923 4,008 $ 4,008 $ 4,008 $ 4,010 — 1,675 — — 1,675 — 502 — Total Preferred Stock Dividends . . . . . . . . . . . . . . . . . $ 5,718 $ 5,683 $ 5,683 $ 4,510 $ 4,010 Combined Fixed Charges and Preferred Stock Dividends . . . . . . $ 58,347 $ 46,567 $40,334 $33,852 $31,185 Ratio of Net Earnings to Combined Fixed Charges and Preferred Stock Dividends Ratio of Net Earnings to Combined Fixed Charges and 3.99 2.43 2.46 2.44 2.43 Preferred Stock Dividends adjusted for DC Office Bldgs . . . . 2.97 2.43 2.46 2.44 2.43 NATIONAL RETAIL PROPERTIES INC. SUBSIDIARIES OF THE REGISTRANT December 31, 2006 Exhibit 21 Subsidiary CCMH I, LLC CCMH II, LLC CCMH III, LLC CCMH IV, LLC CCMH V, LLC CCMH VI, LLC CNL Commercial Mortgage Funding, Inc. CNL SBA License, Inc. CNLR DC Acquisitions I, LLC CNLRS Acquisitions, Inc. CNLRS BEP, L.P. CNLRS Bismarck ND, LLC CNLRS Equity Ventures BEP, Inc. CNLRS Equity Ventures Plano, Inc. CNLRS Equity Ventures Rockwall, Inc. CNLRS Equity Ventures, Inc. CNLRS P&P, L.P. CNLRS RGI Bonita Springs, LLC CNLRS Rockwall, L.P. CNLRS WG Long Beach MS, LLC CNLRS Yosemite Park CO, LLC Gator Pearson, LLC NAPE Acquisition, Inc. National Retail Properties Trust National Retail Properties, L.P. Net Lease Funding, Inc. Net Lease Institutional Realty, L.P. Net Lease Realty I, Inc. Net Lease Realty III, Inc. Net Lease Realty VI, LLC NNN Acquisitions, Inc. NNN BJ’s Orlando FL, LLC NNN Development, Inc. NNN Equity Ventures Harrison Crossing, Inc. NNN Equity Ventures, Inc. NNN Equity Ventures Preston Park, Inc. NNN GP Corp. NNN Harrison Crossing, L.P. NNN LP Corp. NNN Brokerage Services, Inc. NNN RAD Monticello NY, LLC NNN Ster Florida LLC NNN Ster Paradise Valley Arizona LLC NNN Ster Texas L.P. NNN Texas GP Corp. NNN TRS, Inc. NorthStar Brokerage Services, Inc. Orange Avenue Mortgage Investments, Inc. WG Grand Prairie TX, LLC Jurisdiction of Formation Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Maryland Texas Delaware Maryland Maryland Maryland Maryland Texas Delaware Texas Delaware Delaware Delaware Maryland Maryland Delaware Maryland Delaware Maryland Maryland Delaware Maryland Florida Maryland Maryland Maryland Delaware Delaware Texas Delaware Maryland Delaware Florida Arizona Texas Delaware Maryland Maryland Delaware Delaware Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Craig Macnab, Chief Executive Officer of National Retail Properties, Inc., certify that: I have reviewed this annual report on Form 10-K of National Retail Properties, Inc.; 1. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this annual report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls 4. and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent first fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. February 21, 2007 Date /s/ Craig Macnab Name: Craig Macnab Title: Chief Executive Officer Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Kevin B. Habicht, Chief Financial Officer of National Retail Properties, Inc., certify that: I have reviewed this annual report on Form 10-K of National Retail Properties, Inc.; 1. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this annual report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls 4. and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent first fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. February 21, 2007 Date /s/ Kevin B. Habicht Name: Kevin B. Habicht Title: Chief Financial Officer CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.1 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Craig Macnab, Chief Executive Officer, certifies that (1) this Annual Report of National Retail Properties, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (this “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the financial condition of the Company as of December 31, 2006 and 2005 and its results of operations for the years ended December 31, 2006, 2005 and 2004. February 21, 2007 Date /s/ Craig Macnab Name: Craig Macnab Title: Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.2 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Kevin B. Habicht, Chief Financial Officer, certifies that (1) this Annual Report of National Retail Properties, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (this “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the financial condition of the Company as of December 31, 2006 and 2005 and its results of operations for the years ended December 31, 2006, 2005 and 2004. February 21, 2007 Date /s/ Kevin B. Habicht Name: Kevin B. Habicht Title: Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. NYSE Regulation Form Last Updated by the NYSE on April 28, 2006 Domestic Company Section 303A Annual CEO Certification As the Chief Executive Officer of National Retail Properties, Inc. – NNN and as required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual, I hereby certify that as of the date hereof, I am not aware of any violation by the Company of NYSE’s corporate governance listing standards, other than has been notified to the Exchange pursuant to Section 303A.12(b) and disclosed as Exhibit H to the Company’s Domestic Section 303A Annual Written Affirmation. This certification is: È Without qualification or ‘ With qualification By: /s/ Craig Macnab Print Name: Craig Macnab Title: Chief Executive Officer Date: May 12, 2006 S H A R E H O L D E R I N F O R M A T I O N FORM 10-K: A copy of the Company’s Form 10-K as filed with the Securities and Exchange Commission (SEC) for fiscal 2006, which includes as Exhibits the Chief Executive Officer and Chief Financial Officer certifications required to be filed with the SEC pursuant to Section 302 of the Sarbanes-Oxley Act, has been filed with the SEC and is included in this annual report and may also be obtained by stockholders without charge upon written request to the Company’s Secretary at the above address, or on our website. During fiscal 2006, the Company filed with the New York Stock Exchange (NYSE) the Certification of its Chief Executive Officer confirming that the Chief Executive Officer was not aware of any violations by the Company of the NYSE’s corporate governance listing standards. For General Information: American Stock Transfer & Trust Company Operations Center 6201 15th Avenue Brooklyn, NY 11219 www.amstock.com Shareholder Toll-free line: 1-866-627-2644 Worldwide: 718-921-8346 Fax: 718-236-2641 For Dividend Reinvestment: American Stock Transfer & Trust Company P.O. Box 922 Wall Street Station New York, NY 10269-0560 Independent Registered Public Accounting Firm: Ernst & Young LLP Orlando, FL Counsel: Pillsbury Winthrop Shaw Pittman Washington, D.C. Corporate Offices: National Retail Properties, Inc. 450 S. Orange Avenue, Suite 900 Orlando, FL 32801 (800) NNN-REIT (407) 265-7348 www.nnnreit.com SEASON AFTER SEASON 17 450 S. Orange Avenue, Suite 900 Orlando, FL 32801 (800) NNN-REIT www.nnnreit.com 18 THE DIVIDENDS YOU’VE COME TO EXPECT 

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